Warner Music Says Imeem Is Worthless, And Owes It $4 Million Which It Can't Collect

How bad are things getting for music streaming startups? We knew that imeem was on the verge of shutting down before getting a last-minute cash infusion from some of its investors, but an SEC filing from Warner Music adds some more details about exactly how dire imeem’s situation is, as well as that of another music startup, Lala.

Warner Music Group, an investor in both imeem and Lala, thinks they are no longer worth much, if anything at all. It wrote down its entire investment in imeem and half of its investment in Lala in the most recent quarter. As detailed in its 10Q report filed with the SEC, it took a $16 million charge to write down its investment in imeem, and an $11 million charge to write down part of its investment in Lala, plus it took another $4 million charge to write down a bad debt from imeem which it never expects to collect. That comes to a total of $33 million down the digital music drain.

But the reason imeem is in such dire financial straits is because of the crushing payments to music labels it has to dole out for every song streamed from its site. It has renegotiated its deals with the labels to pay on a revenue-per-user basis instead of per stream, and Warner’s filing hints at why it had to do so. It appears that imeem had simply stopped paying those per-stream fees, which would explain the $4 million in bad debt. And that was just for one quarter for one label. No wonder imeem nearly ran out of cash. It had to stop paying its bills.

According to comScore, imeem’s U.S. traffic has come down about 25 percent off its peak last July. As of March, 2009 it was at 5.3 million unique visitors in the U.S. and 24 million worldwide. In the perverse world of music streaming licensing, the bigger your audience, the more money you lose.

Update: When imeem raised rescue money from investors, it had to recapitalize. If Warner pitched in, which presumably it did, then it would have had to write down its old investment anyway. If that is the case, then maybe it doesn’t think that imeem is completely worthless, it is just marking its investment to market. With a recap that means marking it down to zero. But any additional investment after the recap wouldn’t be reflected in that write-down. And since you can still stream Warner artists on imeem, it stands to reason that Warner has not entirely abandoned the startup. Where there is music, there is hope.