The Associated Press is reporting that Yahoo is in early discussions with major record labels over offering unprotected MP3s either for sale or for free as part of an ad-supported service, two record company executives familiar with the talks said Wednesday:

"Unlike music files that come with copy protections embedded, MP3 files are compatible with most portable music devices, including Apple Inc.'s market-leading iPod media players, Microsoft Corp.'s Zune and mobile phones that play music."

Now that all four major labels have pledged to begin dropping copy protection from digital music tracks, Yahoo stands to gain ground. Its current Music Unlimited service, which offers a subscription-based model utilizing DRM-encoded tracks, is nowhere near the iTunes Store in popularity. The labels' latest moves could provide a huge boost to Yahoo, not to mention Napster, Rhapsody, and other competing online music services.

Yahoo Eyeing Online Music Service [AP via Wired]