How Apple used its money and muscle to kill an iTunes competitor

How Apple used its money and muscle to kill an iTunes competitor

Summary: Remember Lala, the innovative music service that made a splash in 2009? After Apple bought the company, Lala's services vanished. Now, a candid (maybe too candid) report from an insider explains why Apple was willing to pay $160 million to make this "clear and present danger" to iTunes go away.

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TOPICS: Apple
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Remember Lala.com?

Back in 2009, it was the single brightest spot in the online music universe, with an innovative service that allowed customers on any platform to preview songs in full, for free, and a "music match" capability that scanned your library and gave you full online access to your collection from any PC or Mac. It also sold music, at prices that consistently undercut those in the iTunes store.

I raved about Lala in my April 2009 report, 6 music services compared: Who can bust the iTunes monopoly? But I was also concerned about the company’s future.

Given the level of competition, any music fan has to wonder whether Lala can survive in the long term. I hope they do. At the very least, I hope some of the big competitors can start to think as creatively as this upstart.

That wasn't an idle concern, as it turned out. Apple bought the company in December 2009, and all signs of innovation stopped immediately. In April 2010, the company announced it was ceasing operations for good.

lala-shutdown-april-2010
(Screenshot by ZDNet)

Readers accused me of being paranoid when I speculated that Apple bought the company just to kill a competitor. Here's what I wrote:

So why did Apple buy Lala? Apple has declined to comment despite repeated requests, so I can only speculate. It might have been because they wanted the developer talent, or because they wanted to slow down Lala's momentum and keep a competitor like Microsoft from buying the company. But given the non-portability of Lala's contracts and the robust growth of the iTunes Store, it's highly unlikely that Apple is going to do anything to discourage iPod/iPhone/iPad owners from purchasing tunes.

Now it turns out that's exactly what happened.

Lala was founded by Bill Nguyen, who went on to found Color. Both companies were purchased by Apple. Aubrey Johnson, a designer who worked with Nguyen at Color, wrote a blog post a few days ago in which he spilled the beans about the Lala deal. The post has since disappeared, with no explanation, but not before it made it into search engine caches. (Sorry, @aub, the Internet never forgets.)

Here's what Johnson wrote:

Lala struggled through pivot after pivot in the music industry, buying digital radio stations, a CD swapping business and finally streaming music.

Amongst its struggles, Lala did have an interesting success. In 2009 when you Googled a song, the first result was a Lala result. Not an iTunes result, not the artist’s MySpace or website ... a Lala result. Every click that led to Lala wasn’t leading to iTunes for a potential music purchase. Even worse for Apple, Lala was often a better deal. When Lala partnered with Google (for Google's Music Beta) there was a clear and present danger to Eddy Cue and his iTunes empire. Nguyen had pure gold and started a bidding war for the control of the company.

Nokia reportedly offered $11 million for Lala, an amount that "disgusted" Nguyen, according to Johnson. So Nguyen called Google.

Google was worried, they moved fast. They presented Nguyen with an offer for the company. Previously, Bill told M&A from Google what it would take to acquire the company. Instead of meeting his demands they decided (via a lowball offer) to see if Nguyen was desperate or bluffing. Bill made his next move.

He called in a few favors and got a meeting with the leadership at Apple. He explained that he had offers from the largest mobile OS competitors and that they wanted to acquire his music startup. Cue knew if Google obtained Lala the ownership of the service coupled with search dominance could be disruptive to their stronghold. Bill was notorious at getting great deals with the music elite, usually through Lala's investor, Warner Brothers Music.

Google's stupid negotiating led to this result:

Apple successfully acquired Lala for roughly $80M (purchase price) with an additional $80M in retention bonuses for the remaining employees valuing the entire deal around $160M.

No, Apple didn't want the technology. It didn't even want the people behind the company:

The ultimate irony in this story is that quite a few notable members of the Lala-to-Apple team followed Bill through the door and onward to his next venture. They left millions in options at a the $196.48 exercise price they had from the 2009 sale/retention bonuses. Some of those same engineers returned to Apple in the highly covered rumor that 20+ engineers went to Apple for $7M.

Meanwhile, it's 2013 and Apple still doesn't have a music streaming service. You can listen to longer previews on iTunes but still can't play a track in full as you could with Lala. Apple did eventually introduce iTunes Match, but that service requires a subscription fee and isn't an open, browser-based solution like Lala's.

What a shame.

Topic: Apple

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77 comments
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  • Seems to me ....

    that here is an excellent opportunity for a few enterprising developers to make a cool 100 mill or so.

    I only want 10% for the idea. ;-)
    D.T.Long
    • Except that idea has been used for decades,

      so you would have a problem getting around "prior art".
      wizard57m-cnet
  • It's the Golden Rule

    Whoever has the gold, makes the rules.
    Tony_McS
  • So how is this news??

