NY Times May 12, 2005
Can Yahoo's New Music Service Earn a Profit? By LAURIE J. FLYNN
SAN FRANCISCO
THE announcement by Yahoo on Tuesday that it is starting a discount online subscription music service sent competitors in the business reeling.
Shares of RealNetworks plunged 21 percent yesterday to close at $5.76, while Napster fell nearly 27 percent to close at $4.65. Apple Computer, whose iTunes music service has a 70 percent share of the online music market, declined 2 percent, closing at $35.61.
Yahoo's Music Unlimited service, which became available yesterday, allows subscribers to retrieve songs from its catalog of more than a million tracks and listen to them on portable music players or on personal computers. The songs become unplayable if a user's subscription expires.
A user who wants to copy a song onto a CD and own it will have to pay an additional fee per song.
The service will charge users $6.99 if bought monthly. If a user pays for a yearly subscription, the cost will be $4.99 a month, or about $60 a year, which is about a third the cost of similar services from Napster and RealNetworks. Both of those companies charge $14.95 a month, or almost $180 annually for features similar to the Yahoo plan.
Apple does not offer a subscription service, but sells downloadable songs for 99 cents each. Though its business model is different, Apple competes in the same online market and could see some of its market share eroded by Yahoo's arrival.
"I wasn't surprised that Yahoo entered the market, but I was shocked at their price," said Eugene Munster, an analyst at Piper Jaffray. "They know they have to play catch-up. So they're going to grind away at Napster and Real."
Mr. Munster said he had expected Yahoo to price its service around $12 a month, a level more likely to allow it to break even.
The online services, according to industry analysts, typically pay the record labels about 65 percent of the subscription revenues. At about $60 a year, Mr. Munster said, Yahoo's music service will not be profitable on subscription sales alone.
But Yahoo, with a market value of about $48 billion and revenue of $821 million in the last quarter, has the resources to lose money while it squeezes its smaller competitors.
Yahoo's announcement has some analysts speculating that it will ignite a price war in online music. Michael McGuire, an analyst at GartnerG2, said he did not think Napster or RealNetworks - two much smaller companies - could afford to cut their own prices anytime soon.
"That would be very painful," Mr. McGuire said. "They're both trying to be profitable."
Besides attracting subscribers with its low price, Yahoo can now sell music to fans who already visit its existing online music sites, which let visitors play music videos, chat with other fans and look up information about CD's and artists.
"What does Yahoo bring to this? A lot of traffic," Mr. McGuire said.
Yahoo's music sites, including its streaming radio service, get about 25 million visitors a month. As one of the most popular sites on the Internet, Yahoo gets a total of 370 million visitors monthly.
Shares of Yahoo rose 82 cents yesterday, to close at $34.88.
In its announcement, Yahoo, which is based in Sunnyvale, Calif., referred to its price of $4.99 a month for the yearly subscription as "introductory." Company executives declined to say what Yahoo's long-term strategy will be.
"I can say we are building a service that creates value for subscribers, for record labels, and for Yahoo," said Dave Goldberg, general manager of Yahoo's music division. Mr. Goldberg said the subscription service site would not display additional advertising.
RealNetworks said it had no intention of lowering its prices, and said it was certain that Yahoo would be forced to raise its price shortly. "Yahoo is using an unsustainable price gimmick to enter the market," said Michael Shutzler, senior vice president for marketing and media businesses at RealNetworks.
"It's not like they're getting a special deal" from the music labels, he said.
Chris Gorog, Napster's chairman and chief executive, said he did not think that a low-priced model could last long. "Based on our discussions with record labels, it is clear that very aggressive introductory pricing for portable subscriptions will be at negative gross margins and we believe that consumers should expect rapid price increases," Mr. Gorog said in a statement.
As it is, selling online music is a difficult way to make money.
Apple Computer, which has sold more than 400 million songs from its iTunes music store, makes only a small profit from those sales.
Apple executives have said that the iTunes store exists in part to help sell iPods. Steven P. Jobs, Apple's chief executive, has said Apple has no plans to offer a subscription service.
RealNetworks said it had more than a million subscribers to its music service.
Napster, which gained notoriety in the 1990's as the first music file-sharing service, had 410,000 subscribers at the end of March.
Yesterday, Napster reported a net loss of $24.3 million, or 60 cents a share, for the fourth quarter, compared with a net loss of 20 cents a share, or $6.57 million, a year ago. Revenue for the quarter grew to $17.4 million, from $6.1 million a year ago, as a result of a growth in new subscribers.
