Yahoo's long and winding music road

With Tuesday's $160 million purchase of Musicmatch, Yahoo sent a clear message that it is determined to be a major player in the fast-growing digital music business, despite its relatively late start.

A giant in the online radio business, Yahoo has been slow to follow Apple Computer and others into digital music sales or subscriptions. As first reported by CNET News.com, the company had been considering several different options, including building its service in-house, based on technology acquired earlier, or buying an existing service.

Sources close to the situation said Yahoo had opened discussions with Musicmatch as early as February and that the start-up had pressed for nearly double Tuesday's purchase price. Yahoo executives, however, said Tuesday's deal had come together quickly, in the last few days.

The acquisition will take some time to be integrated with Yahoo's other music products, such as Launchcast. But it will give the company a solid platform from which to take on increasingly powerful rivals such as Microsoft, Apple and Sony.

"There's going to be a lot of things coming from us," said David Goldberg, who runs Yahoo's Launch subsidiary. "We're making a big investment...We want to be the major player in digital music."

The deal helps clarify what has been one of the last outstanding questions about the future of online music. Most of the biggest companies, from America Online to Microsoft, have given reasonably clear pictures of their strategies for the next few years, which involve either building, buying or using a wholesale service, such as MusicNet.

The rush into the business, following Apple's launch of iTunes last year, has shown increasing recognition that broadband Internet's spread, combined with a wave of digital consumer electronics, has finally ignited the digital music business.

Indeed, the only giant left on the sidelines with Tuesday's announcement is Amazon.com, which offers some free digital downloads on its site but has not announced any plans to sell digital music. The e-commerce giant has repeatedly said it would not comment on its music plans, if any.

Yahoo's own path to the music business has been a winding one.

The company bought Launch for just $12 million in 2001. Executives have been very happy with that service, which has grown to be the second-largest Internet radio broadcaster behind rival America Online's, according to the most recent figures available from Arbitron.

In the wake of Apple's iTunes launch, Yahoo executives were dismissive of the profit potential of selling individual songs online. Nevertheless, by early 2004, CEO Terry Semel was publicly saying it was probably a necessary business to enter.

Late last year, Yahoo quietly purchased a company called Mediacode, with the aim of developing a music jukebox and media player, knowledgeable sources said. Mediacode included several developers who had originally created the Winamp software, now owned by AOL.

The Mediacode acquisition and the subsequent negotiations with Musicmatch highlighted Yahoo's conservative strategy for getting into new businesses. Executives have long stuck to the mantra "buy, build or partner" when it's come to expanding Yahoo's list of properties. Yahoo chose to buy into job listings with HotJobs and boosted its search business with Overture Services and Inktomi, while services such as online personals and comparison shopping were developed in-house.

As for Tuesday's acquisition, Yahoo took the curious step of trying to develop its own technology but then paying $160 million for a company that does the same thing.

Goldberg declined to say whether development based on the Mediacode software was still under way but noted that there would be other music initiatives from Yahoo unveiled this year--and probably next. He said it was important to offer downloads as well as subscriptions, even if individual sales carried lower margins.

"We might offer some things that don't have as good margins for us in order to help give consumers what they want," Goldberg said.

Yahoo is now faced with creating a footprint in a business that is increasingly tied to the consumer electronics business, where Yahoo has historically played little to no role.

Most of the other big online music vendors are working as closely as possible with hardware companies. Much of Apple's success is based on the runaway sales of its iPod music player. Microsoft is linking the launch of its music store to the release of a new generation of Windows-based portable devices from Creative Technologies, iRiver and others.

Sony has tied its Connect service to its line of minidisc players, and even Napster has a branded version of the Samsung hard drive player.

Goldberg said the company was eager to support all devices rather than focus on just one or a few. But Musicmatch already has distribution deals with Dell and Intel.

Yahoo also has the option to tie its digital music product to its broadband access services, which it runs in partnership with SBC Communications, the Rogers cable network and BT. Plans for those ties have not yet been developed, Goldberg said.