New York-based private equity firm Baker Capital has acquired digital music service MusicNet. Baker Capital says the deal will have no affect on its ongoing services, and MusicNet will continue to ope

New York-based private equity firm Baker Capital has acquired digital music service MusicNet. Baker Capital says the deal will have no affect on its ongoing services, and MusicNet will continue to operate as an independent company. Terms of the deal were not released.

MusicNet, which provides the back-end technology for music services run by America Online, Trans World Entertainment, Virgin Entertainment Group's Virgin Digital and HMV, was founded in 1999 by Bertelsmann AG, EMI Music, RealNetworks, Sony Music Entertainment and Time Warner as the first of two music industry initiatives formed to jump-start the online distribution market at a time when peer-to-peer piracy was reaching its peak. PressPlay -- now known as Napster -- was the other.

MusicNet's sale marks the end of labels’ financial support of otherwise independent music distribution services. According to industry sources, the labels were looking for a way to bow out of the market now that online services like iTunes, Rhapsody and many other online download and subscription services have gained traction on their own.

"The market had evolved to the point where it could stand on it's own," says an executive at one music label with a stake in MusicNet.

Sources add that running a digital music distribution service has never been a core focus for labels, and MusicNet's shareholders had been looking to unload the company for the last year. According to Baker Capital principal Jonathan Grabel, discussions began 18 months ago for a potential investment deal that eventually evolved into the acquisition.

While MusicNet's executive leadership is expected to remain, Grabel said the company's board, currently populated by representatives of the former stakeholders, will be replaced.

Baker Capital specializes in digital technology and services, with investments in such companies as wireless firm Action Engine and Wine.com. Grabel said the firm was drawn to both MusicNet's technology and its strategy of partnering with established consumer brands rather than building its own.

"What pushed us over the edge on MusicNet was their business model -- specifically as a wholesale provider -- which we feel is the best solution," he says. "We think MusicNet had the winning hand in that the company has the biggest deployment with users."

MusicNet features a catalog of 1.3 million licensed tracks, made available to a combined 500,000 users.