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Tuesday, December 8, 2009

Timing is everything

Over the weekend, Apple bought music streaming company Lala for an unspecified price. The most authoritative report comes from blogger/reporter Peter Kafka:
Apple ended up paying around $80 million for the company, according to multiple sources. That’s less than half what investors valued the company at in 2008, but it’s more than the $35 million the company raised throughout its life. Which means that some investors could get their money back and more.

But not all of Lala’s investors. Warner Music Group (WMG), for one, ended up getting back about half the $20 million it put into Lala, I’ve confirmed with people familiar the company.
This account and others make it clear that Lala is being purchased for the knowledge of its staff and its technology. One thing it never did was create a viable revenue model, despite multiple iterations and support from both VCs and record labels.

This seems to be a common problem in Web 2.0 startups. The Dot-Com II era has not been creating viable stand-alone companies, but instead technology sandboxes that have to be bailed out by a good fit to a rich incumbent. In this case, Lala’s service nicely complements the market-leading iTunes. But relying on acquisition for exit has always been a small-numbers problem, particularly when the big boys have gobbled up your competitors (leaving you without a dance partner).

As it was, it sounds like the Lala investors (or founders) got a little greedy. Kafka notes that the investors thought the company was worth $200m at its peak. It‘s not clear if there was a willing buyer that was turned away. But if the owners were holding out for more, they clearly gambled big and lost big. As Charlie Jackson used to tell me, “I’d rather be lucky than good” — an admonishment that timing is everything.

Instead, timing is against the entire categlry. A lot of people thought digital technologies would transform the music industry, and thus garnered piles of VC in hopes of realizing that vision. As Kafka notes, the track record is not great:
The last big exit for a digital music company happened way back in the spring of 2007, when CBS (CBS) paid $280 million for Last.fm. But no one has gotten anything close to that for digital music since then. Imeem is being sold for spare parts, and News Corp. also bought iLike at a steep discount. Spiralfrog filed for Chapter 11 after burning through its cash.
Still, somehow Pandora raised another $35 million. Between the economy, the capital markets, the cratering of its sector and its similar lack of a business model, the wildly popular service with innovative technology has been darn lucky to survive multiple brushes with death. If I were CEO, I’d be looking to negotiate any exit ASAP.

Update Wednesday 9am: Other estimates put Lala's purchase price at $17 million — and a net price of $3m after allowing for cash on hand. Meanwhile, MySpace bought another music service with $24m of VC for “less than $1 million” according to various accounts.