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.”

Employees at MySpace have been waiting to find out who their new ad sales boss will be, as All Things Digital reported earlier this week.

And here she is: Nada Stirratt, who until today was running digital sales for Viacom’s (VIA) MTV Networks. (You can read her goodbye memo to MTV colleagues below.)

It looks as if MySpace CEO Owen Van Natta is assembling a team of MTV veterans at his company, which he’s in the process of overhauling.

In addition to Stirratt, MySpace has brought former digital guru Jason Hirschhorn over as chief product officer. And Courtney Holt, who runs MySpace Music, had run digital music for MTV before Chris DeWolfe, Van Natta’s predecessor, brought him on board last year. Viacom hasn’t named a replacement for Stirratt.

Next week could be Stirratt’s debut in front of the entire advertising sales staff of MySpace, who are set to gather at a new seaside resort about 20 miles south of Los Angeles to get a first glimpse of the fresh direction the company is preparing to take under its new management.

The struggling social networking site, HQed in Beverly Hills, has been trying to reboot its image, spur innovation in its product and most of all, pull itself out of a too-long slump, even as longtime rival, Palo Alto, Calif.-based Facebook, has seen explosive growth.

In late August, MySpace sales and marketing head Jeff Berman left the company as MySpace hired MediaLink, a New York- and Los Angeles-based media consultancy, to help get its ad sales business back on track.

That effort has been led by MediaLink President Wenda Millard, who is well known in the ad industry and was longtime leader of the ad sales force at Yahoo (YHOO).

Getting an experienced top ad exec in place will round out a recent spate of new hiring by MySpace, including a new CTO, Alex Maghen, who moved over from its MySpace Music joint venture, and a new CFO, Mark Rosenbaum.

This has been part of Van Natta’s wholesale flushing out of most of the top execs who worked under DeWolfe.

Now, with a new team of execs, the News Corp. (NWS) property is putting the finishing touches on a master plan, which will include a new redesign of its hopelessly messy interface and doubling down on a product strategy that will center on, said one source, “what we own,” namely, music and entertainment.

Music is the obvious key leverage point, the still-bright spot of MySpace, followed by adding big entertainment categories like movies, television, gaming, video and other pop culture arenas.

Once the rejiggered product is in place, it will be up to Stirratt to sell it to advertisers.

Until we see how she does in that key job, here’s her missive to MTVers:

From: Stirratt, Nada
To: MTVN Digital Advertising
Sent: Fri Oct 09 16:34:51 2009
Subject: Thank You for Everything

Hi Everybody–

It is with mixed emotions that I write to inform you that I will be leaving MTV Networks. I have accepted the job of Chief Revenue Officer at MySpace and will be starting there later in the month.

The past 3+ years have been such a wonderful experience and I thank you for the extraordinary work you all have done to make MTVNetworks Digital stand for a best-in-class sales organization unlike any other in the business. Truly. We rocked the industry with our innovation, ideas, relationships and results. And we had a ridiculous amount of fun along the way. So thank you for everything. And a special heartfelt thanks to my leadership team of Kevin, Brad, Jason and Heather: I have learned so much from each of you and will cherish your friendship.

Xo 
Nada

(Full disclosure: News Corp. also owns Dow Jones, which owns this site.)

The service took one step toward wider distribution today when Apple (AAPL) approved its iPhone app (for a glimpse of the app, see the video at the bottom of this post). But that won’t help U.S. users until the big music labels–Warner Music Group (WMG), Sony (SNE), EMI and Universal Music Group–agree to American distribution deals.

But before we get to that, let’s back up and explain what Spotify is: A streaming-music service that lets you listen to whatever you want whenever you want, as long as you have a Web connection. A free version comes with ads, and if you want to do away with those, you can pay for a subscription.

Does that sound familiar? It should. There are plenty of models like this available in the U.S. right now, from RealNetworks’s (RNWK) Rhapsody to MySpace Music, a joint venture owned by News Corp.’s (NWS) social network and the big labels. For various reasons, equivalent (and legal) models have been much harder to come by in Europe, which explains part of the appeal there. The other explanation is that Spotify works beautifully.

But don’t take my word for it. Ask Slate.com columnist Farhad Manjoo (“The best streaming music service in the world”). Or better yet, Facebook CEO Mark Zuckerberg (“Spotify is so good”).

Meanwhile, investors–primarily European ones–have been throwing money at Spotify, and the big music labels’ international arms are enthusiastic partners (and equity shareholders). And the company’s boosters have been pointing to a U.S. launch as early as the fourth quarter of this year.

