It is not a MP3 download service but a protected WMA download. So it does not work with the iPod.
From the service's webpage:
iPod Users: If you're an iPod user with a Windows-based PC, you can transfer music you already own to an Apple iPod using the Yahoo! Music Engine. Unfortunately, iPods are not currently compatible with the Yahoo! Music Unlimited subscription service.
Unfortunately, iPods are not currently compatible with the Yahoo! Music Unlimited subscription service.
The subscription service is the part with the DRM. When you purchase a song you end up getting a list of options on what format to play like mp3, aac and even ogg files when you rip to CD. You end up getting that mp3, which will work on your iPod.
