• by Wendy Davis  @wendyndavis, September 14, 2004

In a bid to become a major player in the fledgling Internet music industry, Yahoo! announced Tuesday that it will buy the privately held Musicmatch, Inc. for $160 million in cash.

Musicmatch offers its 250,000 paid subscribers the ability to listen to streaming music through the Internet. The company also sells downloads of individual songs, much the same as Apple's iTunes and Microsoft's two-week-old MSN Music store. In addition, Musicmatch, based in San Diego, offers Jukebox--a free, highly respected software program that allows users to play and store digital music.

Currently, Yahoo!, based in Sunnyvale, Calif., makes streaming radio and music videos available through Launch, an ad-supported site that Yahoo! bought for $12 million in 2001. Yahoo! expects the Musicmatch acquisition to result in approximately 10 million more listeners--from 12.9 million to 23 million, based on research from Nielsen//NetRatings.

Yahoo!'s Launch also offers premium subscription services, such as artists' clubs for specific musical groups such as "Eagles." The fee to join "Eagles" group was $60 a year. Launch users also downloaded 260 million video streams in the month of July. Yahoo! has 6.4 million paid subscribers to services including Launch, e-mail accounts, personals, and Internet access; no figures relating to the number of Launch subscribers only were available, according to a Yahoo! spokeswoman.

Yahoo! intends to concentrate on growing Musicmatch's subscriptions, as opposed to the pay-per-download portion of the business, says Bob Roback, president of Launch. "While Musicmatch offers both sales and a subscription service, we are much bigger believers in--and will be making a bigger commitment to--the subscription side of the business," says Roback.

Musicmatch subscribers pay a fee--usually $9.95 a month--for access to the company's library of more than 700,000 songs.

The decision to focus on subscriptions, as opposed to pay-per-download, is partly because the pay-per-download model doesn't in itself make much money. The price seems to have settled at 99 cents a song, says analyst Michael Gartenberg of Jupitermedia--which leaves companies with only a "very slim profit." Gartenberg says it might make sense for Apple to operate iTunes, because the music can easily be played on the phenomenally popular iPod, so that iTunes and iPods create demand for each other. Similarly, Microsoft can promote Windows through the MSN Music store.

But without a separate product to promote, the a la carte download model doesn't appear to be a good strategy, says Gartenberg. What's more, it's not easy to play Musicmatch downloads on an iPod because users would first have to convert the files to MP3 format--and many consumers won't do so, says Gartenberg.

Because Musicmatch is private, analysts can't definitively state how much the company is worth or whether the deal makes sense. Still, Phil Leigh, an analyst with Inside Digital Media in Tampa, Fla., estimates that Musicmatch takes in revenues of $50 million a year, based on what he knows of the company's business. One of Musicmatch's greatest strengths is its software program Jukebox--which, says Leigh, is "one of the best on the market" for its ease of use and user interface.

Leigh says Musicmatch has also done particularly well at triggering impulse purchases: "If you're listening to Musicmatch and hear something you like, they've made it easy to buy it."

Leigh adds that because Musicmatch's subscribers have enough disposable income to pay for the service, they tend to be at least five to 10 years older than the college students who use peer-to-peer services, which puts them in the upper half of the 12- to 34-year-old age group that purchases the most music.

The deal is expected to close in the fourth quarter of this year.