February 3, 2004

Jumping into music downloads would be a switch from Yahoo's past music strategy, which has focused on streaming audio and video through Launch, a subsidiary that it bought for $12 million in 2001. Yahoo also distributes Roxio's Napster music service, which lets customers buy music downloads and sign up for subscriptions.

Launch depends on advertising to support a free version of its service, as well as subscription fees for a premium version. Yahoo does not report financial results for Launch, but sources familiar with the figures said the site is about break even.

Yahoo executives, including music division head and Launch co-founder Dave Goldberg, previously have disparaged music downloads as a money-losing business. Music-store companies have conceded that margins are slim to nonexistent, with sales consumed by licensing fees for record companies, delivery costs and credit card fees.

Few analysts expect music downloads to make money anytime soon. Apple Computer, whose iTunes Music Store dominates the market, makes its money on the sale of companion iPod music players and concedes the service is not yet profitable.

Still, many large companies, including Microsoft and Coca-Cola, now have plans to offer music downloads. America Online has also joined the game, taking a shortcut by bundling Apple's iTunes store with its online service. Even RealNetworks, which has bet on subscriptions through its Rhapsody product, recently launched a retail song store.

All of these companies argue they can't afford to stand still in a rapidly changing market where consumer demand is still being formed. If demand takes off, they are confident the services will become profitable. In the meantime, they can rely on music downloads as a "loss leader" to help sell related products, such as concert tickets, posters, T-shirts and even soft drinks.

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