Yahoo’s Song Service Rocks Rivals’ Shares
“Yahoo!” turned to “Yikes!” Wednesday for Napster Inc. and RealNetworks Inc.
A day after Internet titan Yahoo Inc. unveiled its digital music service, shares of its rivals in the online music business receded like an aging rock star’s hairline.
Napster’s stock fell 27% and Real’s shares were off 21%. Even shares in Apple Computer Inc., operator of the most popular online music store, were down 9% at one point before finishing with a 2% drop.
Investors were spooked by Yahoo’s bargain-basement prices. Napster and Real charge nearly $15 a month for their top services, but Yahoo collects as little as $4.99.
“We believe, plain and simply, that this news from [Yahoo] could prove to be landscape-changing news,” analyst P.J. McNealy at American Technology Research wrote Wednesday. “We believe that [its] service could put margin and pricing pressure on all other subscription services because [Yahoo] can use a subscription service as a break-even proposition to do what it does best: sell advertising.”
Yahoo shares rose 82 cents to $34.88. Real fell $1.54 to $5.76. Napster shed $1.70 to $4.65. And Apple lost 81 cents to $35.61. All trade on Nasdaq.
Napster Chief Executive Chris Gorog called the sell-off a “significant overreaction,” and he called Yahoo’s low prices a gimmick that could not be sustained.
“Customers have not fled in the past when desperate pricing moves have been made by a competitor,” Gorog told analysts as the company announced its fiscal fourth-quarter earnings after markets closed. “We don’t believe consumers will be excited to pay for something and simultaneously be barraged by advertising.”
Yahoo’s music-playing software does not display advertisements, but the Yahoo sites that provide artist biographies, photos and music videos do.
Citing sharply higher marketing costs, Los Angeles-based Napster reported a loss of $24 million, or 59 cents a share, for the three months that ended March 31, up from $6.6 million, or 37 cents, the previous year. Its shares fell further in after-hours trading.
Gorog said music service revenue and subscribers had grown steadily for more than a year, reaching $17.4 million in sales and 412,000 subscribers at the end of the quarter.
Analyst Phil Leigh of Inside Digital Media said RealNetworks’ more than $300 million in cash reserves gave it more staying power than Napster, which reported less than $180 million in cash and short-term investments.
Neither company is likely to cut its prices much, he said, if Yahoo raises its fees in just a few months.
Leigh also wondered whether Yahoo would feel a backlash from customers if it raised subscription rates in three months. “The teenagers will just feel like they’ve been tricked,” he said.
Yahoo Music spokeswoman Charlene English declined to comment on the company’s pricing plans.
Real spokesman Matt Graves said, “We’re very happy that Yahoo is validating something we’ve said for a long time, which is music subscriptions are the future.” He added that cutting prices would not spur growth as much as eliminating the need for a credit card, which Real did last month when it launched a scaled-back free service.
Apple spokeswoman Natalie Kerris declined to comment on the drop in the company’s stock.
Unlike Apple’s 99-cent downloads, the subscription offerings from Yahoo, Napster and Real are more akin to cable TV service than the CDs sold in a music store. The monthly fee buys access to a library of more than a million songs that can be played on a computer or transferred to selected portable devices.
To keep a permanent copy of a song that can be burned onto a CD, subscribers must pay 79 cents to 99 cents per track. Otherwise, when they quit the service, they can no longer play the songs they downloaded.
