Yahoo! (Nasdaq: YHOO) is finally facing the music. The company is in the process of shuttering its Yahoo! Music Unlimited service, according to PaidContent.org. It will send its current subscriber base and any future leads to Rhapsody America, the joint venture between RealNetworks' (Nasdaq: RNWK) Rhapsody and Viacom's (NYSE: VIA) MTV.

The handoff resembles Time Warner's (NYSE: TWX) turnover of its 350,000 AOL Music subscribers to Rhapsody rival Napster (Nasdaq: NAPS) last year.

Yahoo! Music Unlimited offers free Web-tethered access to a library of more than two million songs. Subscribers pay $8.99 a month, or $71.88 a year (which breaks down to $5.99 a month). Those rates will likely bump up to the higher rates of the more features-laden Rhapsody America service.

The failure of Yahoo! and AOL in this space should provide an important lesson. Catchall dot-com behemoths have a tough time competing against nimble niche players. AOL Music tried to stand out by offering videos, and failed. Yahoo! tried to stand out on price. That apparently didn't work out, either.

RealNetworks and Napster are the biggest fish in unlimited digital music offerings, but that's still a limited market. Apple (Nasdaq: AAPL) commands a larger audience for its a la carte digital downloads through iTunes.

The premium services also find themselves competing against everything from Internet radio to free, ad-supported streaming sites like CBS' (NYSE: CBS) Last.fm. That's before we even consider the plethora of unauthorized digital music providers.

In short, this is a dynamic sector, but let's not assume that Napster and RealNetworks will be the ultimate survivors. Napster has struggled to turn a profit. RealNetworks posted an operating loss in its most recent quarter. Both companies are blessed with cash-rich balance sheets, but one can't ignore the possibility that they, too, will one day hand off their fledgling services to someone else.

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Longtime Fool contributor Rick Munarriz doesn't have the urge to sign up for a digital music subscription service, though he loves his music enough to subscribe to 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.