Yahoo! hits rivals with musicstore

Napster, RealNetworks take a dive

Strong sales weren’t enough to help digital music company Napster on Wednesday, as it and competitor RealNetworks saw their stocks plunge more than 20% after Yahoo! bowed a similar online musicstore that underprices them by more than half.

Napster and RealNetworks’ Rhapsody both charge $9.99 per month for a PC-only subscription to a million-plus song library and $14.99 for a subscription including portable devices. Yahoo’s new services cost $6.99 per month for PC and portable, though the Netco is expected to raise prices soon after it gains market share.

Investors were clearly worried that Yahoo’s aggressive move, combined with its marketing prowess, will do serious damage to Napster and RealNetworks and possibly make the Web portal the most likely candidate to challenge Apple’s dominance in the online music space.

Apple stock was down Wednesday as well, though a much more modest 2%. Its iTunes Music Store sells songs for 99¢ each, unlike competitors’ monthly subscription plan.

News came as Napster reported revenue of $17.4 million in the quarter ended March 31, up 188% from a year ago and on the high end of its recently increased guidance. Net loss was $24.1 million, primarily because of its $30 million marketing spend on the new Napster to Go portable service, which began last quarter. That’s nearly double the company’s net loss last year.

In a statement, Napster topper Chris Gorog attempted to downplay Yahoo’s competitive threat.

“Based on our discussions with record labels, it is clear that very aggressive introductory pricing for portable subscriptions from competitors will be at negative gross margins, and we believe consumers should expect rapid price increases,” he said.

Gorog added that his company has a number of on- and offline growth plans for the next year, including the sale of cellular ringtones through Cingular and T-Mobile under a recent deal.

Napster shares closed at $4.65 on Wednesday before earnings were announced, down 27%. RealNetworks stock was off 21% at $5.76.