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Online Music Sellers Sink on Yahoo Move
Wednesday May 11, 3:32 pm ET
Online Music Sellers Sink As Yahoo Launches New Music Service


NEW YORK (AP) -- Shares of online music sellers slumped on Wednesday, over worries that a cheaper music service launched by Internet heavyweight Yahoo Inc. will heighten competition in the crowded music download market and hurt their businesses.
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Shares of Napster Inc. sank $1.73, about 27 percent, to $4.62 on the Nasdaq, while those of RealNetworks Inc., which operates the Rhapsody and RealPlayer Music Store, tumbled $1.53, or 21 percent, to $5.77. Both were among the Nasdaq's top percentage losers in afternoon trading. Yahoo shares were up almost 2 percent to $34.70.

Apple Computer, which dominates the music download market with its popular iPod digital music player and iTunes music store, dropped $1.35, or 3.7 percent, to $35.07. The stock fell as low as $33.11 during morning trading.

Yahoo on Wednesday unveiled its "Yahoo Music Unlimited" service, which offers unlimited downloads from a library of 1 million songs for $6.99 per month, or $60 for a year's subscription. The new service is much cheaper than Napster and RealNetworks' Rhapsody, both of which charge about $15 a month for a comparable service.

"We strongly suspected Yahoo would come out with a competing product but didn't think the magnitude of the price discount would be this great -- we can't imagine how this can be profitable for Yahoo," Stifel Nicolaus & Co. analyst Kit Spring wrote in a client note.

Yahoo, Napster and Real Networks are betting on a subscription-based model in the rapidly growing online music market, in which users pay a recurring fee allowing them to transfer songs to digital music players. Once the subscriptions expire, the songs become unplayable.

By contrast, Apple does not sell monthly subscriptions, but charges users by the song and lets them keep the music.

Yahoo will charge subscribers 79 cents to own a song, compared with Apple's iTunes music store, which sells songs for 99 cents each.

The push into the online music market by Yahoo, which operates the most-visited U.S. Web site, will likely result in a "land grab" for all players in the music subscription segment, PiperJaffray said in a client note.

"We expect pricing to become more competitive for all players, which would significantly impact revenues and profits," the investment bank wrote. Though cheaper prices would probably spur broader acceptance of music downloads, "the reduced gross margins would far outweigh the higher subscription numbers in the near term."

Several analysts agreed RealNetworks would see its financials suffer in the wake of Yahoo's aggressive pricing, which some called too cheap to be sustainable. Analysts at both PiperJaffray and Stifel Nicolaus said they were reviewing their earnings estimates for RealNetworks, and will likely lower their targets considering Yahoo's new service.

"We expect this will negatively impact both pricing and revenues for Real Networks," wrote Stifel Nicolaus' Spring, who also cut his recommendation on the company to "Market Perform" from "Market Outperform."

However, Piper Jaffray said Napster was in a better position to defend itself against Yahoo, due to its strong brand name, early success in music downloads, and partnerships with makers of portable music playing devices.

Assuming Yahoo eventually raises the price of its music service to a level where it is more comparable with rivals, Napster should be able to maintain its leadership position in the music download market, Piper Jaffray said. It maintained its "Outperform" rating on the company.

Separately, JP Morgan backed its "Overweight" rating on Apple, saying that Yahoo's new music service would do little to dent Apple's tight grip on digital music.

"The launch of Yahoo's service will likely put some incremental pressure on Apple's stock. Nevertheless, we believe Apple's barriers to entry in the market remain formidable," JP Morgan said in its note.

A big drawback facing Yahoo is that its service will only be available on digital music players using Microsoft's Janus technology, which does not support the iPod, the world's most popular digital music player, JP Morgan said.





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