Yahoo Buys Online Music Provider Musicmatch for $160M

Yahoo Inc. (YHOO) is buying online jukebox provider Musicmatch Inc. (search) for $160 million in a deal designed to broaden the Internet giant's appeal with the growing audience of consumers who buy songs off the Web.

The all-cash acquisition, announced Tuesday, gives Sunnyvale-based Yahoo a major drawing card as it competes against the likes of Apple Computer Inc. (AAPL), RealNetworks Inc. (RNWK) and Napster in the rapidly growing field of digital music management.

"This really rounds out everything we do in music," Dave Goldberg, general manager of Yahoo's music division, said during an interview Tuesday. "We want to offer users a way to interact with digital music in any way that they want."

Investors applauded the deal. Yahoo's shares surged more than 5 percent, or $1.67, to $33.54 during Tuesday's trading on the Nasdaq Stock Market (search).

San Diego-based Musicmatch will provide Yahoo with two features that it doesn't currently offer — an online music store that sells individual songs for 99 cents apiece and a popular software program that helps manage digital music on computer desktops.

Musicmatch's digital jukebox, available in 10 languages, includes 700,000 songs. Besides letting consumers download songs a la carte, Musicmatch sells an $8-per-month subscription services that lets customers listen to any song in the library at any time on the Internet. About 225,000 subscribers pay for Musicmatch's unlimited access service.

Privately held Musicmatch doesn't disclose its financial results, but digital music industry analyst Phil Leigh estimated the company has annual revenue of about $50 million.

By linking the digital download service to its streaming radio service, Musicmatch has become particularly effective in spurring impulse purchases on the Internet, said Leigh, who runs a market research firm called Inside Digital Media (search).

Musicmatch's music management software also is a crucial component in the deal, Leigh said, because so many consumers are transferring songs from their existing CD collections to personal computers and other digital devices.

Yahoo's musical hub right now is an online radio service that's offered for free. The company expects its music audience to climb from about 12.9 million listeners today to 23.9 million after the Musicmatch acquisition is completed during the final three months of the year.

Founded in 1997, Musicmatch has about 170 employees. Yahoo hasn't determined the fate of all the workers, Goldberg said Tuesday, but the company expects to retain an office in San Diego.

The sale vindicates Musicmatch CEO and founder Dennis Mudd, who overcame early skepticism to build a successful business. While attending the University of Pennsylvania's Wharton School in 1986, Mudd wrote his master's thesis on digital audio distribution. Mudd's professor gave the paper a "B," convinced the business model was unrealistic.

Already the Web's most popular destination, Yahoo is counting on Musicmatch's appeal to attract new visitors and persuade existing users to remain on the site longer. If Yahoo achieves that goal, its site may become an even more powerful advertising magnet.

Digital music is becoming a big business in its own right. Sales from online music subscriptions and song downloading is expected to soar during the next five years, rising from an estimated $271 million this year to $1.7 billion in 2009, according to Jupiter Research.

The Musicmatch deal also gives Yahoo another potentially powerful weapon in its intensifying battle with other popular Web sites, such as Google (GOOG), Microsoft Corp.'s (MSFT) MSN and America Online, that have become major Internet entry points.

"Yahoo is really upping the ante here," said Jimmy Schaeffler, chairman of The Carmel Group, an online entertainment research firm. "It opens up a whole set of other opportunities for other music services to be sold."

Roxio Inc., which has reformed Napster's once-renegade music downloading service, shapes up as an attractive takeover target, Leigh said. Roxio's shares rose 12 cents, or 3 percent, to $3.66 during Tuesday's trading on the Nasdaq.