Digital Music War Gets Dirtier

Fresh on the heels of digital music startup iMeem's deal with Universal Music Group allowing it to stream songs from the label's catalog, an online row has erupted about the ramifications of the deal for the future of the music business.

Writing on his blog, serial music entrepreneur Michael Robertson, the founder of MP3.com, declared that the iMeem/UMG deal is a death sentence for iMeem, a San Francisco-based startup.

Robertson called the deal, in which iMeem and UMG will split ad revenue, "a crushing financial agreement that allows [iMeem] to survive as long as venture capital money continues to flow into the company, but spells almost certain financial calamity once outside funding halts."

Robertson's basic argument is that the major labels are pursuing a "gun to the head" strategy, which essentially exploits digital music startups by imposing onerous contractual terms that will prevent them from being profitable.

Robertson cites a $20 million prepayment reported by the Financial Times that iMeem was forced to pay, suggesting that it's something of a kickback.

"[IMeem] paid a portion of those monies now and are required to pay the remainder in the near future," Robertson wrote.

In an interview with Portfolio.com, iMeem spokesman Matt Graves categorically denied the accuracy of the FT's report, which is being used as a plank in Robertson's argument that iMeem signed a bad deal.

"Michael's errors are legion and the information in his post is highly inaccurate," Graves said. "Reports of our future demise have been greatly exaggerated."

The spat has been playing out on the influential Pho digital media email list, which is normally strictly off the record, in front of over one thousand digital media heavies. Graves elaborated on the dispute in a phone interview with Portfolio.com.

The argument points to the state of utter confusion - and indeed panic - over the best way for the music industry to adapt the challenges posed by online music distribution and peer-to-peer piracy.

Over the last year, iMeem has worked to craft licensing deals with all four of the major labels. Each deal is different, Graves said, and all are strictly confidential. But the essence of each deal is an ad revenue split between iMeem and the four major labels, according to published reports. IMeem currently has 19 million users per month.

What set Graves off was apparently Robertson's comment that, "candidly, Imeem personnel will say that their hope is to sell Imeem to a large conglomerate that desires the substantial traffic Imeem currently receives and is willing to overlook the underlying economics."

Graves denied that Robertson ever spoke to any employee of iMeem in a position of authority to comment on the company's deal with UMG.

And, although up-front payments are a common feature of the kinds of deals digital music companies are striking with the major labels, Graves categorically denied the accuracy of the FT report that Robertson cites.

Robertson, it should be noted, is currently embroiled in a lawsuit with EMI over one of his new businesses, MP3Tunes.com, which allows users to store their music online in so-called virtual "lockers."

Graves declined to comment on the specifics of the UMG deal, citing a confidentiality agreement with the label.

by Sam Gustin