Is it time for RealNetworks to Switch Gears? That's the headline of an article at the New York Times that questions the strategies and relevancy of RealNetworks, which operates the Rhapsody music store and subscription service. In the piece, Brad Stone portrayed a company that may be losing momentum.

Companies can be ahead of a new technology wave but fail to catch it if they hew too closely to what made them successful in the first place. Another lesson is that entrepreneurs who have battles with established rivals, even if they think they are correct on the underlying issues, can end up losing out in the long run.



Was Real, asked Stone, sticking too long with the technologies that made it successful? He pondered what Rhapsody means about Real's vision of digital music service. And he examined Real's commitment to the Real player in an era of browser-based alternatives. Both are fair topics in a marketplace that demands growth and innovation from technology companies.

To its credit, RealNetworks has weathered the digital music storm all decade. Its main music offering, the Rhapsody subscription service, has about 800,000 subscribers. The service has two offerings: $12.99 per month for unlimited streaming and $14.99 per month for unlimited streaming and tethered downloads. The service has been upgraded and slightly retooled over the years but its basic form, function and target market have changed little. The company has built many partnerships: Verizon, Sonos, iLike, MTV and others. In Verizon it has a mobile partner that can help with marketing and customer acquisition. In MTV it has a strong promotional partner. In Sonos it has a valuable hardware partner who caters to higher end digital music customers.

Stone found a few critics of the company that questioned its strategies and competitive position. Gartner analyst Mike McGuire questioned Real's strategy for the Real Player. "Sticking to your guns is one thing," he said about the new version of Real Player, "but it's another to say, let's add features because we can, and because consumers should want this." Barbara Coffey, an analyst at Kaufman Brothers, thinks a media company like Real with several huge competitors isn't in too comfortable of a position with $370 million in cash.

A big issue facing Real is Rhapsody's growth potential, which is tied to the fortunes of the subscription business model. With so many less expensive options already at market and on the horizon, an established, mature and paid music service faces moderate, not enormous, growth potential. A good portion of Rhapsody's growth will be a function of its partnerships, not the product. The free Rhapsody.com site, which offers up to 25 free streams per month, and the Rhapsody MP3 store, launched in the summer of 2008, are meant to be stepping stones to the core product, the subscription service. And that core product needs partnerships to create enough value to lure more customers.

Growth for the subscription service has a few other issues outside of competition from free services. One hurdle is the small potential market. A paid subscription service appeals to the sort of heavy users who care about thoughtful editorial and guidance through music’s rich history. The other issue is the trend toward online locker services that host or stream users’ entire collections. A US Court of Appeals decision on Cablevision’s Remote Storage Digital Video Recorder, which the U.S. Supreme Court refused to consider, should usher in a new era of streaming services. Cablevision’s technology is a cloud-based DVR that allows users to record television shows without a set-top box. While Rhapsody tempts users with unlimited access to millions of songs, a cloud-based locker has serious potential if a good interface is built upon it. Rhapsody is great for more adventurous users, but mainstream music listeners are hardly adventurous. Why pay for access to millions of songs you won’t even hear?

As the words "free" and "freemium" are on the tips of everybody's tongues, it's almost strange that Rhapsody comes off as a wise, old sage amongst unproven upstarts and failed attempts. Spiral Frog, an ad-based service that offered free, tethered downloads, met its demise earlier this year. Qtrax, the other great hope for free services, has little chance of remaining a going concern. As for Spotify, the current darling of music streaming apps, a recent report at The Register claimed Spotify it generates 17 pence (US $0.28) per UK user per month in advertising revenue. Less than 4% of its users had upgraded to the paid-for, premium version. At $12.99 to $14.99 per month per user, Rhapsody can live without being the flavor of the month. If making money from the non-payers is so difficult, perhaps it's best to stay with a product aimed at paying customers. Although non-payers may outrank the payers by a factor of ten or 20, payers can provide steady, if un-sexy, business.

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