In a move telegraphed months ago, Yahoo announced today that it was terminating its subscription music service and throwing its support behind Rhapsody, a competing service operated by RealNetworks and MTV Networks.
The deal leaves Rhapsody, Napster and Microsoft's Zune Pass as the last subscription services standing, with Zune Pass being available only to consumers who buy a Zune MP3 player. Previous casualties include MTV's Urge, AOL's MusicNet, Sony Music and Universal Music Group's Pressplay, and Circuit City's MusicNow. Put another way, some of the biggest names on the Web, the music industry and electronics retailing have ventured into the subscription music market, only to be forced into retreat.
Record company executives have contended for years that subscriptions which charge users a flat monthly fee to play, but not keep, an unlimited amount of music were the future of the business. Collecting music would give way to playing songs from virtual jukeboxes stocked with millions of tracks. It's certainly true that people are buying far fewer CDs than they did when the first subscription services launched in late 2001. Yet only a fraction of the music-consuming public 2 to 3 million people, by Jupiter Research analyst David Card's estimate subscribes to a service. In the early days, fans of subscriptions predicted that the market would take off once some well-known names got involved. But as Yahoo's retreat makes clear, a powerful brand isn't enough to persuade masses of consumers to sign on.
Ian Rogers, Yahoo's vice president of video and media applications, stressed in an interview that Yahoo wasn't getting out of the online music business. Fueled by the popularity of its Launch online radio stations, Yahoo has consistently been a top music destination on the Web Nielsen Online said that the site drew close to 20 million people in December, 2 million more than second-ranked AOL Music. But Yahoo's strategy is to focus on services for the masses, and subscriptions aren't that. In fact, Rogers said, operating Yahoo Music Unlimited has diverted attention and resources from the company's free music services, making it harder to add the features they need to stay competitive.
"It's so much work to get the consumer experience right, when you do what you need to do to live up to your license agreements with the labels and then work with the technology," he said. "The investment required was so significant to really make it convenient for the users. And frankly I think that Rhapsody has done that better than anybody."
Both Rhapsody and Napster have made it vastly simpler to use a subscription service, enabling people to play music from a Web browser and offering on-demand songs for free (albeit in limited quantities). But Rogers illuminated one of the central problems for subscription services: They're too complex technologically for most consumers. The electronic locks used by subscription services make them incompatible with iPods, the most popular MP3 players on the planet. That's strike one. The locks also make it difficult to move music around the home, given how few stereos or boom boxes can support them. That's strike two. And even the portable players that are supposed to be compatible with subscription services can run into trouble handling their complex software, resulting in freezes, resets and other maddening malfunctions. That's strike three.
Dave Goldberg, former head of Yahoo's music business and now an entrepreneur in residence at Benchmark Capital, said subscription services face two other fundamental problems beyond the technological challenges. A big chunk of the music-buying public is teens, and it's hard to sell them a service that bills by credit card, Goldberg said. More important, the services are "dramatically" overpriced. "You should price these things at $3 a month and get massive uptake," he said.
The labels, however, have been heading in the other direction, demanding higher royalties from subscription services. "The labels, on the one hand, need people to build businesses around their content, and on the other hand they don't want them to make any money," Goldberg lamented. "Nobody's going to invest in these businesses because they can't make any money at it."
The services also have to overcome a conceptual hurdle with many consumers. Most music fans want something tangible when they buy songs. Subscription services, however, are like cable TV: They sell access to entertainment, not packaged goods. And like cable, they're not easily portable, which is a real problem when it comes to playing music in a car. It would be a different matter if people were continuously connected to the Net and could hear any song they wished, anywhere, any time. But in the current circumstances, music subscriptions work best as ways to sample music not as a substitute for buying it. According to Card, Jupiter's surveys have found that people who subscribe to music services still purchase a lot of music. Subscription services "are great products, but they're really interesting for a niche audience," he said.
If the monthly fee is low enough, the technological and conceptual problems fade in importance. Yet there are so many free ways to obtain music online some illegal, some questionable but some legitimate it's not clear how low that price would have to be to attract masses of users. Free, advertising-supported on-demand services, such as iMeem and Last.fm, present a growing challenge to the likes of Rhapsody. And just over the horizon loom on-demand services whose price would be hidden in the cost of portable players or mobile phone services.
Nevertheless, Dan Sheeran, senior vice president of business development at RealNetworks, argues that Rhapsody is poised to attract a much larger audience. With a growing number of deals with device suppliers, including Verizon Wireless, TiVo and Philips, Rhapsody is gradually becoming easier to access without a computer. And manufacturers such as Haier America are making pocket-sized Rhapsody-enabled devices that can connect to the service through WiFi, bringing the experience on a portable device closer to the full-blown experience on a PC.
Over the next few months, Yahoo's subscribers will be shifted to Rhapsody, where they eventually will have to pay a higher monthly fee (Rhapsody charges $13 for its basic service, compared to $9 at Yahoo). Yahoo will also promote Rhapsody and aim to integrate its play-on-demand functions into the music-related portions of Yahoo's site. In the meantime, Yahoo will continue to invest in new music features, Rogers said, pointing to its acquisition of FoxyTunes and its development of a Web-based music player (demonstrated here).
Neither Rogers nor Sheeran would comment on how the relationship between Yahoo and Rhapsody might be affected if Microsoft succeeds in buying Yahoo. If the software giant's recent history is any guide, Rhapsody's backers have reason to worry. Microsoft announced a much-hyped partnership with MTV in 2005 to promote Urge, and then shifted allegiances to Rhapsody before launching its competing Zune service and backing away from the technology platform that supported those rivals. Still, Yahoo and Rhapsody are making music together at least for now.