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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."

by MacNN Staff



  1. james9490

    Joined: Dec 1969


    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.

  1. mpbritt

    Joined: Dec 1969


    Subscription not a threat

    The subscription services being offered in contrast to the iTunes Music Store are not an immediate threat to Apple, and Apple really has no reason to be concerned. As long as the subscription services don't work with the iPod, which in all its incarnations holds an approximate 75% of the digital music player market, membership rates will remain low for the likes of Napster, Rhapsody, Real, and Yahoo.

    But what the plethora of articles seem to not take into account is that in the online music download market is it not an either or choice between subscriptions and a la cart services. The two services can co-exist and the consumer will get the benefits. And that is what is most important, what is best for the consumer. And presently subscriptions are NOT good for the consumer. The only segment of the market subscription services are good for is the businesses running them, which is why all these analysts are hot for them.

    Subscriptions services are guaranteed revenue for businesses, and wall street loves the promise of on-going revenue. As a result financial analysts love the subscription model. This is the only reason so many positive articles are being written about subscription music services. Financial analysts don't care about the longevity of something. The only thing they care about is the profits for the present quarter. It is all about the bottom line, and as soon as it is shown that subscription services will never show a profit they will be dropped like hot potatoes.

    Over the course of the next few months the market will shake itself out and it will be shown that consumers do want to own the majority of their music, not rent it. The a la cart services like iTunes Music Store, and MSN Music Store will still be around and subscriptions will simply become another service offered that will compete the satellite radio services. Plus the services that work with both Mac OS X and Windows, as well as support the iPod will have the longest life. And the only online music store that fits that bill is the iTunes Music Store.

  1. kw99

    Joined: Dec 1969



    >Yahoo's subscription service is going to be a huge threat for Apple. Apple must be concerned.

    Subscription is no problem for Apple. But that's not even the issue. Apple's bottom line is impacted by how many iPods it sells. So Apple just needs to monitor iPod sales versus its music player competition (NOT iTMS versus other music download services).

    If at some future point (hasn't happened yet), iPod sales are not doing quite so well, Apple determines why. If (1) it is because the other music players are getting better, then Apple needs to focus on making iPods better to maintain it's overwhelming majority share of the market. Believe it or not, most people actually choose the music player because of the music player, not because of the music service it supports. But if (2) it is really truly because iPods don't work with music subscription services and people are actually buying non-iPod devices for that reason, then Apple offers its own music subscription service.

    For (2), the Apple service would ONLY work with iPods, of course. Problem eliminated. Apple must already have the subscription technology lined up, because it will no doubt use a NetFlix-like monthly subscription model when the "iTunes Video Store" comes to market.

    But Apple is probably more worried about (1) than (2). So it will continue to improve the iPod. And where the iPod goes, iTMS will follow because it is the only download service that works with the most popular (by a huge margin) music player. Without even "competing," iTMS will just continue to be the #1 music download service. It must drive the folks at Napster, Real, and now Yahoo! crazy...

  1. klinux

    Joined: Dec 1969



    "It must drive the folks at Yahoo! crazy..."

    Oh yeah, Yahoo! a company that is bigger, more profitable, and more diverse than Apple is really worried.

  1. kw99

    Joined: Dec 1969


    Re: Hmm

    >Oh yeah, Yahoo! a company that is bigger, more profitable, and more diverse than Apple is really worried.

    Bigger? Well, maybe... I guess it depends on how you define "bigger."

    Yahoo! market cap - about $50B Apple market cap - about $30B

    Yahoo! annual revenue - about $3.5B Apple annual revenue - about $8.3B

    Yahoo! net assets - about $4.1B Apple net assets - about $5.1B

    Yahoo! number of employees - about 7,600 Apple number of employees - about 11,700

    [Seems like Apple has the edge on "bigness."]

    More profitable?

    Yahoo! annual gross profit - about $2.3B Apple annual gross profit - about $2.3B

    Yahoo! earnings per share last quarter - $0.14 Apple earnings per share last quarter - $0.34

    Yahoo! estimated earnings FY2005 - $0.57 Apple estimated earnings FY2005 - $1.31

    [Hmm... how do you define "profitable"? Number of web site fits per share?]

    More diverse?

    Apple makes computer hardware, consumer electronics hardware, and software products. It runs an online retail business. It runs a brick-and-mortar retail business. AND it provides online services.

    So Yahoo! is "more diverse" because of what, exactly?

    Come back with your facts straight, klinux...

  1. klinux

    Joined: Dec 1969



    Hey boy, don't mouth off in front of adults, OK?

    When one says bigger, one means market cap. One does not bring up a random number of metrics and say ah-ha, we beat you on 3 out of 4 metrics so we are bigger.

    Morover, profitable is just that, profits. I see you conveniently left out one decimal point. Yahoo's profit is $2.28B while Apple's is $2.26B. Hence, Yahoo is more profitable. No argument there.

    Furthermore, please do not do again what you just did and make the rest of Mac users look stupid in front of others. That is, you compared one company's EPS to another company's. Are you crazy? Are you stupid? Do you know what EPS is used for? Do you know that it cannot be compared across companies otherwise BRK whose share price is $83K and whose EPS is close to $5K is by definition the most profitable company in the world?

    What a fanboy.

  1. try

    Joined: Dec 1969


    Subscription hijack

    Wouldn't it be easy (at least on a mac) to use audio hijack, or like, to get all the songs you want for a lousy 6-10 $ once in a while. I'm sure people will come up with (or there already is) a comparable product for windows users. And I therefore suspect that subscription service will prevail pretty soon. If only this worries the Music industry enough to kill the subscription service.

  1. moorghan

    Joined: Dec 1969


    i think

    the real competition is going to be between subscription services and Satellite Radio.

  1. kw99

    Joined: Dec 1969


    Re: Hmm (2)

    klinux, coincidentally, the price of Apple and Yahoo! happen to be about the same currently, around $36-37. Therefore, "earnings per share" is relevant for comparison. Apple's estimated earnings per share for 2005 is a lot more than Yahoo!'s. Again, you seem to neglect the actual numbers...

    The gross profits is also not always relevant. If a small company with, say, 100 employees has profits of $100 million and another company with 1000 employees has profits of $200 million, which is more "profitable"? That's why I gave a few different numbers.

    But at least I gave some numbers. Some people would just make an improbable statement and think others would believe it.

    Yahoo! bigger than Apple. Yeah, maybe in the minds of investors, but saying a company is "bigger" just because of stock price and shares outstanding is a stretch. When Google went public, did it suddenly become 10 (or maybe 100) times "bigger" overnight?

    Yahoo! more profitable. I'd rather own shares of Apple right now (see above).

    Yahoo! "more diverse" than Apple. Yeah right...

  1. Todd Madson

    Joined: Dec 1969


    Problem is.....

    Yahoo, until just recently, didn't really produce anything. They don't know, they just have an online subscription music service selling the products of others. Underwhelming.

    My wife just got a new MP3 player for our anniversary.

    She could have gotten any kind she wanted.

    After the orange juice incident of last year her old iPod 5gb was not functioning the best.

    What does she do? She goes and buys herself a iPod mini.

    You go with what works.

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