A new report by CNET’s Greg Sandoval yesterday gave an update on Apple and Google’s race to deploy music to the cloud. Basically, according to his sources, Apple isn’t close to doing anything massive in the space. Google, meanwhile, is likely closer but may have a hard time getting traction early on due to iTunes’ dominance. But the most interesting bit is buried a few paragraphs in.

According to Sandoval, the core Lala team (the music-streaming service Apple bought last December) inside Apple hasn’t been working on the cloud music solution. Hell, they haven’t even been working on music at all. Instead, they’re apparently working on “an undisclosed video feature.”

On the face of it, that doesn’t seem to make a lot of sense. But actually, it might make perfect sense. As Sandoval hints at, music in the cloud is nice — but it’s video content in the cloud that’s needed. And I would argue it’s needed soon if Apple ever hopes to be a serious player in Hollywood content.

I’ve been arguing this for some time now: the iTunes ecosystem is on the verge of a major storage problem. And it’s quickly getting worse.

Each feature length movie you download on iTunes is already over a gigabyte in size. If it’s in HD the file size plumps up to a few gigabytes. That’s per movie. Apple’s latest iPhone, the iPhone 4, has a maximum storage limit of 32 GB. If you’re lucky, that means 10 of these movies.

Obviously, that’s not a huge problem right now as most people don’t need that many HD movies with them at all times. But if Apple truly believes that these mobile devices, devices like the iPad, are the future of computing, they’re going to need a better solution. The iPad has a maximum storage of 64 GB right now. That’s maybe 20 of these movies — and nothing else.

But the problem is just as daunting for traditional computers too. Full seasons of television shows in HD on iTunes take up dozens of gigabytes. I have what I would consider to be a modest collection of shows (Mad Men seasons 1 – 4, Lost seasons 4-6, The Office seasons 4-6, Dexter seasons 1-3, and a few others here and there). I had to buy an external drive to handle just those. Considering how cheap external 1 and 2 terabyte drives are now, it’s not a huge deal for me — but most consumers aren’t going to want to do that. Especially going forward.

The iPad is a lot less sexy when tethered to an external hard drive. Actually, you can’t even do that because there are no USB ports.

The situation is completely untenable. The more popular video content on iTunes becomes, the more serious the storage problem becomes. Customers will begin hitting walls and will be forced to delete content because they can’t store it all.

That’s why cloud storage makes so much sense. Netflix is the big success right now in terms of Hollywood content online. How do they do it? Increasingly, it’s through streaming. Hulu? Streaming. Apple’s model will obviously be different. But if they can convince the studios to allow customers to store their purchased movies on Apple servers (maybe in that new massive data center in North Carolina) and stream them as they need them, it will solve the storage problem.

Further, perhaps Apple could allow customers to download files as they need them to take on the road. And then they could delete them when done.

Piracy is obviously a concern here. But the process shouldn’t be too different from the way it’s currently set up (especially with rentals). You could still have a maximum number of traditional computers you would sync your files with (since, unlike music, they’re all still loaded with DRM).

The rumors of a new cloud-centric Apple TV go along with all of this as well. You could argue that the Apple TV is weak for a number of reasons, but again, just look at the storage. It currently offers 160 GB of storage on board. If you actually wanted that to be your one media hub going forward, it would be a joke. I would need about five Apple TVs to store all my video content just right now.

Instead, I stream it from my desktop machine. And I would love to replace that desktop machine with the cloud.

Have you noticed that iTunes doesn’t show you how big TV show files are? At one point, they did. I imagine there are two reasons why they don’t now.

First, Apple likes to keep things as simple as possible. You shouldn’t see the size of the files you’re downloading because it shouldn’t matter. But that’s the thing here. It absolutely does matter. If I buy four seasons of a TV show in HD, I could max out my hard drive without even realizing it. That’s very un-Apple-like.

Second, those numbers are extremely daunting. 30 GB for a TV series? Ugh. (Interestingly enough, they still show the file sizes for movies.)

All of this hasn’t mattered for music because the file sizes are so much smaller. Your computer can almost always store all of your songs with no problem. For most users, their iPods or even iPhones can store all their songs. That’s not the case with these video files. And that’s why the cloud is so important going forward. For music, it will be convenient. For videos, it will be vital.

And perhaps that’s why the cloud music team Apple purchased is working on video.

[images: Warner Brothers]

Previously, iPhone users could only access AudioBox via Mobile Safari, a bit of a kludge since the QuickTime Player plugin effectively takes over the phone’s browser. There’s also existing support for Android, a nifty HTML5-based browser version and a Windows desktop app, with the Italy-based company touting itself as an open platform to store a user’s media library in the cloud, giving them “access to uploaded media from anywhere through the highest number of devices possible.”

Of course, with Apple’s expected launch of its own cloud-based music offering based on the company’s purchase of Lala, AudioBox is just as well to emphasize ‘open’ and multi-platform support. On that note, I’m told that the company wasn’t even entirely sure if its iPhone app would be approved by Apple for sale in the iTunes App Store to the extent that it delayed developing advanced features such as ‘offline’ playlists in case it turned out to be a waste of time.