So let’s assume this happens. What then? The problem with the digital music business, as company after company has found out, is that it’s a miserable business:

• Selling music by the track is a low-margin affair that only works if you have enormous scale–Apple sells some two billion songs a year.
• It’s been nearly impossible to get more than a few hundred thousand people to pay a monthly fee for music–ask Rhapsody or Best Buy’s (BBY) Napster, which have been slogging away at this for years without gaining any traction.
• And it’s been impossible to support a free service with advertising while ponying up big licensing fees to the labels–ask Imeem, et al.

So why will Spotify be any different? Depends on whom you ask. Some figure that it has the best chance of working as a mobile service and that since phone users aren’t used to the idea of getting all the music they can eat on their phones for free, they’ll pay up if given the chance. Others think the big labels have gotten wiser and/or more benevolent about their licensing fees and are willing to wring less out of Spotify at the start in the hope that it will pay off down the road.

Still others just shrug and figure it will work out somehow because…well, one of these days, someone has to figure out how to make this work. “Everybody loves the product,” says an industry executive familiar with the company’s plans. “And there’s a hope that the business model is realistic.”

I have heard rumbling that not all of the big labels are equally enthusiastic about a U.S. licensing deal. It’s unclear whether that’s due to something specific about the U.S. market or to internecine squabbles at particular labels. But Spotify will need at least three of the big four to play along. And then we can see just how realistic the model really is.

Caraeff is already heading up Vevo on an interim basis, but right now he’s still holding down his old job as executive vice president of UMG’s eLabs unit. At some point later this year, he is “99.99 percent certain” to be named president of the video site, according to someone familiar with Universal’s thinking. No word on who will get his old job.

That’s a good start for Vevo, which you can think of as either a “Hulu for music,” or more practically, “YouTube Music,” since the project will move videos at the world’s biggest music company from the world’s biggest video site and onto the new venture.

Running a start-up will be a new role for Caraeff, but at least he knows digital music and UMG specifically–he’s been working there since 2005. Prior to that, he ran wireless for Sony’s (SNE) movie arm.

Just as important, the appointment means Vevo will at least have cleared one hurdle that tripped up News Corp.’s (NWS) MySpace, which announced its plans to start a music site in the April 2008 but couldn’t land a CEO for the venture until MTV vet Courtney Holt took the gig in November–a couple months after the site launched.

There’s plenty for Caraeff to do: In addition to overseeing the launch of the site itself, he’ll need to staff it–while Google (GOOG) is helping Universal build and power the site, Caraeff will need to hire a “couple dozen people,” says a source familiar with his plan. A big priority: Assembling a sales force to sell the video clips.

And then? Plenty of other questions, which I raised a month ago when the deal was first announced. Forgive me, but I’m just going to quote myself here:

And even if Google’s technical expertise makes it easier for UMG to get a decent site up and running, neither company has a real track record when it comes to getting big brands to pony up for video ads, which is supposedly the whole point of the site.

Lots of people made similarly disparaging remarks about Hulu, of course. There was no way that GE’s (GE) NBC and News Corp.’s (NWS) Fox were going to be able to launch a decent site, let alone provide a challenge to YouTube. But they did, and they are. So the Vevo folks have that example to inspire them. (News Corp. is the owner of Dow Jones, which owns this Web site.)

But even if UMG gets the site off the ground, there is a considerable risk for both the label and for Google. Because if it works, Vevo will be diverting a lot of eyeballs away from YouTube–yesterday’s press release boasted that UMG’s YouTube channel has racked up 3.5 billion views.

The idea is to provide advertisers with a clean, well-lit space that will make them feel comfortable enough to spend money. But part of YouTube’s appeal is that is a riot of  the good, the bad and the WTF? You may start out watching a U2 video, and 20 minutes later end up watching a clip of a doped-up seven-year-old after a visit to the dentist. If you end up at Vevo, you’re going to have be very interested in music videos–and, at least for now, just the ones that Universal owns.

Are there enough video watchers out there to justify a business with some 50+ employees, which is the number I’ve heard Vevo/Universal is looking at? And can Universal figure out how to turn those eyeballs into more money than they’d generate on YouTube itself? Got me. Can’t wait to find out.

People familiar with the matter tell me that DeWolfe and News Corp., specifically new digital boss Jon Miller, are discussing a leadership change today. News Corp. (NWS) officials declined to comment. (News Corp. is the owner of Dow Jones, which owns this Web site.)

