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Can $10 Rhapsody service mount comeback?

Rhapsody is out on its own now, but the music industry is steaming toward cloud-based subscription services. There's opportunity here.

The ailing Rhapsody music service that Viacom and RealNetworks failed to revive starts going it alone this month. The newly independent company will partner with a major music label this time around as well as slash monthly music prices from $15 to $10.

In February, Viacom and Real announced they would spin off the jointly run music subscription service and that they would sell a minority share while each held on to 47 percent of the company's stock. On Monday, Rhapsody said that Universal Music Group, the largest of the top four recording companies, has acquired a stake of just under 5 percent. An undisclosed entity acquired an even smaller amount.

The news comes at what could be an opportune time for Rhapsody. Technology companies and the large record labels are gearing up to try to shift music-listening habits toward subscription services, specifically those that live in the cloud.

For people who may have forgotten about Rhapsody, or for that matter subscription music services, the company charges a monthly fee in exchange for unlimited access to millions of songs from the major and indie labels. Rhapsody's users have dwindled for years as the number of the ad-supported sites (YouTube) and online radio services (Pandora) have expanded.

In 2009, Rhapsody lost 125,000 of its 800,000 subscribers.

An all-you-can-eat music buffet is an idea the recording industry has pushed for years, but one that consumers have rejected. Russ Crupnick, a senior analyst with research firm NPD Group, said only 3 percent of the Internet population subscribes to music services.

Compare that with the 19 percent who download songs from a la carte services such as Apple's iTunes and Amazon, or the 25 percent who favor streaming music from the likes of MySpace Music and Pandora. The real surprise in NPD's stats is that 40 percent of the Internet population now listens to music via YouTube and other video sites, Crupnick said.

"I was surprised enough by that number that I asked my daughter Lauren about her listening habits," Crupnick said. "Sure enough, she said 'I don't buy from iTunes anymore. I just listen to YouTube.'"

It's these free-to-consumer, ad-supported sites that apparently whittled away at Rhapsody's subscriber base. But the big knock on subscription services has always been that once customers stop paying the monthly fees, they lose their libraries. Few people, it seems, want to take on that risk.

Rhapsody needs cloud strategy
Many in digital music believe that consumers might feel better about subscription services if the fee were between $5 and $10 per month, and if these services could offer more than just unlimited access to songs.

Say Rhapsody offered customers the ability to store copies of their music on the company's servers and enabled them to access their songs from any Web-connected device? This is the so-called cloud feature, or the long-dreamed-about jukebox in the sky.

Apple is working on a cloud offering and Google has at least considered it, music industry sources have told CNET. Longtime tech entrepreneur Michael Robertson founded years ago and his cloud venture is up and running, although it faces a copyright legal challenge from music label EMI.

If the music business heads this way, there could be opportunity for Rhapsody.

NPD estimates that the average iTunes user spends $50 annually on music. Why can't Rhapsody tell customers: give us that same $50 and you still won't get ownership, but we'll give you an ocean of music that you can access anywhere, anytime, from any device? I don't know that consumers will go for it, but it's a better pitch than the one they're selling now.

Here's something else Rhapsody might be able to build on: music subscribers spend.

While Rhapsody lost 15 percent of its user base last year, the people who have up to now paid $15 a month are the hard-core fans. They are much more likely to dip into their wallets for concert tickets, music-affiliated merchandise, and even song downloads, according to Crupnick.

Crupnick said: "These services have found a small niche of highly valuable and highly engaged music customers."