SpiralFrog gets loan extension, fortunes still look bleak

SpiralFrog continues to dodge bullets.

The troubled ad-supported music service that has needed loans to keep operating was supposed to pay creditors $7 million by April 19. At least from the outside the situation looked bad because it was only three months ago that SpiralFrog needed a $2 million loan. Where would a start-up that's only been in business for six months get that kind of money?

Turns out, SpiralFrog's managers renegotiated the loan terms and the company now has a year to repay, according to a company spokeswoman.

So SpiralFrog keeps hopping, but for how much longer?

At the end of the month, privately held SpiralFrog is due to report year-end earnings for 2007 (the company reports like a public company as part of an agreement with investors). That report could hold important clues about the company's prospects.

Early indications are that SpiralFrog, which attracted lots of media attention two years ago when it announced plans to offer free legal music, has met with mixed results.

The good news is the New York-based company topped 1 million unique visitors in January and music-industry sources say it has made several hires in recent weeks.

But the service still wrestles with the same problem it has tried to remedy for two years: a highly limited song selection.

Once trumpeted as a potential iTunes killer, SpiralFrog's music library is dwarfed by iTunes. After two years of trying to sell the four largest music companies on its business model, SpiralFrog executives have managed to sign one: Universal Music Group. It's extremely hard for a music service to compete against Apple's music store, but it's nearly inconceivable to do it without songs from all top four labels.

Meanwhile, social networks, such as Imeem and Last.fm, which stream music to users' PCs, can boast licensing deals with the majors. And MySpace and Facebook are also in talks with the labels about offering music.

Numerous sources close the record labels said SpiralFrog's problem mostly comes down to its business model. Sony BMG Music Entertainment and Warner Music Group don't have much faith, the sources said. EMI Music Group's publishing unit already has an agreement with the service and the label could eventually sign, according to one source.

Another deal breaker for the labels has been the turmoil at the company. An executive shuffle in Dec. 2006 and SpiralFrog's money troubles has given the big music firms pause, said the sources.

Those financial worries may continue to undermine the company.

SpiralFrog needed to pay Universal Music $3.3 million before it ever sold a single song. Even if managers convince another major to sign on, where are they going to get the money to pay the fees?

In the third quarter, SpiralFrog burned through $3.4 million while reporting revenue of $20,400. But the free-music service, which launched in September, had only been open for a three weeks during that period. Starting with the fourth-quarter report, we're going to start seeing how scrappy SpiralFrog really is.