Yahoo Inc. is plugging its Internet radio service into CBS Corp.'s webcasting network in a move driven by dramatically higher fees for airing music online.
Yahoo's retreat from operating a standalone service, announced Wednesday, makes it the second major Web site this year to flee the rising royalty rates by hitching its radio operations to CBS. AOL Radio, owned by Time Warner Inc., hooked up with CBS in June.
Yahoo's radio channel, called Launchcast, will combine with CBS beginning in February.
The shift broadens Yahoo's retrenchment from online music. The company closed a music downloading service and transferred its music subscription service to RealNetworks Inc.'s Rhapsody earlier this year.
Under the latest arrangement, Yahoo will depend on CBS Radio to power Launchcast and sell all the ads on the service. Yahoo employees will still oversee the programming for Launchcast's roughly 150 stations, drawing from CBS Radio's content.
In return for the helping hand, Yahoo's highly trafficked news and sports sections will feature some of CBS's top-rated radio stations, including WFAN in New York and KNX-AM in Los Angeles.
The combination also will widen Launchcast's audience by enabling users to listen to the service through the Firefox and Safari Web browsers for the first time. Launchcast's player has worked only with Microsoft Corp.'s Internet Explorer.
Yahoo shares fell 74 cents, or 6.5 percent, to $10.76 in Wednesday's afternoon trading while CBS shares gained 47 cents, or 7.3 percent, to $6.88.
Much of Internet radio's appeal stems from its ability to offer a more eclectic selection of music than terrestrial radio. So Launchcast's annexation into a traditional radio network saddened the founder of a rival Internet service, Pandora Media Inc.
"It's a real shame because Yahoo was such a pioneer in this field," said Tim Westergren, who now serves as Pandora's chief strategy officer nearly nine years after he started the company. "It should serve as a cautionary tale of what can happen when copyright holders want too much money."
CBS believes its system for targeting ads at Web listeners in specific ZIP codes will help boost Launchcast's revenue and ultimately provide the service with more resources, said David Goodman, president of CBS Radio's digital media and integrated marketing
Yahoo has been taking a hard look at all its services as management tries to trim about $400 million in annual expenses, but the company was reassessing its commitment to Internet radio well before the cost-cutting campaign began in October, said Michael Spiegelman, who heads Yahoo's music service.
The reason: a March 2007 decision by the U.S. Copyright Royalty Board that raised the royalties for music streamed over online radio. That aided the music industry, which is desperate to offset steadily declining revenue from compact disc sales, but it meant by some estimates that royalties could eat 70 percent of Internet radio stations' revenue.
Recently passed legislation has opened a window for Internet radio stations to negotiate lower royalties with the music industry, but Yahoo didn't want to run the risk of facing higher costs for a service that has never been a big moneymaker.
"Because of the unfavorable rates, we didn't think it made sense to invest in the product," Spiegelman said.
CBS also must pay the higher royalties for its webcasts, but the fees don't faze it as much because its radio network is more diversified than Launchcast's music-only approach. News and sports-talk stations don't have to pay the higher rates because they don't play music.
Launchcast picked up some of its technology from Broadcast.com, which Yahoo acquired in 1999 in a deal initially valued at $5.7 billion. One of Broadcast's founders, Mark Cuban, used his part of the windfall to buy the Dallas Mavericks, a National Basketball Association franchise that he still owns.
Yahoo's waning interest in Launchcast had already diminished its audience. It shrunk 43 percent to 2.9 million U.S. listeners in the year ending in October, according to the Internet research firm comScore Inc.
Some of those listeners appear to have migrated to Pandora, which boasted an audience of 5.3 million in October, a 58 percent gain, comScore said.
Pandora is "cautiously optimistic" it will be able to decrease its royalty rates so its radio service can play on, Westergren said. If the higher royalty fees are passed along, Pandora would have to pay $17 million to $18 million to cover the bill this year, consuming almost all of its projected revenue, Westergren said.
