Search engine giant Yahoo (Nasdaq: YHOO) 
announced plans to acquire Musicmatch in a $160 million cash deal on Tuesday, positioning the Web destination to compete in the online music sphere.
The deal follows Apple's (Nasdaq: AAPL) announcement in July of the iTunes Music Store's first profitable quarter. The company reported $73 million in revenues, a figure that included iPod accessories and services sales.
A Growing Market
The digital music in 2003 brought in just under $100 million, while the more traditional CD market earned $11.9 billion, with sales continuing to decline.
Jupiter Research projects that the online music business will surge to more than $270 million this year. Jupiter analysts believe that over time subscriptions to streaming music will outpace a la carte downloads, and that, combined, the two could be worth over $1 billion by 2009 -- 12 percent of consumer spending.
Why Musicmatch Looked Good
Although Musicmatch was bought at a cost of three times earnings, it may prove to be a bargain.
Inside Digital Media senior analyst Phil Leigh said Musicmatch is one of the few independent companies in the digital music sector that is profitable on a stand-alone basis.
"Yahoo will be able to expose the Musicmatch capabilities to many more consumers than the music firm could do on its own," Leigh told MacNewsWorld.
"The best evidence of this is the tremendous expansion that Launch Media enjoyed after Yahoo acquired it several years ago."
Yahoo may also have valued the deep experience of Musicmatch, which dates back to digital music's infancy in 1997.
Entrenched and iPod Friendly
The company has one of the more popular jukebox software packages for users who rip purchased CD's onto the computer.
Leigh suggested that iPod users could find Musicmatch software convenient for just this task.
"First, it makes it easy for consumers to transfer their existing CD collection to their computers in the form of dot-MP3 files that will play on the iPod. Second, the Musicmatch jukebox is also a convenient program for managing the dot-MP3 files once they are on the computer and burning them to CD-R media as well," Leigh said.
Leigh believes today's digital music user is more interested in transferring an existing CD collection to the computer than buying tracks legally off the Internet.
Impulse Buying
Musicmatch's ability to offer multiple program choices to consumers may give it one advantage over Apple's iTunes Music Store. Currently iTunes offers songs and albums via download only, with some streaming Internet radio available via the iTunes software. The Musicmatch menu, by contrast, includes subscription services for music streaming, Internet radio and the popular per-song download.
Leigh believes this mixed approach may drive consumer adoption of the pay-per-song model. "For example, listeners to Musicmatch radio or a related subscription services can purchase the songs they are currently hearing on the fly without having to search for the track, composer or artist."
Leigh also passed on an anecdote from Musicmatch CEO Dennis Mudd's college days. Mudd "was an MBA student at Wharton. For one of his classes he wrote a business plan to start up a company that would develop a business by selling music over the Internet," Leigh said.
"He was given a grade of
B. Although the professor evidently liked some things about the
paper, he felt that the idea was not practical."
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