BoomTown » Hadi Partovi

Sale of iLike to MySpace–$13.5 Million in Cash, $6 Million for Talent Retention–Delayed Over Tax Issues (Really!)…Plus, the List of Other Suitors!

Kara Swisher — Tue, 18 Aug 2009 06:25:06 +0000

The board of iLike planned a meeting earlier tonight to go over a buyout offer by MySpace, several sources close to the situation said. But it was suddenly canceled because of some thorny tax implications related to the talent-retention part of the deal to purchase the social music start-up.

This does not mean the pending acquisition is in jeopardy, sources said, and it could be on track to be signed as early as today, barring any more complications.

That is what both iLike and MySpace execs are hoping, said sources, one of whom described the outstanding issues as a “technicality.”

What’s also been unclear is the actual price the social networking giant is paying for iLike, which has been reported as about $20 million.

In fact, only $13.5 million will be paid upfront in cash, with about $8 million of that money likely going to one of its major shareholders, Ticketmaster Entertainment (TKTM), due to its preferred shares.

Another $6 million has been promised by MySpace in forward payments to retain some key employees–including iLike co-founders and twin brothers Ali and Hadi Partovi.

Although those employees can remain in Seattle, where iLike has its HQ, they must stay employed at Beverly Hills, Calif.-based MySpace for two and a half years to get their money.

It’s that talent part of the deal that caused the Partovis to cancel the iLike board meeting, which they explained to key investors was necessary due to some confusion over how the money paid to these employees would be taxed.

A person briefed on the issue said that if it was taxed as compensation, it would have a much higher tax rate than if it were considered long-term capital gains.

The Partovis said in the email that they were working on the problem with their advisers on the sale, Allen & Co., as well as with lawyers and accountants.

Tax snafus in the middle of a sale are not exactly the way the entrepreneurial Partovis envisioned it was going to go for iLike (see my various video interview related to iLike below) when they created the compelling music sharing and recommendation service in 2006.

After only a few years, the innovative start-up claims it has 50 million registered users overall.

A lot of that growth was due to iLike quickly becoming one of the most popular widgets on social networking sites like Facebook, where it has also been the top music application, with 10 million active monthly users.

The Partovis–who once were close with execs at Facebook (see my party video below), particularly founder and CEO Mark Zuckerberg–placed great faith in its growth lifting all Web 2.0 boats.

It did not turn out that way, though, especially from the important financial point of view, and iLike scrambled to diversify.

The iLike service recently began offering a music downloading service, for example, as well as other such features, all of which would be attractive to the music-centric focus at MySpace.

Once an Internet sensation, MySpace has been struggling to restructure itself after losing momentum and buzz in recent years, as well as a huge advertising revenue drop in its most recent quarter.

Its owner, News Corp. (NWS), replaced its founders with new management four months ago, including former Facebook exec Owen Van Natta as CEO.

After making major staff layoffs and rejiggering management, Van Natta and his new team have been working on an overhaul of the MySpace product and seem to be refocusing it to become a global music and entertainment service.

MySpace also has a joint venture with major music labels, MySpace Music, which has been trying to attract consumers and build a viable business. Sources said MySpace Music could also buy into the iLike deal or simply license its technology to improve its features.

Thus, purchasing iLike would fit in well with MySpace’s overall plans.

And iLike has also been in need of a fix itself.

For all its popularity, especially on Facebook, it has moved slowly toward profitabilty, and its $17 million in funding has been dwindling, as has its viability as a standalone company.

Back in more frothy Web 2.0 days, iLike’s generous funding gave it a valuation of more than $50 million, which has also lost steam over time and as the economy has worsened.

In the last quarter of fiscal 2008, for example, Ticketmaster wrote down its $13 million investment by $6 million.

Tensions between its execs and iLike have gotten worse over time, although some thought at one time that Ticketmaster would buy iLike.

No longer, which is why the founders turned to Allen & Co., as MediaMemo reported as far back as November, to find another big investor or buyer.

Wrote Peter Kafka: “Delivering free music on the Web has so far proven to be a high-cost, low-revenue endeavor…”

So, the New York deal-making firm ginned up a small group of suitors, which included Facebook, Activision Blizzard (ATVI) and Microsoft (MSFT), as well as MySpace.

Of the three, Activision was most serious, with interest in integrating iLike’s community and technology tools with its Guitar Hero franchise.

But Activision never actually made a formal bid, said sources.

Both Microsoft and Facebook also considered the purchase, but sources said they would only offer stock in a deal. But iLike wanted cash in the deal.

The Partovis were also was wary about working at either place.

