AOL (search) said on Thursday it bought Circuit City Stores Inc.'s (CC) digital music subscription service MusicNow LLC, a move that thrusts Time Warner Inc.'s (TWX) Internet unit into competition with RealNetworks, Yahoo, Napster and other subscription services.

Financial terms of the deal were not disclosed, but a source familiar with the matter said AOL paid less than $25 million.

MusicNow (search) will offer downloads at 99 cents each, comparable to iTunes, and it will offer monthly subscriptions for $9.95 for unlimited downloads or streaming, which refers to listening to music online without downloading it.

For an additional $5 a month, listeners can download songs to a compatible digital music player.

RealNetworks Inc.'s Rhapsody (search) subscription service is $9.99 a month. Napster sells its service for $9.99 a month. Yahoo's service is $6.99 a month, or $4.99 a month if one buys a 12-month subscription. Last month, CNET reported that Yahoo was raising its price to $11.99 a month for users who want to download music to digital music players.

AOL currently has a partnership with Apple Computer Inc.'s (AAPL) iTunes, by far the largest online music service. But that partnership is aimed at members of AOL's Internet service.

The MusicNow service is available to any Internet user through AOL's Web site. The move reflects AOL's focus on providing services through its Web site rather than solely to its own membership.

The strategy allows AOL to build its online advertising revenue at AOL.com and derive subscription revenue from the music service.

MusicNow also allows AOL to reach music listeners who don't own Apple's iPods, which are only compatible with iTunes and no other online service. Conversely, iTunes users can only download songs to iPods.

"AOL's partnership with iTunes is strong, has been fruitful for both companies, and will continue," said AOL spokesman Nicholas Graham.

AOL said the agreement was signed on September 27th and closed early this week.