Telefonica tunes in Rhapsody's Napster for streaming music

Telefonica Digital, the digital arm of one of the largest telecommunications companies in the world, has picked Napster as the recommended streaming service for its business units, bringing Rhapsody's subscription music service to Latin America for the first time.

While limited in scope initially, the partnership means Napster will have a vocal advocate for it when Telefonica operating units -- such as O2 and Movistar -- pick a music service to bundle into phones.

At first, their alliance will mean Napster replaces Sonora, a subscription music service provided by Telefonica unit Terra in Brazil, Argentina, Colombia, Chile, Peru and Mexico. That moves Napster into Latin America, an area of rapid smartphone growth, for the first time.

The companies wouldn't specify Sonora's number of active users, but they generalized it is in the hundreds of thousands.

Rhapsody has more than a million paid subscribers globally. Telefonica had 317.3 million customers as of June, across 24 territories. Its main commercial brands are O2 in northern Europe, Movistar in Spain and Latin America, and Vivo in Brazil.

Telefonica can earn a minority stake in Rhapsody International as part of the partnership, but the companies wouldn't specify how large it could be or other financial terms.

After Rhapsody bought Napster in 2011, it kept quiet on the former peer-to-peer service that switched to above-board streaming service, until it announced plans to expand into 14 European countries from the UK and Germany in June.

Telefonica noted the Napster would help it connect with customers amid rapid growth in smartphones in Latin America, where the devices reach only about 20 percent of the market and are still growing at a quick clip. That compares to a percentage in the high 60s in Europe and the US, and growth is slowing. In addition, the beginning rollout of 4G mobile networks in Latin America means, for Telefonica, the region which can support services such as music streaming.

The idea is that as more and more people in the region adopt smartphones, the music streaming service could be a top factor in deciding which carrier to choose. Paul Springer, Rhapsody's senior vice resident and global head of product, said that in Latin America, about 70 percent of customers named music as one of the top features they require on a phone, versus about 40 percent or 50 percent in the US.

"Our understanding is that the Sonora base will place us at the top of all the services on a pure subscriber count, and that does not include other carrier deals we hope to have this year," he said.

The carrier partnership model of expansion has worked for some music streaming services before, including Rhapsody. In 2011, Rhapsody was bundled into the premier data plans of MetroPCS Communications, and it had deals with Verizon Wireless and AT&T that let users sign up and pay for their service via their mobile phone bill before that.

But Spotify may provide the clearest example of growing through telecom deals. Spotify rapidly ramped up to more than 6 million paid subscribers and more than 24 million active users by sealing partnerships with European mobile telecommunications companies like Vodafone, Orange, Telia and -- yes -- Telefonica. Spotify has launched in 32 markets, but telecom providers in the US haven't greeted Spotify as warmly: it hasn't sealed any similar deals yet in the US, but it has recently hired a new executive in charge of global business development to pursue just these kinds of deals.

Telefonica wouldn't specify which music services it considered before picking Napster, but said "it's safe to say we looked at all the major ones."

Updated at 6:24 a.m. PT: Added further details about the deal and context.