A source told CNET the service went under at about 4 p.m. PDT, and has been down ever since. The publication has been unable to reach anyone at SpiralFrog for comment, as have we, but claims the source said the startup issued secured notes in order to borrow at least $9 million from hedge funds and others last year to stay in business. Alas, it seems like all efforts to keep the company afloat have been in vain, causing another ad-supported free music download service to cease operations (recently a similar music service geared towards college students, Ruckus, pulled the plug).

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?), but we were already critical of the ad-supported digital DRM-tied music download strategy then:

“I don’t know if SpiralFrog will be able to sustain their business off of on-site advertising and affiliate music sales.”

We covered the company again in January 2008 when SpiralFrog seemed to be doing fine, but the scene was changing and the company had to fend off a lot of competitors, including HypeMachine, RadioBlogClub, Deezer, InTune.fm, Mog, Last.fm, Imeem, etc. It didn’t catch on enough with music fans, sinking the startup in a sea of debt obligations, which it was unable to repay in time.

We’d like to relay the question CNET asks at the end of the source article: is the ad-supported music business facing a shake-out?

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Both Imeem and Anywhere.FM saw a lot of synergy in the deal. Anywhere.FM has the best upload and player interfaces I’ve seen, but lacked a solid monetization method. Imeem will bring its music deals and sales team to bear on the service and hopes to leverage Anywhere’s client side iTunes sync uploader, buddy radio, and recommendation technology in particular. Anywhere’s uploader can upload your entire iTunes, WinAmp, or Windows Media Player libraries, including personal playlists, song ratings and play counts, with a single click. In an email correspondence, Imeem’s CEO Dalton Caldwell hinted at the company’s future saying, “I think that an excellent and complete product that is fully licensed will win vs. the fragmented market we are seeing out there right now.” I couldn’t agree more.

Although not currently announced, Anywhere.FM will likely have access to the same licensing deals Imeem struck with the major labels. The deals allow users to stream any of 5 million songs from their friends for free. Being included on the deals would mean Anywhere.FM could avoid web broadcasting rules that placed limits on how often and in what order songs could be played.

Inking deals with all the majors marked a major turn around in Imeem’s history by ending the lawsuits that earlier dogged the site. But the deals came with at least Universal exacting a pound of flesh in form of some stock and a large upfront cash payment. The Financial Times said the payment was $20 million, although Imeem disagrees. Michael Robertson of MP3tunes.com, and earlier MP3.com, called it a death sentence.

While the ad supported model by their executives own admission has yet to be proven, Imeem has a major leg up over the competition. They’re legal with a large library and currently have over 20 million monthly uniques and 65,000 new registered users each day according to their own stats. Comscore ranked them the top growing social site last September. If ad supported music is going to succeed, Imeem is the startup to watch.

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While you’d think the main advantage of a download is portability, most people won’t be able to take songs off their computer because they use iPods that can’t play the WMA files. See more details in our earlier coverage.

The songs come from some pretty unique deals with the big labels UMG, EMI, and BMI. In exchange, labels get a share of the ad revenue and affiliate song sales on the site and the comfort of control through the service’s DRM.

However, SpiralFrog was over a year in the making and only officially launched last September. A lot has changed since then. Music prices have dropped, DRM is dead (for paid tracks at least), and new legal/questionably legal sites have popped up to serve up free tunes. Competition includes HypeMachine, RadioBlogClub, Deezer, InTune.fm, Mog, Last.fm, Imeem, and a bunch of other sites. One key difference is that users on these sites stream music instead of downloading it, but that doesn’t seem to be slowing down their growth rates. Imeem, which follows an ad splitting model similar to SpiralFrog, did over 3 million monthly uniques around the time SpiralFrog launched last year. Lets not forget that Yahoo may be treading in this territory as well.

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SpiralFrog originally made a splash when they sealed a deal with Universal BMG to give away free downloads of some of their songs in exchange for a share of on-site ad revenue. Later they closed a deal with EMI and have since added a bunch of smaller labels totaling over 700,000 songs. However, now we know a little more about how their free system works.

Songs on SpiralFrog are not ad-supported through interstitial advertising or free in the sense that you can bring them anywhere. Instead, you get DRMed songs (WMA) leased to you for a free 30 day membership (or you can buy on Amazon). You can renew your membership, and the lease to play your songs, by answering survey questions (# concerts per year, how you discover music, etc). All that data helps SpiralFrog know what kind of ads to serve on the site.