Sources tell me Miller hadn’t been planning on getting rid of DeWolfe (pictured above) in the near future, and that until yesterday he was still evaluating his options. News Corp. CEO Rupert Murdoch had once treated DeWolfe as a favorite and gave him significant autonomy at MySpace. But Murdoch, who brought Miller on earlier this month, has been leaning toward a change as MySpace’s traffic has stagnated and its buzz and momentum have moved to Facebook.

Still, Murdoch had left the decision about the site’s leadership to Miller, his new hire, sources said. One possibility: Elevating DeWolfe to a nonexecutive advisory position.

Those options narrowed last night once TechCrunch ran a story claiming that News Corp. had hired a headhunting firm to “scour for possible replacements” for DeWolfe.

News Corp. hadn’t actually hired a headhunter, I’m told by multiple sources. But I’m also told that the report was enough to spook DeWolfe into calling Miller to ask what his plans were. That conversation led to today’s negotiations, which will likely lead to his stepping down as CEO, although he may remain affiliated with MySpace in some capacity.

Meanwhile, News Corp. has been talking to Van Natta (pictured here) about taking DeWolfe’s place. Van Natta, who had been a highly regarded executive at Facebook, was at one point the leading candidate to head up MySpace Music, which launched last fall, and the two sides held extensive conversations.

But Van Natta, like many other potential hires for that position, bristled at the job’s org chart: Rather than a standalone company, a la Hulu, the site News Corp. set up with GE’s (GE) NBC, MySpace Music is simply a unit of MySpace, reporting to DeWolfe. MTV executive Courtney Holt eventually took the job.

But Van Natta’s fate has remained closely intertwined with MySpace anyway. Project Playlist, the free music-streaming site he took over last fall, has seen traffic plummet after MySpace, along with Facebook, cut off the site’s access to their users, a move prompted by lawsuits from several major music companies.

Van Natta has made some headway at extracting the company from its legal mess, which predated his hiring, and he has hammered out a settlement with EMI Music Group. But Playlist is still being sued by Warner Music Group (WMG) and Vivendi’s Universal Music Group, and even music sites that aren’t in legal trouble are struggling to keep their heads above water. Plenty of Silicon Valley watchers wonder why Van Natta landed at Playlist in the first place and think that he has been looking for a way out.

Here’s a video of DeWolfe talking with BoomTown’s Kara Swisher a little more than a year ago when MySpace opened a new office in San Francisco. Below that is a video of Van Natta talking to Swisher in 2007 about Facebook’s ill-fated “Beacon” project.

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 proposed deal, first reported in The Wall Street Journal and CNET, is in advanced stages. A person familiar with the negotiations say it’s “highly probable” that a pact can be hammered out, but says it could still take a month or more to finalize.

The gist: Google’s (GOOG) video site would help Vivendi’s music unit distribute videos on sites outside of YouTube. And YouTube would create a specialized portion of its existing site where Universal could hopefully sell more lucrative ads against its clips.

As of now, the discussions about the new site only involve UMG and YouTube, and the plan isn’t dependent on getting the other big labels to sign on, I’m told. But that doesn’t mean the other labels couldn’t be incorporated, and the site would obviously be more potent if the other guys were involved.

In December, Warner Music Group’s (WMG) videos started disappearing from the site after the company couldn’t reach a deal with YouTube; last month, Sony’s Sony Music Entertainment (SNE) renewed its existing deal to stay on the site.

The WSJ says talks about some kind of deal have been happening since last fall. But let me immodestly point out that I’ve been beating the drum for this deal–repeatedly–for a couple months.

Here’s my logic, which apparently sounds right to other folks: YouTube’s music videos are popular, and should be appealing to advertisers. But right now they’re money-losers for the site: It has to pay the labels about half-a-cent every time it plays a video, and it doesn’t generate enough revenue to cover those costs.

But if YouTube could somehow separate the music video traffic from the rest of the site–as MySpace has managed to do with its MySpace Music offering–that could change. As I’ve written before:

What would YouTube Music look like? It’s not that important. Maybe in addition to videos, it would offer downloads via Amazon’s (AMZN) digital media store, as MySpace does. Maybe it would have detailed biographies and a spartan design, like that MTV video site that MTV pretends doesn’t really exist yet. Doesn’t matter.

What is important: Like its MySpace predecessor, YouTube Music would take the large audience that already consumes music content throughout the site and assemble it one place. That might have some benefits for the site’s users. But it’s undeniably useful for the site’s ad sales team: Advertisers like clean, well-lit spaces with lots and lots of bodies, and partitioning off music creates just that.

