Yahoo! Goes to 11

It's time to kiss your PC-tethered media player goodbye. Yahoo! (Nasdaq: YHOO  ) announced this morning that it's teaming up with SanDisk's (Nasdaq: SNDK  ) new Sansa Connect MP3 player to create a Wi-Fi-enabled music subscription service.

Until now, Yahoo! and SanDisk were significant companies with insignificant roles in digital music. SanDisk is a distant second to juggernaut Apple (Nasdaq: AAPL  ) and its iPod on the hardware side. Bragging rights don't come with that silver medal; everyone knows that Apple has eight times the market share of its nearest rival.

Yahoo! is in an even more unsavory position. Because iPod users turn to Apple's iTunes for their downloads, everyone else is fighting for the 30% of digital music sales that aren't coming through Apple.

So why should it matter if two fledging players find themselves sharing the same piece of driftwood on the sea to nowhere? Well, for starters, one should never underestimate the appetite of two hungry companies with deep pockets. In addition, this kind of alliance really does have the power to change things.

And the portal will rock
SanDisk has become a popular antidote to Apple. Even if it commands just 9% of the MP3 player market (according to the NPD Group), that slice is nearly three times larger than the bronze medalist. So whether you're a music subscription service like RealNetworks' (Nasdaq: RNWK  ) Rhapsody or the leading consumer electronics superstore chain, the flash-memory giant is at the top of the list of any aspiring Apple-toppling company in need of a hardware partner.

Why should this salvo end up any different than the other blanks fired at the iPod gorilla in the past? That may rest on what Yahoo! brings to the table. SanDisk is already raising the bar by hooking up with privately held ZING to make its Sansa Connect players Wi-Fi-ready. Consumers may not seem to mind docking their iPods to their computers to refresh their virtual jukeboxes, but that's because the mainstream audience hasn't been treated to the convenience of wireless delivery.

Last year's Zune hinted at the possibilities with its networking features, but Microsoft's (Nasdaq: MSFT  ) player has failed to make a dent in the market, because of the software giant's own arrogance. When you're introducing a brand-new product, touting virtual song-sharing with nearby users implies that you need to have at least two friends willing to go whole-hog on the Zune platform. That's never easy.

You can be a community of one with the new Sansa Connect. As long as you have a Yahoo! Music Unlimited To Go subscription, your player can be refreshed with new songs whenever you're at a freely available Wi-Fi hotspot. Grabbing lunch at a Panera? Returning books to your local library? Checking into a Hampton Inn? They can all provide an aural feast for your new SanDisk player.

Apple can't compete on two levels: Wi-Fi functionality, and its lack of a music subscription service. The digital-music buffet model has been a growing one for Rhapsody, Napster (Nasdaq: NAPS  ) , and Yahoo! in the past. Now Yahoo! has a chance to win over a new audience with five simple words: Can your iPod do that?

Integration into other Yahoo! applications is another winner. The Sansa Connect can scour Yahoo!'s popular photo-sharing site Flickr for digital snapshots, as well as stream Yahoo!'s LAUNCHcast Internet radio stations. In a nod to Zune's social-networking ambitions, the player can also cull recommendations from nearby users or Yahoo! IM buddies. And that's just one of its many features.

You've got Mel on line one
One company that may see this as a short-term gain -- despite the long-term pain -- is Sirius (Nasdaq: SIRI  ) . The satellite-radio company's uphill battle to complete its pending acquisition of rival XM just got a lot less steep this morning.

Yahoo! Music Unlimited To Go is priced at $11.99 a month for consumers paying a year in advance. A current promotion with MasterCard grants new subscribers a second year for free. So Sirius CEO Mel Karmazin can point to the Yahoo!-fueled Sansa Connect and argue the following:

  • Satellite radio offers commercial-free music discovery through roughly 70 music stations, yet now Yahoo!-SanDisk users have access to 2 million tracks.
  • The Yahoo!-SanDisk combination is cheaper than a Sirius subscription.
  • The relevance of terrestrial radio and satellite radio will be tested.

Pointing to Apple's market dominance to justify the union of the satellite radio duopoly would have been a hard sell. The iTunes Music Store is just the digital replacement of the corner vinyl retailer. But now that the Sansa Connect with Yahoo! service is cheaper than XM or Sirius, streams Internet radio channels, and offers access to a wider library of dynamically updated content, only a collection of ignorant regulators would stand in the way of the merger between XM and Sirius.

However, these are also the same reasons why a combination of XM and Sirius may not be enough to stanch the red ink bleeding from satellite radio. Karmazin's a brilliant guy, but this is clearly a near-term opportunity to get a deal done before facing some even beefier challenges to overcome in the future.

Is the face of digital music changing this morning? I think so. Obviously, this isn't the kind of thing that happens overnight. However, any kind of initial success here will force Apple to rethink the music-subscription model, and spur its need to compete with Wi-Fi-enabled iPods in the coming months and years.

Fictional Spinal Tap guitarist Nigel Tufnel, in pure mockumentary glory, once pronounced that his amps were superior because they went all the way to 11. Conventional amps max out at a setting of 10. Well, the digital music revolution just went to 11 this morning. Let's see who turns up to turn it up louder.

Digital music is a high-growth industry that's often explored as part of the Rule Breakers newsletter service. XM was a former recommendation there. Yahoo! is a Motley Fool Stock Advisor pick. Microsoft and MasterCard are Inside Value stock selections. A free 30-day trial to any of these newsletters will add some rhythm in your step.

Longtime Fool contributor Rick Munarriz isn't a subscriber to any digital music service, though he does have satellite radio. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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