For the record, the deal theoretically values Imeem at something like $8 million, but most of that comes in the form of accounts receivable and debt obligations, and isn’t relevant to MySpace, which won’t be dealing with that stuff. And it’s not relevant to investors like Sequoia and Warner Music Group (WMG), which pumped at least $25 million into the venture.

In retrospect, Warner’s move to write off all of its Imeem investment in May was 100 percent accurate.

In September, I visited Caldwell in his San Francisco office. He looked like a guy who has had a very hard year, but he was confident that the company had gotten through the worst of it. If Imeem executed on plan, he argued, it would be able to survive. It wouldn’t be a home run, but it could at least sustain itself–no mean feat for a digital music start-up.

So what happened? “Things can change very quickly,” a person familiar with the company’s story told me yesterday. The short version of the story is that Imeem quickly and unexpectedly ran out of cash. Here’s the longer version of that story, which I’ve pieced together from various sources:

• As Om Malik reported, the company was hit with a copyright lawsuit by music publisher Orchard Enterprises (ORCD). Fighting the suit or settling it would require significant resources.
• Efforts to raise another funding round fell flat. If you want, you can blame the fact that Sequoia declined to pour more money into the company, which acted as a blinking red warning light for other potential investors. Or you could point to the fact that Web music start-ups of all stripes have been flailing for a couple of years.
• Ad sales, which had been perking up throughout the year, fell short of Q4 targets.
• All of the above meant that Imeem was struggling to meet payroll and payments on its debt, which it racked up when it built out its own content-delivery network.

So in retrospect, it’s easy to see why the company sold: It had no choice. And it’s sort of easy to see why News Corp.’s (NWS) MySpace bought Imeem: It’s hard to pay less for talent.

Haven’t heard a price yet, but I wouldn’t expect much, given that this deal, like the iLike purchase MySpace made earlier this year, is an “acqhire”–News Corp.’s (NWS) social network/portal wants to buy Imeem for its “sales team, engineering, Snocap and other Imeem IP,” a person familiar with the transaction tells me.

The deal, which isn’t finalized, was first reported by TechCrunch.

Once it’s finished, it will conclude an up-and-down year for Imeem, in which the service pleaded with the major music labels, successfully, to change the terms of its music licensing deals, which were killing the streaming music site. But that wasn’t enough to prevent investor Warner Music Group (WMG) from writing off the money it had sunk in the service (though Warner later ended up increasing its stake in the service without actually writing another check).

Like other Web music services that sprang up in the past few years, Imeem wanted to provide users with free tunes, and pay the licensing fees by selling advertising against its user base. But the economics for that proposition appear unworkable: The labels, who are afraid that giving away music on the Web will kill any chance they have of selling the stuff, are reluctant to cut their fees substantially, and ad dollars for music sites have been relatively hard to come by.

That dynamic is still causing problems for MySpace’s own music service, one of the few remaining sites offering free streams. It will be interesting to see how that company is affected by “OneBox,” the new Google (GOOG) search feature which provides free streams for searchers, then directs them to MySpace and LaLa, one of the other surviving services.

The search giant is working on a new service that will provide searchers with streaming music, which sounds a whole lot like a content play at first blush. But Google will only be offering limited bits of music, and it will be relying on other companies to actually provide the tunes.

Sources describe the service, which they refer to as “One Box,” as a refined set of answers for music queries. The idea: Punch in, say, “Madonna,” and you’ll be presented with one or more songs, which may be partial clips or full-length versions, then guided to other sites where you can purchase the music.

That is: If you’re looking for Google (GOOG) to launch a rival to Apple’s (AAPL) iTunes or to music streaming services like iMeem and MySpace Music, this isn’t it.

In fact, Google is actually partnering, in a way, with News Corp.’s (NWS) MySpace: iLike, the music start-up that MySpace purchased earlier this year, is one of the two services providing music to Google, industry sources tell me. The other is Lala.com, which has a novel streams-plus-cheap-songs concept. (This is presumably one of the “big announcements” Lala founder Bill Nyguen was referring to yesterday when I spoke to him).

UPDATE: Streaming music service imeem will also be providing songs for the new service, I’m told by people familiar with Google’s plans. It’s unclear to me whether the company will provide full streams in search results. No comment from Google, Lala, MySpace or Imeem. Or the labels, for that matter.

