It seems the rumors that MySpace was offering $20 million for iLike were true, and now we have an understanding of why the price seemed so insanely low.

The other day we brought you the rumor that MySpace is offering $20 million to purchase social music service iLike.  In the report we noted that the reported offering price seemed quite low for a service with 50 million registered users and investments of $16.5 million.  Well, as more sources have dug in to the story, the reasoning behind the price has come to light, and now it not only makes more sense, but it also makes you wonder if anyone should be buying the service at all.

According to Greg Sandoval at CNET, 80 percent of iLike’s traffic is driven by MySpace’s arch-rival in the social networking space, Facebook.

As we noted in the original article, iLike launched in 2002, but it really didn’t take off as a service until it was added to Facebook’s application platform.  According to an unnamed source speaking with CNET, the future of iLike, or any other company doing business on the Facebook platform, is very far from being clear.

The cash flow of any company doing business on Facebook’s API, or Facebook Connect, or Facebook platform is inherently at risk. The multiple that an investor can place on that cash flow is not that much greater than 1, because you never know at which point Facebook could change the terms of the relationship or change the technology and cut off that cash flow.

This has been a personal concern of mine for any company that builds their business around another company’s API (application programming interface) or platform.  You are relying on that company to keep the rules of the game as is for an indefinite amount of time.  Seeing as MySpace would be buying a service that is 80 percent dependent on its number one competition, what would stop Facebook from changing some minor rule of the app platform to stop iLike from working?  With just the tap of the “enter” button by a Facebook programmer, iLike could lose all of that traffic, and MySpace would be sitting with a service with only 10 million users.

Hopefully Facebook would play nice, but would you want to pay $20 million for a service that was at the mercy of your chief competition?

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Entry was posted on Wednesday, August 19th, 2009 at 1:38 pm under Music, Social Media.

Read more entries by Sean P. Aune.
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