Yahoo Cedes Music Webcasting to CBS

As part of the deal, CBS will provide Yahoo Launch with music to stream, sell all of the service's ads and -- crucially -- pay all royalties associated with the 150 or so Launchcast channels, according to the Associated Press. Meanwhile, Yahoo's role in its own music streaming operation will be reduced to programming tunes from CBS's streaming catalog -- the same 1.3-million song catalog that powers AOL Radio and CBS's own offerings including Last.fm and the recently-launched Play.it.

In addition to the primary headache of reconciling royalties with ad revenue, Yahoo no longer has to worry about fixing Launch so that it works with operating systems besides Windows and browsers aside from Internet Explorer. Yahoo's stations currently require listeners to use IE with Windows Media Player and a plug-in installed. After February, it will use CBS's browser- and operating system-agnostic streaming system.

The deal represents an ignominious end for Launch, which appeared in 1999 and was purchased by Yahoo in 2001 for $12 million, in one of many acquisition that made Yahoo the most popular music destination in the world. In outsourcing music streaming to CBS, Yahoo joins AOL, which merged its online radio operation with CBS in June.

CBS clearly thinks it can make music streaming work despite royalty rates that are driving its competition out of business. Its strategy appears to be to operate at a large scale through partners and and its own services (Last.fm, Play.it, CBSRadio.com, etc.), in order to drive down marginal costs. The company may also have designs on introducing audio ads, in addition to banner ads, into its streams. Jon Simson from SoundExchange, which collects webcasting royalties on behalf of recording artists and record labels, said in April that streaming sites such as Pandora should insert audio ads into their programming in order to survive the rates. We wouldn't be surprised if CBS took his advice in order to cope with the same rates that drove AOL and Yahoo into its arms.

As for music consumers, this represents the loss of another major, legal listening option (call it what you will, but starting in February, Yahoo Launch will be CBS Radio in a different shirt). They could end up with one major option: CBS Radio, in its various carnations, which could start including audio advertisements similar to the ones found on the FM dial.

Granted, consumers will still have plenty of those to choose from at the other end of the spectrum, where less popular webcasters qualify for SoundExchange's more favorable "small webcaster" rates.  However, those webcasters have limited potential for growth. Once their revenue hits $1.25 million per year, they're subject to rates that neither AOL nor Yahoo could sustain.

Webcasters and commentators have said streaming radio royalty rates were unworkable since they were determined in March of '07, and they may have been right. If Yahoo can't afford to run its own online radio stations, the outlook for its competition is dire.