    Companies buy the competition on a daily basis and close their doors soon after. They keep the IP, contracts and licenses, then get rid of the "excess baggage" of the transaction.

    Besides, the previous owners were the ones who saw $$$, took it then ran singing the happy joy joy song all the way to the bank. They were the ones who sold out.
    wackoae
    • It's news in the sense it shows inconsistency in how the SEC handles these

      mergers and buyouts. (SEC in this case is Securities Exchange Commission, not
      the Southeast Conference in NCAA, hehe). In one case, AT&T proposed buyout of
      T-Mobile, that was blocked because it would lead to "less competition", yet in this
      case it was allowed. Right, wrong? I don't know, but inconsistent it is.
      wizard57m-cnet
      • Lala was a STARTUP

        It wasn't even competition .... and they where whoring themselves around desperately looking for a buyer.

        Also, SEC doesn't get involve on this kind of NORMAL purchases.
        wackoae
      • Lala had perhaps 1-2% market share.

        At best. The startup wanted to see how much $$$ they could make. Nokia offered. Google offered. Apple offered. Apple won. Apple got some tech (Match) and picked up the people real cheap with Color.

        So how is this really news? Why not title this "How Google messed up and lost Lala"? Because the click bait is less.
        Bruizer
        • "So how is this really news?"

          "So how is this really news?"

          It isn't. It's anti-Apple propaganda. You're supposed to read that Apple shut down a great company for competitive reasons, because they were "better" than Apple at streaming music. Then you're supposed to HATE Apple. This is ZDNet. Hating Apple is what it's all about. Bought-and-paid-for propaganda for gamers.
          zato_3@...
          • Actually, I'm a bit surprised

            Usually its "MS shut down a great company for competitive reasons, because they were "better" than MS at it", while with Apple it's all about "Giving the customer the best possible user experience available". ;)
            William Farrel
          • could it be

            That Ed is about to leave the sinking ship? :)
            danbi
      • FTC

        Fair Trade Commission weighs in anti-trust issues. AT&T and T-Mobile would also be regulated by the FCC, since they are telephone companies and using radio spectrum. SEC regulates stock transactions.

        Thing is Amazon, Google, Pandora, etc., may have been somewhat pleased that there was one less streaming competitor. And Apple spends the bucks to take it off the board, well, win-win because common wisdom is that Apple doesn't get internet services, so they'd be wasting their money. Something I mention with the assumption that there was no petition to the FTC to challenge the sale back then. I don't remember, but i presume Mr. Bott would have mentioned as that strengthens his premise.

        Well, perhaps one doesn't buy my scenario. It's really hard to see where Apple taking LaLa off the board did impede Google's or Amazon's plans for music. I don't think it helped Apple in any way (or would have harmed Apple if it was Nokia or Google that ingested LaLa). Apple, after all, premises its offerings on track ownership.

        Oh, if all one showed for one's effort were top searches at Google, wellllll, I guess that's cool, but somebody somewhere is probably looking for cash. The 80-160 million from Apple was the big jackpot win. And while Mr. Bott identified LaLa as one candidate among a bunch to disrupt Apples iTMS business, I always understood him to be a quite happy Zune Music Service customer and, further, how have those other folks on his 2009 list done four years later?
        DannyO_0x98
        • FTC

          "Federal Trade Commission".

          Though I wonder how fair, at times.
          William Farrel
  • Smoking gun

    Buying a competitor to stop its services to the public will be seen as anti-competitive if no other company offers the service.
    Agnès Meyer
    • How..

      If they weren't really relevant and were openly trying to sell themselves?
      Johnpford
  • nope, don't remember it

    "Remember Lala.com?"

    Nope. Don't remember it.

    "Meanwhile, it's 2013 and Apple still doesn’t have a music streaming service."

    They do, actually. Costs $25/year. iTunes Match.

    Maybe you think it's a shame it costs $$ and isn't browser based, but it's there.
    CobraA1
    • uh, no

      With Lala (and any other modern streaming service) I can play an album in full even if I don't own it. That is not how iTunes Match works..
      Ed Bott
      • Never been a fan o the Album as a rule. Unless it's a greatest hits

        collection that is. What I've found again as a rule is a given Album may have a couple songs on it that i enjoy (if I'm lucky) and the rest is waisted on me at least. So it's not an issue with me.

        Pagan jim
        James Quinn
        • Nor did we think it would be

          For other, maybe yes?
          William Farrel
      • ^ This

        I have an Xbox Music subscription and a WP8. I hear a song I like in an ad or tv show? I pull out my phone, it looks it up, and two minutes later I can have the entire artist if I want. On all my devices without paying a dime except the monthly sub, and I can guarantee I get well over 15$ worth of music every month.
        Alleycat5
        • And all my music purchased I know for a fact I like and it's mine

          for life no monthly fee required. So if I'm having economic issues it's not a worry for me cause my music is my music. NO matter what my finances happen to be.

          Pagan jim
          James Quinn