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Friday, Jan 18, 2013 9:00pm
Report: Apple's Lala, Color acquisitions reveal buyout style
A new published account of how Apple acquired both the technology and employees of music startup Lala and failed social network Color sheds insight into the deal-making style of Apple executives, at least while Steve Jobs was CEO. Aubrey Johnson, a former designer at Color, recounts the rise of Lala and the struggles of Color and how Apple eventually paid "pennies on the dollar" to acquire the Color talent that had walked away from the Lala deal. The blog post sheds some light on the workings of small acquisitions and backroom dealings.

Lala, a music service that went in several different directions in the shifting sonic landscape of the last decade, was nonetheless able to make a name for itself, particularly with hardcore music aficionados who appreciated the company's CD-swapping matchmaking service. When the company was able to top Google searches for song titles, founder Bill Nguyen knew he had a goldmine and arranged to try and sell the company to some industry leaders, reports AppleInsider.

Nokia offered first, hoping to use Lala's technology and base to invigorate Nokia's mobile OS, but the offer ($11 million) was a fraction of what Nguyen wanted. He called Google and told the search giant that he was negotiating with Nokia and to move fast if they wanted to buy Lala, which was already helping Google with its then-Music Beta project. But again, Nguyen received a lowball offer from Google as well.

He called Apple and got a dinner with Steve Jobs, Eddy Cue and Tim Cook at Jobs' home. He told the Apple leadership that if Google acquired his company, it would do serious harm to iTunes' dominance, since Google would put Lala's technology and talent behind the company's powerful search and ad technology. Jobs asked questions and made comments over a beet salad, and eventually told Nguyen he was going to give him a slip of paper with a number on it, and if he liked the number "let's just do it and just be done with this whole thing, okay?"

The figure was $80 million, with another $80 million in retention bonuses for the employees. Nguyen nodded and the deal was done. Ironically, Nguyen himself and a few employees of Lala left shortly afterwards to start another venture (Color Labs), walking away from those retention bonuses and saving Apple tens of millions. Ironically, the Color social network (which offered automatic community grouping and sharing of photos of events through an iPhone app) did not do well (and the app was just discontinued at the end of 2012). Apple offered to buy the company for a reported $7 million -- acquiring almost two dozen of the same engineers that had abandoned the retention bonuses when they worked for Lala at a fraction of the price.

As Johnson puts it, "Apple obtained the same employees for pennies on the dollar (compared to the Lala offer). This time with even more experience and startup life under their belts. Paying twice was genius." Some of Lala's technology went on to become the foundation of iTunes Match, the $25-per-year subscription add-on that works with iTunes.

The service offers full backup of a music library (both iTunes-purchased music in unlimited quantities, and non-iTunes music up to 25,000 songs) and on-demand streaming or downloading of cloud-stored music at high-quality 256kbps AAC, essentially allowing mobile devices to have access to enormous music libraries they could never hold with their physical storage capacities. Color's technology has been partially incorporated into iPhoto through the Shared Photo Streams feature, but ironically the main features of both companies that attracted their original user bases -- community disc swapping and automatic photo sharing among groups -- died with both startups, at least for now.