Yahoo’s steeply discounted foray into online music subscriptions struck a sour note on Wednesday with the shareholders of Napster and RealNetworks — 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%, to close at $4,65 on the Nasdaq Stock Market, where RealNetworks’ shares fell $1,54, or 21,1%, to $5,76.
Yahoo’s entrance into the music downloading business even hurt Apple Computer, 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%, 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%, to $34,88 on the Nasdaq.
Napster chairperson Chris Gorog sought to reassure investors as $69-million of his company’s market value evaporated on Wednesday.
”We think there has been a significant overreaction in the market,” Gorog told analysts during a Wednesday conference call.
”Our customers have not fled in the past when desperate pricing moves have been made by competitors.”
Echoing the sentiment of many analysts, Gorog predicted Yahoo will raise its prices within a few months, relieving the financial pressure on Napster. He also is counting on a consumer backlash to the ads that Yahoo will serve up with its music service.
Los Angeles-based Napster has been struggling financially, even before Yahoo entered the fray. After the stock market closed on 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. The company expects to lose another $27-million to $28-million in its current quarter.
Wednesday’s stock market reaction reflected a wide belief that Yahoo’s music subscription service, introduced on Wednesday, will force Napster and RealNetworks to either lower their prices or risk losing subscribers. Either scenario would make it more difficult for Napster or RealNetworks to make money.
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 one-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.
Los Angeles-based Napster and Seattle-based RealNetworks charge $14,95 per month, or nearly $180 annually, for a comparable service that enables users to transfer songs from the internet to MP3 players that use Microsofts’ 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.
But Cupertino-based Apple might be forced to change its tune now that Yahoo is offering music subscriptions on its website, the world’s most heavily trafficked with 372-million unique users.
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.
If Yahoo’s service catches on quickly with consumers, Apple probably will offer a subscription option before the end of the year, predicted Piper Jaffray analyst Gene Munster.
Apple spokesperson Natalie Kerris declined to comment on how Yahoo’s service might affect iTunes, whose current market share exceeds 70%.
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 one-million people subscribe to its music services. Napster said on 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 PJ 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 on Wednesday, but a company executive said on 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. Yahoo ended March with $1,1-billion in cash compared with $370-million at RealNetworks and $170-million at Napster. – Sapa-AP