Billboard analyst Glenn Peoples predicts that RealNetworks will sell its 51 percent stake in music-streaming subscription service Rhapsody in 2010. My question: who'd buy it?
Rhapsody certainly appears to be a drag on RealNetworks' earnings. According to the company's financial filings for the third quarter of 2009, its music businesses--which include Rhapsody and sales of music through the RealPlayer store--posted an operating loss of $10 million. That's better than the $25 million operating loss in the same quarter of 2008, but the fundamentals aren't improving.
Subscriber numbers are down from about 800,000 at the beginning of 2009 to about 700,000 at the end of September. Revenue was down about 7 percent from the previous year. Gross margins are the lowest of RealNetworks' four business segments, thanks mainly to content licensing and delivery costs. The company is bound by its agreement with MTV Networks, which owns the other 49 percent of Rhapsody, to spend more than $200 million on advertising with MTV over the course of their agreement--an additional expense. On a strict financial basis, this is a tough business to justify.
The replacement of founder Rob Glaser with a new CEO, Robert Kimball, on Wednesday could pave the way for a sale. But to whom? One candidate would be MTV, the other partner in the joint venture. But after , I wonder if MTV might be getting cold feet as well--as Peoples points out, online music sales work best as a loss leader for other products, such as iPods and iPhones for Apple or consumer electronics gear for Best Buy (which owns Napster). Without guaranteed advertising payments from RealNetworks, how will MTV do any better running Rhapsody on its own than it did during the partnership?
I see two better candidates: Apple and Google. Apple could combine Rhapsody's technology with iTunes and its recent acquisition of Lala to give consumers ultimate flexibility in how they buy and consume music on their iPhones and iPod Touches--single-song downloads, cloud-based music storage, and on-demand streaming would all be available. Google could use Rhapsody, which is for Android phones, to improve Android's music story--imagine it as a sort of turnkey answer to the iTunes Music Store, although it would be up to Google to figure out how and whether to add single-song downloads in addition to subscription services.
More importantly, both companies have the cash flow to keep supporting Rhapsody at its current burn rate, the brand mojo and advertising budget to push it into the mainstream, and big revenue streams--hardware for Apple and advertising for Google--that could justify the investment.