Yahoo! Singing New Tune with Acquisition of Launch.com

Yahoo! (Nasdaq: YHOO) continued its ongoing transformation into a full-fledged media company with the announcement Thursday that it is acquiring online music provider Launch Media (Nasdaq: LAUN) for approximately US$12 million.

Webnoize director of research Lee Black told the E-Commerce Times that the deal will likely benefit both companies.

“Launch has a good brand name and some relatively good content for the music space,” Black said. “I was surprised at the price that was paid for a company that had established a strong brand, but it was becoming clear that small players in music space were going to have a tough time against the major players.”

Yahoo! said it would pay 92 cents for each share of Launch stock, which rose 53.5 percent Thursday to close at 89 cents. The acquisition is expected to be completed in the third quarter of this year.

As part of the deal, Yahoo! extended a $3 million loan to the financially strapped Launch, in addition to a $2 million loan it provided Launch in May.

Launch.com provides consumers with streaming music videos and music news, as well as an Internet radio station, called Launchcast, that offers streaming music stations with audio and video content tailored to consumer preferences.

One Settlement Down …

Yahoo! also announced that Launch has come to a settlement with one of several major record labels suing Launch for copyright infringement.

In addition to paying Universal Music Group for past performances over Launchcast, Launch has entered into a non-exclusive license agreement for use of Universal-controlled recordings in Launchcast.

“The lawsuit may have lowered the price Yahoo! paid for Launch,” Black said.

BMG Entertainment, EMI Recorded Music and Sony Music Entertainment are still plaintiffs in the suit. According to Webnoize, Yahoo’s April agreement to distribute PressPlay, a subscription music service backed by Universal Music Group and Sony Music Entertainment, could help Launch secure a license with Sony for Launchcast.

Getting Off the Ground

Launch might have had no choice but to be acquired, given its recent financial woes.

The Santa Monica, California-based company laid off over 25 percent of its staff in May, and discontinued plans to expand in Europe and Japan. The company also laid off 20 employees in January.

For the first quarter ended March 31st, Launch’s net revenues fell 41 percent to $3.8 million, for a loss per share of 87 cents.

Changing Stripes

The Launch acquisition is the latest step in Yahoo’s expansion from the portal world into the entertainment realm. In April, Yahoo! appointed the former co-chief of Warner Brothers, Terry Semel, as its new chief executive officer.

“Yahoo! hasn’t really been doing anything too interesting over the last couple of years,” Black said. “There may have been an internal debate over its direction. But after they brought in their new CEO from Warner Brothers, that told us they were going to become a media company.”

Black said that Yahoo! began to see that all the top content online was moving into closed online environments, and that it risked falling behind by staying in its exclusive role of directing people to other content.

“Consolidation of the Internet is creating the need for walled gardens for media companies,” Black said. “Yahoo! certainly has lots of consumers and a powerful brand name — but they don’t have a lot of content. But the question is still out around whether they can become a successful media company or not.”