MTV and RealNetworks: A sound decision?

The new Rhapsody America squelches an off-key alliance with Microsoft. Now it's got to take on Apple.

It makes sense that RealNetworks and MTV are partnering with one another--they have a lot in common.

Both companies linked up with Microsoft and had high hopes for the marriage. But both found their partner to be less than faithful. Jilted by Redmond, they hope to find in each other a more stable companion.

Of course, the RealNetworks-MTV alliance, called Rhapsody America, is not about the one they have loved and lost, but the one who has rebuffed them altogether--Apple.

For years, companies big and small, alone and with various partners, have sought to rival the iPod-iTunes combination. Yet, they have had little success. Having sold 3 billion songs, Apple is not only the largest digital music store, but one of the biggest music stores in the U.S., surpassing and Target.

Indeed, it was Microsoft's desire to dethrone iTunes that led it to RealNetworks in the first place, and later to MTV.

RealNetworks' relationship with Microsoft on the music front began in acrimony. Its partnership with MSN Music was part of a broad antitrust settlement between the two Puget Sound rivals. As part of that pact, announced in October 2005, Microsoft agreed that no music service would be promoted more heavily on MSN than RealNetworks' Rhapsody.

That narrow wording left Microsoft with plenty of room for dalliance, and the software maker quickly started making the rounds in search of other companions.

At the Consumer Electronics Show in January 2006, Microsoft announced it was working with MTV to co-develop a music service called Urge that would be built into the next version of Windows Media Player, though Rhapsody continued to be touted some on MSN.

Almost as soon as it was announced, though, Microsoft's eye wandered again, this time turning inward. In June 2006, the company confirmed it was planning the Zune, which would have its own service to rival Urge.

With painful Microsoft memories fresh in their mind, MTV and RealNetworks are taking no chances this time around, signing a prenuptial agreement of sorts. As part of their joint venture deal, the two companies agreed that the service "shall be the exclusive offering of its type with respect to digital audio music by each of (MTV) and Real for a multiyear period for online, Web-based service offerings and mobile-based service offerings."

The terms of the deal, filed with the Securities and Exchange Commission on Tuesday, also stipulate what each is bringing to the marriage. RealNetworks is contributing, among other things, its existing Rhapsody service and subscribers, the Rhapsody brand and Web address as well as its distribution agreements and some cash. MTV is also throwing in cash, as well as a five-year, $230 million note and its Urge subscriber base and content.

The two companies are also trying to head into an area where Apple has been less prominent--putting music on mobile phones. That's where their third partner--Verizon Wireless--comes in. As part of the deal, Verizon plans to start sending a duplicate copy of songs bought over the air to a customer's Rhapsody account. Rhapsody users will also be able to transfer subscription content onto Verizon phones.

Still, calling the iTunes store a force to be reckoned with would be a dramatic understatement. According to the NPD Group research firm, the online music retailer first made its way into the top 10 leading music retailers in the third quarter of 2005, joining the likes of Target, Tower Records and Borders.

As of July, Apple was citing NPD statistics stating that only Wal-Mart Stores and Best Buy still sell more albums than iTunes. When it comes to online music stores, NPD found that iTunes captured 70 percent of the market share for single-track downloads to PCs in 2006; eMusic, which sells only songs without digital rights management software from independent labels, came in second with 10 percent, and Napster came in third with 4 percent. Rhapsody and MSN Music tied for fourth place with only 3 percent of the online music market share.

That's not to say that others don't still have iTunes in their sights. Wal-Mart announced Tuesday that it will start selling MP3 music tracks without digital rights management software, meaning that such songs can play on a wide range of music players including Apple's iPod. Apple also sells some DRM-free tracks from EMI, but charges $1.29, versus the 94 cents that Wal-Mart is touting. Wal-Mart is offering tracks from Universal Music Group, which is selling its library in MP3 format from several online stores, though notably not through iTunes.

Wal-Mart also sells music in Microsoft's WMA format for 88 cents a track, while Apple charges 99 cents for tracks encoded in its FairPlay digital rights management technology.

CNET's Caroline McCarthy contributed to this report.

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