Apple shares fell yesterday on news that Yahoo intends launching its own Windows-only music download service.

Apple shares fell as much as seven per cent during particularly heavy trading yesterday, but later in the day shares rallied slightly, closing down 2.22 per cent at $35.61 per share.

Available in the US, Yahoo Unlimited enters the market at an introductory price of $4.99 per month for an annual subscription, or $6.99 on a monthly basis.

Agressive Yahoo debut, but Apple rules the roost

Adam Harkness analyst Steven Frankel told Reuters: "They were expected to enter the market, they were expected to be aggressive, but they were not expected to be this aggressive."

JP Morgan analyst Bill Shope doesn't believe Apple has a great deal to fear from Yahoo's iPod-unfriendly service. Shope does see the service putting "some pressure" on Apple, but thinks Apple's dominance of the existing market, and its closed loop ecosystem of iPods and iTunes should protect the company.

He also predicts Apple will change the rules of the game, according to VCBS MarketWatch: "Shope thinks Apple look to further distance itself from its competition by adding functionality to its iTunes music store, such as video downloads."

Napster takes punishment

Napster was badly hit by the news as a day it announced deepening losses in its fourth quarter. Alongside a la carte downloads, Yahoo is offering a subscription-based service which significantly undercuts Napsters offering. The company's stocks fell $1.70 (26.77 per cent), closing at $4.65.

Napster investors are also considering the company's fourth quarter loss (despite significant revenue increases) of $24.3 million, compared to a loss of $6.6 million in the year ago quarter.

In an attempt to place a positive spin on the results and Yahoo's launch into the market, Napster CEO Chris Gorog said: "We believe the promotion of new subscription services by competitors will expand the market."

He added: "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 that consumers should expect rapid price increases."

Real, Loudeye, hurt too

RealNetworks also saw severe decline, with 21.1 per cent ($1.54) lopped off its share values, closing at $5.76. The company recently re-launched its three-tiered Rhapsody service: Rhapsody 25; Rhapsody Unlimited and Rhapsody To Go. The company last week announced its first profitable quarter since 2002.

Loudeye - which owns the UK's OD2 service - was less significantly affected, losing just 2.38 per cent of its value. However, Loudeye shares stand at a mere 82 cents each.