Originally created 05/12/05

Yahoo music service already hurting rivals

SAN FRANCISCO - Yahoo Inc.'s steeply discounted foray into online music subscriptions struck a sour note Wednesday with the shareholders of Napster Inc. and RealNetworks Inc. - the owners of the rival services that stand to lose the most from the new competitive threat.

Napster's shares plunged $1.70, or 26.8 percent, to close at $4.65 on the Nasdaq Stock Market, where RealNetworks' shares fell $1.54, or 21.1 percent, to $5.76.

Yahoo's entrance into the music downloading business even hurt Apple Computer Inc., which runs the dominant online music store with more than 400 million songs sold since it opened two years ago.

Apple's shares fell 81 cents, or 2.2 percent, to $35.61 on the Nasdaq, even though industry analysts say the company is far less vulnerable to Yahoo's aggressive push than Napster and RealNetworks.

Yahoo's shares gained 82 cents, or 2.4 percent, to $34.88 on the Nasdaq.

Napster Chairman Chris Gorog sought to reassure investors and subscribers as $61 million of his company's market value evaporated Wednesday.

"We believe we will continue to compete very successfully against any new entrants," Gorog said in a statement that also predicted Yahoo would raise its prices, echoing the sentiment of many industry analysts.

Los Angeles-based Napster has been struggling financially, even before Yahoo entered the fray. After the stock market closed Wednesday, Napster announced it lost $24.3 million during the first three months of this year, while its revenue rose to $17.1 million from $6.1 million a year ago.

Wednesday's stock market reaction reflected a wide belief that Yahoo's music subscription service, introduced Wednesday, will force Napster and RealNetworks to either lower their prices or risk losing subscribers.

In an effort to make up for lost time in the booming digital music market, Yahoo is offering consumers unlimited access to a library of 1 million songs for as little as $4.99 per month, or about $60 annually.

Subscribers who don't want to make a one-year commitment can pay a rental fee of $6.99 per month.

Napster and RealNetworks charge $14.95 per month, or nearly $180 annually, for a comparable service that enables users to transfer songs from the Internet to portable MP3 players that use Microsoft Corp.'s digital music software.

The subscription services enable customers to rent an unlimited number of songs without ever owning the music outright. That's a significant distinction from Apple's iTunes store, which sells songs for 99 cents apiece and so far has frowned upon the rental approach.

Apple has been able to eschew subscriptions so far because only about 15 percent of consumers to date have expressed an interest in renting songs instead of owning them, said Piper Jaffray analyst Gene Munster.

But the Cupertino-based company might be forced to change its tune now that Yahoo is offering music subscriptions on its Web site - the world's most heavily trafficked - with 372 million unique users. That means Yahoo will have a bully pulpit to preach the virtues of renting music.

If Yahoo's service catches on quickly with consumers, Apple probably will offer a subscription option before the end of the year, Munster said.

Apple spokeswoman Natalie Kerris declined to comment on how Yahoo's service might affect iTunes, whose current market share exceeds 70 percent.

Yahoo's audience already includes 8.9 million subscribers who primarily pay fees for high-speed Internet connections, matchmaking services and extra e-mail features.

Seattle-based RealNetworks says more than 1 million people subscribe to its music services. Napster said Wednesday that it has 412,000 subscribers.

Although Yahoo's music service already is making a big splash, analysts say the company's success is far from assured.

Yahoo still must prove its music management software, which is being licensed from MusicNet, will make the process of transferring songs to MP3 players simple and painless for consumers. Apple's easy-to-use music management software helped the iTunes store succeed.

The popularity of Apple's iPod players also figures to work against Yahoo because those devices aren't compatible with its new subscription service. Apple already has sold more than 15 million iPods, creating a loyal audience unlikely to move to a competing service.

Analysts also widely expect Yahoo to raise the introductory price of its subscription service - something that might alienate subscribers if it happens.

"I find it hard to believe that Yahoo's prices are going to remain at this level," said American Technology Research analyst P.J. McNealy. "The only real question is how much higher they will go."

Munster predicted Yahoo will raise its subscription price to $10 to $15 per month after the initial testing, or "beta," phase is completed.

Yahoo didn't return calls Wednesday, but a company executive said Tuesday that the company expected to be able to make money with an annual $60 subscription.

Yahoo appears better positioned than Napster or RealNetworks to absorb the costs of a potential price war because it makes so much money already from advertising.

Excluding the sales commissions it pays its partners, Yahoo's advertising revenue totaled $672 million during the first three months of this year. That's twice as much as the combined annual revenue of RealNetworks and Napster.

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