February 10, 2010, 12:00 AM

Rhapsody music service to become its own company by April

Facing a loss of subscribers and revenue, online music service Rhapsody America will become an independent company by April after being spun off by majority owner RealNetworks and MTV Networks.

Facing a loss of subscribers and revenue, online music service Rhapsody America LLC will become an independent company by April after being spun off by majority owner RealNetworks Inc. and MTV Networks, according to a filing this week with the U.S. Securities and Exchange Commission.

RealNetworks, No. 96 in the Internet Retailer Top 500 Guide (a PDF version of the company’s financial and operating profile can be ordered by clicking on its name), owns 51% of Rhapsody, while MTV parent Viacom International Inc. owns the remaining 49%. RealNetworks will contribute $18 million in cash to the reformed Rhapsody in exchange for convertible stock. MTV will provide advertising support. RealNetworks and MTV each will own less than 50% of the spin-off, with minority investors holding the remaining stake.

“Separating Rhapsody into its own independent company is a significant first step in making RealNetworks a more focused and profitable company,” says Robert Kimball, president and acting CEO for RealNetworks. “Rhapsody will be the largest pure-play digital music service in the market. We have provided Rhapsody with the right team and financial and intellectual property assets to succeed in the competitive market for digital music.”

RealNetworks is scheduled to report fourth quarter and full year results for 2009 on Thursday. At least 700,000 music fans subscribed to Rhapsody as of Sept. 30, down 6.7% from 750,000 subscribers for the same date in 2008. The company has said it expects music revenue to decline in the fourth quarter.

For the third quarter, RealNetworks reported:

  • Revenue from digital music sales and advertising on music web sites declined 6.7% year-over-year, to $38.8 million from $41.6 million.
  • Total sales declined 7.7 % year-over year, to $140.3 million from $152 million.
  • A net loss of $4.3 million, down from $16.8 million for the same period in 2008.

Besides falling revenue, the company also has weathered management changes. In January, Rob Glaser, RealNetwork’s founder and CEO, stepped down from the post, though he remained board chairman. Also that month, Mike Lunsford, who oversees Rhapsody, took on the job of executive vice president of the technology products and solutions and media software and services divisions for RealNetworks. A Rhapsody spokesman says the spin-off was in the works prior to Glaser’s departure from day-to-day operations, and that Lunsford and the rest of the Rhapsody management team will remain.


The spun-off Rhapsody will be governed by a board of directors that will include two members appointed by RealNetworks, two members appointed by MTV and one member agreed to by both companies.

Rhapsody offers downloads of 8 million songs. Consumers can buy Rhapsody subscriptions for $12.99 or $14.99 per month. Rhapsody has tried to steadily increase the services it offers to subscribers, including the launch last fall of a mobile app that enables subscribers to access Rhapsody songs via Apple Inc.’s iPhone and iPod Touch. RealNetworks is No. 5 in the Internet Retailer Top 500 Guide.

The spun-off Rhapsody will have to offer consumers more, says Sonal Gandhi, an analyst at Forrester Research. “In order to succeed, even to continue, they need to give people more for their money,” she says. “There is too much free music out there. Why pay when you can get it for free?”

Competition will continue to come from the likes of Napster, acquired in 2008 by RealNetworks, No. 10 in the Internet Retailer Top 500 Guide. The online music service in May began offering customers a $5 monthly subscription that allowed downloads of five songs and unlimited streaming to a consumer’s PC. For Rhapsody, offering beefed-up services and better deals to consumers will depend largely on how well the company negotiates with music owners, Gandhi says. “A lot depends on what they can get from the labels.”

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