iLike: A cautionary tale

TechFlash reports: There's still no official news on MySpace's reported $20 million acquisition of iLike. But there continues to be plenty of speculation and chatter about why the one-time fast growing Seattle online music service would sell out at that price to that social networking company. And now TechCrunch's Michael Arrington -- who broke the news of the deal earlier this week -- says that iLike had other offers from Facebook and Amazon.com.

No matter who ends up buying iLike, the company's story and weak valuation indicates the huge challenges for startup companies that attempt to build services on the back of other platforms.

Rumors have circulated for months about iLike -- including speculation last year that RealNetworks and Ticketmaster were interested. But it is looking more certain that MySpace will end up with the online music recommendation service, with a deal expected to be announced soon.

iLike -- which has raiased $16.5 million -- boasts more than 50 million registered users and has operated at break even all of this year. It also once boasted a valuation of more than $50 million, but that took a nose dive once it entered the M&A market.

CNET's Greg Sandoval -- whose been doing some solid reporting on the iLike deal -- offers an interesting explanation on why iLike's valuation is so low. He writes:

What has pushed iLike's valuation down is a problem with control. The company's managers have no way to prove to potential acquirers that their business model has a bright future because they can't predict from one day to the next which direction Facebook's Platform will go. The source said that leaders at iLike, or any other company on the platform, are not truly in control of their fate--Facebook's Mark Zuckerberg is.

We've chatted before about the problems of hitching a wagon to a rising star (whether the iPhone or Facebook or Twitter) -- a topic that Seattle venture capitalist Bill Bryant addressed in this TechFlash story from June. Bryant told me:

"I am quite skeptical that one can build a valuable, large scaled and sustaining business on top of someone else's core platform offering. It doesn't matter if you're talking about Twitter, Facebook, Salesforce, the iPhone, Windows, Cisco ... the platform will over time absorb the best and highest valued extensions, additions, features, services in its own drive to add value to the broadest set of customers."

Looks like iLike may have found themselves in this trap, which should serve as a cautionary tale for any startup that hooks their future to a platform that they don't own.