Business Matters: How Rhapsody Got to 1 Million Subscribers
Business Matters: How Rhapsody Got to 1 Million Subscribers

Rhapsody Continues Rapid Subscription Expansion
-- Music subscription service Rhapsody announced Thursday it surpassed 1 million subscribers, just one week after its tenth anniversary. This latest milestone shows the company has increased subscribers by 25 percent since its June 11 announcement of the 800,000 subscribers. The company now claims to stream an average of more than 10 million songs a day.

So what's behind this surge? A Rhapsody spokesperson offered three factors without breaking down the impact of each: the Napster acquisition that closed on November 30, Rhapsody's partnership with mobile carrier Metro-PCS and organic growth.

Looking at the timeline of digital music and consumer technology products, it seems clear that Rhapsody turnaround has been aided by two other factors: the introduction of the iPhone and the greater awareness of subscription services following Spotify's launch in July.

Without the iPhone and the resulting rise in smartphone adoption, Rhapsody would not have the platforms to launch its mobile offerings. Since Rhapsody's mobile offering was tied to unpopular devices (Sandisk's MP3 players could never match the iPod) and cumbersome DRM restrictions, the service's value was mostly confined to PC and home usage.

Then came the app revolution. Being able to offer the service on Apple mobile devices was a breakthrough. Although Rhapsody still uses DRM - as do other subscription services with mobile plays - the introduction of mobile apps on the iOS and Android platforms allowed customers to enjoy a better experience on far more popular devices.

Indeed, mobile has become a key growth driver. The service is now available on more than 60 devices, and the company claims that 40 percent of its streams in 2011 came from mobile - the first a majority of playback came on a device other than a PC.

The second factor can be traced by Spotify. Rhapsody's recent surge also coincides with an overall improvement in consumer adoption and awareness in the subscription model, and that can be attributed to Spotify's long-awaited launch in the U.S. Subscription is not a zero-sum game. Rhapsody has added subscribers as Spotify, Mog, Rdio and Cricket's Muve Music have pulled in music fans to the subscription model.

A pessimist might look at Rhapsody's subscriber count, compared it to that of Spotify and note that the younger of the two has done more in less time. Spotify announced in mid-October it had reached 250,000 U.S. subscribers -- just a quarter of Rhapsody's current count but impressive considering Rhapsody had a 9.5-year head start.

But an optimist would note Rhapsody's turnaround in recent years. By the time RealNetworks spun off Rhapsody in the first quarter of 2009, the service had around the same number of subscribers it had a year and a half earlier. According to RealNetworks' supplemental financial information for the third quarter of 2009 (the last date for which these numbers were made public), Rhapsody subscribers grew from 600,000 in first quarter of 2008 to 800,000 in the first quarter of 2009, then fell to 700,000 two quarters later.

Rhapsody's subscription revenue grew from $115 million in 2007 to $128 million in 2009, according to RealNetworks' 2009 annual report, mild growth considering the events during that time: the migration of Yahoo! Music subscribers, a partnership with Verizon Wireless and MTV Networks, and the launch of an MP3 store that included a broad advertising campaign - even TV commercials.

None of these factors had a noticeable impact on subscription growth. At best, they covered up the fact that Rhapsody would have otherwise lost subscribers. While Rhapsody's average number of subscribers grew from 2008 to 2009, the company experienced "a sequential decline in the average number of subscribers during 2009" (2009 annual report).

Today Rhapsody has found what it lost years ago: momentum. It is positioned to ride the wave of interest in subscription services. It has numerous partnerships and distribution to dozens of devices. And it has a decade of accumulated knowledge. On a whole, the optimist probably has more to celebrate than the pessimist.

Moontoast Names New Vice President of Product
-- Moontoast has raised $1.5 million out of a $6 million equity raise, according to a report. The Nashville-based company, named by Billboard as the #2 music startup of 2011, provides direct-to-fan commerce solutions and is especially interested in turning social media platforms into viable sales channels.

On Tuesday Moontoast announced the naming of Errol Apostolopoulos as Vice President of Product. Prior to joining Moontoast, Apostolopoulos was the Head of Innovation at e-commerce solutions provider Optaros Inc. ( Venture Nashville)

Potential New Law Highlights Potential Optimism Bias in Music
-- A few U.S. legislators are considering a law that would mandate artists get a 5-percent commission on the resale of their artwork. Not for musicians, however. This would apply only to visual artists like painters, not musical artists. California already has this law on its books. Now Representative Jerrold Nadler, Democrat of New York, and Senator Herb Kohl, Democrat of Wisconsin want it to go national.

But there is a lesson here that can be applied to music. The always insightful Freakonomics blog picks up the topic and predicts the law would hurt artists. But the real food for thought - for both visual and musical artists - comes in the Freakonomics authors' discussions of optimism bias, the tendency to assume success is far more likely than it really is. An excerpt from the post:

"On average, Authors were willing to sell their chance of winning the haiku contest for $22.90. But Bidders' average willingness to pay was only $10.38. These results are consistent with the hundreds of other studies that have confirmed optimism bias in a wide variety of settings. Authors believed that they were roughly 30% likely to win a contest where in reality they had, on average, a 10% chance. They were irrationally optimistic."

Is there an optimism bias in music? Perhaps. Some labels and artists price music according to a perceived fairness. Certain prices are ascribed to products -- $15 for a CD or $9.99 for a digital album - based on the value they want to place on their creations. But when there's little interest in a particular artist, price is one variable that can be used to capture scant consumer demand. Thus, the need to move product can help an artist or label overcome optimism bias.

Optimism bias may also take shape in other ways. Some artists - namely Coldplay and the Black Keys - are popular enough with music buyers that they can hold back their music from streaming services in order to drive consumers to purchase downloads or physical product. But most artists lack such popularity and don't have such power to dictate the ways in which consumers experience their music. For them, just being able to be found and heard on a streaming service may outweigh whatever benefit they might obtain from withholding their music from those services. Thus, there could be some danger in being overly optimistic about your fans' desire to buy rather than stream.

But optimism bias can be overcome, although it's easier at the individual level than the retail-level. One example is the "pay-what-you-want model" popularized by Radiohead's "In Rainbows" and employed by direct-to-fan services such as Bandcamp and Topspin. By placing the pricing decision in the hands of the buyer, an artist need not risk losing sales to the different between perceived value and actual demand. ( New York Times, Freakonomics)