Both Partovis, for example, had worked at Microsoft (Ali after selling it LinkExchange in 1998 for $265 million; Hadi several times, once following Microsoft’s acquisition of Tellme Networks, which he co-founded).

As it has turned out, in its short life, iLike’s last, best alternative is apparently MySpace.

“Look, iLike has been shopped around for a while, and while the team and technology are great, it only has one choice and that’s to be sold,” said one person involved in the various scenarios. “The question for the buyer then is whether it was worth it to pay up or just move on and do it ourselves.”

So until the bean counters settle this IRS nightmare, here is my video interview with Hadi Partovi about a year ago at iLike’s HQ in the Capitol Hill section of Seattle, when times were a little more hopeful:

[ See post to watch video ]

And here is a very dark and very shaky video I did when iLike threw a fete in Silicon Valley to celebrate its start-up two years ago and to send some appreciation in Facebook’s direction–it is so dated that Facebook COO Sheryl Sandberg, who is in the video, is still at Google (GOOG).

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

Kara Visits iLike in Seattle!

Kara Swisher — Wed, 23 Jul 2008 21:39:22 +0000

On my recent trip to Seattle, I visited the offices of iLike in the Capitol Hill section of that lovely Pacific Northwest city to take a video gander at one of the more interesting start ups to emerge from the social-networking arena.

The music discovery site, unlike a lot of others in its sector, has been plugging away for several years with much less funding–about $16 million from the founding Partovi twin brothers, former AOL (TWX) wunderkind Bob Pittman and a big slug from Ticketmaster (IAC)–but with a lot more impact.

Like its competitors, such as Last.fm, it has forged its popularity by focusing on linking its users with one other and musical artists via what they like to listen to.

Kind of like that old shampoo cliché: She told two friends and she told two friends and so on and so on and so on.

It’s actually quite an infectious app and also Web site, with 30 million registered users, and it’s one of the few that is useful on social-networking sites like Facebook, hi5, Orkut and Bebo.

So useful, in fact, that Facebook has selected the service as one of only two “preferred” partners, a designation Facebook announced today at its second developers conference in San Francisco.

iLike was the brainchild of Ali and Hadi Partovi, longtime Web entrepreneurs who have also worked at big companies like Microsoft (MSFT), and whose interest in music and online delivery was the inspiration for the site.

To make money, iLike has a number of businesses.

First and foremost it is essentially a lead-generator for sites like Amazon (AMZN), iTunes, Ticketmaster, and more recently, the Rhapsody subscription music service, with which it just added a somewhat restricted full-song playback offering.

And iLike has just launched an ad platform for concert promoters.

The brand itself, although focused on music right now, obviously has extension possibilities (iLike movies? iLike TV? iLike tacky theme parks?).

Most observers of iLike assume it will sell to a larger entity eventually, such as Ticketmaster, for whom the site has become a major referrer.

But the Partovis–who have sold start ups before–insist they want to build the iLike brand.

Here’s a video interview with Hadi Partovi in which we talk about all this and more, along with a tour of iLike’s offices:

[ See post to watch video ]

A Tale of Two Parties in Silicon Valley, Part 2: iLike Kisses Up to Zuckerberg

Kara Swisher — Fri, 07 Sep 2007 08:49:20 +0000

Why shouldn’t the Partovi brothers–Hadi and Ali, both longtime serial tech entrepreneurs who sold their previous companies for big scores–give a little love back to that nice boy, Mark Zuckerberg of Facebook?

So, last night, they threw a party to celebrate their start-up called iLike and also send some appreciation in Facebook’s direction.

After all, their social music discovery service is one of the most popular third-party applications on the hot social network, with seven million Facebook users (out of 11 million total), hypercharging the Seattle-based iLike.

Funded by Ticketmaster (IAC), Khosla Ventures, Bob Pittman and with a cast of top tech players as advisers, it is one of the widget wonders of the moment.

Facebook founder Zuckerberg was at the party, as well as many others in the Facebook widget universe, which is ruling Silicon Valley at this moment, with their zombie bites and silly polls and cartoonifying software.

They partied in the backyard of a tricked-out house in the fancy Silicon Valley neighborhood of Atherton–the home of Elevation Partners’ Marc Bodnick, an iLike board member.

There, a much hipper and younger demographic than the earlier August Capital party had a late dinner of salmon and all manner of other treats under the stars.

That was capped by a concert from San Francisco’s popular band, Third Eye Blind, which has had many big hits including “Semi-Charmed Life.”

By the looks of things at the iLike party, it is a completely charmed one for the Partovis.

[ See post to watch video ]