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Bankruptcy protection filing shows some major labels have canceled contracts with, but company says Chapter 11 will give it breather and allow it to find new funding.

Universal Music Group, the record label representing such acts as Lady Gaga (above) and U2, is owed $16 million by troubled
Greg Sandoval/CNET

Round up the usual suspects. filed for bankruptcy protection and undoubtedly the major record companies will be blamed. In filing for Chapter 11 on August 6, the music service reported that it has $2.2 million in total assets (only $203,000 in cash) and owes the four largest record companies a combined $25 million.

For years, online music stores have claimed consumers just don't spend enough on music anymore to support big licensing fees. Label critics will argue case closed, greedy record executives caused Playlist's downfall. The story, however, is much more nuanced.

While licensing costs surely played a part in Playlist's financial collapse, it is also true the start-up careened into a digital-music brick wall. The company adopted a risky business model (ad-supported music), an expensive legal strategy (offering unlicensed songs), and suffered a run of bad luck (losing a marquee CEO). Jeremy Riney, the company's founder, declined to comment for this story.

Once a bright prospect, Playlist is largely forgotten by the public after years of upheaval. But the company's bankruptcy filing is worth studying because it gives us a peek at data we don't often see from privately held music services. Playlist's story also offers instruction to tech investors-- who have largely fled digital music--about how rounding up a large following doesn't always add up to big profits.

In 2008, Playlist could boast 45 million registered users and 20 million monthly unique visitors to its site, court documents show. Consumers appeared to enjoy the social elements of creating and sharing music playlists with friends. The company intended to generate revenue by selling ads and ad-supported music was all the rage back then. Playlist was attractive enough to lure Owen Van Natta, a former high-flying Facebook executive, to sign on as CEO. Van Natta helped inject Playlist with credibility and attract an investor group led by Bob Pittman, the music-business guru who created MTV and formerly led AOL.

Terminated license agreements
The momentum didn't last long. Van Natta left after only five months to become MySpace CEO and a cloud of litigation hovered over the company. The music that Playlist offered was largely unlicensed and this brought a copyright lawsuit from three of the top labels. Sony Music cut its own deal in April 2008 and didn't take part in the litigation. Last May, two years after signing its first licensing agreement with a major label, Playlist announced it finally possessed agreements from all four. They apparently came too late.

Records show Playlist is unable to pay three labels the agreed-upon licensing fees. The company said it "settled federal litigation [with the record companies] with a combination of settlement payments and issuance of promissory notes." Playlist lawyers added that payments to the labels were due May 26 and "since the promissory notes have not been repaid, [some of the labels] have terminated their licensing arrangements."

That means Playlist may still be operating, but it has lost the right to offer some of the music sector's most popular songs.

Over the years, other music start-ups, including Napster, took a "play now, negotiate later" approach to the labels and ended up owing millions. Presumably, the idea behind the strategy was to gather a big enough audience so that the record companies would be more inclined to partner with a money-making service rather than risk killing it in court. In Playlist's case, the strategy doesn't seem to have worked.

Breathing spell
Help is on the way, the company said in court papers. Managers wrote in their filing that the company plans to use Chapter 11 to "gain a breathing spell free from the threat of execution of that it can complete a new round of equity financing." Playlist said it has lined up an undisclosed private equity firm that appears willing to invest. The company said it would use the money to pay off the labels.

Music industry sources told CNET last spring that was running low on funds, and at least to that point, the company's efforts to find new investors hadn't come close to meeting Playlist's need. Earlier this month, when Playlist first announced it had filed for bankruptcy protection, managers said they intended to continue operating and expected to quickly emerge from Chapter 11. Yet, it's hard to see much reason for optimism. has asked the court for an extension to file required documents because "reductions in staff" have left managers too short handed to complete the paperwork. The company's workforce numbered 45 in May 2009 but is now down to 15 employees, records show.

In addition, Playlist also requested that it be allowed to keep using cash to pay bills. If managers aren't allowed to use "cash collateral," then the "debtor will be forced to immediately shut down operations and liquidate its assets," the company wrote. As it stands, owes Universal Music Group $16.6 million, Warner Music Group $4.1 million, Sony Music Entertainment $3.1 million, and EMI Music $2.1 million.

And what happens if Playlist survives bankruptcy protection? The company may find it hard in the future to strike new licensing deals. Some at the labels believe filed for bankruptcy protection to get out of paying the labels the already reduced licensing fees, insiders said. They are also skeptical that the investor Playlist says it has lined up will come through. Playlist isn't exactly an attractive bet right now. Not only does Playlist owe a lot of money but management has apparently undergone another shakeup.

John Sykes, the former MTV exec who replaced Van Natta as CEO, has been replaced by Riney, the company's founder, records show.

And there's this: digital music and specifically ad-supported music is in shambles. Nobody in the sector has managed to post a significant profit over any significant period of time. SpiralFrog and Ruckus went under. Imeem and iLike were sold for peanuts. After Lala concluded its chances of making money were slim, it sold to Apple, The Wall Street Journal reported last year.

So, there may not be much for Playlist to return to.