So Apple did the deed. It bought streaming music startup Lala.
AllThingsD’s Peter Kafka says it was done at a valuation reflecting Warner Music Group’s writedown earlier this spring, which means investors are lucky to get 50 cents on the dollar. The New York Times also reported that the sale was prompted by realization that Lala’s prospects for profitability in the near future were dim. This makes Lala the third music startup this fall to be acquired at a breakeven or loss to investors, after iLike and Imeem were bought by MySpace.
Music is extraordinarily difficult. The going rate for streaming is around a half-cent per play, and any startup eager to break into the space must confront the four major record labels in the U.S., who demand a pound of flesh usually in equity and an upfront payment worth millions of dollars. This means you too, Spotify. (Hence, the much-ballyhooed Swedish startup’s $50 million round involving Hong Kong billionaire Li Ka-shing this fall.)
So what does Apple get out of the deal? Lala’s streaming contracts expire in the event of an acquisition, so scratch that off the list. The buy could help Apple kill an emerging competitor, or bring in Lala’s engineering talent to build some streaming functionality into iTunes. Or Apple could be buying it to keep it out of the hands of another mobile operator or manufacturer like Nokia, that would want to offer streaming content to customers.
The normally chatty founder Bill Nguyen and his team aren’t talking to the public. He spoke publicly earlier this fall when Lala secured a deal with Facebook to offer song streaming on the social network in the form of virtual gifts. Lala has scored a few promising deals this fall, including Google’s music search service.