That’s why MySpace Music was able to launch with an array of blue-chip advertisers last fall. And there’s no reason why those same advertisers wouldn’t pony up for YouTube music too.”

Want to see a video from one of the acts signed to the world’s biggest music label? You can’t see one embedded in this site from YouTube–at least not an official one. That’s because UMG has disabled the embedding feature from its YouTube clips, which, unfortunately, is standard practice for the big labels.

So here’s David Letterman talking about one of the label’s acts.

Google’s YouTube has cut a deal with Sony (SNE) to keep the label’s videos on the world’s biggest video site. But it is still haggling with the other big music companies: Warner Music Group (WMG), Universal and EMI.

Here’s one way that Google (GOOG) execs could speed up the process–wave the results of this survey of U.K. youngsters in front of the labels’ faces. And make sure to underline this part:

You Tube has soared into pole position as the default website that this age group turn to for checking out new artists (38%). Myspace (and a band’s own website) come a distant joint second, each scoring 15%.”

A couple decades after the fact, the labels are still smarting because Viacom (VIA) built MTV into a giant business on the backs of their labor. Now YouTube is becoming this generation’s MTV. But this time around, the labels are in a position to benefit–if they can think big.

Right now, the labels and the video site are hung up on the fraction of a penny the labels get when YouTube shows one of their videos. The labels want a bigger fraction; YouTube wants to pay less. But that’s a silly debate: The bigger challenge is figuring out how to turn the intense interest YouTube users already have in music into a real business.

Again, my not-so-modest proposal: The best way to to pull this off is to copy MySpace and create a YouTube Music. As I wrote last month:

What would YouTube Music look like? It’s not that important. Maybe in addition to videos, it would offer downloads via Amazon’s (AMZN) digital media store, as MySpace does. Maybe it would have detailed biographies and a spartan design, like that MTV video site that MTV pretends doesn’t really exist yet. Doesn’t matter.

What is important: Like its MySpace predecessor, YouTube Music would take the large audience that already consumes music content throughout the site and assemble it one place. That might have some benefits for the site’s users. But it’s undeniably useful for the site’s ad sales team: Advertisers like clean, well-lit spaces with lots and lots of bodies, and partitioning off music creates just that.

That’s why MySpace Music was able to launch with an array of blue-chip advertisers last fall. And there’s no reason why they wouldn’t pony up for YouTube music too.”

So. Labels? YouTube? Get to it. You’ve got a huge audience there that’s already consuming your product. Time to turn those eyeballs into dollars.

UPDATE: Several readers have pointed out this data from Big Champagne, which shows that MySpace Music generates many more “music impressions” than YouTube does. That’s interesting, but I’m not quite sure what the point is. For one thing, there’s no reason why MySpace Music and (my proposed) YouTube Music can’t co-exist. Less important point, I think that a YouTube music impression, delivered via a video clip, is worth much much more to an advertiser than a MySpace Music impression delivered via audio.

UPDATE2: Can’t recall what MTV used to be like when it played videos? Here’s an hour-and-a-half-long trip in the way back machine. Thanks to BusinessWeek’s Roben Farzad for digging this one up.

First, some data points:

• Gawker Media’s Nick Denton reports a big traffic spike at his sites in January–298 million page views, a 30 percent year-over-year increase. That’s even though one of his biggest annual eyeball attractors–Steve Jobs at MacWorld–never materialized.
• Blip.tv CEO Mike Hudack tells me that uploads to his Web video network have increased 50 percent so far this year.
• Now News Corp.’s (NWS) MySpace, citing comScore numbers, notes that its U.S. traffic shot up last month as well: Unique visitors were up 10 percent, which is worth noting for a (relatively) old social network, and those folks spent 30 percent more time on the site than they did a year ago. (News Corp. is the owner of Dow Jones, which owns this Web site.)
• Obligatory Twitter traffic stat: 2.6 million uniques in January, up 1,362 percent over the last year.
• ComScore’s (SCOR) overall numbers for Web usage for the last month: Uniques up 4.1 percent, page views up 3.1 percent, time spent per visitor up 2.5 percent.

Is any of this meaningful? Hard to say: Any single site can argue that it has done something to generate more visits and engagement from its users: MySpace has its MySpace Music site, Twitter is the buzziest start-up of the last 12 months, etc.

And last month also happened to feature Barack Obama’s inauguration, which was a huge Web traffic driver.

