Yahoo says Rhapsody will handle its digital music

NEW YORK Mon Feb 4, 2008 6:18am EST

A man checks his cell phone outside the Yahoo! booth during the Consumer Electronics Show (CES) in Las Vegas, Nevada January 7, 2008. REUTERS/Steve Marcus

A man checks his cell phone outside the Yahoo! booth during the Consumer Electronics Show (CES) in Las Vegas, Nevada January 7, 2008.

Credit: Reuters/Steve Marcus

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NEW YORK (Reuters) - Internet media company Yahoo Inc said on Monday its music service will now be handled by Rhapsody America, an on-demand subscription service run by RealNetworks Inc and Viacom Inc.

Yahoo, which previously said it would replace its in-house built Yahoo! Music Unlimited service, said it would migrate customers to Rhapsody over the coming months, while allowing subscribers to access their music library from a new Rhapsody account.

The strategic partnership was announced after Microsoft Corp made a $44.6 billion bid on Friday to take over Yahoo. It raises questions about whether RealNetworks and Yahoo will be able to execute their new partnership if Microsoft succeeds in buying Yahoo.

Microsoft and RealNetworks were locked in a bitter and protracted anti-trust dispute for eight years until Microsoft agreed to settle with RealNetworks for $761 million in October 2005. RealNetworks founder and chief executive Rob Glaser, is a former Microsoft executive.

In addition, Microsoft already has a comprehensive range of digital media products and services, including an online music store and its Zune digital media players.

Dan Sheeran, a senior vice president at RealNetworks said any conflicts with Microsoft are two years old and both companies would proceed with their agreement.

Like Microsoft, RealNetworks sees the value of a partnership with Yahoo as a way to get in front of more than 23 million monthly Internet users.

"This really works to make Rhapsody much more available to a much wider audience," said Sheeran.

Yahoo Music's monthly subscribers, who currently pay around $9 a month will eventually have to pay around $12.99 a month for Rhapsody when their existing contracts expire.

But paid services have to compete with an increasing array of free music services such as social radio Last.fm and Imeem.com, which both offer variations of on-demand services. They also compete against illegal free services.

Sheeran said that, while Rhapsody has become more flexible and offers more free music on a limited Web service, it has no intention of dropping its paid subscription business.

In August, Viacom's MTV Networks, RealNetworks and Verizon Communications said they would create a digital music service called Rhapsody America, which would be able to compete with Apple Inc's successful iTunes online store.

Verizon Wireless, which is jointly owned by Verizon and Vodafone Group Plc is the exclusive wireless distributor for Rhapsody's digital content.

Yahoo also said on Monday it acquired privately-held FoxyTunes, a company that developed a toolbar plug-in application that enables users to control more than 30 desktop and Web-based music players.

(Reporting by Yinka Adegoke; Editing by Andre Grenon)

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