iLike’s sale to MySpace, announced earlier this week merits comments on a couple of points.

First, it’s fire sale time. At roughly $20 million, this represents a new low for music-based valuations. In halcyon days, we had seen the prices climb. From Real’s $36 million acquisition of Listen.com in 2003, to Yahoo’s 2004 $160 million acquisition of MusicMatch, followed by the 2007 CBS purchase of Last.FM for $280 million. These last two deals were likely at inflated valuations due to competition for the properties (Viacom for MusicMatch) or desperation, as in the case of CBS. In January 2007, Napster purchased 300,000 subscribers from AOL for $15 million. Also in 2007, the Rhapsody America JV between Rhapsody and MTV roundtripped $230 million through a 5 year note in that amount (from MTV to Real) and a guaranteed ad spend in the same amount (by Real/Rhapsody). And it killed the Urge brand (and service) MTV had invested several million dollars and a couple of years in developing. In late 2007, Microsoft snapped up  Musiwave, in an acquisition that has yet to bear fruit, for a rumored $40 million. And last year’s acquisition of Napster (and its 700,0000 subscribers) for $121 million, included $67 million in cash, which really set the value at $54 million.

Next, the Napster transactions give us a per subscriber valuation – the AOL sub purchase (300k subs for $15 million) equates to $50/subscriber. The Napster sale (700k subs for $54 million) equates to $77/subscriber, but Best Buy was buying the whole company including customers who purchased downloads, not just a block of subs, so the attributable premium makes sense. In iLike’s case, while users do not equal subscribers, an audience of some 55 million was just sold for $0.36/user. This price is a steal for MySpace!

Lastly, of the acquisitions cited above, I would believe that only MusicMatch (due to their much loved downloadable player) was approaching profitability at the time of the purchase. Therefore the valuations were based on either 1) the desire to take a product out of the market so as not to advantage a competitor, 2) add the potential value of a new audience and business to an existing audience and business, 3) technological advantages or 4) a new JV. In iLike’s case, I would surmise that reasons 1 and 3 are applicable – as the MySpace and iLike audiences are highly duplicative. iLike is deeply woven into Facebook, which represents an opportunity for MySpace to disrupt Facebook, and the iLike platform is content-type agnostic.

Given today’s market, iLike should be pleased that they were able to close out a deal. It’s probably not at the valuation anticipated by the shareholders. Spiral Frog wasn’t able to find a buyer, Qtrax is on the skids. imeem’s investors will look at this with concern, as will Project Playlist’s and even Pandora’s and those backing the much-hyped Spotify. Audience is not enough – iLike claimed 55 million users – profitability, despite challenging content terms is key to seeing these valuations reverse their downward spiral.

From leaks last evening, it is sounding like the Microsoft/Yahoo search deal is done, as I’d suggested in an earlier post. Combined, the Yahoo and Microsoft search business will command 30% market share of search – a credible number 2. There is still, what I would term, a lack of clarity around core product focus at both MSFT and YHOO. Yahoo, as the world’s largest portal is really a media company. So jettisoning the search technology, to focus on ad sales makes sense. And Microsoft, at heart, is a technology company. Yet, Wallpaper, Microsoft’s Lloyd Braun led entertainment initiative, and the MSN portal, competes with Yahoo’s core strengths, and doesn’t really fit in with Microsoft’s culture. I believe aligning certain portal properties, along with merging Hotmail and Yahoo Mail’s resources, is the next step in the consummation of this merger/Yahoo acquisition. Perhaps both MSFT and YHOO’s antitrust counsel have suggested taking iterative approaches to an overall alignment is the most efficient means of completing to an inevitable partnership. This would allow allow the respective businesses to move forward without being tied up in procedural hearings that only serve to strengthen competitors. We will see what’s next!

Was this Microsoft’s bing strategy  all along:

• Hire Yahoo Search braintrust
• Rebrand Live Search
• Focus on algorithms, presentation tweaks and tools.
• Throw the Kitchen Sink at it. Somewhere between 50 and 100 million into a scorched earth launch and marketing strategy to see if it moves the market share the needle. Try and buy users through cashback incentives.
• If yes – throw more Kitchen Sinks
• If no – back to the table with Yahoo

We will probably know by the end of this month how this hypothetical first decision plays out. According to ComScore, bing was only up 0.4% in June. Google still holds over 65% of the US search market and Microsoft, despite the investment is at 8.4%. While Microsoft may be the most profitable company in history, with unlimited resources to launch products, bing is no bang, and all the Kitchen Sinks available won’t land them a credible second place in search on their own.