At this point I’m not clear how Google and the labels will determine how much of a song a searcher will be able to listen to. Last I time I checked, iLike didn’t have the ability to provide full song streams at all. And Lala’s licenses only allow the service to provide listeners with a full song once–after that, they have to purchase the track from the service.

One other note: “OneBox” is the name of an existing Google feature that offers up not just links, but actual answers to certain queries. (Think of weather, or stock results). So while it’s possible that Google intends to brand the service with that name, I wouldn’t be surprised if this was the term the company has been using internally and with the labels, and that the service will have a different name when it launches.

TechCrunch first reported about the service this morning.

This one isn’t a total shock, as EMI and Grooveshark had supposedly been close to a deal prior to the lawsuit. And it wouldn’t be the first time that a label sued a Web company: See Warner Music Group (WMG) and Imeem, as well as Universal Music Group and News Corp.’s (NWS) MySpace, among others.

No details on the deal from EMI or Florida-based Grooveshark, which offers free streaming music, a la MySpace Music, Imeem, Spotify and others. Unlike those services, though, Grooveshark doesn’t appear to have licensing deals with three of the big four labels and plays their music anyway. But with the exception of the EMI suit, it has remained unmolested. Interesting.

For the record, here’s the release (Inside baseball note to Grooveshark guys: Please don’t attach press releases as PDF files. Really cumbersome. Thanks.):

Music streaming service Grooveshark signs deal with EMI Music and EMI Music Publishing
Gainesville, FL–Today, digital music service Grooveshark.com announced it has entered into agreements with major label EMI Music and EMI Music Publishing that will give Grooveshark users access to content from EMI’s roster of current and legendary catalog artists and EMI Music Publishing’s songwriters.

Grooveshark offers music fans the ability to stream songs for no fee from a vast catalog of music. Fans can enjoy Grooveshark’s music without having to download client software or register. The basic service is free to fans and supported by visual advertising. Fans who opt for a $3 per month premium service can enjoy unlimited ad-free streaming music. The site was recently named the best way to listen to music on the web by Rolling Stone, and just surpassed one million registered users.

“EMI Music and EMI Music Publishing have collaborated with us to create a mutually sustainable deal which represents the future of digital music,” says Grooveshark CEO Sam Tarantino. “We will continue to deliver the best music service on the Internet to our users, and we will expand our capacity to strengthen fan-to-artist connections through our technology.”

“We think services like Grooveshark offer great music discovery options for fans,” said Mark Piibe, EMI Music’s Global Head of Digital Business Development. ”In turn, Grooveshark offers a new revenue stream for our artists and will help us learn more about how we can better connect different types of fans with artists.”

That’s still a million miles away from Apple’s (AAPL) commanding grip on the digital music market–it has held steady at around the 70 percent mark for years–but it’s better than nothing. And given that it was at zero less than two years ago, not terrible.

The eight percent number sounded familiar to me because that’s the number the music industry has been guesstimating for some time. But NPD’s stats suggest that Amazon (AMZN) has been grabbing share from smaller players. Not included on the list below, for instance, are NPD data showing that Wal-Mart’s (WMT) download store saw its share drop from 1.9 to 1.3 percent. Also of mild interest: Share gains for the RealNetworks (RNWK) Rhapsody Store and, yes, Microsoft’s (MSFT) Zune Marketplace.

Here’s the breakdown (click on chart to enlarge).

But let’s be clear: The digital music download market looks like the search market in that it’s dominated by a single giant player. But it’s not like search in that there aren’t many benefits to running a download store with a relatively small audience: The small margins for music sales mean that you need to be awfully big to make this a significant business. Which is another reason to be wary of would-be music players that point to their plans to sell downloads (think Imeem, and iLike).

Digital music start-ups seem to come in two flavors these days: Those being sued by the major music labels and those with expensive licensing deals they can’t afford.

But for some reason, plucky Grooveshark, which runs a very nice, free streaming music service, has stayed out of both of those buckets until now. I’ve confirmed that EMI Music Group is suing the site–whose motto is “Play any song in the world, for free!”–for copyright violation.

The label filed suit against Gainesville, Fla.-based Grooveshark in a New York court on May 8. I don’t have a copy of the complaint yet, but if you feel like sharing, hit me at peter@allthingsd.com or use the blind tip box here. No comment from EMI, but Grooveshark sent me a very long statement, which I’ve printed at the bottom of the post.