As it stands, the iPhone app supports streaming of a user’s music library over WiFi and 3G, multitasking/background support thanks to iOS 4, and unlike AudioBox’s Android app, playback can start and resume from any point in a track.

Along with the possibility of Apple, AudioBox competes directly with a number of services, including Spotify with its recent support for syncing a user’s own music library. There’s also the likes of mecanto.com, bitspace.at, psonar.com, moozone.com, and tunesbag.com (see TCEU coverage). Update: And of course, MP3tunes (see TC writeup), founded by Michael Robertson, an early pioneer of music locker-type services.

Revenue-wise, AudioBox operates a freemium model, with Pro accounts starting at $3.99 and providing greater storage than 1GB and, crucially, mobile app access. The company, founded in December 2009, also claims to already be profitable.

HP is preparing for a major showdown with Apple. After snapping up the beleaguered Palm for $1.2 billion, Hewlett-Packard has purchased Melodeo, a Lala competitor, for roughly $30 to $35 million, according to a source familiar with the deal.

The acquisition, which was signed this month, may seem inconsequential for a behemoth like HP, but it represents a major shift in strategy for the laptop-maker. With Melodeo in its pocket, HP is now a player in mobile music services. Didn’t expect that did you?

What is Melodeo?

Similar to Apple’s Lala or Pandora, the Seattle-based Melodeo streams music to its mobile apps from the cloud. Melodeo’s main product line is nuTsie— yes, an anagram of iTunes. NuTsie’s flagship service (which is available on several platforms including Blackberry, Android and Windows Mobile) scans your iTunes playlists and allows you to access those playlists on your mobile device in shuffle mode. You can also look at other users’ playlists and discover songs through the company’s proprietary recommendation engine or nuTsie’s editorial playlists (i.e. Top 100 Reggae Songs, Top 100 90′s Songs).

The pricing depends on the wireless provider and the phone, for example, the Android app requires a one-time download fee of $9.95, meanwhile, some Verizon phones are $2.99 a month. The flagship service is not available on the iPhone, for the obvious reason that the iPhone comes with your iTunes library, but nuTsie does sell an assortment of playlist apps on the iPhone, like “Top 100 On iTunes,” and Effin Genius, an app that scans iTunes and creates new playlists based on your preferences and the songs you don’t own.

Melodeo is not as well known as many of its rivals like LaLa, Spotify, or Pandora, but it has a growing base of customers. According to sources, its website attracts a little over 2 million uniques a month and nuTsie apps have enjoyed 2 million downloads with roughly 60% being the flagship app.

Those numbers aren’t earth shattering but the real value of nuTsie is in its next iteration. The company is preparing to unleash nuTsie 3.0 across its platforms, a service that will let you take your entire, physical music library, from your desktop, and copy it into the cloud. You will be able to access any song on demand— unlike the older version, which ties you to the shuffle mode. The service works through a joint desktop and mobile app, allowing synchronous updates. By unlocking your entire iTunes library and making it essentially fully functional on several devices, Melodeo is presenting a serious challenge (or at least a sizable disruption) to Apple’s music business model.

Beyond its stellar design, part of the reason Apple has built such a loyal legion of iPod and iPhone users is the iTunes program. The more portable a user’s music library is, the easier it is for users to step outside the Apple ecosystem. With several companies frothing at the lips to take Steve Jobs down a peg, Melodeo was an attractive asset. Prior to the deal, Melodeo raised $7.9 million from Ignition Partners and Voyager Capital— amusingly, Ignition Partners was a major investor in LaLa. In the acquisition, HP did not throw down serious coin to be the victor, but there were multiple suitors, including HTC (also a serious suitor of Palm), according to a source familiar with the deal.

With Melodeo, HP also gets a key hire: David Billmaier, Melodeo’s VP of Product Marketing. Billmaier is a former Apple employee who worked for Jobs for more than a decade designing Apple products. Billmaier will fit in nicely with the growing collection of ex-Apple employees at HP. In its Palm acquisition, HP gained several former iPhone engineers and Palm CEO Jon Rubinstein (although it’s unclear how his position will shakeout in the wake of the takeover).

The question now is what will HP do with Melodio and what does it mean for their larger, mobile strategy.

Logically, I expect HP to launch the latest iteration of Melodio’s nuTsie application on every HP-Palm and Slate product, probably starting later this year. The other option is to take the basic technology and create an entirely new HP music experience around it, retire the nuTsie brand, and transition its users over to the new product once it is up and running.

The introduction of nuTsie should enhance the appeal of Palm’s operating system, WebOS. Forget about Palm’s mediocre stable of smartphones, WebOS will be the critical pillar in HP’s mobile strategy. As HP’s SVP of Strategy and Corporate Development Brian Humphries recently told TechCrunch: “Our intent is to double down on WebOS.”

Unfortunately, HP is more than than fashionably late to the mobile party— but, at the very least, the company is cognizant of its tardiness. As evident from its recent acquisitions, HP is not wasting any time trying to build new products from within. They have correctly concluded that if they’re going to go full throttle on mobile, now is the time. So what HP wants— HP will buy. It will be interesting to see if this is just the beginning of HP’s shopping spree.

