New York-based SpiralFrog, which plans to launch its service this year, said the world's largest music label had agreed to make its library available to US and Canadian customers of the service.
Users can download an unlimited number of songs or music videos if they register at the site and watch online advertisements.
The tracks cannot be burned to a CD, but users will be able to transfer music to portable media players equipped with Microsoft Windows digital rights management software, Ford said.
However, the service will not work with Apple Computer's computers or its iPod music players.
The inclusion of Universal could give SpiralFrog an edge with consumers by adding a roster of star acts such as U2, Eminem and The Killers.
The site is not compatible with
The move has the potential to shake up an online music sector dominated by Apple Computer's iTunes Music Store, whose marketing of 99-cent song downloads has become the standard market model.
"This concept holds a lot of promise," said Phil Leigh, a senior analyst at the research firm Inside Digital Media.
"Youthful consumers are moving to the internet, so the way to popularise music is on the internet, and you have to be able to make it available for free."
The radio model
Leigh said the market has the potential to generate revenue in the same manner as radio.
"The US radio industry generates $20 billion a year in revenue and they give the product away for free," he said. "Record labels generate $12 billion a year and they sell their product."
SpiralFrog boss Robin Kent, a former advertising executive, said the service will offer an alternative to the pay-per-song model as well as the widely used practice of illicit file-swapping.
"Offering young consumers an easy-to-use alternative to pirated music sites will be compelling," he said.
Kent said the website will offer high-quality legal downloads with protection against viruses and spyware. It will have built-in digital rights management technology to prevent illegal copies of the downloaded songs.
A Universal spokesman who asked not to be named said the new service is among several online ventures being supported by the music giant.
"The US radio industry generates $20 billion a year in revenue and they give the product away for free. Record labels generate $12 billion a year and they sell their product"
Phil Leigh, senior analyst,
Inside Digital Media
An industry source said EMI was in negotiations with SpiralFrog and other groups that may be launching ad-supported music websites.
Although surveys show many consumers still use file-sharing sites to swap pirated music, the market for legal online music has soared with the advent of iTunes and others, and with the crackdown in the United States and other countries on piracy.
Apple's iTunes holds more than 80 per cent of the US market for music downloads, and is also strong in other countries. Apple's iPod - which is the only player compatible with iTunes music - holds about 75 per cent of the US market for music players.
Mark Mulligan, an analyst with Jupiter Research, said the success of SpiralFrog will hinge on whether the site can get the right content and grow a sizeable audience.
"Without a good audience there won't be an appealing proposition for advertisers, which means no viable business model."