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Yahoo's music foray sends rivals' shares into a dive

Yahoo Inc's steeply discounted foray into online music subscriptions struck a sour note on Wednesday with the shareholders of Napster Inc and RealNetworks Inc -- the owners of the rival services that stand to lose the most from the new competitive threat.

Napster's shares plunged US$1.70, or 26.8 percent, to close at US$4.65 on the NASDAQ Stock Market, where RealNetworks' shares fell US$1.54, or 21.1 percent, to US$5.76.

Yahoo's entrance into the music downloading business even hurt Apple Computer Inc, which runs the dominant online music store with more than 400 million songs sold since it opened two years ago.

Apple's shares fell US$0.81, or 2.2 percent, to US$35.61 on the NASDAQ, even though industry analysts say the firm is far less vulnerable to Yahoo's aggressive push than Napster and RealNetworks.

Napster chairman Chris Gorog sought to reassure investors as US$69 million of his company's market value evaporated on Wednesday.

"We think there has been a significant overreaction in the market," Gorog told analysts during a Wednesday conference call. "Our customers have not fled in the past when desperate pricing moves have been made by competitors."

Echoing the sentiment of many analysts, Gorog predicted Yahoo will raise its prices within a few months, relieving the financial pressure on Napster. He also is counting on a consumer backlash to the ads that Yahoo will serve up with its music service.

Los Angeles-based Napster has been struggling financially, even before Yahoo entered the fray. After the stock market closed on Wednesday, Napster announced it lost US$24.3 million during the first three months of this year, while its revenue rose to US$17.1 million from US$6.1 million a year ago. The company expects to lose another US$27 million to US$28 million in its current quarter.

Wednesday's stock market reaction reflected a wide belief that Yahoo's music subscription service, introduced on Wednesday, will force Napster and RealNetworks to either lower their prices or risk losing subscribers. Either scenario would make it more difficult for Napster or RealNetworks to make money.

Yahoo appears better positioned than Napster or RealNetworks to absorb the costs of a potential price war. Yahoo ended March with US$1.1 billion in cash compared with US$370 million at RealNetworks and US$170 million at Napster.
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