Update: HP and Melodeo have confirmed the deal.

From HP:

HP confirms that it has acquired Melodeo, a privately-held company that provides cloud-based delivery systems for content across multiple devices.

HP’s acquisition of Melodeo is another example of our efforts to bring new, innovative technologies to market. We are excited about the potential of this technology to bring the power of cloud-based delivery services to millions of customers.

Lala – where music will stop playing …

In a brief message that was just posted on the Lala.com website, Apple has announced that the service will be shut down on May 31st, 2010. Apple will not be accepting new users, and existing users will be able to log in only until the end of next month.

Does this mean we can start raising our hopes for iTunes in the cloud?

At the bottom of a Wall Street Journal piece published back in January 2010, the paper suggested that Apple was gearing up to launch iTunes.com as soon as this June, citing sources familiar with the matter.

For an extensive view on how far-reaching that could prove to be, check out this guest post by Michael Robertson, the former CEO of MP3.com, who laid out Apple’s cloud-based media strategy going forward.

An iTunes-in-the-cloud offering – which is basically what Lala’s value proposition boils down to – is the central part of such an endeavor. Late last year, we wrote about how a move to the cloud was inevitable for iTunes. With the imminent shutdown of Lala, it’s safe to assume something is brewing at Cupertino.

Will Apple be the first company to turn online music subscription services into a sizable business?

Perhaps Apple, which acquired Lala late last year, will be making an announcement at its Worldwide Developers Conference, which will be held June 7 in San Francisco.

Update: here’s what it says when you’re logged in (click for larger image)

Update 2: and this is the email that was sent out to users:

Dear,

The Lala service will be shut down on May 31st.

In appreciation of your support over the last five years, you will receive a credit in the amount of your Lala web song purchases for use on Apple’s iTunes Store. If you purchased and downloaded mp3 songs from Lala, those songs will continue to play as part of your local music library.

Remaining wallet balances and unredeemed gift cards will be converted to iTunes Store credit (or can be refunded upon request). Gift cards can be redeemed on Lala until May 31st.

Click here or visit Lala.com/support for more information, or to view Lala’s Terms of Service.

Thank you.
Lala

(Thanks for the tip, Josh)

Yesterday, we ran a guest post by Michael Robertson, the former CEO of MP3.com, who laid out Apple’s cloud-based media strategy going forward. An iTunes-in-the-cloud offering is the central part of this, and could happen “almost over night,” as Robertson laid out. And late last year we wrote about how a move to the cloud was inevitable for iTunes. The planets seem to be aligning for this to happen sooner rather than later. Apple’s recent purchase of the music startup Lala has potentially made this possible, because of that team’s talent, if nothing else. But there’s more.

Apparently, part of Apple’s strategy in moving iTunes online would be to make it so that third-party sites could easily implement one-click purchases of iTunes content, presumably through some iTunes APIs. Yes, plenty of sites offer iTunes click-to-buy buttons now, but they require that you load up the iTunes software and enter the iTunes Store through there to make the purchase — it’s cumbersome, to say the least.

A fully web-based iTunes could have huge business potential for Apple which has traditionally counted on the service as just a small source of overall revenue (aside from the newer App Store element), and used it as more of a way to move iPods with their higher margins. Such a move would potentially turn services like Pandora into mini-iTunes stores.

[photo: flickr/vsz]

For years there’s been speculation that Apple would supplement their $1/song (now $1.29) iTunes business with a monthly subscription service, but their upcoming plans are quite different and once again are positioning them to lead the digital music industry into a new era. Leveraging their ubiquitous iTunes software Apple plans to upgrade their users almost over night to a cloud music service in an ambitious move to beat Amazon and others to a cloud music service. Record labels are wary to give Apple even greater dominance which is why Apple’s new strategy is designed to sidestep new licenses from the major labels.

Apple’s recent acquisition of digital music startup Lala rekindled speculation of an iTunes subscription service. There’s no shortage of subscription offerings (Napster, Rhapsody, Spotify, Pandora, etc), but none have attracted the millions of subscribers necessary to make the high royalty structures work. Experts have pondered that Apple’s design expertise and hardware integration could make subscription work. And leveraging Lala’s digital library, licenses from the major labels, and a management team who cycled through several business models including the ten cent web song rental could make it a reality. It’s a logical assumption, but after talking to a wide variety of insider sources it’s clear there is no upcoming Apple subscription service and Apple has far different plans.

Lala will play a critical role in Apple’s music future, but not for the reasons cited above. Lala’s licenses with major labels are non-transferable, so they’re not usable for any new iTunes service. The 10 cent song rental model never gained traction and does not cover mobile devices thus is of little value to Apple. What is of value is the personal music storage service which was an often overlooked component of Lala’s business. As Apple did with the original iPods, Lala realized that any music solution must include music already possessed by the user. The Lala setup process provides software to store a personal music library online and then play it from any web browser alongside web songs they vend. This technology plus the engineering and management team is the true value of Lala to Apple.

