Inside Digital Media on Yahoo Music Unlimited

Phil Leigh at Inside Digital Media does some really nice work and offers a lot for free at his website, like a research report released in April on Future Developments in Podcasting.  He does regular interviews with digital media insiders including a recent discussion with the authors of The Future of Music or today's interview with Paul Greenberg of MusicNet, the company powering Yahoo Music Unlimited.

Leigh also puts out a newsletter with interesting perspectives that you don't get on his website, though I really think it's worth archiving at his site.  In any case, earlier this week he shared his analysis of Yahoo Music Unlimited and gave permission for me to rerun the piece here at ProHipHop.  What follows is all from Phil Leigh.  Thanks Phil!

Our Thoughts on Yahoo's New Music Service
from Phil Leigh of Inside Digital Media

Yahoo's new unlimited digital music service may be the most significant development in the legitimate online music business since the launch of Apple's iTunes.

First, it could considerably stimulate demand for legitimate music subscription services because it is priced so aggressively. The annual rate of $60 even provides a potentially attractive alternative to the ad-ware intensive and virus prone Peer-to-Peer networks where free unauthorized file swapping of copyrighted material has been common.

Even college students and teenagers can afford the $60-per-year alternative. In short, cost will no longer be a significant deterrent to the adoption of a legitimate subscription service. Instead, the two most important factors that could result in poor adoption rates for Yahoo will likely be: (1) significant holes in the catalog of legitimately available tracks and (2) the performance of the new Yahoo software, particularly as it relates to the interoperability with the Janus enabled portable devices.

Although the one million track Yahoo catalog is impressive, no doubt there are still popular artists who are missing, such as the Beatles. It remains to be seen how music lovers will respond to the gaps. Additionally, one of the reasons that Apple's Music Store is currently achieving impressive sales rates at about $500 annually is because the iTunes software works reliably with the iPod.

Simply put, consumers in large numbers will not pay anyone to further complicate their lives. In this context, it is important to bear in mind that Yahoo notes that the new music software is being offered in a Beta version only. The Devil may be in the details. If so, the consumers and Yahoo will end-up taking the hindmost.

Second, we speculate that the initiative is being vigorously applauded by the recorded music industry in the background. After five years of declining sales, the industry recognizes that it is not merely piracy per se that is adversely affecting demand; it is the disintermediation of the youthful consumer away from traditional media and into the new media of the Internet. One consequence is that commercial broadcast radio is losing its influence with the youth market thereby making it harder for the labels to popularize new releases and fresh artists. It is becoming ever more obvious that the Internet must increasingly fulfill the traditional role of radio in popularizing new releases.

Yahoo's new music initiative places considerable emphasis on ways of sharing music with affinity groups. Theoretically, it does so even better than the Apple iTunes store. Thats why the labels may be applauding along the sidelines.

For example, the integration of the service into Yahoo Instant Messaging is designed to encourage friends to share music ideas and tastes with one another. The personalization capabilities and the Instant Playlist generation features linked to artists and genres are additional examples of how new releases and new artists can be popularized.

Third, there can be little doubt that Yahoo's announcement will put significant pricing pressure on the other online incumbents. The most likely point that might prevent such pressure would be potential bugs associated with new Yahoo music software. If consumers encounter numerous glitches, system crashes, and arcane error messages when trying to use the new service, then competitors may elect to avoid matching the Yahoo pricing. For now, I'm not switching from Rhapsody, because I know that it works and it works well.

However, assuming that the Yahoo service provides satisfactory technical performance, then Napster and Rhapsody will be under pressure to adjust their prices as well. More significantly, we think that even Apple will feel the competitive impact. While the popularity of the iPod will insulate them initially, the value proposition of a $60 per year subscription service will be hard for the consumer to ignore, assuming, the technical performance of the Yahoo service and the Janus enabled devices proves to be satisfactory. Despite disparaging the concept repeatedly in the past, it may even lead Apple, meaning Steve Jobs, to reconsider the merits of offering its own subscription service.

It's as certain as fleas on a yard dog that Microsoft will put enormous resources behind the effort to make Janus interoperability a pragmatic reality. It is far from certain that they will get the results they want anytime soon. Given all of the different device manufactures (Yahoo claims 10 already), there are a lot of moving parts to manage. Also, as noted, Yahoo characterizes its own release as a Beta version.

Fourth, we are admittedly surprised by the pricing. We have no reason to doubt the validity of the quote in the Wall Street Journal from Yahoo's Dave Goldberg that the service will be profitable at the rates specified. However, the financial releases to shareholders from Napter and the public comments by management at RealNetworks, and even MusicMatch prior to its acquisition by Yahoo, would imply that the profit ratio is not very high unless special circumstances apply.

Perhaps Yahoo has economies of scale that the others cannot achieve. Maybe they have unique terms with the labels and publishers. Again, we don't doubt the profitability claims. Confessedly, it does leave us scratching our heads, but that probably is precisely the state where Yahoo wants outside observers and competitors to find themselves.

Phil Leigh
President
Inside Digital Media, Inc.