The takeaway: Grooveshark says it was working on a licensing deal with EMI and now finds itself in court instead. The company does refer to deals with “many artists, labels and publishers,” but as far as I can tell, it doesn’t have deals with any of the other three majors–Warner Music Group (WMG), Universal Music Group, or Sony (SNE)–either.

Grooveshark started out as a peer-to-peer file-sharing start-up in 2006, and has since morphed into a streaming model. When I talked to marketing VP Joshua Bonnain in May, he told me the company was primarily funded by friends and family–most of the company’s employees are either students at or graduates of the University of Florida, he said. But he also said the company had received a “substantial investment from a large party” that he wouldn’t identify.

Bonnain said the site, which generates at least some ad revenue, planned on splitting half of it with the copyright owners of the music it played. But I was never clear about how that was going to work since Grooveshark doesn’t have deals with the majors. Then again, Bonnain didn’t tell me that the company had been sued a few days before we talked, either.

In the music world, negotiations don’t preclude suits and vice versa; Warner was, at one point, suing iMeem, but then became an investor in the site. Same thing with Universal and News Corp.’s (NWS) MySpace. The only real question I’ve had is why the big guys haven’t gone after Grooveshark yet. I’ve been asking label folks about the start-up since November and I’ve only gotten shrugs for an answer.

Anyway, as I said, it’s very nice service, and it would be a shame if the labels can’t figure out a way to work with it or help it survive. But the odds of that happening, based on the unpleasant history of digital music start-ups to date, are very low. So enjoy this themed playlist I created with the site’s help, which features music from all four majors, while you can. Grooveshark’s statement is below.

For the past year, Grooveshark has been in talks with EMI Records and other copyright holders to negotiate licensing agreements for the use of their content. We are pleased to announce that over the past few months Grooveshark successfully concluded mutually beneficial agreements with many artists, labels, and publishers that we hope to be a template for other such agreements with additional copyright holders.

Recently, EMI Records chose to abandon the template we’ve built with the help of other major copyright holders and opted for their traditional intimidation tactic of filing a lawsuit as a negotiating tool. We find the use of this negotiating strategy counterproductive, as Grooveshark has been willing to conclude an agreement with EMI Records that is economically sustainable for both EMI Records and a start-up company the size of Grooveshark.

Grooveshark is run by a group of young and passionate musicians. We love music, we make music, and we believe that the use of all music should be paid for. We adopted this core philosophy at our inception and to date have concluded agreements with hundreds of record labels, major US performance rights organizations, and thousands of independent artists who support Grooveshark’s business model. (See: Grooveshark Artists)

As musicians, we support the rights of copyright holders and strive to sign sustainable agreements with all content owners, ensuring that all artists get paid– or we agree to remove content from our system in accordance with our DMCA Takedown Policy. We hope that EMI Records eventually follows the lead of the many forward-thinking labels we are already working with, who would rather get their artists exposure and a fair share of our revenue than block content access and force customers to illegal networks.

We understand that the economy of the digital music business is in a state of flux, and we hope to help ease this transition by providing the required new tools and services that lead to the next generation of the music industry. We respect the ownership rights of the major labels and publishers, and our core mission has always been to compete with piracy by offering a service that is genuinely better than what illegal networks offer, while also ensuring fair payment to copyright holders. Our next important step on our road to success is to conclude a mutually beneficial agreement with EMI Records that is sustainable for both EMI and Grooveshark.

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.

Less boast-worthy: Warner has written off almost all its investments in lala and imeem, two digital music start-ups it once thought would help save it from the slump in CDs.

In 2008, Warner invested $20 million in lala.com and $15 million in imeem.com. Now the label is taking a $33 million charge on the two start-ups.

The company’s 10-Q, filed this morning, spells it out: It wrote off $16 million in imeem–its entire investment–and half of its investment in lala. It also threw away $4 million via a “receivable write-off” related to imeem–that is, the start-up owes Warner money the label doesn’t expect to see again.

This appears to explain why Warner wasn’t bothering to renegotiate its streaming rights deal with imeem earlier this year even though it owned an equity stake in the company: It looks like the label had already concluded the company wasn’t worth saving. UPDATE: A person familiar with the situation says Warner may yet hammer out a new agreement with imeem.

