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…And Then There Were Two February 4, 2008

Posted by David Card in Media.
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…er, actually, three. That is Rhapsody, Napster, and Microsoft as the remaining major players in the on-demand subscription music service business. I got a little tied up with Yahoo-Microsoft this morning, so I’m late to post on Yahoo’s intention to shut down its Yahoo Music Unlimited service, and instead promote Rhapsody. This deal more or less mirrors what Napster and AOL did, and Rhapsody and MTV did, not all that long ago.

Jupiter remains as bullish as anybody on these services, which are awesome products that, so far, only appeal to a niche audience of music aficionados. We’re projecting the $235M market (US, 2007) will grow to $600M in 2012, but we did lower our forecast a bit, as the business has remained sluggish and we’ve learned more about customers who subscribe. That forecast is in comparison with $1.1B in US downloads projected to hit $2.8B in five years.

We’d expected Yahoo to either exit or revamp its strategy when we built our forecast, but I was expecting them to do an ad-supported product. Apparently, Yahoo doesn’t think it can make the economics work. I’m skeptical others can either, unless there’s a fairly radical re-thinking at the labels and publishers about royalties and guaranteed minimum payments. Or maybe they’re willing to cut deals with start-ups that they won’t with the big guys.

Yahoo hopes to migrate its customers — we estimate several hundred thousand — over to Rhapsody during the first half, and will offer pro-rated refunds if necessary. SanDisk’s very cool WiFi Sansa Connect device for YMU is history.

While the potential of Yahoo’s marketing clout behind the Rhapsody service is there, I’ve got to admit it didn’t make YMU a leader. Yahoo did a few TV ads and plenty of promotion on its Music web channel — which continues to be a great, ad-supported business for Yahoo — before it soured on the subscription business and decided to narrow its focus. The proof will be in the execution of that joint marketing, and in integrating other Rhapsody services into Yahoo Music (and vice versa, if it makes sense).

What does this mean for Apple? Not much really. Were Apple to create its own service, or bless one of the existing ones, I’ve no doubt the whole category would grow. But the lack of one isn’t hurting iPod sales or helping the competition so far. The iTunes store is a store, not a service, and there’s really only marginal competition between buying and “renting” yet. Jupiter surveys show that subscribers spend almost as much on downloads — and more on CDs for that matter — as download-only customers do.

I’ll have a report out on the challenges and opportunities these services are facing, along with their ad-supported contenders, very soon. Clients can ping me before then for a draft if they like.

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