Yahoo is negotiating with major music labels over the possibility of becoming a subscription-based online-music distributor of labels' content, a source reports.

The source says Yahoo and the labels are mulling several ideas, including a subscription-based service that would give customers access to an artist's entire catalogue. The company refused to comment.

Three of the "big five" record labels (BMG, EMI, Sony, Universal and Warners) are already affiliated with major Internet companies. In January, America Online agreed to buy Time Warner (and Warner Music Group), which subsequently agreed to buy EMI.

Unfinished EMI’s Fionnuala Duggan, vice president new media Europe at EMI was at pains to point out the EMI merger was not yet finalized at the Digital Distribution in the Music Industry conference yesterday.

Bertelsmann's BMG Entertainment is a longtime partner with Lycos. Following Terra Networks agreement to buy Lycos last week, Bertelsmann agreed to offer preferential access to its content to the combined company.

Between January and March 2000 the "big five" companies accounted for over 78 per cent of UK album sales, according to Music and Copyright magazine. Two weeks ago, Sony and Universal announced a joint venture to distribute subscription-based music and video content for PCs, set-top boxes and handheld devices. The service, a Sony spokesman said, would include both streaming content and downloads.

Partner The announcement did not address how the two companies would distribute their content. Industry insiders say the Sony-Universal venture is looking for a distribution partner instead of building a separate company, or site, itself.

Others say the two labels have to do something quickly, because the competition has already locked up Web distribution partners. "Sony and Universal need to do a deal with somebody because they won't have nearly enough reach otherwise," says Lycos EVP Ron Sege. Both Sony and Universal refused to comment on whether they are talking with Yahoo. BMG, Warner Music Group and EMI did not respond calls seeking comment.

A deal with Yahoo would instantly legitimize the music subscription model, because Yahoo is one of the most popular destinations on the Web, according to analysts. In March, 48.3 million unique users visited Yahoo's sites, according to Media Metrix. Only AOL's properties draw more visitors.

Competition Yahoo isn't the only portal vying to provide music on-demand. Real Networks also aims to implement a subscription-streaming service for the major labels, according to Chairman and CEO Rob Glaser. Real announced this week that its installed user base for the Real Player had reached 125 million.

As the distribution of music online has become more popular, partly due to the success of and Napster, labels and distributors alike have felt pressure to reach distribution agreements with, and make investments in, Web companies.

The labels have made investments in companies, such as, attempting to stay close to whichever model is popular when Web music distribution gains mass acceptance. It's likely that once a large player like Yahoo adopts a workable business model, the smaller companies will reach similar deals with the labels.