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Will Yahoo's music move prompt a price war?

The Web giant's new cut-rate subscription service could put pricing squeeze on rivals, analysts say.

With the release of a new low-price music service, Yahoo is kicking off a price war that could put rival subscription services in a painful squeeze, analysts say.

On Tuesday, the Web giant announced that its new Yahoo Music Unlimited service will be priced at just $6.99 a month--or $60 for a full year of service--while offering subscribers access to unlimited downloads that can be taken to compatible portable devices.

That's less than half the cost of similar services offered by Napster and RealNetworks, both of which charge close to $15 for their portable subscription plans. In its announcement, Yahoo said its pricing would be "introductory" but did not say when the price would shift, or by how much.

"It is going to put pressure on (Napster and RealNetworks)," said GartnerG2 analyst Mike McGuire. "But it all depends on how long Yahoo can keep running this introductory pricing."

Whatever the outcome, the price war is likely to draw attention to the subscription music model, which has languished in the shadow of Apple Computer's 99-cent iTunes download store for several years.

Subscription companies have looked to new software from Microsoft that would allow downloads to be taken to compatible portable devices. Subscribers had previously been limited to listening to the downloads on their PCs.

The Napster to Go service launched in February, with the company touting it in a high-profile Super Bowl advertisement. RealNetworks launched its version late last month, sweetening the deal by offering nonsubscribers the ability to listen to 25 songs for free to try out the service.

Napster's share prices tumbled 20 percent in after-hours trading Tuesday following Yahoo's announcement. RealNetworks' share prices had fallen more than 11 percent.

Napster executives said they didn't expect Yahoo's low pricing to last for long, however.

"Based on our discussions with record labels, it is clear that very aggressive introductory pricing for portable subscriptions will be at negative gross margins and we believe that consumers should expect rapid price increases," Napster Chief Executive Officer Chris Gorog said in a statement.

According to recent federal securities filings, the company had about $139 million in cash and short-term investments at the close of 2004. That could be used to subsidize temporarily lower prices for its service.

RealNetworks has a little more breathing room, with nearly $370 million in cash on hand and short-term investments.

RealNetworks said it's not interested in immediately matching Yahoo's pricing, however. The Web portal has had a mixed record in attracting customers to its paid services, said RealNetworks Chief Strategy Officer Richard Wolpert.

"We're going to take a 'wait and see what happens' approach," Wolpert said. "We have been extremely focused on returning our company to profitability and on not getting caught up in gimmicks that were money losers."