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One of the first things Microsoft did when launching the new Zune was kill the 2-year-old MSN Music download service.

The business reasons were plain: MSN Music was a PlaysForSure service, but the Zune wasn't PlaysForSure-compatible, and it came with its own music download service, integrated into the Zune software.

Sure, there's still something with the brand name MSN Music, but it's basically a shell--a few music videos, some promotional tie-ins with Zune (through a program called Ignition), and a radio station powered by Pandora.

If Microsoft's smart, it'll keep LaunchCast around.

(Credit: Yahoo)

So what might that mean for Yahoo Music, if Microsoft's proposed acquisition of Yahoo clears? Probably not much, at first.

Microsoft's Kevin Johnson, who leads the group responsible for online services and Windows, mentioned in a conference call that the company would get the quickest benefits from combining their advertising platforms, particularly paid search: "scale economics can kick in fairly rapidly when you just look at the simple step of just combining the search-related ad inventory on a single ad platform."

Translation: as soon as the acquisition closes, Yahoo Search would be folded into Microsoft's Live Search, and Panama would be folded into AdCenter.

Eventually, though, Microsoft would go through all the other Yahoo divisions, looking for overlap or strategic misfits. Here's where Yahoo Music could feel the heat. Selling PlaysForSure-protected files does nothing for the Zune, and even if Yahoo goes with DRM-free MP3 files, it would seem to be redundant with the Zune Marketplace.

Now, if Microsoft were smart, it would recognize the popularity of the combined Yahoo Music and LaunchCast (see Aribtron's online-radio ratings). But often, decisions in acquisitions are driven by politics and emotion rather than actual business logic.

Editors' note: Yahoo on Monday announced that it is discontinuing its Yahoo Music Unlimited subscription service, transferring its customers to RealNetworks' Rhapsody service.

An unnamed Yahoo spokeswoman recently bristled at the notion that the company ever attempted a period of "Hollywood-ization" under former chief executive Terry Semel, a former CEO of Warner Brothers. She argued that Yahoo had never done original programming, despite the fact that their original content division, dubbed "Originals," used to be called "Studios" and was headed by former CBS TV executive David Katz. And, not to mention that Yahoo executives publicly announced in 2006 that they were backing away from TV-style programming.

I don't want to get into a semantic squabble here, but recent moves would seem to indicate that they may be resurrecting that script.

For instance, some of Yahoo's online music content will soon be making its way onto TV screens. Yahoo is producing a series of music performances that will be distributed on MTV's high-definition channel MHD, according to The New York Post.

"A new alliance between Yahoo and MTV marks a rare instance in which material first designed for the Internet is making its way to mainstream television," the paper reported on Thursday.

The series--"Nissan Live Sets"--consists of live performances from seven or eight featured musical artists, who have included Christina Aguilera, Kelly Clarkson and Avril Lavigne. It has been viewed more than 10 million times online so far, according to Yahoo and will kick off September 17 with a new 30-minute episode running each month through May.

Then there's the deal disclosed this summer with Rocket Science Laboratories, the firm behind reality TV shows Temptation Island and Joe Millionaire, to create short-form, interactive video programming that could wind up on TV as well.

Lloyd Braun, who joined Yahoo after serving as chairman of Disney-owned ABC Entertainment, helped spearhead the plans before he left the company late last year, according to Adweek.

"Yahoo Entertainment GM Drew Buckley envisions Rocket Science helping to establish content involving entertainment, music and television," the Adweek report says. "Our goal is to see how we're going to keep consumers for a longer period of time and extend engagement," Buckley said. "Video programming is a piece of that."

In addition, Yahoo is working with Embassy Row, which produces Who Wants to be a Millionaire, on the daily Yahoo online video series The 9, and also has a deal with animation specialist Gotham Group, but it's unclear what that project will be.

According to a report yesterday in The Wall Street Journal, Yahoo's restructuring plan will likely involve significant cutbacks at Yahoo Music, including the shutdown of one or more of its subscription-based services.

