The supermarket company has taken a 91% stake in London-based We7, with the remaining shares to be purchased within weeks.
Tesco’s purchase of We7 comes as the supermarket moves increasingly into digital entertainment, after its acquisition of the online movie rentals firm Blinkbox in April last year.
Genesis frontman Peter Gabriel is expected to make a £2m windfall from the deal from his We7 stake. He founded the “digital jukebox” with Steve Purdham, the chief executive, in 2007.
Purdham said the deal was a “great outcome” for the company and a boon for UK technology companies.
We7 boasts a catalogue of 11m music tracks and is available on iPad, iPhone and Android apps and on the web. The company has never turned a profit, but tripled its annual turnover in 2010 and reduced losses to just under £3m.
Purdham said on Thursday that the deal made sense for both We7 and Tesco.
Adding: “Initially it’s business as usual but given what they’ve got there’s great opportunities; the real one is access to their wealth of consumers and marketing.”
Tesco is expected to attempt to tie the We7 technology into its existing digital products, targeting customers who want to listen to online music on the move.
Purdham, a serial entrepreneur who sold an internet security firm for $415m (£267m) at the height of the dotcom boom, shied away from describing We7 as a British techonology success story.
Mark George, the digital director at Tesco, said in a statement: “Customers and technology together are transforming the way we listen to music.
“Tesco is already one of the UK’s largest retailers of CDs; this move will help us offer a greater choice for the growing number of customers who want to access music instantly on any device, whenever and wherever they want. We7 has a great team and a good technology platform from which we can launch a range of digital music services in the future.”