How And Why Apple (AAPL) Bought Music Startup Lala

Aubrey Johnson, a former lead designer at Color Labs Inc and currently Designer in Residence at Science, gives us a behind-the-scenes look at Apple (AAPL)’s 2009 acquisition of two startups: Lala Media Inc. and Color. Outside of the fact that both firms were co-founded by technology entrepreneur Bill Nguyen before being purchased by Apple, not much else until now was really known in terms of how the two deals were reached.

In a blog post titled “Twice,” Johnson writes that as a Cloud-based streaming music service, Lala’s biggest strength wasn’t its streaming technology, it seems its biggest strength was that Nguyen had managed to get Lala’s song listings near the top song search results on Google (GOOG), thanks to a search placement deal with the search giant. As a result, the firm was taking sales away from iTunes. Johnson explains that after Nguyen received low bid offers from both Google and Nokia — Johnson characterized Nguyen as “absolutely disgusted” by Nokia’s $11 million offer — he then contacted Apple to see if they’d be interested in buying his company.

[via AJblog] “In late November [2009], Nguyen was seated at the dinner table in Steve Job’s home on Waverly St in Palo Alto. Also present were Eddy Cue and Tim Cook and other Apple executives. Steve led the conversation while eating a beet salad:

“I’m going to give you a number, Bill, and if you like it, let’s do it and just be done with this whole thing. Okay?” Bill agreed.

Jobs passed a piece of paper to Nguyen and Bill nodded. The deal was done.”

Lala was bought out for $80 million with an additional $80 million in retention bonuses and stock options for employees that stayed on at Apple through the acquisition, valuing the entire deal around $160 million. Not a bad one considering Nokia had only offered $11 million.

After the purchase, a number of Lala engineers left the company with Nguyen to start Color, the photo sharing app for iOS and Android that generated a lot of buzz back in 2011. Johnson points out that many employees left millions in Apple stock options at the $196.48 exercise price they had from the 2009 sale/retention bonuses to work at Color. After the startup failed, Apple bought much of the Color’s talent for $7 million last year. Here is how Johnson sums up the Apple-Lala-Color acquisition:

“Apple obtained the same employees for pennies on the dollar. This time with even more experience and startup life under their belt. Paying twice was genius.”

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