An upcoming major revision of iTunes will copy each user’s catalog to the net making it available from any browser or net connected ipod/touch/tablet. The Lala upload technology will be bundled into a future iTunes upgrade which will automatically be installed for the 100+ million itunes users with a simple “An upgrade is available…” notification dialog box. After installation iTunes will push in the background their entire media library to their personal mobile iTunes area. Once loaded, users will be able to navigate and play their music, videos and playlists from their personal URL using a browser based iTunes experience.

Apple will link the tens of millions of previously sold iPods, Touches, AppleTV and iTablets to mobile iTunes giving users seamless playback of their media from a wide range of Apple branded devices. Since media will be supplied from the user’s personal collection, Apple is freed from the hassles of device and region limitations. iTunes shoppers will be able to continue to buy music and movies as they can now with purchases still being downloaded, but once downloaded they will be automatically loaded to their mobile iTunes area for anywhere access. Again because users are in possession of the materials no new licenses are required from the record labels or publishers.

Some are curious why Apple with thousands of engineers would need Lala talent and technology. For sure Apple could copy Lala technology, but time is of the essence and Lala lets Apple move faster in transitioning from their PC software business to a cloud service. They get a knowledgeable digital music engineering team, plus a code base to build upon which already does uploading and web playback. There’s precedence for this strategy. The iTunes software did not originate within in Apple but came via an acquisition. Finally, Apple gets the quick witted, brilliant, but occasionally loony Lala CEO Bill Nguyen who will play a future role in Apple. (Although one wonders how Jobs and lime light relishing Nguyen can co-exist.)

It’s critically important that technology companies build and maintain a core strength. This cornerstone allows them to command a significant portion of the profit stream and is a beachhead to launch other initiatives. Think Amazon/e-commerce, Microsoft/OS, Google/search, Apple/media. Jobs is keenly aware of the digital transition from PC to cloud centric programs and services. It’s imperative Apple lead in this transition or risk ceding leadership in media to others such as Amazon, Real, Microsoft, Yahoo, etc. Lala will help Apple protect their media franchise from encroachment by accelerating their cloud efforts. iTunes users can expect mobile iTunes in 2010.

eMusic last year inked a similar deal with Sony Music Entertainment.

The agreement includes titles from WMG’s Atlantic Records, Rhino Records and Warner Bros. Records as well as from independent labels distributed through WMG’s Alternative Distribution Alliance (ADA) stable that are not currently sold on eMusic. The deal will make 10,000 catalog albums from artists like REM, Depeche Mode and Aretha Franklin available for downloading, but does not include newer hit records.

eMusic says it currently offers more than 7.5 million tracks, and that it has sold more than 350 million music downloads under its current ownership. The company sells monthly membership plans beginning at 24 credits for $11.99. One of its rival, FreeAllMusic, yesterday announced that it had signed an agreement with Universal Music for ad-supported downloads.

eMusic CEO Danny Stein reiterated earlier rumors about its plans to complement the company’s subscription-based music download service with streaming, telling Reuters that the company is currently in talks with label partners for new licensing deals that would allow registered users to stream songs, similar to services like CBS-owned Last.fm and LaLa (which Warner Music Group invested in and was recently acquired by Apple).

Streaming would be added in 2010, provided rights holders come to terms with the realities of new business models, Stein said. We’ve contacted the company for more information about its streaming plans, such as timing and pricing.

Interestingly, Stein didn’t dismiss rumors about a potential sale of eMusic, but told Reuters that a buyer would have to pay its owner, Dimensional Associates, for a successful 2010 and 2011 upfront in order for them to consider it.

Which sounds to me like something that you would say if you were definitely up for sale.

Why? It’s hard to know for sure, but it seems pretty likely that Apple’s recent deal to purchase Lala is at play. At the very least, it would seem that behind-the-scenes politics are dictating the results now being shown. We noted at the time of the Apple/Lala deal that it could change the Onebox offering, and it looks like it has. Plenty of results that used to serve up a Lala play option now default to iLike, which itself is now a part of MySpace Music (as is imeem). In fact, doing a random sampling of 30 popular songs brought yielded 28 iLike Onebox results, and only 2 Lala results. The problem with this is that for the majority of iLike Onebox results, you can only listen to either 30 or 90 second clips, rather than the entire songs, like you could on Lala. That obviously makes Google Music Onebox music much less useful.

A couple weeks ago, BusinessWeek got a comment from R.J. Pittman, Google’s director of product management, stating the Apple’s Lala deal would not alter the Google/Lala agreement. “We are agreeing to continue to leave the service as it is,” he said. (Apple declined to comment on the matter.) But this may simply mean that Lala will remain as one of the Onebox options, but has been taken out as the featured player for most musical content.

“We have enjoyed a good relationship with Apple for many years, and that continues to be the case,” Pittman also told BusinessWeek. That’s true, but there has definitely been a growing divide between the two in recent months as their interests continue to overlap. This has become a big enough issue that Google CEO Eric Schmidt had to step down from Apple’s Board in August despite assurances that he had no plans to do so leading up to that.