Asset write-downs–acknowledgements that the stuff you bought back in the boom is worth a lot less now–have been par for the course for big media companies following last fall’s crash. If anything, Warner is a little late to the game here–many of its peers took their lumps last quarter.

But it is unfortunate for imeem, which has just raised an emergency funding round–something in the single-digit millions, I’m told–and is still out trying to land more cash.

For the record, Warner said music sales were down 17.6 percent in the last quarter and that the company lost 45 cents a share on revenue of  $668 million. Analysts had been looking for revenue of $730 million. Warner attributed a loss of 22 cents a share to the write-downs.

And as far as Warner’s digital revenue goes, that six percent increase is worrisome since it shows continued deceleration: A year ago, digital revenue had increased 48 percent over the previous year. And Warner’s digital total was up just one percent over the previous quarter.

Since everyone wants to weigh in on the state of online music service, imeem, let me add in my two cents: The once-buzzy start-up isn’t on life support yet. But it sure could use some help–just like every other Web music player.

I can confirm that the company has sought, and received, new terms from some of the big music labels, most notably Universal Music Group. One big label that hasn’t given imeem any concessions yet: Warner Music Group (WMG), which owns an equity stake in the company.

Wired.com has a nice summary of the reason imeem needs new terms from the labels. But the short version is that the original deals it had in place meant it lost money every time someone played a song. And that the more popular it got, the more it lost.

That kind of business plan isn’t out of the ordinary for Web companies that struck deals with the big music labels–even Google’s (GOOG) YouTube has a similar kind of arrangement. But those deals, which were supposed to make sense once the online advertising business kicked into gear, are also obviously no longer sustainable.

The big picture: imeem went looking for buyers last fall–at the same time that its venture investor Sequoia Capital began lecturing start-ups about the need to cut costs–and hasn’t found any.

That puts Imeem in the same boat as every other notable online music service, including iLike and Pandora, all of which have been looking for money or an acquirer during the last six months.

One of them–Spiralfrog–finally shut down earlier this month. And if the other start-ups can’t get the labels to cut them some deals, Spiralfrog will have company.

But just in case you weren’t convinced, here’s some new data from NPD Group:

• CD sales dropped by 19 percent last year.
• The number of U.S. CD buyers  dropped by 17 million last year.
• The number of music buyers dropped by 13 million last year.

Only the last number is noteworthy. Because while NPD says that digital music downloads increased by 29 percent in the last year–good for Apple (APPL)–the research firm also notes that many Americans have simply stopped paying for recorded music, period.

Up until last fall, music optimists would argue that this was OK, because people were more engaged with music than ever. Semi-true cliche: The music labels are in trouble. The music business is doing just fine.

And indeed, NPD throws out a series of stats which show that more people are listening to free music provided by the likes of Pandora, iMeem and News Corp.’s (NWS) MySpace Music. But all of the sites that are providing free music are having a very hard time figuring out how to make a business out of it. It’s quite likely that we’ll see some of them fold or sell out in the next few months. Stay tuned.

Note: News Corp. owns Dow Jones, which owns this site.

The company says the site is emphatically not supposed to be another MusicNet or PressPlay, the two unenthusiastic yet very expensive attempts the big labels made at creating their own portals in the wake of the original Napster.

So what is it? The site wasn’t scheduled to go live until 4 a.m. New York time, but it popped up earlier this evening and I gave it a quick spin. (Click to enlarge images.)

Based on that very cursory look, I think it’s meant to be a cleaner, in-house version of sites like MySpace Music and iMeem. Those sites offer streaming music, music videos and the opportunity to buy songs via affiliate deals with Apple (AAPL) or Amazon (AMZN).

Once it’s really up, that is. EMI says the site is in beta, but that’s generous. U.S. users can only listen to 30-second clips. U.K. users can listen to entire songs. But only ones from EMI’s catalog–which are the only songs that appear to be on the site, anyway.

There’s also a rudimentary discovery engine, and it appears as if the site will eventually direct would-be buyers to 7Digital, a U.K.-based iTunes and Amazon competitor.

The press release, which I’ve reprinted below, describes the site as a “learning lab.” I guess there’s nothing wrong with that–and the company has more pressing issues than a Web site launch. But I don’t understand the point of putting up something this raw.

