Launch Media operates Launch.com, a Web site that offers streaming audio, music videos, artist information and music news. Yahoo said the addition will complement its existing entertainment sites including Yahoo Music, Yahoo Broadcast and Yahoo Radio.
With the deal, Launch Media becomes one of the last online music start-ups to link up with a larger media company, following the path of MP3.com, Napster and Myplay.com.
Yahoo, meanwhile, has been working to sharpen its entertainment focus in an effort to tap different sources of revenue. In April, it hired as CEO former Warner Bros. Co-Chairman Terry Semel, who highlighted the development of paid services throughout Yahoo as one of his objectives. Offering entertainment content could be one way to lure passive Yahoo visitors into becoming subscribers, but so far using the Web as an entertainment business has not succeeded.
"The Launch acquisition really fits into our goal of being the premier entertainment destination on the Web," Ellen Siminoff, Yahoo's senior vice president of entertainment and small business, said in an interview. "Entertainment is absolutely one of those areas that lends itself to premium services."
The company already has a deal with Pressplay, the online music subscription service from Vivendi Universal and Sony. It also recently relaunched Yahoo Broadcast, which streams video and audio over the Web.
The addition of Launch Media highlights the increasingly competitive battle among Internet heavyweights to become appealing online music destinations. AOL Time Warner and Microsoft have been pushing aggressively into online music, a trend underscored by their recent spat over installing Windows Media technology onto the America Online service. AOL Time Warner has an advantage by owning its own record label--Warner Music Group--while Microsoft has gained many allies among record companies for its audio delivery technology.
"Yahoo is going to be feeling a lot of competition from AOL and MSN because the portal battle is moving into the music space very quickly," said Eric Scheirer, an analyst at Forrester Research. "Differentiated music services will be an important part of the competitive landscape among the portals."
Under the terms of the deal, Yahoo will begin a cash tender offer to purchase all of Launch Media's outstanding shares at 92 cents per share, representing a value of about $12 million. Yahoo also has extended a $3 million loan to Launch Media, in addition to the $2 million it lent the company last month.
The deal, which is subject to customary closing conditions, is slated to close in the third quarter of this year. Launch Media's board has unanimously approved the merger.
Launch Media's operations will remain in Santa Monica, Calif., after the deal is finalized. However, the companies have not determined whether Launch Media's brand will remain or whether the site will be fully absorbed into Yahoo. Yahoo traditionally has incorporated the brands of its major acquisitions into its network of sites, as in the case of home page publisher GeoCities and Web streaming service Broadcast.com.
Launch Media will become a subsidiary of Yahoo, which means Yahoo will not be dragged into the company's legal battle with the recording industry. In May, the Recording Industry Association of America sued Launch Media for violating license agreements with Universal Music Group, Sony Music Entertainment, BMG Entertainment and EMI Recorded Music by offering an unapproved level of interactivity via its LaunchCast streaming software.
Launch Media pulled LaunchCast after it was sued but has since restarted the service without content from the labels. Launch Media and Yahoo intend to offer LaunchCast to boost their music efforts.
"We want to build a very large business around music for consumers at Yahoo," David Goldberg, chief executive of Launch Media, said in an interview. "We've got our music videos on demand, and LaunchCast which will be important parts of what we're going to have."
On Thursday, Launch Media said it had settled a portion of that copyright infringement suit with one of the labels, Universal. It agreed to pay for content run previously on its site and to enter a nonexclusive licensing agreement with Universal for the use of its recordings over its Web radio service.