It’s not clear if it is Apple or Google that would have wanted Lala to be less prominently featured in Music Onebox, but it’s certainly possible that neither really liked the placement. After all, in pitching the idea to the record labels, Google likely played up the idea as an alternative to iTunes. The music labels have long sought a viable alternative to Apple’s musical powerhouse that could restore some leveraging power to them. Meanwhile, Apple will now have to foot the bill for Lala streaming — and that means paying the labels for every clip longer than 30-seconds, we hear. So they probably don’t want all those Lala clips being served up either.

Regardless of the reason, Google Music Onebox is now a lot less useful, and that’s too bad.

Update: As some people have noted in the comments, results on searches vary — but it’s important to make sure you’re logged out of your Google account and you clear you cookies. The reason is that Google keeps track of your preferences in a cookie.

[photo: flickr/duncan harris]

The launch has been a long time coming, considering the fact that the startup has already produced a fully functional web client, and Adobe-AIR powered desktop client and applications for iPhone, Facebook and Boxee since its founding in late 2008.

Like Lala, imeem (which both recently got acquired, by Apple and MySpace, respectively) and other competitors like MP3tunes and Deezer, tunesBag allows registered users to upload their entire music collection to the cloud. This enables them to play tracks from anywhere as long as they have a working Internet connection and a browser.

There’s also a social layer wrapped around the music streaming and backup service, which makes it easy for users to share individual songs and playlists with others by e-mail or via social networks, as well as rate and recommend them publicly.

What about copyright, you ask? tunesBag claims it has all of that covered, as it will only make sharing features visible to people who are located in countries where sharing of tracks is legally covered by licensing agreements, as determined by their IP addresses. As a substitute, the service will attempt to fetch the music from other sources (e.g. YouTube to let other people stream songs you wish to share with them). This isn’t fail-proof, of course, which tunesBag acknowledges.

As an example, I uploaded Depeche Mode’s Enjoy The Silence to my tunesBag account, and the public link to it will not effectively give you access to the track I uploaded, but to a video that features the song as the audio layer.

I hardly think this approach is going to stop the record industry from taking a very critical look at the fledgling company’s offering, although they appear to be serious about closing deals for more countries in 2010 (the service is already available in multiple languages, by the way).

TunesBag has adopted the standard business model of most digital music startups: advertising, selling premium services and affiliate revenue.

The startup offers a basic, advertising-supported version of the product for free with 1GB of space, or an ad-free version with more storage space for your music (up to 200GB), higher streaming bitrates and a desktop uploader. The company also hopes to generate revenue from referrals for music purchases, event tickets, etc.

The service has announced that it surpassed 40 million registered users earlier this month. That means the service had doubled its size in 2009. And it’s adding 600,000 new registered users a week now. Even more remarkable is that half of those new users are coming from mobile devices. And of those, the iPhone continues to lead the way with 10 million Pandora users of its own. That number has grown some 400% this year.

These good numbers follow the news earlier this year that Pandora had officially been “saved” after reaching an acceptable deal with the music companies for the royalty rates they have to pay. Pandora, unlike the other music services mentioned above, is much more of a radio service in the traditional sense of the word because you can’t pick exactly which song you’re going to listen to. But a proposed rate hike, which almost went into effect, would have severely hampered Pandora’s ability to survive as a business. Instead, with the new deal, they expect to be profitable by next year.

And that certainly seems possible given that Pandora is now apparently accounting for 44% of all Internet radio listening hours, Ando Domestic Ranker and their own internal numbers confirm. And they have great demographics to serve up ads to. Amongst 18-24 year-olds, Pandora has twice as many daily visitors as Hulu and ESPN, according to comScore. That said, the more music Pandora streams, the more they have to pay, so they need those ads to be effective. But that seems to be the case.

And while you might think the surge in mobile usage might be bad for Pandora which relies heavily on the ads that blanket its website, number indicate they have been able to monetize these mobile users as well.

LaLa was purchased for $17 million by Apple, according to our sources with indirect knowledge of the deal. And the company supposedly had $14 million in cash in the bank, meaning the actual purchase price was really $3 million.

That’s in line with recent competitive sales like iLike ($20 million) and iMeem ($1 million). LaLa had plenty of cash in the bank, but they were burning $500k/month, say our sources. There’s just no reason Apple would pay $80 million for the company.

We also believe that LaLa was acquired mostly for the star engineering team and the awesome recent Google deal more than for the product. iTunes in the cloud isn’t something we should hold our breath for. $3 million for top-of Google music results and a top team of engineers makes a lot of sense. $80 million not so much.

LaLa has raised $35 million and was valued at $180 million or so in it’s last round of funding. The reason for the misreports on the $80 million sale may have to do with those numbers. We’ve heard that the purchase price was “forty or fifty cents on the dollar” from one source, meaning 40% or 50% of the $35 million in venture capital the company has raised. But a misunderstanding of what that means could easily have people thinking it was 40% or 50% of the last round valuation, which gets you the $80 million number.

If we get additional sources on this story either way we’ll update. LaLa, which used to love to talk to us, has become scarce when we call or email.

