Having raised as much as $12 million in VC and debt funding, the company made a splash in August 2006 (after 2 years in operations) when Universal Music made their entire music catalog available for free download through SpiralFrog, joined by EMI a month after. About a year after, SpiralFrog started handing out private beta invitations (what took them so long?)

Attorneys representing defunct music service SpiralFrog have notified investors not to expect any returns. Whatever money comes from liquidating assets will go to a group that loaned the company an “amount exceeding $34 million.”

Is this going to be the start of more ad supported music download and streaming services moving towards the deadpool? I can see Qtrax is going to now have a lot of trouble is this economic environment and Im sure they will be the next to be closing.

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A lot of people are talking about how a weak economy is affecting advertising revenues and from my experiences this is definitely the case. However, because advertising is suffering some journalists also expect that to have an effect on ad-supported music startups, such as Spiral Frog.This is definitely not the case, mainly because they provide royalties as a percentage of their revenues.

For Spiral Frog that have now reached a new milestone in terms of their catalog size, over three million songs are now available through their service.Music videos for download also increased to almost 5000 and registered users have grown to 2.3 million according to the company.

SprialFrog believes this is the largest total number of registered users on any legal, free music download site, but offered no details as to how active the users are.

According to Joe Mohen, founder and chairman, “With the current economic turmoil and the potential threat of a recession looming, the offering of free music is very attractive to budget conscious consumers.” SpiralFrog’s biggest competition isn’t paid downloads, however, it’s free pirated mp3′s via P2P. It is also unclear how the economic downturn will effect the advertising revenue that all ad-supported sites require.

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