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If Yahoo can't do it . . .

Its retreat from the subscription music market begs the question: Can anyone make this business work?

February 04, 2008|By Jon Healey

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."

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