Yahoo! Joins Suddenly Crowded Online Music Field

The race to develop a commercially successful online music service has begun. But the finish line? It's nowhere in sight.

Thursday's announcement of an alliance between Yahoo! (YHOO) and two of the world's largest record companies marks the third Internet music venture this week from deep-pocketed, established media and technology firms.

Details are sketchy on the service being offered by Yahoo! and the record companies, as they were with other entrants, and none has the complete music catalog that handicappers say is necessary for victory. But, according to one analyst, this week's announcements at least clarify which companies are in the running.

In addition, the deal illustrates Yahoo!'s continuing efforts to diversify its revenue stream beyond the advertising dollars on which it has relied for a large majority of sales.

Yahoo!'s shares, boosted by a positive report from Lehman Brothers analyst Holly Becker, were trading at $15.56 Thursday afternoon, up $3.13, or more than 25%.

Remember the Sitcom?

Under the terms of the deal announced Thursday, Yahoo! will feature the yet-launched Duet music service as early as this summer. The deal is the first that covers the marketing of Duet, a 50-50 joint venture formed last year by Sony's (SNE) Sony Music Entertainment and Vivendi Universal's (V) Universal Music Group.

The Yahoo!-Duet deal comes three days after the formation of MusicNet, a partnership of RealNetworks (RNWK) and the other three music majors: AOL Time Warner's (AOL) Warner Music Group, EMI Group and Bertelsmann's BMG Entertainment. MusicNet is slated to launch by early fall, with AOL Time Warner and RealNetworks slated as its first distributors.

Thursday's announcement also closely follows Microsoft's (MSFT) debut of the preliminary version of MSN Music, a free online service that streams music, or transmits it for listening at a user's computer without being stored as a file on the computer's hard drive.

The upshot of this week's music news is that online portals, or general-interest, all-purpose Web sites, will be the focus of the online music business -- not record-company-specific sites or music-specialist retail sites as some had theorized, says Eric Scheirer, a media and entertainment analyst at Forrester Research. "It's quite clear the labels have given up on the idea of being the distribution point themselves. And that's exactly the right decision for them," he says. "The future of music distribution online is going to rest with the portals."

In a competition that should play out over the next 12 to 18 months, the advantage goes to AOL, says Scheirer, thanks to its ownership of a record company and its experience in billing consumers for services.

Microsoft, he says, will be hurt by its weakness in establishing consumer-focused services: "Compared to Yahoo! and AOL, they're definitely the runner-up." Scheirer's firm consults with numerous record companies, online portals and technology vendors in the online music business.

Details, Details

Though Yahoo! and Duet were light on the details of their service, they had more details today than did the similar MusicNet service on Monday. Duet will offer monthly subscriptions to music access for various fees -- streamed music or pieces downloaded to people's computers, or a combination thereof. The service will debut with streaming media this summer, followed by music downloads to a computer -- access to which will be contingent on subscribing -- and, eventually, downloads to portable devices. The prices to be charged and the technology to be used in the Duet service have yet to be determined, say Sony and Universal.

Like MusicNet, Duet says its service is open to anyone who wants to distribute it, or to any record label that wants to contribute its music. But the fact remains that the music industry has arrayed itself into two camps, with Sony and Universal aligned in Duet and AOL, EMI and BMG linked to MusicNet. Why haven't the five majors been able to agree on a single system? Ellen Siminoff, senior vice president of entertainment and small business for Yahoo!, suggests that's too negative a view of the situation. "I'm thrilled there aren't five services," she says. Yahoo!, she says, is seeking to add music from record labels other than those on Duet to the music it will be offering in its Yahoo! music section. She declined to comment on any discussions the company might have had with the record labels lined up with MusicNet.

If all goes well for Yahoo!, music subscriptions will be one of the new sources of revenue that will help the company offset any future weakness in the advertising business upon which it was built. "Yahoo! has been wanting to diversify its revenue model," says Siminoff. But Thursday's deal also illustrates how Yahoo! is trying to make further inroads with traditional marketers. "This is a huge alliance for Yahoo!," Siminoff says. "Sony and Universal are two of the premier brands in the entertainment industry."

And maybe, one day, Yahoo! will be one, too.

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