February 3, 2004

Yahoo's management also is starting to see the value of a more comprehensive strategy, if only to defend against its own users defecting to rival offerings, sources said. "Theoretically, if you don't have it, they will go elsewhere," said a source familiar with Yahoo's plans.

For months, music insiders have been expecting Yahoo to up the ante in its music bet, a move they say would change the dynamics of the industry. As one the most highly trafficked sites on the Web, Yahoo is better positioned than most to sell music services. In addition, Yahoo could sell music through partnerships with high-speed Internet access providers such as SBC Communications.

"Yahoo seems to be a real obvious major player in the space," said Jeff Cavins, chief executive of Loudeye, which builds music stores for other companies. "Digital music for Yahoo is a natural way to create incremental revenue and profit."

Yahoo has made several stabs in that direction. Last year the company explored ways for Gracenote, a music database provider, to build software that would let Yahoo customers buy and play back digital songs, sources said. But the partnership never bore fruit, so Yahoo turned to Mediacode.

Mediacode, led by former Nullsoft engineers Ian Rogers and Rob Lord, has created software that lets people access their media libraries from multiple PCs. For example, songs stored on a PC at home can be played at work.

Although Yahoo acquired Mediacode's engineers to build its own player, the company could hedge its bets by acquiring existing technology.

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