RealNetworks makes key play with Rhapsody spinoff

Excerpt from the blog

RealNetworks announced Tuesday it's going to restructure Rhapsody and spin off the subscription music service into a stand-alone company.

The Seattle company is the majority owner of Rhapsody, which is also partly owned by MTV. The venture was formed after Real bought Rhapsody — formerly Listen.com — in 2003 for about $36 million.

Rhapsody sells monthly subscriptions starting at $13, providing unlimited access to a vast library of digital music.

The subscription approach didn't catch on as Apple came to dominate the music business with a model selling individual tracks. But some have speculated Apple could enter the subscription business itself and invigorate the approach.

Meanwhile, subscription ventures are in fierce competition with ad-supported services offering free music online and with competitors such as Best Buy's Napster service, which undercut Rhapsody's price.

Subscriptions to Rhapsody have settled at about 700,000 after peaking at more than 800,000 in the first quarter of 2009.

The spinoff is the first major change since a Jan. 13 executive shake-up at RealNetworks in which founder Rob Glaser passed CEO duties to chief counsel Bob Kimball. That was presented as the beginning of an effort to restructure Real to focus on core businesses.

Real's remaining operations include its music business selling digital content, ads and other subscriptions; PC and mobile games; media software including RealPlayer; and technology services and products sold to corporations.

"Separating Rhapsody into its own independent company is a significant first step in making RealNetworks a more focused and profitable company," Kimball said in a news release.

"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."

Rhapsody will be based in Seattle and have about 150 employees, including current Rhapsody staff and some members of Real's music group, which will move to the new company. The total includes a San Francisco office that has fewer than 50 employees.

It's a complicated deal. Kimball told employees in an e-mail Tuesday that "it was brain surgery trying to disentangle a decade-old music business from the rest of Real." But basically Real and MTV's parent, Viacom. are unwinding a partnership that split their ownership of Rhapsody 51 to 49 percent.

When it's done, sometime in the first quarter, both companies will own an equal number of shares in Rhapsody.

Real is contributing $18 million and the Rhapsody brand, and MTV is contributing $33 million worth of advertising support (and canceling a $111 million advertising commitment to Rhapsody).

How the deal will affect Real's earnings will be discussed in a conference call with investors Thursday, spokesman Ryan Luckin said.

Asked if Rhapsody is being positioned to go public or to be acquired, Luckin said the plan is to set the venture up to operate as a stand-alone business.

"It's got the IP [intellectual property] and the cash to go forward and try to be successful in the digital music space," he said.

At the end of 2008, the Rhapsody America venture with MTV had lost $17.8 million and had remaining equity of $384.3 million, according to Real's November earnings report.

Being removed from the RealNetworks umbrella will give Rhapsody more flexibility to partner with other companies, Luckin noted.

Subscribers to Rhapsody won't see a change, he said.

RealNetworks stock closed Tuesday at $4.16, up 2 cents. The spinoff announcement came after the markets closed. In after-hours trading, the stock jumped more than 10 percent to $4.59.

This material has been edited for print publication.

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com.