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Yahoo takes on iTunes with new music service

Community, music-sharing are key in new subscription plan that deeply undercuts rivals' prices.

Yahoo plans to launch a new flagship music service on Wednesday, in hopes of capturing a slice of the online music market now dominated by Apple Computer.

As earlier reported, the service is built in large part around a monthly subscription plan similar to those now offered by Napster and RealNetworks, which allow customers to take music onto their portable devices. However, Yahoo is deeply undercutting those rivals' prices, offering initial monthly subscriptions for just $6.99, compared with nearly $15.

Yahoo also has spent considerable time building links to its other products, such as its popular instant messaging application, with the aim of making community and legal music-sharing among subscribers a core part of the service.

News.context

What's new:
Yahoo plans to launch an early version of a new music service on Wednesday in an effort to take on Apple's iTunes.

Bottom line:
Song-sharing and the community aspect of the Web giant's new subscription plan are key--and could change the market dynamics of the online music business.

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Record label executives who have seen the service, which is in part based on wholesaler MusicNet's technology, say the community aspect in particular shows a promising evolution for the online music business.

"They've unpacked the opportunities and social aspects of the peer-to-peer environment, taken the best aspects away from that, and put them back into their environment," said one top record label executive familiar with recent versions of the service, who asked not to be named.

Yahoo's entry could help change market dynamics that have tipped overwhelmingly toward Apple, which controls about 70 percent of both the MP3 player market and the digital song download market.

Yahoo has a nearly unparalleled reach, with more than 300 million users worldwide, and has already developed a loyal base of listeners who use its Launch music video and Web radio service. Indeed, record label executives say Launch can already be as important as traditional radio when debuting a new album.

Much will depend on the marketing muscle put behind the service, however. Other giants, including Sony, Virgin Digital and Microsoft, have launched their own iTunes competitors, and none have so far gained substantial traction in the market.

Apple's iTunes, by contrast, has sold more than 400 million songs in the two years it has been in operation. On Tuesday, it opened four new stores--in Denmark, Norway, Sweden and Switzerland--bringing its presence to 19 total countries around the world.

Yahoo has already dedicated substantial resources to its music business, however.

The Web portal bought a small digital music company called Mediacode in December 2003. It later spent $160 million to purchase Musicmatch, one of the most well-established MP3 software companies, which also offers its own 99-cent download store and a monthly subscription service.

More recently, sources said Yahoo is developing its own audio search engine aimed at finding downloadable songs and music data around the Net.

"People are much more likely to react and be receptive to music recommendations that come from friends and contacts."
--Mike McGuire, analyst, GartnerG2

Despite the string of purchases, the company has been working to build its own subscription service, along with wholesaler MusicNet. That service, dubbed Yahoo Music Unlimited, is slated to launch this week.

Like the recent entries from Napster and RealNetworks, Yahoo's service will be based in part on Microsoft's Janus technology, which allows music accessed using monthly subscription plans to be transferred onto some compatible MP3 players. Those songs will not work with Apple's iPod, which does not support Microsoft's technology.

The service will also be tied into the Yahoo Messenger service, allowing subscribers to chat and share playlists with each other while they're on the computer. Some elements of the service may be aimed particularly at teenagers, who avidly use online social tools to explore new music, with a pitch to parents indicating that Yahoo Music is a safe, legal way to share music, sources familiar with the project said.

"We are committed to being at the forefront of the rapidly growing online music segment," Lloyd Braun, head of the Yahoo Media Group, said in a statement. "Yahoo Music Unlimited draws on the best of Yahoo to provide personalization and community features unlike anything else in the marketplace."

Other subscription services also have moved toward community tools, though without the built-in base of the Yahoo audience. Napster allows subscribers to browse each other's playlists, while RealNetworks has integrated playlist blogging tools into its Rhapsody service. Yahoo's own Musicmatch offers a "send to a friend" feature, which lets even nonsubscribers listen temporarily to songs on shared playlists.

Analysts say Yahoo has the potential to make a splash in the market, particularly if it uses the instant messaging link to full advantage. It will face the same hurdle as its predecessors in explaining monthly subscriptions to customers largely familiar with iTunes' 99-cent downloads, however.

"People are much more likely to react and be receptive to music recommendations that come from friends and contacts," said GartnerG2 analyst Mike McGuire, cautioning that he had not seen the service. "But in the end it's going to come down to the offering, and whether they can create that compelling marketing message that explains why paying for access is better than paying for downloads."