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Thursday, May 12, 2005, 04:00 pm PT (07:00 pm ET)

New Yahoo! music service may sway some users from iTunes

Yahoo's new Music Engine is not as elegant as iTunes but it allows for easier searching and listening of music than any other offering outside of iTunes, making it Apple's strongest competitor so far, according to one analyst.

American Technology Research analyst Shaw Wu believes Yahoo's large music video library and low $60 annual subscription price may sway some users to consider an alternative to Apple's ubiquitous iPod+iTunes combo.

"While Yahoo doesn't have a tightly integrated stack of hardware, software, and service like Apple, its adoption of Microsoft PlaysForSure Windows Media technology gives it access to a wide range of compatible hardware devices," the analyst wrote in a research report released to clients on Thursday. He believes this could help accelerate sales of non-iPod MP3 hardware made by Creative, Rio, SanDisk, Dell, Samsung, and iRiver.

Wu also believes Yahoo's new music service could potentially benefit several other companies who produce components for non-iPod players, including Seagate, Sigmatel, Marvell, and Texas Instruments.

Sigmatel, he says, will benefit from flash-based digital music player growth as the dominate provider of system-on-a-chip (SOC) components with Microsoft PlaysForSure DRM technology. Likewise, Wu expects Texas Instruments to see some upside as a provider of integrated circuits for non-iPod microdrive-based players.

Meanwhile, the analysts believes Seagate, Toshiba, and Hitachi will benefit as microdrive makers, and similarly Marvell, which produces SOCs for microdrives.

Examining the big picture, AmTech Research says Apple will remain a strong player in the MP3 and digital music space, but it believes the company's "very dominate position" will be "challenged" by both Yahoo! and Sony.

"Even if Apple were to enter the music subscription business, we believe margins on iPod MP3 hardware would be under more competitive pressure than ever," Wu said.

While AmTech Research believes Apple is "well-positioned" in the digital music business, as well as in its Mac business, the firm is maintaining a "Hold" rating on Apple stock with a 12-month price target of $40 a share.

The firm said it remains concerned with high investor expectations and increasing competition.