Some Thoughts on Rhapsody, iTunes, and the Future of Digital Music

9/10/09

It can’t hurt for Rhapsody to offer an iPhone app. However, they are going to have to compete with rampant iTunes, Pandora, and rampant piracy. While Pandora has a paid option, their free option satisfies many of the needs mobile users have for music. If RealNetworks offers a similar “free” option, it could provide a natural up-sell path to a paid subscription. Further, having such a free version, combined with MP3 music download micro-purchases, could boost the sales of both their subscription services and their MP3 sales. That would be goodness.

As I see it, subscription services for music, while viable, is going to be a relatively small niche of the music business. Users are pursuing music across multiple devices, and the burden to carry DRM [digital rights management] along with the music creates adoption hurdles that limit the size of the total addressable market.

If you look at Rhapsody subscription growth, it is largely driven by inorganic customer acquisition. The integration of Yahoo! Music Unlimited customers and Verizon Wireless probably accounted for all the growth, possibly offsetting declines that would have otherwise occurred. I think this is a mixed signal. On the one hand, at best there has been little to no growth in the business in the prior six months. On the other, adding new modes of consumption, like Verizon Wireless mobile devices, has resulted in some growth. Though they did not split-out the latter in their last quarterly report, I suspect that most of the growth in the six month period ending on June 30th was probably the result of the Yahoo! Music Unlimited integration.

Bill Baxter is chief technology officer at Seattle-based BuddyTV. Follow @

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  • Joel

    Any idea what the subscriber base of Rhapsody is? I think it’s a great service for music enthusiasts (esp. the Rhapsody On the Go service). Walking in to Best Buy the other day though makes me think this service may not be around much longer.

  • Bill Baxter

    That’s a great question. Since the spin-out of Rhapsody and the formation of the entity with MTVN and the incorporation of Yahoo! Music Unlimited subscribers as well as Vierizon Wireless, it is hard to assess. However, if you read the 10Q carefully, you can see that the revenue is the Music line is 82% of the total. Assuming an ASP of $13.99/month for this, that would result in approximately 790K subscribers. Let’s say their ASP is smaller, maybe $10/month. That would yield on the order of 1.1M So I think a range of 790K to 1.1M is probably right.

    Who knows if their model will evaperate. Maybe with MTVN behind the venture, it will gain some momentum.