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Yahoo Swaggers Into The Music Subscription Fray

Last week, Internet behemoth Yahoo took the wraps off Yahoo Music Unlimited, its entry into the online music subscription market. For Mac users, Yahoo Music Unlimited is just another party to which we aren’t invited, since it only supports recent versions of Windows and, in fact, doesn’t even let music from its subscription service play on iPods. Yahoo Music Unlimited is more interesting for the pressure it puts on its primary competition – Rhapsody and the re-born Napster – and, less directly, on MSN Music and Apple’s iTunes Music Store.




A (Not So) New Hope — Yahoo Music Unlimited is an all-you-can eat subscription service which provides access to more than 1 million tracks. The service is largely built on Yahoo’s acquisition of MusicMatch last year: users search for and manage music using the Yahoo Music Engine, an iTunes-like application based on MusicMatch Jukebox; users can then share songs and playlists amongst other subscribers using Yahoo Messenger. Subscribers can play music acquired through the service as long as they maintain an active subscription, and also transfer tracks to a selection of portable music players.


However, because Yahoo’s new service relies on Microsoft’s WMA digital rights technology, the list of supported players does not include Apple’s iPod. iPods support only Apple’s FairPlay DRM technology, and to date Apple has unmercifully squelched efforts to enable support for other DRM systems on the iPod. But you know what? Other online music subscription services don’t work with iPods either, so Yahoo’s offering is basically more of the same.



The Revenue Strikes Back — What’s new about Yahoo Music Unlimited is its price – $6.99 a month, or annual subscriptions for $59.88 (which translates to $4.99 a month) – and the fact that it’ll be a component of one of the world’s most-trafficked Internet sites.

Yahoo’s prices substantially undercut both RealNetworks’ Rhapsody and Napster, which charge $14.95 a month. Yahoo isn’t saying whether Yahoo Music Unlimited prices are an introductory offer or how long they might last. However, considering that both Napster and RealNetworks’s music subscription businesses have been struggling at their current rates and many of the businesses’ costs are similar (music and technology licensing, bandwidth, user support, staffing, etc.) Yahoo’s initial pricing likely means Yahoo Music Unlimited is making little to no money – or even taking an upfront loss – on every subscriber.

The real question is the degree to which Yahoo cares. Yahoo has both deeper pockets and a substantially more diversified business model than either RealNetworks or Napster, and can probably afford to subsidize an online music venture longer than its immediate competition can stay out of a price war. If Yahoo can bring enough eyeballs – and mouse pointers – to its music service, it may be able to make up any loss on subscription fees via advertising. And as one of the most frequently visited sites on the Internet, Yahoo’s high-margin online advertising business is a virtual juggernaut.

Return of the FUD-y — Right now, Yahoo Music Unlimited doesn’t pose a direct threat to Apple’s iTunes Music Store. For one thing, incompatibility with Apple’s iPod makes iTMS the primary online music store for more than 15 million white earbud-wearin’, head-boppin’ iPod aficionados. (In comparison, Napster has yet to crack half a million subscribers.) For another thing, the iTMS model of purchasing downloaded music – rather than merely purchasing access to it for the duration of a subscription – still seems to hold mind-share: according to Piper Jaffray analyst Gene Munster, right now only about 15 percent of online music consumers would prefer to rent music rather than own it outright.

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Nonetheless, both the online music and wider technology industries are still setting their sites on Apple and iTMS, if for no other reason than it’s not yet worth the trouble of aiming at other market players. If Yahoo Music Unlimited succeeds, Apple may have to offer music subscription services in addition to its paid-download model. (It’s worth noting that all the subscription services also let subscribers purchase music at prices comparable to iTMS; of course, those fees are on top of base subscription costs.) On the other hand, if Yahoo’s music subscription service fizzles or turns in lackluster numbers, it may represent the last serious effort to redefine the online music space as a renters’ market, rather than a buyers’ market.

Perhaps the darker cloud on the horizon of Apple’s music business is, ultimately, whether devices like the iPod or devices like mobile phones will be the primary means by which consumers purchase and listen to music. Sure, Apple has sold more than 15 million iPods, but that number is dwarfed by the estimated 500 million cell phones shipped in 2003 alone (75 million of those were camera phones with substantial on-board memory and processing capability). Last week in Frankfurt, Germany, Microsoft founder Bill Gates commented that he felt the current iPod business model was unsustainable, and he’d bet on mobile phones taking over the top spot for music listening. (He even drew a parallel between Apple’s current iPod success and its early lead with graphical user interfaces.) Current mobile phone technologies and business models are certainly more supportive of a music subscription model than a purchase model.

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Nonetheless, it’s too early to start writing an epitaph for the iPod or iTMS. The online music market is still volatile, and in the last few years it has shown only two constant themes: 1) unexpected success and innovation from Apple, and 2) pundits and industry leaders claiming Apple can never succeed.

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