The Yahoo Music Business Model

By May. 25, 2005, 2:00am PT 20 Comments

A few days have passed since I used and published my initial impressions of Yahoo Unlimited, and during that time, I have come a conclusion, though that word has such finality to it. Yahoo Unlimited is an ad-supported personal radio network.

There, I said it. Now let me explain. Radio networks normally have preset play lists, and deejays that manage those play lists. The songs, which are broadcast in a one-size fit all model, are interspersed with advertisements. Ads bring in the dollars, and keep large terrestrial radio network owners in gravy.

In case of Yahoo Unlimited, the online company offers up a million songs, turns you into a deejay and charges you $5 a month. (As long as you don’t download the tunes to devices!) If people transfer music subscriptions to a device, they cost Yahoo about $6 a month, and as a result the whole model is unprofitable to begin with. (Business Week reported that Yahoo could be paying around $8 a month to the music industry, but my sources are saying its $6 per subscriber per month.)

Given the state of the MP3 player device market, and the minimal support for devices as of now, in reality Yahoo’s music service is all about making customers sign-up and listed to music on their PCs. It makes most economic sense of the company.

Of that $5-a-month subscription fees, Yahoo is going to send about $3.50 goes to the music industry, a number of industry sources have told me. (Business week put this figure at $6 a month.) As long as folks don’t start moving songs over to their devices! Lets assume it costs Yahoo spends about $1 per user on infrastructure, hosting and bandwidth costs. Its total costs are about $4.50 or so.

In other words, the money to be made for Yahoo here is about $0.50 per user per month or about $6 a year. Even with a million subscribers, that works out to about $6 million a year. That’s not enough to even cause a blip on Yahoo’s bottom-line.

Enter advertising. If Yahoo can sell ads worth $2 a month on its PC-only service, the monthly profits can swiftly climb. More ad-dollars will mean even more cash in the bank for Yahoo! In other words, you play the deejay; create your play lists and ad dollars make it all happen. Just like a radio network, except one with extreme personalization.

Hypothetical scenario: what if Yahoo turned this into a free service, and decided to eat all the costs, that is $4.50 a month – within days it would have more than 20 million users who will sign-up. $6.50 a month of advertising every month, on every user means $130 million a month or $1.56 billion a year. Even with costs hovering around $1.08 billion, Yahoo could make some serious cash here. Has the record industry hoisted by its own petard?

The problem is that this model won’t work for Napster or Real Networks – they just don’t have the scale of Yahoo, or the audiences to cherry pick from 176 million registered users. Yahoo will become their single biggest nightmare. And while that is happening, Apple will continue to sell its iTunes! Think of it this way – if Yahoo Unlimited is Infinity Broadcasting, then Apple is Virgin.

There are a couple of issues, I admit.

1. It’s going be tough to sell advertising in an area that right now at least is subscription only and actually convincing consumers would be most difficult aspect of my theory.
2. Given the level of greed at the record labels, they are most likely to demand a cut of any money Yahoo makes on advertising.

But despite that Yahoo has got to be thinking that advertising is their endgame, for sure, or Steve wins his bet. Though I would say, Jerry has better odds. On Yahoo Music every time you look at a bio or something else you end up on a page with a (surprise!) banner ad.

Business Week’s Heather Green has her take on this. Yahoo has insisted that it is not an ad model. “We thought that too, but according to Dave Goldberg, vice-president and general manager of Yahoo! Music: “We’re not doing this to sell ads,” he says. Yahoo, he says, already has an ad-supported model in its Internet radio and music video offerings. “For users who want more control and greater access, subscription is the right model for them.”

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