Looking to boost its presence in the digital music market, AOL has acquired music subscription provider MusicNow from Circuit City Stores.

The acquisition agreement was signed at the end of September and the deal, whose financial terms weren't disclosed, closed this week, AOL said in a statement on Thursday.

The new music service, dubbed AOL Music Now, can be previewed by the general public at www.aolmusicnow.com.

AOL will gradually migrate subscribers of its existing music service, [email protected], over to AOL Music Now over the coming months. They will be notified of the switch via email and will maintain their current price plans, the company has said.

AOL is switching strategies by moving from the partnership arrangement it has had with MusicNet to owning its own service.

"Since music is increasingly important as a strategic part of AOL's digital services offerings, it makes sense to own a music platform rather than to partner," said Nicholas Graham, an AOL spokesman.

[email protected] is available only as an extra paid service to subscribers of AOL's online service, while AOL Music Now will be available to anybody.

"This allows us to extend our music offerings to an entirely new expanded audience," Graham said. AOL Music Now will be integrated into the AOL.com portal and the AOL Music website.

There are currently about 450,000 subscribers of [email protected], and AOL hopes to build on that base.

AOL Music Now will offer users a higher degree of customisation than is currently possible with [email protected], AOL said.

Graham said the company wants to lead both segments of the market: the online store 'à la carte' model of selling individual songs and albums, and the subscription model, in which users typically pay a monthly fee for unlimited streaming of songs and controlled downloading of songs to a PC and/or mobile device.

This will be a difficult goal for AOL to attain, according to Jupiter Research analyst Michael Gartenberg. "It's a tough business it's getting into right now," he said.

In the segment of à la carte downloads, the best known provider is Apple with its iTunes store, which works only with the company's ubiquitous iPod player. RealNetworks is probably the highest profile 'hybrid' provider of both downloads and subscriptions with its Rhapsody service.

Other players in the digital music space include Microsoft's MSN division and Napster. "It will be hard for AOL to differentiate itself in a meaningful way," Gartenberg said.

It's hard to say at this stage whether AOL's decision to abandon its partnership with MusicNet for an ownership strategy will pay off, Gartenberg added.

Ted Schadler, a Forrester Research analyst, said that whatever ends up happening, AOL has made a move it had to make if it has aspirations to remain as a player in this market. In the early days of digital music, the business model for providers involved simply compiling a catalogue of songs for people to buy, but that has changed as the market evolves.

Acquiring customers has become a more complicated challenge, and requires differentiating one's service by providing elements such as personalisation, customisation and community features, as well as flexibility in payment options, which ultimately translate into a better overall music experience, Schadler said.

"To do that you have to own the property," he said. "You can't do it through a loose affiliation or by rebranding someone else's offering. So it makes a lot of sense for AOL to own those assets."

MusicNow holds its own against competing services right now, but AOL must build on what's there in order to make it compelling and unique, Schadler said.

"It allows me to picks songs and express preferences and see playlists of people like me. It's pretty good," he said. "If it's about other people finding me based on my profile and contacting me over this website saying, 'Dude, you've got to check this out', that's not happening."

MusicNow, founded as FullAudio in 1999 and based in Chicago, was bought by Circuit City in 2004 and has 40 employees. AOL Music Now will operate as a standalone subsidiary within AOL, which in turn is a subsidiary of Time Warner.

AOL Music Now will be both an online music store and a subscription service. It will sell individual songs for $0.99 and offer two subscription options: unlimited streaming and downloading to a PC for $9.95 per month, and unlimited streaming and downloading to a PC and a portable music device for $14.95 per month.

AOL Music Now songs can be managed with Windows Media Player or other compatible players.

Personalisation features will include daily custom playlists and the ability to view and share music profiles with other users.

MusicNow's library includes more than one million songs from the four major music labels.

AOL Music Now will not require a separate software download because its functions can be accessed via a browser, Graham said.

"Streams can be played directly through the browser and downloads can be played offline on media players that support the Windows Media DRM [Digital Rights Management] 10.0, such as Microsoft's Windows Media Player and AOL's Winamp, which will support it shortly," he said.

US digital music sales, which include downloads and subscriptions, tripled to more than $330m in 2004, according to Jupiter Research. In 2005, download spending is expected to more than triple and reach $550m, while subscription spending will grow more than 65 percent and exceed $250m, according to Jupiter Research.