LONDON, 17 DECEMBER 2008 — EMI Music today announced the launch of its new website, EMI.com. The site provides options for fans to discover new music and rediscover their favorite musicians. It also gives artists another platform to showcase their music and videos. EMI.com is one of many ways EMI Music will experiment with new digital platforms in order to develop a deeper understanding of how consumers interact with and experience music online.

“EMI.com is designed to be a learning lab. It will help us gain even more knowledge about consumers’ preferences and choices. Those insights will be invaluable to our artists, helping them respond to fans in a more relevant way,” said Alex Haar, Vice President of Digital Special Projects at EMI Music. “This is the beginning of a longer term experiment. In the coming months, we will continue to add content and features to the site.”

This launch of EMI.com is the first step in a process to better test and learn from the consumer experience. As of today, EMI.com will house a range of information about EMI artists, such as music, videos, photos, biographies and discographies. Fans in the U.K. and U.S. can listen to their favorite songs (in full or in 30 second segments, respectively), watch videos and create playlists. The discover feature of the site helps fans search for tailored music recommendations, by entering artists’ names, including those of non-EMI artists.

Future features, such as the ability to create widgets or to purchase music, will be added to the site in ways that will enable the company to test different values of increasing consumers’ music experience. The site will also be home to free special and unique content from EMI artists, such as interviews, concerts and back-stage visits.

Shamsa Rana, Managing Director of Imdad Capital Ltd., was responsible for designing and implementing EMI.com. Rana also brought in a digital media company, Perform, which built the site.

“With EMI.com, we wanted to build a site that provides a simple, user-friendly experience,” said Rana. “A focus on the fan and passion for the user experience is critical in today’s digital landscape, and that’s exactly what we worked to achieve with EMI.com.”

It’s conceivable that iLike, led by brothers Hadi and Ali Partovi, is simultaneously pursuing funding options. But my understanding is that much like competitive music service iMeem, which is also on the block, iLike’s executives and investors are worried about keeping the company afloat as a standalone entity. Delivering free music on the Web has so far proven to be a high-cost, low-revenue endeavor, and that’s a difficult path to choose in this environment.

My sources couldn’t tell me what sale price iLike is hoping to get. It has raised about $16 million in two years. Most of that came from Ticketmaster (TKTM), which has now split off from Barry Diller’s IAC and trades as standalone company. A smaller slug came from Bob Pittman’s Pilot Group, which has taken a stab at other Web music start-ups, including a recent investment in Project Playlist. I’ve asked the Partovis and their PR rep for comment, but haven’t heard back.

Ticketmaster’s existing ownership makes it an obvious buyer. The company also has a relationship with RealNetworks (RNWK), which began powering a free music service for iLike this summer. And while I don’t have confirmation that the two companies have actually talked, the third very obvious buyer would be Facebook, which is responsible for the company’s success to date.

iLike originally started out as a music discovery service that promoted the homegrown music found on Garageband.com, another Partovi brother music start-up. But it really hit its stride with the launch of Facebook’s open developer platform in the spring of 2007. Since then it’s become one Facebook’s most popular apps, with more than 5.4 million active monthly users.

That hasn’t translated into huge revenue: The company hasn’t expended much effort trying to sell advertising on Facebook, which is a challenging environment to begin with. And while it generates referral fees when it sends concertgoers to Ticketmaster, those sales haven’t been significant enough to register on the company’s SEC filings so far.

Now Facebook is looking to create its own music service, and it’s conceivable that iLike could step in and take on that role for the company. One big problem: Facebook wants to provide users with a service that gives them the ability to listen to songs in their entirety, à la MySpace Music. But Facebook doesn’t actually have licenses with the big labels that allow it do that. Instead, it provides users with 30-second clips.

All Things Digital’s Kara Swisher visited with Hadi Partovi this summer; below the two talk about iLike’s history and ambitions.

This move should temporarily boost traffic at iMeem, which finds itself competing for the ability to premier new releases with rival music services like iLike, MySpace, Rhapsody, et al. Last week, for instance, MySpace got bragging rights over “Chinese Democracy,” the sort-of-long-awaited album from Guns N’ Roses.

But it’s unclear whether these premieres actually help Britney or her label, Sony’s (SNE) Jive: Few of the visitors to MySpace’s GNR page stuck around to listen to the whole album, and hordes of GNR fans don’t seem to have flooded Best Buy (BBY) stores, which have an exclusive on the disc.

But who cares? That’s tomorrow’s problem. For now: Free Britney Spears!