Taking the Wraps off the New Rhapsody

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Transition from Subscriptions

Until this point, Rhapsody has generally been known as a subscription service, where customers buy memberships for a monthly fee, usually $12.99, then check out music from the service and listen, mostly from their PCs. The company says it delivers about 5 million songs a day to its subscribers. For $2 more per month, customers can put their music on portable digital players, including those from SanDisk (SNDK).

Rhapsody has also been available via other networked devices, like Tivo's (TIVO) set-top TV boxes and Sonos' ZonePlayer devices, among others.

Despite its inroads with various devices, Rhapsody has generally struggled to gain traction against Apple and iTunes. Gartenberg says even by offering DRM-free MP3 songs, making bold gains may be hard.

"For most people the DRM argument is not important. As long as what they are getting from iTunes works on their iPods and iPhones, they're happy and really don't care about whether or not a song has or doesn't have DRM protection," points out Gartenberg. Still, it is likely to boost some sales that otherwise would have been lost to iTunes.

RealNetworks executives say it's not uncommon for Rhapsody customers to first find music they like on Rhapsody and then buy it on a permanent basis on iTunes. Adding the option to purchase iPod-compatible MP3 songs makes it more likely that those sales will be completed on Rhapsody and not on iTunes. "This is the first time we have been able to go directly after the iPod audience," says RealNetworks Vice-President Neil Smith.

The Verizon Key

Getting its subscription service available to millions of Verizon Wireless subscribers via the V Cast service could also potentially widen Rhapsody's reach, says Jupiter's Gartenberg. "Verizon's 3G wireless network is more than adequate to handle the demands of the service," he says. "It essentially means that Rhapsody's 5 million songs will be available on Verizon phones. It could turn out to be significant because it gets Rhapsody off the computer and off the various niche devices it works with and onto mainstream consumer electronic devices."

Verizon Wireless—a joint venture of Verizon Communications (VZ) and Vodafone (VOD)—offers several phones from Motorola (MOT), Samsung Electronics, LG Electronics, and others that work with the V Cast service, which is offered on top of its basic voice service plans.

RealNetworks' tieup with Verizon is a culmination of an alliance that was first announced last year. Real, Verizon, and Viacom's (VIA) MTV Networks said they would team up to create an integrated online music service. Since then Rhapsody took over the operation of MTV's then-fledgling online music store. Earlier this year, RealNetworks acquired the assets of Yahoo Music (YHOO) and has been migrating its customer base to Rhapsody.

Hesseldahl is a reporter for BusinessWeek.com.