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Audiogalaxy, a music streaming service that was initially created more than a decade ago by developer Michael Merhej, has been acquired by fast-growing Dropbox for an undisclosed sum. The acquisition has led to all sorts of speculation that a cloud music service might be on the way for Dropbox, which could be an interesting twist given its 100 million-strong user base.

Audiogalaxy has a fascinating history. Started in the late 1990s when Merhej was a student at University of Texas at Austin, it was shut down in 2002 following a dispute with the recording industry. Merhej went on to found and FolderShare, which was acquired by Microsoft in 2005, and later become Windows Live Sync. (More on that below).

But that’s not the end of the story. Earlier this year, Mehrej, along with Tom Kleinpeter, jumped back into Audiogalaxy, unveiling a new streaming music service that competed with Pandora, Spotify, Rdio and others.

“It’s almost a homecoming, coming back to Audiogalaxy,” Mehrej told GeekWire when the new service was born. The new Audiogalaxy allowed users to stream their own music from their computers to their mobile devices. The big catch was that users needed to leave their computers on to make it work, but the free service avoided the need to upload tracks to a cloud service.

Hadi Partovi

As a result of the deal with Dropbox, the Audiogalaxy service will be shut down. It’s our understanding that the Audiogalaxy team also plans to relocate to the San Francisco Bay Area, where Dropbox is based. Update:  Merhej tells us that he’ll be sticking around Seattle, but may be taking “many more flights down” to the Bay Area.

There is some commonality between the two companies in that Seattle angel investor Hadi Partovi, a backer of Dropbox, previously encouraged Microsoft to acquire Mehrej’s FolderShare seven years ago.

Microsoft renamed FolderShare as Windows Live Foldershare, and then shut off Mac support shortly after the acquisition. In 2008, Microsoft retired the Windows Live Foldershare service and encouraged people to sign up for Windows Live Sync, offering an upgrade for users who didn’t have shared folders. Partovi, who had since left Microsoft, decided to switch to Dropbox, investing in the company when it employed just two people.

Here’s what happened next, according to Partovi.

“Merhej and Tom  — who were understandably disappointed by seeing Microsoft working on so many products competing in the same space — Windows Live Foldershare, Windows Live Mesh, Windows Live Sync, and Windows Live SkyDrive — decided to quit Microsoft. After some time off, they joined forces again, re-purchased the Audiogalaxy domain name, and built a new web-based cloud music service. The new Audiogalaxy didn’t have the legal woes of its namesake, but didn’t develop a sustainable business model either, so I approached them to see if they’d be interested in talking to Dropbox. The rest is history. Dropbox is very happy to acquire one of the very first teams to pioneer P2P file-sharing and file-syncing.”

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