Will Portable Music Subscriptions Be Profitable?

BusinessWeek:  BusinessWeek reports today that Microsoft is waiting for the right moment to strike with its own low-cost introductory offer of a music subscription service similar to Yahoo's recent entry of a $7 a month 'all-you-can-eat buffet' model. "When you see us move into the space," says Rob Bennett, senior director of MSN Entertainment, "you'll see us try very similar things." However, many feel that pricing music this low just won't work in the long term and the business model probably isn't sustainable because portability costs more..."The online providers typically pay the music labels about $6 per person a month for a subscription that allows users to listen to music only on their PCs. The service, in turn, typically charges users $10 per month. After expenses such as the cost of server infrastructure and credit-card fees, that leaves a profit margin of about 30%."...However, for subscriptions that allow downloads to portable players - the label gets another $2 per person. That's why the long term profitability of lower priced subscription models is a scary proposition - having to rely on volume. Even though Yahoo already has the infrastructure to deliver the new service, keeping rollout costs lower, many insiders believe that Yahoo will eventually be forced to raise its rates. "They need volume, and when they get it, the price will come up," says Amanda Marks, executive vice-president of Universal Music Group's eLabs digital distribution unit.  If she's right and you just signed up for Yahoo's Music Unlimited, don't be surprised if your credit card bill reflects an unannounced increase in your monthly music fee...

The article makes a few other good points:

--Changing consumer behavior (i.e., renting, not buying music) is not easy and takes time

--As appealing as it is for many to get unlimited music for $60-$180 a year from services like Rhapsody, Napster and now Yahoo - compatible portable MP3 players will have to get a whole lot "cooler" before people start buying them since they don't currently work with the iPod.