Yahoo Music Creates Unlimited Pain for Competition

17 May 2005

With an aggressive pricing strategy and years of brand recognition, Napster and Real will be hard-pressed to face the Yahoo machine.

The company started as the brainchild of a couple of Stanford grads, who felt the nascent World Wide Web needed a little navigational organizing.

They created Yahoo! and offered visitors two columns of web site categories where people could find sites of interest.

Today, Yahoo offers a well-known portal to a host of other web services.

E-mail, instant messaging, and lots of content on sports, entertainment, and other topics.

Instead of being a labor of love, the company brings in revenue from a variety of advertising options. And as the company grows, it develops more services.

Yahoo Music Unlimited comes along as the latest offering in the Yahoo portfolio.

It is a digital music subscription service, similar to Napster and RealNetworks' Rhapsody. For a monthly fee, users can stream music to their computers and optionally carry it with them on portable music players.

Where Yahoo makes its biggest impact will be the pricing department.

A year of Yahoo Music costs less that $60, about a third of what Napster and Real charge.

Yahoo has a lower price per song for those who want to burn music to CD, at 79 cents per track. The market responded predictably to the news.

RealNetworks shares fell $1.54, or 21 percent, to $5.76. Napster fell $1.70, or 27 percent, to $4.65.

Even Apple, purveyors of the popular iTunes Music Store, may have been affected by the news, falling 81 cents to $35.61.

Yahoo enjoyed a rise of 82 cents to $34.88.

Apple can have some say on the success of Yahoo's music service. Yahoo doesn't support AAC encoding, which is the format for songs that are destined for an iPod.

Instead, Yahoo songs will have Microsoft's digital rights management technology, called Janus in place.

The iPod has become an iconic fixture in society, and not supporting the devices directly will keep a few customers away. But one change Apple can make, but has resisted doing, would be to offer a subscription service of its own.

The Cupertino company has been content to let iTunes drive sales of the iPod.

Yahoo's new service only supports a dozen digital music players currently, none below $199.

They will have to persuade companies like Creative to add support for Janus to their lower-cost players to really achieve gains on Apple.