Yahoo Eyes Subscription Market with Music Store Upgrade

Yahoo has added a subscription service to its digital music offerings as the portal bids to use its vast resources, name recognition and experience in e-commerce to shake up what is rapidly becoming one of the most crowded niches in online business.

Yahoo Music Unlimited, as the service is known, opened in beta form with a basic price of US$6.99 a month, a price that gives users access to about a million songs, which can be downloaded and transferred to portable players.

Yahoo is also touting the added-on features the music store will offer, including personalization tools and the ability to share samples of music via its instant messenger platform.

Subscription Approach Gaining Favor

Lloyd Braun, head of the Yahoo Media Group, said the service “draws on the best of Yahoo to provide personalization and community features unlike anything else in the marketplace.”

“We are committed to being at the forefront of the rapidly growing online music segment,” he added.

Hoping to sign up more customers for the long haul, Yahoo is offering the service for a price of $4.99 per month if users buy a full year’s subscription. A subscription also includes discounted downloads from the Yahoo digital music store — at 79 cents per track — and a version of the LaunchCast Internet radio service.

The subscription approach to digital music is rapidly gaining favor among both consumers and music store operators, who seem to have realized that the best approach to competing against market-dominating Apple and its iTunes Music Store is to offer what it does not.

The re-launched Napster has focused on the potential cost savings music users can enjoy from subscription services rather than paying for each track. That firm has reported huge gains in subscribers in recent quarters following a Super Bowl ad-led marketing blitz. Also, RealNetworks recently re-launched its own digital download service that for the first time included the ability to transfer downloaded songs onto portable MP3 players.

Powerful Combination

Many analysts believe the long-term trends favor subscription services over the pay-per-track approach that has made the iTunes Music Store the clear market leader in digital music to date. Consumers, particularly the younger ones who are the most voracious consumers of digital tunes, favor subscriptions because they do not have to commit to owning a song forever and can refresh their portable players at a fraction of what it would cost to fill it with songs for which they own the rights.

Yahoo has been expected to launch an integrated subscription service ever since it purchased MusicMatch, a move analysts said gave it an inside track against many competitors.

However, Jupiter Research analyst David Card said the new service appears to include little MusicMatch integration, at least in the beta form. Card also said that though Yahoo brings much to the table, it will likely have to settle for sharing a slice of the music download pie in the long run.

“The combination of a solid subscription service offering and a big media company will be powerful, but it’s all about execution,” Card said. “I don’t think this is a winner-take-all-market, and even if it is, it’s too early for that anyway. I suspect music services — like most media and entertainment businesses — will support multiple companies without a clear market share leader, where companies differentiate by audience, niche, programming, exclusives, pricing, etc. But clearly, companies without big media partners need to compensate with other forms of marketing.”

Three Horse Race?

Card said the low introductory prices, meant to entice new users, likely met with grimaces among music industry executives, who worry that consumers will come to expect such rock-bottom pricing long-term, especially those still struggling to wean themselves off illegally sharing digital downloads.

Many analysts agree that the field remains wide open for the time being, but note that both RealNetworks and Napster have built impressive foundations of subscription revenues. RealNetworks has long offered monthly plans for Internet radio service and was enjoying growth in its subscription music service even before the portability option was added.

Analysts also see significant long-term implications in what’s happening in today’s digital music marketplace, especially as it relates to mobile commerce and the use of smartphones as replacements for today’s standalone MP3 players.

Jupiter’s Card noted that sales of music phones will outpace those of portable music players within five years, opening up new opportunities and giving a leg up to sites that build their services to accommodate more mobile users.

Inside Digital Media analyst Phil Leigh said the cell phone market is one that bears watching, especially now that many mobile network carriers have begun to recognize the value of offering their users access to digital tunes.

Mobile Phones

Yahoo might very well see the overall mobile services field, where it is busy rolling out new services from instant messaging to mobile search, and its music offerings coming together before long.

“All the ingredients are present to enable the cell phone to be a portable music player with the added bonus that the wireless network itself can facilitate impulse purchasing,” Leigh told the E-Commerce Times. “Since digital music tracks are often priced at about one dollar per song, impulse buying could well become a major source of revenues for the record labels.”

Analysts say Yahoo is wise to focus on the value-added features its site offers, since pricing will likely remain competitive in the long run, and the companies that attempt to compete with discount rates will likely be hard pressed to remain profitable.