When Yahoo Music doubled the price of its subscription music service last week, customers with carefully selected music libraries had a choice: pay up or surrender your music at the end of the first year.


Yahoo Inc.'s new pricing model brings its service within a few dollars of competitors Napster Inc. and RealNetworks Inc.'s Rhapsody, and heats up the battle for second place behind Apple Computer Inc.'s dominant iTunes. Both Napster and RealNetworks stocks jumped when Yahoo announced the price hike.


In a world where iTunes has more than 80 percent of the market share and Apple reported $3.7 billion in fourth-quarter revenues fueled largely on iPod sales competing music services are turning themselves inside out to come up with ways to attract and keep users.


Yahoo Music shook up the digital music market in May when it launched its $4.99 per month yearly subscription service ($6.99 for monthly subscribers). That was half the $10 per month industry standard charged by L.A.-based Napster and Seattle-based Rhapsody.


The new pricing is $9.99 per month for a yearly subscription ($11.99 monthly) to Yahoo Music's "Unlimited" option, which allows users to transfer music to portable devices and burn CDs. It competes with Napster To Go ($14.95 per month) and Rhapsody To Go ($14.99 per month).


Yahoo's baseline service, where music stays on a user's computer for the home stereo and can't go anywhere, will remain at $4.99 monthly (annualized) or $6.99 per month.


Though Yahoo does not release exact subscriber numbers, some analysts are skeptical about its success so far. "I don't think Yahoo's numbers are that phenomenal on the subscription side," said Gene Munster, an analyst at Piper Jaffray & Co. who covers competitors Napster and RealNetworks. "They probably thought they would be doing better by now."


Yahoo admits the number of subscribers to the portable option is far below that of regular subscribers, but spokeswoman Charlene English indicated that portable music customers aren't the main focus. "We feel there are still a lot more customers out there that do not have a portable device for music," English said.


Differing strategies
The battle for second place among digital music services is not really about the music.


Yahoo could become a dominant player, said P.J. McNealy of American Technology Research, because of its ability to drive advertising revenues on its music site. That would allow Yahoo Music to be a break-even business and that's all it needs to be. "It doesn't have to be a major driver of profits and revenues for them," McNealy said.


It all has to do with the various business models. Apple, for example, acknowledges that iTunes is a loss-leader, but the company uses it to fuel sales of iPods. RealNetworks, meanwhile, just reached a $761 million settlement with Microsoft Corp. that includes a cross-promotional agreement where the MSN Network will promote and distribute Rhapsody's music and game service.


Napster has announced a new offering, a Napster.com portal, to be launched next year. Chief Executive Chris Gorog was vague about the details, but said it would be a free, Web-based music destination offering a broader music experience. The company also just announced a partnership with Clear Channel Communications Inc. to offer live concert recordings. "How do you build a business? You leverage what you have," Munster said.


Few in the industry were surprised by Yahoo's price hike. The company had said from the outset that its cut-rate offer was a promotion. "We never said that we wouldn't change the price," said English. "It was an introductory price. We still have the lowest pricing anywhere."


The company cited a need to accommodate the business agreements with record labels, which were not thrilled about Yahoo's $4.99 per month for portability. "It's an indication that they were tired of losing money paying for this," said Munster. "They just ended the subsidy."


Yearly customers on the Yahoo Music Unlimited service will retain the lower rates until their first anniversary, at which point they will have to renew at the higher rates.


"Who knows, at their anniversary there might be some promotion that might be available or maybe they'll realize that they don't need that portability, so their pricing will stay the same," English said.


Like Napster and Rhapsody, Yahoo Music offers a subscription model, where a monthly fee gives users unlimited music on a "rental" basis. Cancel the subscription and your library disappears.


Compare that to Apple's iTunes model, where users purchase songs to own in their personal library. Yahoo Music does offer songs for download, at a cost of 79 cents per song, compared with Napster's 80 cents and iTunes 99 cents. Though Yahoo is the market leader in pricing, no subscription service has captured users' fascination like iTunes, or more precisely, like the cult of the iPod.


So that leaves subscription services waiting for a hardware sensation to rival Apple's hipster device. "The number of devices out there has been really disappointing," McNealy said. "But it's still early on for these things."

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