Yahoo Music's going to join Amazon.com in offering DRM-free MP3s, either for free as part of an advertising-supported service, or for sale on a per-download basis, according to anonymous record company executives cited in this AP story.
Ian Rogers, the exec in charge of Yahoo's music service, has certainly thought long and hard about the future of the music industry, and Yahoo's got tons of traffic (which it hasn't done a very good job of monetizing, but that's another story). I like the site's search interface--it's a lot better than Amazon's, which mixes MP3 downloads and physical CDs with no rhyme or reason--and it's the only major commercial music download site that offers lyrics.
They've got a fighting chance, in other words, but will need something extra to differentiate themselves from the rapidly growing pack. Some ideas: offer a range of bitrates, all the way up to lossless. Do more with the lyrics, like integrating them into music streams, then scrolling them across the Yahoo Media Player when users play or link to a song that's hosted on the Yahoo streaming service. Make it as easy as possible for independent artists to post their files on the site, like CDBaby and (recently) Last.fm--depth of catalog is key.
What not to do: stay wedded to Windows Media Audio, require a subscription fee or online registration, or (worst of all) try and create yet another desktop application for playing music--we've got plenty of those already, and most iPod users will stick with iTunes.
I'll wait on the details before speculating further as to whether a revamped Yahoo Music will hit or miss.