Yahoo! and Rhapsody announced today that Rhapsody will be taking over the music subscription service business from Yahoo!. I think this is a big win for both Rhapsody and Yahoo! as Rhapsody is the best subscription service available and Yahoo! has been unable to keep up and turn a profit. Rhapsody’s technical foundation and user interface is well in front of anything else on the market including Zune, Napster and Yahoo!
The digital music space is a notoriously small margin business. If you look at the revenue from the sale of a single song – $.99 on iTunes – the actual cost to iTunes for that song is $.78 or so on average. This cost includes royalties to artists, songwriters, producers, record labels, etc. This means the sale of a song has a COGS of 79%. That’s a hard cost without including the cost of building and distributing the software, writing the copy, getting all of the info about the song from AMG or Muze or whoever.
I open this blog post with this insight because in the music subscription space, the economics aren’t too far off. For legal services like Rhapsody and Yahoo!, the subscription service is responsible for paying labels, artists, song writers, etc for every song that is played or downloaded through the service. Yahoo! has been charging a low $5.99 per month (if you agreed to a full year) or $8.99 per month. This is a dramatically lower monthly fee than Rhapsody which is $12.99 (still cheap for all you get). The difference between the fees means that either Yahoo! was getting a screaming deal on their music or they only have a selection of lower priced music (not the case) or they were losing money.
My guess is that they were losing money on the subscription service and making some money on the free player/advertising product. By handing off the subscription business to Rhapsody, they are able to monetize the subscription base they have built up, offer a product that is precipitously better than their current product and allows them to focus on the free/ad supported version of the music service which is what they are good at.
It’s a proverbial win-win!
