Yahoo! faces an uphill battle against Apple's iTunes
updated 08:40 pm EDT, Thu May 19, 2005
Yahoo! vs. Apple
Yahoo! , after entering the digital music industry earlier this month, according to an article in BusinessWeek. The report says that the company faces the difficult prospect of changing customers' attitude toward "renting" music and that its current price model is not sustainable for longer term profits. Apple, on the other hand, has little incentive to change to a subscription model: "Since [Apple] makes nearly all of its music profits from the iPod, it has little incentive to create a subscription service -- or to make iPods compatible with those that exist. Simply put, there's not enough demand." Furthermore, the labels are wary of the current Yahoo! pricing scheme, believing that Yahoo is charging too little and could get consumers hooked on unsustainably low prices, according to the report: "The labels are very sensitive to the devaluation of music."
The article says "online providers typically pay the music labels about $6 per person a month for a subscription that allows users to listen to music only on their PCs. The service, in turn, typically charges users $10 per month. After expenses such as the cost of server infrastructure and credit-card fees, that leaves a profit margin of about 30%," and that portability for users costs Yahoo! even more.
"That means subscription rates may remain higher than most people are willing to pay. Then there's the iPod: The most popular player doesn't work with existing subscription services. Compatible players will have to get a whole lot cooler before people start buying them."
troll
Joined: May 2005
Huge threat
The problem with this particular BusinessWeek article, though, is that it doesn't consider Moore's Law. Price will always come down as time goes by. Initial cost might seem high, but Yahoo can easily afford it and the cost will come down as they continue working with music labels. 30% profit margin is still fairly big considering even most auto dealerships make enough profit selling their cars at 10% profit margin. Yahoo already has millions of members for its other services, and its brute force marketing taking advantage of that user base will be a huge threat for Apple.
Apple might be able to hang onto their current iPod momentum for now, but it won't last very long. Most people don't realize that music player is commodity item. When subscription-based services flourish, it becomes more common and iPod isn't compatible with those services, people aren't going to hang onto their old iPod. They throw it away and buy something that actually works with those subscription services.
Yahoo's subscription service is going to be a huge threat for Apple. Apple must be concerned.