This could be bad news for Lala users. It’s unlikely that the innovative deals negotiated by Lala will survive through the acquisition. For over a year, Lala users have been purchasing the rights to stream their music an unlimited number of times for ten cents per song. If the deals with the music labels go up in smoke, Lala may lose the right to stream those songs. In other words, all the money users have been spending on web songs may go down the drain. If the deals are nullified, hopefully Apple will renegotiate them to at least cover existing purchases until it releases its own streaming music service. We’ve reached out to Lala but have yet to hear back.

Likewise, this may well affect the Lala music gifts that have been recently offered by Facebook, and it could also harm the Music OneBox service Google recently launched (though Google can still rely on MySpace/iLike for its song streams).

Stone writes that Apple is interested in Lala because of its engineering talent and technology, and that it was Lala that initiated the discussions. From the Times:

One person with knowledge of the deal, but who was not authorized to discuss it, said that the negotiations originated when Lala executives concluded that their prospects for turning a profit in the short term were dim and initiated discussions with Eddy Cue, Apple’s vice president in charge of iTunes.

This person said Apple would primarily be buying Lala’s engineers, including its energetic co-founder Bill Nguyen, and their experience with cloud-based music services.

The deal makes sense. It seems inevitable that Apple will eventually launch its own cloud-based streaming music service. And that’s exactly what Lala is — an iTunes in the cloud, with some interesting pricing mechanics.

A few other interesting things to note. This acquisition comes a little more than a month after Lala was integrated into Google’s OneBox and Facebook’s gift store. Lala may well have been viewing these launches as last-chance efforts to find a path to profitability. Given these reports that Lala’s “prospects for turning a profit in the short term were dim”, it looks like those launches may not have gone as well as Lala hoped.

Bloomberg is reporting that Apple is “in talks to acquire online music service Lala, according to two people familiar with the matter.”

The shoe fits. Back when Lala launched I described it as an iTunes in the cloud — something that we believe Apple will inevitably launch. Apple is certainly building a lot of data center capacity for something. Lala is already one of two companies powering full-song streaming for Google’s new music search (the other one is MySpace Music via its iLike acquisition), and it is a part of the Facebook gift shop. Lala already has all the streaming licenses in place with the major music companies and a team which can help Apple create a killer streaming version of iTunes.

We’ve been huge fans of Lala since its launch in October (you can see our extensive coverage here. The site uses an innovative ‘web song’ model that lets you buy albums for very cheap (10 cents per song) that you can then stream as many times as you’d like. That pay-to-stream model would certainly be more attractive to Apple than just an advertising-supported one. Lala’s streaming licenses might also allow iTunes to deliver a full-song sample instead of the 30-second previews currently available.

Update: I walked over to the Lala office, which is only a few blocks from us, to see if I could gather any more details. They didn’t seem particularly happy to see me. I knocked on the door and a Lala employee answered, keeping the door half shut so that I couldn’t see in. I asked if any of the company’s executives were around. He looked over his shoulder, asked if they were, and a second later said they weren’t (it was not a particularly convincing effort). He promptly shut the door, and I’m pretty sure I heard someone inside say something to the effect of “Are you serious, don’t answer it!”.

Obviously this isn’t confirmation of anything, but they’re clearly on high alert.

One other point to note: back in October we did an extensive sneak preview of the long-awaited Lala iPhone app. The Lala team had previously been concerned about having their app rejected because of the way it competed with the native iTunes app, but in light of the recent acceptance of apps like Spotify they were optimistic.

It’s now been more than a month since we gave that preview. Six days ago I reached out to Lala to find out what the situation was, and, as a secondary question, to see if they had an extra spot in their iPhone beta program. CEO Geoff Ralston replied to my question about the beta, but he totally ignored my question about the iPhone app. Most CEOs in that position would have at least acknowledged that they had fallen prey to the Apple approval process.

We’re still digging for more.

We’ve heard that artists will be offering songs that can only be found through Google search, some of which will be given away for free. Over 20 artists are involved. Beyond that details are still scant, but we hear that the new promotion will start running soon — perhaps later this week.

MySpace is the big lottery winner here. They bought iLike for $20 million in August. What they got: a talented (literally) team that is starting to fill the executive ranks at MySpace, the biggest music application on Facebook, and, it turns out, a deal with Google that is now sending massive traffic flow directly to MySpace Music.

Our understanding from sources is that MySpace made an offer to iLike without knowing about the Google deal. Supposedly, since iLike was under NDA, all they knew was that iLike had a big partnership opportunity with some big company, nothing more. In hindsight the iLike deal looks smart even without Google. Add that in and it looks absolutely brilliant. I’m no fan of MySpace CEO Owen Van Natta, but I’ll give the man credit here.

Giving Facebook The Benefit Of The Doubt

Facebook decided not to aggresively pursue iLike. They seem to have firmly moved away from any desire to deal with content directly, so this looks less like a mistake and more like a strategic decision.

But one thing is clear. Facebook utterly failed to execute on their music strategy from last year, even while trying to work via a partner application to avoid direct contact with content. Meanwhile, Google stepped in and quickly brought streaming music directly to users, without paying anything at all for it.

iLike CEO and now MySpace exec Ali Partovi, speaking at the launch event last night, didn’t hold any punches against Facebook. He gave huge credit to Google for pulling off a win-win-win-win (labels, google, users, MySpace/LaLa) in the difficult online music space. And he noted that “others have tried or are still trying and have failed miserably.” He was quite clearly referring to Facebook.

