Warner gets back into bed with Imeem

Warner Music Group is reportedly raising its equity stake in music-streaming startup Imeem in exchange for accepting lower royalties from music played on the site. The deal comes a month after Warner appeared to abandon Imeem by writing off its entire USD16m investment in the music service.

The deal is reportedly linked to a funding round that Imeem has just closed, a follow-up to the emergency funding Imeem received last month. AllThingsDigital reports that the firm has now accumulated USD6.5m this spring from undisclosed investors.

One perspective on the news is that Warner had a change of heart after writing off the value of Imeem and decided to throw its weight behind the service. There are good tactical reasons for wanting to own a slice of the online music sector, even though the returns are currently low. As the music industry comes to rely less and less on physical sales, it is important for all the major labels to have one foot in the digital domain.

However, this view downplays the significance of Warner’s write-down, which was more than likely based on a careful analysis of Imeem’s balance sheet. Like the rest of the music industry, Warner has watched while other online music ventures folded. These include SpiralFrog, which went bust in March, and Ruckus, which shut up shop in January. Warner is acutely aware of the difficulties involved in making money from online music. The Imeem write-down shows it is not afraid to admit that the project it is funding could go the same way.

On this analysis it seems more likely that the current equity deal is a long-range gamble aimed at making Warner more money in the unlikely event that Imeem starts earning cash. Warner can afford to cut the royalties it charges Imeem on the understanding that, if Imeem makes it big, it will own a substantial part of the business. In the words of blogger Peter Kafka, it’s a ?no-risk bet? for Warner. A shrewd move, but one that accepts that there is a slim chance of Imeem actually making money.