Melodeo, Making Big Push in Online Music, Eyes Apple in the Cloud

OK, so you’re a small, profitable tech company in the digital media sector. Your closest competitor just got acquired by Apple. Now Steve Jobs is encroaching on your territory. How do you want to play it?

That’s the situation Seattle-based Melodeo faces after Apple paid a reported $85 million last month to buy online music startup Lala, based in Palo Alto, CA. It looks like Apple (NASDAQ: AAPL) is making a play to own the streaming music market, breaking with its traditional approach of selling music downloads via iTunes. The implications pose a challenge for nuTsie, Melodeo’s flagship streaming music service that lets iTunes users play their songs on their (non-iPhone) mobile phones and netbooks.

After the story emerged that there had been a bidding war for Lala, reportedly between Apple and Google (and probably others), rumors of acquisition talks involving Melodeo also have surfaced. Reached by phone, Dave Dederer, Melodeo’s vice president of business development, declined to comment specifically on any talks. “Like any small, venture-backed company, at some point we need a bigger partner to bring our efforts to their greatest possible fruition,” he says. “The Lala acquisition has accelerated conversations we’ve been having. A lot of people have been courting us over the last few weeks.”

In the meantime, Melodeo is raising the bar on its products. Last week, it released an application that analyzes the iTunes playlists on your iPhone or iPod Touch and automatically creates new playlists that it streams to you over the Web. The new app is called “Effin Genius,” a play on the “Genius” song-recommendation feature of iTunes. (It’s kind of awesome.) Effin Genius has gotten some rave reviews; CNET called it “Pandora’s smart little brother.” And Melodeo is building buzz around a new product to be announced soon—as early as this week—which is supposed to give any smartphone or Web-connected device the capabilities of an iPod, only better.

It’s all part of the company’s efforts to march to the beat of its own drum in online music. For now, the math is simple: there are about 400 million iTunes customers (Apple has roughly 75 percent market share of digital songs), but only 100 million-plus iPhone and iPod users. That presumably leaves a lot of people without mobile access to their music libraries. Which is where nuTsie comes in: the service is available for a monthly fee, or a one-time charge per device, on all major U.S. carriers, all major handset manufacturers, and all major mobile platforms including Android, BlackBerry, and Windows Mobile devices.

Melodeo was founded in 2003 to sell music downloading and podcasting services to wireless carriers. That business didn’t work out, in part because of issues between record labels and the carriers. So the present management team, led by CEO Jim Billmaier, came in about four years ago to push the streaming music approach for mobile devices. Melodeo is backed locally by venture firms Voyager Capital and Ignition Partners, who most recently co-led a $7.9 million funding round in 2007. (Interestingly, Ignition also backed Lala.) Melodeo currently has about 20 employees.

On a visit to the company last month, I found the management team chomping at the bit to lay out its strategy in cloud-based music now that Apple has put its stake in the ground. But first, I wanted a little more context. “We think Apple taking this step is the best thing ever,” said Billmaier. “They’ve validated the cloud.” Dederer added, “They were smart enough to say, ‘We need this now.’”

At the same time, Melodeo says it’s far ahead of Lala in terms of the types of devices it covers and its level of technical experience in streaming digital media from the Web to different devices. As for other competitors, there’s Rhapsody from RealNetworks and Pandora, the radio-like recommendation service. The latter has lots of users and lots of funding, but wasn’t profitable as of last year. Dederer says Pandora’s song recommendations work in a “reductive” way: when you hear a new song, you either like it or hate it (and never hear it again). “We really want to crack this nut of music recommendation where it’s not reductive, it’s expansive,” he says. “It needs what we call ‘delightful randomness,’ because that’s what a real music discovery experience is.”

The company’s overarching goal is to combine song recommendations, radio, and friends’ playlists to provide the ultimate music experience for consumers. And do it all from the cloud. Melodeo’s patented technology essentially makes it efficient to stream songs from the Internet over wireless networks, which can be slow and unreliable, down to mobile phones with varying (and non-ideal) specs. “Devices still don’t have the power or screen real estate. There’s a lot you have to do to make things small and run fast,” said Bob Wise, the company’s senior vice president of engineering.

So far, the effort seems to be paying off. Dederer says Melodeo has sold well over a million paid apps, of which nuTsie for mobile devices is the main part of the business. The company also makes money through white-label deals with Starbucks, Salvation Army, Sony, and other big organizations.

I asked Billmaier what Melodeo’s biggest challenge is now. “For us, it’s market awareness,” he said. “Before, it was validation of cloud-based music. We couldn’t have cracked that on our own. Now our solution can go mainstream.” Billmaier also commented that “Lala had lots of money. We’re building a company the old-fashioned way, with profits.” Dederer added, “We might be the sole profitable digital music company in the world.”

Which brings us back to Apple. “Strategically, now that Apple has acquired Lala, we’ll be part of the answer to, ‘What will everyone else do about this?’” Billmaier said. By “everyone else,” he was talking about consumers, wireless carriers, big tech companies like Google and Microsoft—anyone who has to “survive versus Apple” in the digital media world, he said.

So, assuming Melodeo doesn’t get bought by Google or another Apple competitor tomorrow, what’s the near-term outlook for the company? “We have some deals in the hopper that could triple or quadruple our revenues and make us go from marginally profitable to massively profitable,” Billmaier said.

That would be impressive indeed. But it sounds like Melodeo is happy to strengthen its own position in the world of cloud-based music and build up its user base and partnerships, while staying out of the way of the tech giants—at least until its service becomes indispensable to them.

“Apple is the new Microsoft,” Billmaier said. “They’re on a collision course with Amazon and Google.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and Editor of Xconomy Boston. E-mail him at gthuang [at] Follow @gthuang

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