The truth is that we don’t know if Facebook flailed on a huge opportunity to get into the Google search stream, or if they just decided they don’t want the hassle of dealing with music directly. We’ll give them the benefit of the doubt. And they certainly had no idea of the Google deal back when they were trying to buy iLike anyway.

Ticketmaster Flubs It

None of Facebook’s excuses (didn’t know about the Google deal, strategically not what they want, etc.) apply to Ticketmaster. The company was a big shareholder in iLike, had a board seat, and certainly new every detail of the Google deal. They could easily have acquired iLike, probably for not much more cash than the $13.3 million they already had invested. But instead they let the company go to MySpace, knowing full well that they were enabling a huge potential competitor.

If Ticketmaster had acquired iLike all that Google music search traffic would be under their control. Click throughs to the iLike site could be monetized through event ticket sales. It would probably be a matter of months, not years, before they got their investment back in additional ticket sales.

And what’s worse is that MySpace now controls all that traffic. MySpace actually has a much more complete worldwide database of concert events than even Ticketmaster has, and they already flow through a lot of traffic to ticket sales at Ticketmaster and competitors. Now that database is combined with iLike’s impressive concert discovery and alert product. When you plug Google search traffic into all of that, its got to be scary for Ticketmaster:

“MySpace has the world’s largest database of live events, and iLike has already built some of the world’s best concert-discovery features available online,” Courtney Holt, president of MySpace Music, wrote in a blog post. “We’re delighted to have implemented the first structured integration of concert data into Google search, and this is only the beginning of our efforts to innovate in the live event space.”

We frankly can’t see any reason at all for Ticketmaster to let iLike go to a potential competitor, particularly with this Google deal locked up. Ticketmaster CEO Irving Azoff certainly knew what was happening. So why did he make such a huge misstep? Possibly because he’s in the middle of a divestiture of topline assets as part of a merger with Live Nation. Azoff is rumored to be looking for a huge personal payout as part of that deal, and may even be spinning himself off along with assets.

In other words, maybe Azoff couldn’t care less about the future of Ticketmaster.

Key takeaways – Google will integrate new partners as it makes sense. And while MySpace knew about the negotiations between iLike and Google prior to announcing their acquisition of iLike in August, the deal was far from certain. More on that in a subsequent post.

All are below:

For those that haven’t used Lala before, here’s a quick overview of the service: Lala revolves around the concept of the ‘web song’ — you’re allowed to listen to any song you want totally free exactly once. If you like it, you can then pay 10 cents for the right to stream it as many times as you’d like from then on. This means that you can ‘purchase’ and entire album for around a dollar. You can also use Lala’s Music Mover tool to upload your entire library of MP3s to the cloud free of charge. This is all built on top of a very slick interface, but so far it has come with one downside: because all of the songs are streamed, users didn’t have a way to access them when they weren’t at a computer. Lala’s iPhone app changes that.

The app will be familiar to anyone who has used the iPhone’s native iPod app. The big difference is that all of your songs are streamed from the cloud, so you don’t have to worry about syncing your songs. The app is also better for music discovery than the normal music app, because you don’t have to wait for songs to download — you can instantly add an album to your music library in one click. And it’s significantly cheaper.

Of course, streaming has its own problems. Normally if you’re disconnected from a streaming music service, your music goes dead. Fortunately the Lala app uses caching to store hundreds of songs from your library, which it has waiting in case your connection dies. Lala wouldn’t say exactly how many songs are saved, but they say that the app uses some intelligence to determine what gets cached (e.g. it will generally save songs you’ve most recently added to your library).

So what was the reason for the delay? Lala CEO Geoff Ralston says that “basically everything” had issues, from dealing with licensing from content owners to tweaking the app itself. Suffice to say, it works very well now, and is sure to be a hit among Lala users. It has good timing too: Lala just launched as one of the partners powering Google’s music search service, which is sure to drive a lot of traffic to the site.

Other music streaming apps coming for the iPhone include Spotify, though that isn’t out in the US.

Check out a video walkthrough of the app below.

I’m here at Capitol Records in Hollywood, California for a special media event where Lala, MySpace, iLike, Google and others are officially announcing the launch of Google’s Music Onebox — a special new kind of Google search result that will let you instantly stream songs directly from Google’s results page. We first broke the news of the feature’s impending launch last week, though none of the companies involved have been willing to comment on it until now.

Here’s how the new feature will work: Onebox will let users stream songs directly from Google’s search result page, and will also include additional content like tour information and music videos (the actual content shown will vary depending on the partner — more on that later). Enter a query for “Use Somebody”, and you’re going to see a small ‘play’ button in your search result that lets you stream the Kings of Leon song in its entirety, or buy the song. Clicking on the play button will bring up a small browser window that will immediately start streaming your song. If you enter the name of an artist rather than a song title as your search query, Google will present a handful of popular songs by that artist with multiple ‘play’ buttons.

