Peter Kafka

Recent Posts by Peter Kafka

Exclusive: Warner Music Group Gets Back Together–Very Cautiously–With Imeem

the-breakupJust a few weeks after a very public breakup, Warner Music Group and Imeem are getting back together again.

Warner, which told investors last month that it had written off the $16 million it had invested in the Web music start-up, plus another $4 million in debt, has made a new deal with the company and will get another slug of equity. The big difference: This time, Warner isn’t cutting Imeem a check.

Instead, Warner will get more equity in Imeem in exchange for a renegotiated licensing deal that is supposed to 1) give Imeem a better chance of being able to pay Warner for use of its music and 2) reduce the amount of cash Imeem does pay out to Warner every quarter.

Both companies declined to comment. But multiple sources familiar with the transaction say it was tied to a funding round that Imeem just closed, a follow-up to the emergency money it took on earlier this spring. In total, I’m told, Imeem will have raised an additional $6.5 million this spring. No word on which investors ponied up cash.

But I do know that it wasn’t Warner Music Group (WMG), which already had to tell investors that the $20 million it put into the company previously was worthless. Warner still holds the shares it has written off, but it wasn’t going to pony up any more cash in the recapitalization.

So why make another deal with Imeem at all? The positive spin is that Warner’s earlier write-down was simply an accounting requirement, and that Warner really does like the streaming music company. I’m not sure how much enthusiasm Warner really has for Imeem, but at this point, taking a flier on the company is a no-risk bet: Instead of throwing good money after bad, Warner only has to give it access to its digital music catalog, which doesn’t cost the company a cent, and won’t show up on its books.

Best case scenario: Imeem survives and Warner’s stake is worth something again some day.

And if you want to be optimistic, the really good news here could be for the battered online music business in general, which has struggled to figure a model that works. Up to now, no one except Apple (AAPL) and Amazon (AMZN) has been able to figure out how to make a business out of providing music over the Web–in large part because of the music labels’ insistence on unworkable payment structures.

You could argue that this isn’t the labels’ problem, it’s the start-ups’ problem, and they shouldn’t have gotten into the business in the first place. But now that they’re in it, the labels can try to keep them alive or pull the plug entirely. Looks like they think they’re better off keeping them around.


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