Unless I’m being daft, everything that you have described seems correct to me. (And, thank you for describing the situation so clearly!)
However, the “initialization failed” error is a blanket error which basically means that there’s no good connection. It could be hardware (wiring, ISP connector installed on the wrong side of the board, bad solder joint somewhere, solder bridge, etc) or it could be software. To help eliminate things, you might try using one of our standard makefiles.
Download the code example and makefile here:
Edit the file to change programmer type, by commenting out line 6 and uncommenting line 7.
Then, at the command line, compile with “make all” and then upload the program with “make install”. The full avrdude command that it calls should be as follows:
avrdude -p m164p -c usbtiny -P usb -v -e -B 4 -U lfuse:w:0xC2:m -U hfuse:w:0xD9:m -U efuse:w:0xFD:m -U flash:w:octolively.hex
One of the things to note there is that you do (I think) have to explicitly tell it to look on the USB port, with that “-P usb” above. :)
