How Warner Music Killed Facebook Music

Facebook’s ongoing effort to launch a free streaming music service is stalled, according to multiple sources familiar with the situation. The company was close to a deal that would bring free streaming music from three of the four big labels (Universal, Sony, EMI) through the Total Music joint venture. But the deal stalled when the lone holdout, Warner Music, refused to participate.

Through most of 2008 Facebook said on and off record that they had no real interest in their own music service and that third parties like iLike could continue to build their Facebook music applications without fear of competition directly from Facebook.

News leaked in the Fall, though, that Facebook had approached a number of third parties to power the official Facebook music application:

We believe, based on discussions with a number of sources, that Buzznet, iLike, iMeem, LaLa, Last.fm, Rhapsody and other services were contacted and provided with a document (sometimes referred to by sources as a RFP (request for proposal), other times called a term sheet) that outlined certain goals of the new Facebook music service.

The RFP requires the third party service to build and power a new Facebook Music Service that offers free music streaming and playlists, music downloads for a fee, and other music merchandising services such as ringtones, concert ticket sales and physical goods like tshirts (if this sounds like MySpace Music, it’s because it is exactly their model). The service must not only handle front end user requirements but must also be able to handle the very tricky tracking issues required by the labels to monitor music streams and fees.

The RFP also includes onerous termination provisions that allow Facebook to take ownership and control of the service and the user data under certain circumstances. In return, say our sources, Facebook will offer the third party a split on revenues generated from the service.

We’ve heard conflicting accounts of who will pay for the big up front fees labels require to get a music service up and running. Some estimates of prepaid royalty requirements are as high as $100 million, which Facebook is looking to avoid paying themselves. Other sources say that Facebook may be willing to pay these fees if they can’t force the third party to take them on.

Many people, us included, saw this as a new effort by Facebook to tackle the music opportunity. But our sources say it was actually near the end of a year-long effort by Facebook to launch their own free streaming music service in partnership with Total Music. Only when those discussion faltered did Facebook reach out to other third parties.