Whenever we utter the words ‘iTunes killer’ (or iPod or iPhone) we always say it with a pinch of salt ‘ the ‘i’ products from Apple are largely not for killing, at least not for a while.
So when, in 2007, we and everyone else talked about the RealNetworks deals with MTV Networks (MTV) and Verizon Wireless, to take the subscription Rhapsody service and put it up against the AT&T supported iTunes service, we fell well short of calling it an iTunes killer.
What we said instead at the time was that any music service that did not find outlets through either cellular operators (or by association handset vendors) would struggle.
The extent of the truth of this statement is perhaps shown in the latest change of fortune to come out of Rhapsody (now Rhapsody America), in which RealNetworks is losing majority control of the service.
Going back to 2007, the deal was simple, Verizon Wireless would ensure sales, by throwing away its music service and offering the new MTV backed Rhapsody as its VCast Music. MTV would put in money, and merge in the rights from its own rival service, and Rhapsody would be
contributed by RealNetworks, who would own 51%.
It was thought that the global distribution of MTV, which operates on 135 television networks around the world and reaches 500 million people would have provided a basis for recommending the Rhapsody service, but so far this has not materialized because largely it hasn’t spread.
Now 30 months on, the plan does not seem to be working. The two part owners of the service are reconstructing their deal, all in favor of MTV, which will now stretch its ownership to take equal control with RealNetworks and all the call and put options that RealNetworks had to repay MTV debt and take back ownership 100% – are now dropped. A third party will take an unspecified number of shares, and both RealNetworks and MTV will go below 50%. The board will be made up of 2 members nominated by each side and a 5th independent member that they have to both agree on, presumably from the third party.
The newly formed company from all this will operate independently from its parents, which means that RealNetworks management will not operate it on its own. RealNetworks will have to put in more money as well, some $18 million, which goes some way perhaps to rebalancing the equity equation where, MTV put in a $230 million five year note in debt funding. As of September 30 only $91.3 million of that debt had been called down.
RealNetworks had to repay all the money on that loan note and wait until 2011 before it could invoke an option to buy back control 100%. That option has now gone and the two will retain equity parity. For a while longer at least.
What is interesting is how the Rhapsody America service has fared throughout the recession. RealNetworks filings show that its music segment totaled $2.8 million for its last reported quarter, the third quarter 2009. Numbers are due any day for its next quarter. It attributed the drop in music segment numbers to a loss of Rhapsody subscribers, and this is now nothing like a challenge for iTunes, and not a viable music service for Verizon to retain in the long term. It certainly cannot be keeping Verizon subscribers from deserting to AT&T, and if and when Verizon takes the iPhone, this could leave Rhapsody dead in the water.
The failure to internationalize the service and announced new operator deals across Europe is perhaps key to the failure of the service.
Over a year ago the highly publicized other US online music rival, Napster, was sold off to Best Buy, for $121 million after subscriptions declined to 700,000. God knows what they are down to today. Napster was doing fine in selling music subscriptions until each of the strong players aligned with mobile operators and then its revenues dropped like a stone. The fact that Nokia and Sony Ericsson both launched their own music portals would not have made a dent in US revenues for Rhapsody, because they are only strong outside the US, but they will both have denied it some international opportunities.
RealNetworks will keep a $10 million preference over MTV if the company is sold or liquidates and some of the $18 million it is paying is to repurchase its international radio business from the combined venture. MTV will now guarantee $33 million advertising, to replace an advertising commitment of $111 million.