Yahoo! is considering offering non-copy protected MP3s either paid for or as part of an ad-supported free service.
Yahoo already has Music Unlimited which costs USD 6 per month and allows the users to access over 2 million songs which they can play and save on any PC.
The search company also has Launchcast which is a streaming radio that allows Yahoo users to listen to playlists either for free or for a paid fee - USD 3 per month.
Two senior staff members from record companies involved in the talks say that Yahoo is hoping to launch that service in 2008.
Recording companies like Universal Music Group, Sony BMG Music Entertainment, Warner Music Group Corp., and EMI Group PLC have hinted in the past weeks that they are ready to work with online e-tailers to sell their music without digital rights management.
Yahoo already proposes music videos and plan to have song lyrics at a later stage which might position it against the likes of Myspace Music.
It remains to be seen whether Yahoo's plans to use adverts to pay for the music backfires if the world slips in an economic recession or if users will tolerate even a small amount of adverts.