Still… there aren’t that many more Americans who are getting online for the first time at this point. Isn’t it reasonable to assume that a wide variety of sites is posting big traffic gains because many of us are now unemployed or underemployed? And that we’ve got more a lot of downtime to surf and click?

Alas, all those eyeballs aren’t translating to dollars for many of these publishers: Just ask Time Warner’s (TWX) AOL, which saw page views increase 69 percent during the last three months of 2008, but saw ad revenue drop 18 percent.

But I digress. If for some reason you do find yourself with more time on your hands, might I suggest this trio of themed YouTube videos? Enjoy. And good luck.

[Image Credit: Daquella Manera]

The IFPI estimates that some 40 billion tracks were stolen/shared last year, though it’s not entirely clear how the group came up with the math. Regardless of the methodology, that’s bad, right?

Depends on how you look at it. The IFPI also notes that people spent some $3.7 billion on digital music in 2008, which is up about 25 percent. Figure about half of that comes from Apple (AAPL), which moves about two billion tracks a year from its iTunes store. The remainder would be from mobile, with a very small smattering from services like RealNetworks’ (RNWK) Rhapsody and a few dollars spent on ad-supported services like News Corp.’s (NWS) MySpace Music, etc. (News Corp. is the owner of Dow Jones and of this Web site.)

But the standard summation still applies: The growth of digital has yet to replace the decline in physical sales–overall music sales dropped seven percent last year.

The Recording Industry Association of America (RIAA) initially contacted Facebook last summer requesting the removal of the Project Playlist application for copyright violation, and recently reopened those communications. We have forwarded the RIAA’s letters to Project Playlist so it can work directly with that organization and music labels on a resolution. In the meantime, the application must be removed to comply with the Facebook Platform Terms of Service. Our hope and expectation is that the parties can resolve their disagreements in a manner that satisfies the developer and copyright holder, that continues to offer a great experience to music fans, and that doesn’t discourage other developers from using Platform to share their creativity and test new ideas.”

The only surprise here is that it took Facebook this long to face up to reality: There was next to no upside for Mark Zuckerberg and company in fighting the big music labels, three of whom are suing Project Playlist. But there was plenty of downside: At best, the social network would end up squaring off against potential partners; at worst, it’s conceivable that it could end up being sued by the labels as well.

Facebook’s move is also less important than the one that MySpace made last week. That’s because Project Playlist is first and foremost a music service geared toward users of News Corp.’s (NWS) social network.

It’s also not surprising that MySpace was the first to bail on Project Playlist at the labels’ request: Not only does the network have its own competing music service–MySpace Music–but its partners in that service are the four major labels– Sony (SNE), Warner Music Group (WMG), Universal Music Group and EMI.

Most important is what the big labels who are suing Project Playlist– Warner, UMG and EMI–hope to accomplish by forcing the social networks to cut it off at the knees. The boilerplate answer from the labels is that Project Playlist violates copyright, and that they’d complained to MySpace and Facebook before, etc, etc.

But that’s a silly argument: The labels have also been trying to negotiate a deal with Project Playlist for some time, which is why investor Bob Pittman sank up to $20 million into the company earlier this year and former Facebook executive Owen Van Natta came aboard as CEO last month. I’m told that those talks had reached advanced stages this month.

So that leaves us with two possible conclusions:

1. This is just another negotiating move by the labels, which have previously sued Web services before partnering with them (see: Warner/Imeem, Universal/MySpace). But since they’ve already sued Project Playlist, cutting off their oxygen is more effective.
2. The labels have decided that ad-supported, free music services like MySpace Music, Imeem and Project Playlist just aren’t going to work, period, and that’s there’s no point in even trying to let new ones thrive.

For now, I’m going with No. 1, just because it’s the most obvious answer. But I’m willing to hear other arguments: Sound off in comments below or drop me a line at peter@allthingsd.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.

As of this morning the deal, first reported by CNET last week, still wasn’t done. But at this point there doesn’t seem to be anything left beyond “i”-dotting and “t”-crossing. I’m told that Holt may be showing up at the MySpace Music party in San Francisco tomorrow (along with Lionel Richie and BoomTown’s Kara Swisher).

News Corp.’s (NWS) social network has been casting about for someone to run the site, which is a JV of sorts with MySpace and the big music labels, for most of this year. What took so long? The conventional wisdom is that the job doesn’t appeal to many would-be executives because it’s not really a CEO job–it’s a job running a unit of MySpace.

But even if you buy that, this would still seem like a step up for Holt: MTV still–amazingly–doesn’t do much with digital music. And MySpace was a major player even before it launched the new site.