To keep the whole system secure, they’ve locked down the download process end to end DRM controls. First you have to get a download manager, and then ensure you have Windows Media Player 9.0 or up. The system is kind of annoying and only works on Windows machines since it uses Microsoft DRM. Although, Microsoft DRM has already been cracked. The DRM requirement also means the songs only play through Windows Media Player, making them unportable. Unlike other DRM setups, though, there doesn’t appear to be a limit to the number of computers you can download to as long as you set SpiralFrog up on them.

Once the system is in place, you can search for artists and download their songs/videos individually. The songs are queued in a download manager and stored locally by artist and album in your SpiralFrog folder. The system seems to have intentionally been crippled so you view more advertising, with downloads happening one at a time and only while on the site. Using the site, I was able to download a bunch of songs and play them with no problem, but other early beta user have had trouble.

I don’t know if SpiralFrog will be able to sustain their business off of on-site advertising and affiliate music sales. A lot of other services are simply going DRM free, not download free. Blogmusik also recently went legit in France, but the US courts and music industry are a lot harder to sway. However, limiting the lease time on the songs means they can continuously tweak what hoops their users need to hop through to keep playing the music they download. For now it may be a simple option if you want a (legal) source of free tunes.

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The (big) downside here is that the music at SpiralFrog will be wrapped in strange DRM that requires regular logging in the the ad driven SpiralFrog service in order for the music files to continue playing. Standard DRM of limited devices, copies and Windows only applies as well. Some people say it’s still a big step because it’s free music, I (and others) question the technical coercion and wish there was some better way to do it.

EMI calls itself the largest music catalogue in the world and currently carries stars like Sting, Nelly Furtado, Jay Z and Kanye West. Sounds great for a party, just don’t forget to watch the obligatory ads before you expect to hit the dance floor.

The press release emphasizes the superior quality of SpiralFrog downloads, compared to the incomplete albums, low quality files and malware of the dark underworld of music piracy. I can’t help but think that many users would visit SpiralFrog regularly and view the advertisements just to get new free music, without being forced to do so in order for their downloaded files to work. That’s just creepy. Creepy or not, though, things are changing.

SpiralFrog will offer free downloads wrapped in a still undisclosed form of digital rights management technology. How tired. Executive bios indicate the company has been around for more than two years, but we’ll see if they were doing anything more than lining up big names for their corporate roster, music partnerships and advertisers for the site. How about coming up with some workable alternative to the pathetic state of DRM with two years of work?

Music lovers have been demanding a different business model for some time, and it looks like at least some industry heavy hitters are going to give it a go via SpiralFrog. We’ve profiled several independent sites experimenting with new business models for music lately (Amie Street, Sellaband and Magnatune) but you had to expect the big guys to try something more traditional. See also eMusic, low cost and DRM free.

The CEO of Spiral Frog, Robin Kent, was former CEO of advertising firm Universal Mccann. Their CTO, Vesa Suomalainen, was an executive at Microsoft for 12 years. SpiralFrog’s management and directors is made up of a long list of big media execs, like Frances Preston (former President and CEO of BMI) and Jay Berman (former Warner representative to the RIAA). SpiralFrog told the Financial Times that they were in talks with Warner, EMI and Sony-BMG as well. This is clearly big media’s attempt to try free downloads driven by ads, but it’s still caught up in DRM!

Is there any chance that the ads will generate enough revenue to cover the costs to be incurred? Perhaps if the site is high profile enough there is. High end clothing retailer Perry Ellis is already lined up to advertise on the site. Sounds like a gamble to me, but we’ll see.

Update with details: I just got off Skype with the fantastic Neville Hobson (see FIR), who’s doing PR for Spiral Frog. He wasn’t able to convince me that this was really a compelling service, but he did provide some juicy details.

Spiral Frog will offer a desktop downloader for Windows Media Files (no iPods!) that can be listened to on one PC and two portable devices. Here’s the kicker – you must log in to the Spiral Frog service at least once per month, and see their ads, or your files will stop playing! The details aren’t fully set in stone, but it will be something like that. There will be links to third party sites of the record labels’ choosing if you’d like to buy your freedom to at least skip the ads.

Spiral Frog will also offer far more than just music, but also video and other digital content. The selling point here is that users will be able to access media legally, without the malware, bad network connections and pirate’s shame that comes from other online media sources. Weird Al’s new “Don’t Download This Song” must be linked to in reference to those arguments!

It will be an exciting day if the major labels come up with something truly more compelling than piracy on one hand or coercion on the other – but I don’t think this is it.