yahoo musiccYahoo, stuck between financial hardships and a potential Microsoft hostile takeover, has decided to kill off its Yahoo Music Unlimited subscription music service, moving those customers over to RealNetworks’ Rhapsody music service. While Yahoo claims this was no easy decision, it probably was — Yahoo Music Unlimited has a relatively small user-base.

It is just a small part of Yahoo’s music portal at music.yahoo.com, which gets more than 25 million unique visitors each month.

Here’s the thing, though. Yahoo would be foolish not to try and leverage these millions of users to launch some kind of new service, whether that be low-price DRM-free tracks or free, ad-supported downloads (as had been rumored).

As Mathew Ingram points out, simply shuttling users over to Rhapsody isn’t going to cut it. People increasingly want to be able to download DRM-free tracks to use where ever they choose, not stream DRM-laced tracks for a fee.

In fact, just a couple of weeks ago, reports surfaced that Yahoo was looking to get into the DRM-free MP3 game — separate from its music portal and subscription music service. It is possible that talks between Yahoo and the major labels would have stalled given Microsoft’s new effort to buy Yahoo. However, this dissolving of Yahoo Music Unlimited was an early phase of a larger music-based goal for Yahoo.

Interestingly enough, right before the announcement was made about ending Music Unlimited, they went out and purchased FoxyTunes, the web browser plug-in that allows users to control various music players without leaving their main browsing window. This purchase, along with the Web Media Player they recently announced, indicates a more social, complimentary approach to music on the Internet.

The question now is if the Microsoft bid will derail Yahoo’s music plans.

MG Siegler blogs on technology and new media at ParisLemon.com.