Here’s what the results page looks like, when multiple songs are being presented:

The new feature is being powered by two entirely different services: Lala, the innovative music site that lets people buy ‘web songs’ for ten cents, and iLike, the popular streaming music and artist hub that was recently acquired by MySpace. In an interesting twist, iLike’s appearance in OneBox will be short-lived — MySpace branded widgets will soon be taking their place. This is an important step in MySpace’s transition to being seen as a media/content hub rather than a pure social network. MySpace is also leveraging some of the new features it has recently rolled out since the iLike acquisition, including its artist dashboard and extensive library of music videos — you’ll be able to jump to a music video for a song directly from MySpace’s Onebox results (this is impressive given that the site only launched those services a week ago).

Likewise, this is also a massive win for Lala. We’ve been big fans of Lala since the site relaunched back in October 2008 with a unique business model that lets users build their music libraries in the cloud for cheap — you can purchase an entire streaming version of an album for around 80 cents, or 10 cents per song. The service’s only problem has been establishing traction, and this will certainly help with that. Expect the service’s userbase to see a big jump as millions of people on Google are exposed to Lala for the first time.

The joint partnership comes with a few quirks. Google will basically be doing a coin toss with each eligible query to determine which service will be serving up the widget. That will help the service distribute load and perhaps leaves the door open for Google to include multiple other music services, but I’m not sure it will provide the best user experience — some users may get confused when a feature in one widget isn’t available in the other.

Google VP of Search Products and User Experience kicked off the event,talking about how Google has expanded its search offerings over time, with Images (2201), Book (2003) and Maps (2007). “Music” is one of Google’s top ten searches of all time, as is “lyrics”. But it hasn’t always been easy to actually find music, which is why Google is looking to offer full song streaming directly from Google.

Google has also partnered with Gracenote to provide full lyric search — if you type in the lyrics from a portion of a song, they’ll identify the song. Song purchasing partners include imeem, Rhapsody, and Pandora, who will help with music discovery.

Google passed the baton off to MySpace, with MySpace Music President Courtney Holt outlining how much growth MySpace Music has seen and how happy the site is to be working with Google. Ali Partovi, iLike’s former CEO (and MySpace’s current SVP Business Development) took the stage, first taking the time to congratulate MySpace on acquiring iLike. He was joking, but what he says has some truth to it: MySpace made an offer on iLike before iLike could talk about the Google partnership, which iLike had been working on for a long time. In other words, MySpace lucked out with the deal.

Lala’s Bill Nguyen next to the stage, saying that Lala has always been about finding music, and then discovering more that you might like. He says that for the last ten years, music has been about business models, not discovery. Once you wind up on Lala, you can follow other users and see what they’re listening to.

The new feature will be gradually rolling out to users, with a small percentage (1-5%) having access today and rolling out gradually over the next couple days to everyone in the US.

Here’s the Lala player:

Here’s MySpace’s widget (you’ll be seeing an iLike widget temporarily, but eventually they’ll shift over to look like this):

Following Google’s announcement of its music product this morning, Facebook is officially enhancing its Gift Shop with a redesign and new categories of gifts and additional gifts for charity, music and sports from developers. The changes will be rolled out to users in the coming weeks

On Facebook’s Gift Shop, you need to purchase credits on the site (via credit card), that cost 10 cents in U.S. currency are are available in 15 different countries. With the enhanced version of the gift shop, you will be able to purchase songs as gifts for your friends. Powered by Lala.com, the gift shop will offer over 8 million songs from a vast variety of artists ranging from Mozart to Beyonce. Web songs cost 1 credit (or 10 cents) each, while full, downloadable, and digital rights management-free (DRM) MP3s are 9 credits each. Some of this money goes to Facebook but Lala takes a cut of every transaction. But you don’t have to have a Lala account to play or receive a song.

So how do Facebook users play their songs form the social network? You can play songs from your news feed or from Lala.com’s platform, which they can connect to via Facebook Connect. If you buy an MP3, you can also download the songs you can play the tracks on iTunes or other music players. Facebook users who can see the music gift on other friend’s feeds can play the song in full once, after which they will be able to play a 30-second clip.

Facebook is also getting a little more sports-friendly by adding branded virtual gifts from professional and college teams. Officially licensed gifts from the U.S. National Basketball Association and U.S. Major League Soccer are now available in the Gift Shop, as well as school-themed gifts from a number of major U.S. colleges ranging from Oklahoma State to Stanford University.

While you can currently purchase gifts from non-profits, like Kiva, Project Red, TOMS Shoes, Charity Water and the World Wildlife Fund, Facebook is now also including gifts via the Causes application. So you can make donations to a cause as a gift for your friends for pretty much any cause supported through the app.

The concept of Facebook as an e-commerce platform seems to be lifting off. PayPal is partnering with Payvment to help any Facebook user set up a retail storefront. Not to mention the immense popularity of virtual gifts on the platform. And with this new announcement, it seems that not only if Facebook opening up a revenue stream, but the network is creating a totally new way for users to socially engage with the platform: through music.