In fact, it looks like Yahoo has already removed all links to its Yahoo Music Unlimited To Go service. The service, priced at $11.99 per month, allows users to transfer files to a compatible portable device. The service now can be found only by conducting a search, and I'm not sure if Yahoo is accepting new customers for it. That leaves Yahoo Music Unlimited, which offers PC-only downloads for $5.99 per month, with an option to buy CD-burnable downloads for an extra $0.79 apiece.

This could cause some trouble for manufacturers of portable music players that don't have their own stores. I'm thinking particularly of SanDisk, which has the No. 2 position fairly well locked up at this point, with around 10 percent of the market, mostly at the low end. (Microsoft hopes to be in this position by next year, but so far hasn't officially announced any low-cost flash-based players, so it isn't in the same market category.) Today, SanDisk's Sansa Connect player is the only one offering a Wi-Fi-enabled device with a subscription-based service--that is, anytime, anywhere access to millions of songs. But that product relies on Yahoo Music Unlimited To Go. So SanDisk will either have to find another partner (Rhapsody?), build its own store, or fundamentally change the Connect--perhaps offering downloads only, as Apple's going to do with its iTunes Wi-Fi Store.

The decision to cut back on Yahoo Music also illustrates a point I made yesterday: online music stores generally exist to sell some other product. According to an Insider estimate from April by PacificCrest's Andy Hargreaves, Apple pays about 70 percent of the cost of each download back to the content owner. (Anecdotally, this matches up with the cut that independent musicians receive when they sell their songs on iTunes via CD Baby--see the end of this post on Digital Audio Insider.) After that, Apple has to cover various other costs (delivery, transaction fees to payment processors) and probably ends up keeping about 10 percent. Compare this with the estimated profit margins on Apple hardware like the iPhone (50 percent before the recent price cut) and iPod Shuffle (around 40 percent when it launched in early 2005), and it's clear that iTunes is meant to drive hardware sales, not the other way around.

Microsoft and Nokia are following a similar tack, building their own music stores in hopes of selling more devices. But for companies with no adjacent business, selling online music is tough. I imagine large retailers like Amazon.com and Wal-Mart Stores do OK because of their huge scale, and RealNetworks is making a go of it with Rhapsody, but smaller online retailers face a tight squeeze.

[This entry has been revised: I didn't read the MediaNet release carefully enough...they are offering DRM-less MP3s, not WMA files. Apologies to anybody whom I misled. My bad.]

Back in May, EMI--one of the big four record labels--agreed to sell its songs through Apple's iTunes without digital rights management (DRM) protection.

Before this move, iTunes and the iPod were technically linked: if you bought a song from iTunes, you could only play it on an iPod (unless you burned it to CD then re-ripped it into an unprotected format). Offering DRM-less downloads severed this link, allowing users to play downloaded iTunes songs directly on a Zune player (one of the few portable players other than the iPod to support AAC), and making the MP3 conversion process easier. But by and large, the landscape didn't change much. The iPod already has 70 percent+ of the market, so there just isn't much demand for playing iTunes songs on other types of devices.

Today, MediaNet announced that it, too, has licensed more than 1 million DRM-free tracks from EMI. MediaNet, which just changed its name from MusicNet, is the back-end store for most of the second-tier music download stores (iTunes is the only tier-one store, with something like 80 percent market share), including Yahoo Music, MTV Urge (heavily promoted by Microsoft before it launched its own Zune player and store), and Samsung Digital Connect (Samsung's response to Zune).

Equally important, the DRM-less downloads on the MediaNet stores will be in the MP3 format. While AAC (and Windows Media Audio, for that matter) offers a much better quality-to-compression ratio, MP3 is supported by all portable players, all digital media software for all computer platforms, and far more consumer electronics devices than any other compressed digital format. This could actually change the landscape: paid downloads, from one of the major labels, playable on an iPod, from a source other than iTunes. That's new.

The challenge to iTunes' hegemony could accelerate when Amazon launches its MP3-based store later this year. If EMI and the other smaller labels offering DRM-less MP3s begin to see their digital sales rise, then the other big labels might follow suit. And once all tracks are available in DRM-less MP3 format, the only differentiator for the iTunes store is the fact that it's integrated with the iTunes software, which is required to use an iPod (or iPhone). That integration should be enough to keep iTunes in the lead, but now these other stores have a fighting chance to compete on pricing and selection.