Rhapsody at 10 Years: Surviving Long Enough to Face a Herd of New Competitors

11/30/11Follow @curtwoodward

Being too early with a concept is one of the more frustrating ways that an entrepreneur can wind up going bust. But a decade after emerging as one of the original subscription music services in the U.S., Seattle’s Rhapsody is still around.

That survivor story includes a pretty twisted ownership history, as Rhapsody evolved from an acquisition by RealNetworks (NASDAQ: RNWK) to its current position as an independent joint venture between Real and MTV Networks.

And it’s lived long enough to see its way of doing come back into style. These days, Rhapsody is facing off against a surge of buzzworthy competitors, like Spotify, which are banking on a similar mechanism—monthly payments from consumers who want access to a huge pool of on-demand tunes.

As it gets ready to celebrate its 10th anniversary this week—festivities include a concert from indie rockers Built to Spill—Rhapsody CEO Jon Irwin offered up some insights about the past and future of streaming music.

My first question for Rhapsody has always been whether the company will move to a freemium model—it famously has stuck to paid subscriptions as its default, even as new challengers like Spotify or Pandora have entered with a free, ad-supported tier to get people in the door.

Jon Irwin

Irwin didn’t dismiss a freemium model as something that would never happen at Rhapsody. But he labeled it a kind of gimmicky move to grow users, basically “a gamble based on venture capital.”

That’s because services offering a no-cost entry-level service still have to kick in fees to the music labels for the rights to their songs, Irwin says, which only increases the pressure to convert freeloaders into paying subscribers. That can lead to limits on how many songs a user can access, or where they can play the music, or how freely they can navigate the full music library.

Rhapsody, on the other hand, focuses on offering free trials to get new users. Irwin says that’s a much more straightforward way of adding legitimate, paying subscribers than a free tier with hurdles and restrictions.

“We have the ability to pivot to that if we want. But I’m about creating shareholder value, which means I’m going to continue to grow my base as sustainably as possible,” Irwin says.

That base was last publicly disclosed at 800,000 subscribers, and Irwin said there won’t be a new number released until early next year. Part of the hesitance is that Rhapsody is finishing up its deal to absorb the subscribers of Napster, another pioneering online music brand from the turn of the millennium.

Spotify, by way of comparison, says it now has 2.5 million paying subscribers, up from 1.6 million when it rolled out the service in the U.S. in mid-July. Its base built in Europe, where Spotify started before emigrating across the Atlantic. Coincidentally, Rhapsody’s purchase of Napster means the U.S.-based music service is headed for Europe, since the deal included an option on Napster subscribers in the United Kingdom and Germany.

Irwin pointed to innovative partnerships in mobile as a source of growth for Rhapsody in the future. The company recently announced a partnership with Metro PCS, a small wireless carrier which sells pre-paid cell phone plans. Rhapsody can now be bundled as a baseline feature for MetroPCS subscribers, putting music streaming into a market that might not use the service if it were billed separately.

“You pay for your unlimited voice, unlimited text, unlimited web—now you get unlimited music,” Irwin says. And the concept is being embraced by the music labels, Irwin says, as they look for ways to sustain an industry that has seen its fundamental economics implode over the past decade.

“That brought a whole new demographic to the digital music economy,” Irwin says. “It’s not a base that is purchasing songs on iTunes … They were probably still obtaining their music illegally, or just listening to Pandora, where there’s a limited catalog, where there’s no flexibility.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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