June 2, 2005, 12:00 AM

Yahoo sounds a new round of competition in digital music

Yahoo, which most consumers don’t associate with music, is coming into the digital music market swinging with a cheap price and, according to some analysts, no intention of making money on digital music.

Napster and iTunes have re-defined the digital music business with large selections of music available- legitimately-to music lovers. Both showed that there could be a business in music downloading. But as consumers grow more comfortable with obtaining music from the Internet, competition inevitably followed.

And now Yahoo, which most consumers don’t associate with music, is coming into the market swinging with a cheap price and, according to some analysts, no intention of making money on digital music.

Yahoo Inc. last month launched a service that leverages its might as a diversified Internet player by introducing its Yahoo Music Unlimited subscription service at $6.99 per month, less than half Napster’s $14.95. Yahoo is in a position to use digital music to draw customers into other revenue streams, says Ted Schadler, analyst with Forrester Research. “Yahoo is saying digital music is a loss leader and that they’ll make their money somewhere else,” he says. “That’s annoying if you’re Napster, because for them digital music is their only game.”

Yahoo Music Unlimited also lets subscribers download single song tracks at 79 cents each, a rate that undercuts iTunes’ 99 cents and even Walmart.com’s 88 cents, and access free music at Yahoo’s LAUNCHcast Internet radio service.

Yahoo’s strategy serves two purposes, Schadler says. While less than 10% of U.S. households subscribe to digital music services, Yahoo is catering to consumer demand for a mixture of digital music options-subscriptions, paid downloads, and free radio-and it helps Yahoo build a larger audience for online advertising, including ads running on LAUNCHcast, Schadler says.

But Napster will continue to innovate with new services like Napstertones, a ringtones download service for cell phones, as it sticks to its pure-play, ad-free strategy, says chairman and CEO Chris Gorog. “We believe most consumers will demand that a paid subscription service should be an ad- free environment, and Napster is committed to offering true music fans a safe haven,” Gorog says. m

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