Yahoo! Looks to Stand Out in Music Crowd

Updated from 10:48 a.m.

Yahoo! (YHOO) agreed to buy Musicmatch in a deal that will practically double its reach in the fast-growing online music business.

Sunnyvale, Calif.-based Yahoo! said Tuesday it will pay $160 million in cash for the closely held San Diego-based provider of personalized music software and services. The deal signals Yahoo!'s decision to go toe-to-toe with big music players like Apple (AAPL) and RealNetworks (RNWK) as the digital music industry expands.

"Yahoo! is committed to being a major player in digital music," said CEO Terry Semel. "This combination bolsters our strategy to capture the largest audience of consumers as they make the shift to digital music and supports Yahoo!'s goal to give consumers the greatest choice, control and flexibility in how they interact with their music. This acquisition is one of several product innovations and new initiatives in which Yahoo! will invest to build our music portfolio this year and in the future."

Musicmatch assets include Musicmatch Jukebox software, which allows consumers to play, burn, download, discover and organize an entire music collection; the online Musicmatch Radio network, which offers free and premium streaming access to more than 900,000 songs and more than 200 pre-programmed stations; and the Musicmatch Music Store a la carte song download service, which offers access to more than 700,000 tracks.

The combination will boost Yahoo!'s music reach to 23 million listeners from 12.9 million, according to figures compiled last month by Nielsen//NetRatings. Yahoo! said that reach will make its content "even more compelling for advertisers and record labels."

The immediate revenue opportunity is small, but the business has clear growth implications. Yahoo! said it expects music subscription sales to grow from $113 million this year to $890 million in 2009, going by Jupiter Research figures. It sees digital downloads reaching $803 million in 2009, compared to $158 million this year.

Yahoo! music general manager Bob Roback says the Musicmatch acquisition is part of Yahoo!'s efforts to go beyond what he terms a "media" approach to music -- broadcasting collections of music like radio stations or MTV -- to add "distribution," or supplying specific music sought out by individuals, similar to the function fulfilled by a record store.

"This is one step in our assembly, if you will, of that entire value chain of products in services in music that we aim to offer to our users," says Roback.

While Musicmatch will eventually sell a la carte music downloads, Roback says he believes its subscription model, enabling features such as personalization and better sampling opportunities for new music, offers "a differentiated and more compelling product."

But among subscription services, Roback indicates there's much room for improvement. "I don't think anyone yet has offered the perfect mix of access to catalog, price point, portability, personalization and community," he says. In addition, he says, companies haven't been able to integrate for listeners all the different elements of an online music. "Nobody has really tied together the music experience from the user perspective in the way that we intend to," Roback says.

Yahoo!, which acquired Launch Media in 2001 to serve as the cornerstone of its online music business, is one of many companies attempting to get a piece of the music business as it slowly shifts from CDs and other tangible media toward online delivery.

Apple, for example, not only sells the popular iPod portable music player but operates the iTunes online music store enabling downloads into iPod owners' gadgets.

RealNetworks, for its part, operates the Rhapsody online music subscription service, and incurred Apple's wrath in July by introducing cut-rate music downloads playable on Apple's proprietary systems.

Microsoft (MSFT) launched its own online store in recent weeks as well. And that's only a partial list of the players. Last year, for example, CNet (CNET) acquired the MP3.com domain name as part of an effort to establish a music information site.

On Tuesday, Yahoo! rose $1.49 to $33.36.

>To order reprints of this article, click here: Reprints