IM the way to beat Apple in online music?

New entrants to online music such as Yahoo! and Microsoft are using instant messaging to boost their chances of beating Apple, says Jim Hu. But it may not be that easy, as the record labels are wary of the song-sharing IM offers.

As internet giants step into the crowded online music arena, some are banking on a new weapon to help attack market leader Apple: instant messaging.

Yahoo! last week acquired digital music service Musicmatch for $160m in cash in a move that adds a multimedia player, a digital music store and a subscription service to the company's arsenal. Despite the acquisition, Yahoo! is on track to launch its own music service, music industry sources said, and eventually combine it with Musicmatch.

Yahoo!'s plans are still sketchy but sources close to the company say instant messaging will play a key role. While the popular IM software already lets people listen to online radio, new versions will let people share and interact with one another's digital playlists.

One source familiar with the plan who spoke under the condition of anonymity: "The whole advantage that [Yahoo!] has is using its broad reach to push products and integrate them."

A Yahoo! representative declined to comment for this story.

Microsoft has publicly acknowledged similar interests in tying its MSN Music online store into MSN Messenger. In a press conference last month, MSN's corporate vice president Yusuf Mehdi described a scenario in which two IM chatters could listen to each other's playlists and then buy the songs if they wished.

Without any fanfare, MSN has already begun toying with playlist sharing. The latest MSN Messenger, version 6.2, contains a link to a test application called ThreeDegrees. Among other features, the software lets a person share a playlist with other members in a private group.

Microsoft's Mehdi said eventual MSN Music features on IM will stem from ThreeDegrees development. A Microsoft representative declined to comment further on music integration in Messenger, but offered a glimpse of how ThreeDegrees is being used.

"It's a research product to test IM features," the representative said.

America Online has not talked publicly about its future online music plans. Its latest AOL Instant Messenger, version 5.9, includes a button to a Netscape-branded online radio stream.

For the web portals, diving into the online music market means playing catch-up to Apple's iTunes, currently the market leader. To do that, the portals will tap every possible advantage, such as promotion across highly trafficked online areas and weaving services into applications like IM.

Instant messaging ranks with email and web surfing as one of the most popular activities on the internet. Studies show that IM users are loyal and stay connected for hours at a time.

For users at home and at work in August, MSN Messenger led the pack with 28.6 million unique users, followed by the once-dominant AIM with 27.6 million, according to Nielsen/NetRatings. Yahoo! trailed at 18.1 million, the research firm said.

MSN users spent an hour and a half using IM every time they launched the software. AIM users spent five hours per session, and Yahoo! Messenger users typically logged on for about two hours and 50 minutes, Nielsen/NetRatings said.

Combining IM and music make further sense because people develop strong attachments to songs.

Mike McGuire, an analyst at GartnerG2, said: "Music is one of those deeply emotional and personal things. We all exchange information when we get interested in news stories but not at the depth of discovering music."

Microsoft is taking full advantage of its Windows monopoly to grow MSN Music. The music store is already available in its Windows Media Player 10 and MSN Messenger is next on the list.

Matt Rosoff, an analyst at Directions on Microsoft, said about MSN Messenger: "Here they've got this asset; it's got millions of users. One thing that Microsoft can do to build a digital media platform is link different services together. You use your big assets to point consumers to new services you're offering."

The marriage between IM and music is not without its hurdles. Record labels have quietly expressed dissatisfaction over services that let people trade or even stream songs to each other. IM slips dangerously close to the land of peer to peer, record industry executives say.

In a sense, Apple's iTunes program already allows this, letting people who are on the same internal network browse each other's playlists and stream music. But label executives privately say this was supposed to be for home use, not for use by entire school dorms or offices - and certainly not used for downloading music, as is allowed by unauthorised hacks like OurTunes. The record labels have pushed Apple to put tighter restrictions on this practice, music industry sources say.

Label executives say that people who are part of the same subscription service can listen to each other's playlists without a problem, because they're all already paying for rights to the same music. But allowing one IM user to browse another person's playlist and stream music without paying for it could become problematic.

One label executive, who asked not to be named, said: "If I'm streaming my collection to someone else, and no one's getting compensated for it, that's not OK."

Jim Hu writes for CNET News.com