Apple has approved Rhapsody’s on-demand music streaming application, marking the second time in a week that the company has given the nod to a potentially competing music service on the iPhone and iPod Touch platforms.

The Rhapsody app—available immediately—is a free app that allows existing Rhapsody subscribers to stream any song in its 8 million track catalog, so long as they have the $15 a month Rhapsody To Go subscription. Non-subscribers will get a seven-day free trial. Users can also access and create playlists, add new tracks to their library accessible from the PC, and stream either their personal or Rhapsody-created radio stations.

What’s more, users can buy and download via a connection to the iTunes store, with Rhapsody acting as an iTunes affiliate. The company say it plans to upgrade the app in the future to allow subscription downloads to the iPhone as well.

The news comes just days after Spotify had its on-demand streaming app approved as well. Spotify’s app is live now only in Europe until the company makes the jump to the U.S. market, where at least for now Rhapsody has the monopoly. Rival Napster said it also has an iPhone app developed, but won’t submit it for approval until it can get better streaming rates from the music industry. It instead created a mobile website to access the service.

Rhapsody’s VP of business management Neil Smith explains his company's offer in greater depth in this exclusive interview, and will address the same issues as a panelist at Billboard’s Mobile Entertainment Live conference in San Diego Oct. 6.

So were you surprised the app was approved?

No. I was actually confident it would be approved because my personal feeling is that the App Store platform is probably a more important thing to Apple long-term than maintaining an unlevel playing field on their devices for their music store. They have enough confidence in iTunes that they’re not afraid to take on other music providers.

This is only a streaming app right? You can’t sideload subscription files to the iPhone?

There won’t be any sideloading, at least as far as we know. That’s not something we’re even talking to Apple about enabling. With respect to purchasing, if you press and hold [the track icon] you have the opportunity to buy from iTunes. So we link to the iTunes store for MP3 purchases. We figured most of the people who had an iPhone and iPod Touch were iTunes users, so it made sense for them to point to iTunes for purchase rather than have them come back to Rhapsody. It’s a standard iTunes affiliate thing. With respect to [subscription] downloads… we use Windows Media DRM. Obviously that’s not going to work on the iPhone. We need to develop a different technical solution for that. We’re looking into it and expect to come out with that at some point in the future. We figured it would be better to get the streaming app out and then add that later rather than hold off until the whole thing was ready.

Can you still stream music if the device is out of coverage?

No. But we’ve been playing with this for a long time, and despite the online horror stories about AT&T’s connectivity, we find that it’s actually not too bad.

Napster recently said it wouldn’t submit its iPhone app because the labels are charging too much to stream to mobile devices. Can you address the economics behind this at all?

I can’t speak to what Napster was trying to accomplish, but we found the labels to be pretty amenable in our outreach to them. This is a portable product, so it requires the portable tier. But within that construct in this case the labels were not particularly greedy. [In] our experience they were very reasonable. I think they in general agree this usage paradigm—where you can have the entire library in your pocket available over the air—is something that can help kickstart the adoption of the access model. They’re very interested in getting it out there. The terms they came back with were actually very reasonable.

Are the terms any different from streaming music online?

This requires the Rhapsody To Go tier. So to the extent that Rhapsody To Go is different from Rhapsody Unlimited, yes. But from our perspective, having the music on your phone is not much different that sideloading it to a Sansa. This was treated no differently than any other MP3 player.

How important is it to launch this in the U.S. before Spotify? That service has a lot of momentum you’re going to have to compete with when it goes live in this country.

From our perspective the reason Spotify blew up so big and so fast was it was free. That model isn’t going to happen in the U.S. anytime soon, maybe ever. The U.S. is the market where the labels make all their money. They can’t afford to have a service that doesn’t generate substantial revenues to them suck up all the usage in the United States. Don’t get me wrong, I recognize Spotify has a [fast] client, it’s fast and clean, but if it was $15 [a month] out of the gate, it wouldn’t have a million users. Once you take the free piece away, we compete pretty well. I don’t think we have any disadvantage.

Does this bring you any closer to offering a music subscription package through mobile operators, such as your partnership with Verizon Wireless?

We’ve been talking to the carriers, specifically Verizon, and the labels about bundles that would include this kind of capability for a while. The barrier there has been the disconnect between what the carriers can afford to underwrite as part of a data plan and what the labels expect to get paid. If those two numbers were the same, then this would have happened a long time ago and everybody who is interested in music and has a data plan through their carrier would be getting a great experience right now. It’s an economic issue.

But you’ve managed to work that out with AT&T to use this Rhapsody program on the iPhone.

The iPhone is obviously exclusive on AT&T for a while. But Android isn’t, Palm isn’t, RIM isn’t. All the major carriers have smartphones from one or more of those platforms. All those guys have app stores now and will have more apps in the next six months. We intend to go after all of them. The carriers have to decide whether music is important enough to their customer base to include it in their pricing or whether it’s something those who think it’s important will just go and get.

Smith is a panelist on the “Debate: Mobile Music’s Money Matters” panel at Billboard's Mobile Entertainment Live, taking place Oct. 6 in San Diego as part of the CTIA Wireless I.T. & Entertainment conference, where these and other topics will be explored. Other panelists include Shazam CEO Andrew Fisher, Nokia’s Adam Mirabella, Jim Ryan from Motricity and Paul Miraldi from Clear Channel Radio. A full agenda and registration details are available at www.billboardevents.com.