MySpace's iLike buy raises questions about Facebook

updatedThe reported sale of popular online social music application iLike to to MySpace for the surprisingly low price of $13.5 million set off a flurry of rumors and fragmented reports across the web earlier today — some calling it a quickie fire sale, others claiming it spells doom for all web-based music distributors, and many questioning why Facebook would let its most popular music application fall into the hands of its rival.

One of the biggest questions is this: If such a major application commands such a low valuation, what does this mean for Facebook’s application ecosystem? Why do developers want to build on Facebook if there’s no perceived value there? But caution is merited here: It has been incredibly tough to make money from music on the web, and there’s no reason to believe that support by Facebook should really change that. Other apps on Facebook, such as social games, are doing fine.

iLike’s status is significant because it had a special relationship with Facebook: The application was long considered the Facebook music application, and Facebook had refrained from developing its own. That contrasts to other popular platforms, such as iPhone, which has iTunes, and MySpace, which has MySpace Music. The longer Facebook refrained from building its own, the more it seemed iLike had become the official Facebook music app.

Officially, both MySpace and the music distribution and recommendation company are silent on whether a deal is even in the works, although we’ve had enough sources surface (albeit requesting they be kept anonymous) to suggest an acquisition is more than likely. When, why and how much is still unclear however. So-called “insiders” are divided on the facts. While Kara Swisher says she relied on “several sources close to the situation” in the All Things Digital article that kicked off today’s news, one source of ours insists that the story — mainly its claims that iLike had run out of cash, along with hard numbers — is inaccurate.

Our source says reports of a roughly $20 million deal (at most) between MySpace and iLike are more accurate than the $13.5M number and that such a deal would take place this week. That being said, if you tack on the $6 million the All Things D article says will be earmarked for employee retention, the figure is basically $20 million anyway.

But skirmishes over the limited facts aren’t nearly as interesting as what iLike could do for MySpace — and, even more so, why an application that owes so much of its success and traffic to Facebook (some estimates put it at 60 percent of its users) would join forces with its primary competitor. And finally, there’s the valuation question: How much does iLike’s status reflect on the values of other Facebook applications?

myspace-primary_logo-blue_clean_53_1007_lowThe first question is pretty straightforward. MySpace has actively been rebranding itself as more of an entertainment portal than just a social network, especially since Owen Van Natta became CEO. And so far, it’s seen success. Bands have found an effective outlet for recruiting fans and spreading news in MySpace Music, a service that allows them to host their own pages and sell their music. iLike does pretty much the same thing, only it has a substantial presence on the other major social networks as well — significantly Facebook, but also Hi5, Bebo and others. Really, it only makes sense for the larger fish to gobble up the smaller.

The second question — what this means for Facebook and its relationship with iLike — is a lot stickier. For a while now, we’ve been hearing rumblings that Facebook isn’t the most hospitable environment for application developers. Terms of service often shift, leaving apps out in the cold, and favoritism is rampant. Basically, we’ve heard that if Facebook tells a development team to “Jump!,” it had better answer: “How high?” Or it could find its app buried or even banned. Still, it’s surprising to hear that this might have been the case with one of its earliest (iLike launched in 2006 at the start of the app revolution) and highest-profile applications.

Whether or not these sentiments are true for iLike or even most apps, we don’t know (developers would be crazy to voice these criticisms publicly, because they could be punished). But it would make sense for iLike to find refuge with MySpace if the tides had turned against it at Facebook. It may not have been out of money — as some internal sources argue, countering rumors — but if its Facebook following was truly in jeopardy, it would have probably hit a wall sooner than later.

There is evidence that iLike probably hasn’t run dry, including reports that the first quarter of this year was its best yet and that it has been cash-flow positive since December of 2008. It also raised $16.5 million from its founders, as well as from Scott Banister, Bob Pittman, Vinod Khosla, and, notably, Ticketmaster (disclosure: Mark Sugarman is a seed investor of iLike, and he’s also an investor in VentureBeat, although VentureBeat’s editors haven’t had a single conversation with Sugarman about iLike). Yes, Ticketmaster did dial down its stake in the company, but it still had prospects for another round of funding and was reportedly planning to phase the ticket distribution giant out as an investor anyway.

The third and final question is about valuation. It’s true that music has had a really tough time on the Web, and a low value for iLike shouldn’t automatically lead us to conclude that all other Facebook applications won’t do well. In fact, some companies have downright thrived since launching on Facebook. Games company Zynga started on Facebook, but has boomed, has since adapted to the iPhone, and is the envy of Silicon Valley right now. It’s reportedly on track to make more than $100 million in revenue this year — which would make its market value at least that, and perhaps even double or triple that.

Admittedly, $20 million isn’t a blockbuster exit for any of these parties, considering that iLike was valued at more than $50 million at one point last year. But the argument has been, in this instance and others, that it would be hard for any company so dependent on Facebook — working within an alleged set of constraints — to command a major price tag.

VentureBeat will continue reporting on the situation as more details come to light.


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