The Deal: Telefonica Is in Rhapsody

WHAT: Rhapsody International, which operates as Rhapsody in the United States and Napster in international markets, has struck a deal to offer its Napster digital music streaming service to Telefonica's 200 million Latin America customers. As part of the deal, Telefonica will be able to earn an equity stake in Rhapsody International as subscribers grow. Napster will replace Telefonica's existing Sonora service beginning Nov. 1. Sonora was already one of the largest subscription services with hundreds of thousands of subscribers in Brazil, Argentina, Colombia, Chile, Peru and Mexico. In Brazil, customers of digital media company Terra will be among the first offered the opportunity to switch from Sonora to Napster.

WHY: In the tough digital music subscription market, partnerships with telcos -- in particular mobile -- are now widely seen as the holy grail to reach meaningful scale quickly enough to cover the costs of licensing music rights in the first place. Even though Rhapsody has been in existence for more than 10 years under various owners and iterations, it has struggled to grow significantly in the United States -- it reported a total of 1 million subscribers in 2012. The deal with Telefonica could be a major game-changer for the increasingly unfashionable and unprofitable digital music service. According to filings, Rhapsody lost $9.2 million in first-half 2013 on revenue of $68.6 million.

WHO: The current version of Rhapsody was created as a joint venture in 2007 between Real Networks (51%) and MTV Networks (49%). In 2010, after a minority equity deal with the major labels, Real Networks' stake was reduced to 47%. But in September 2013, Rhapsody International went through a restructuring after investment firm Columbus Nova Technology Partners became a significant shareholder in the company. Longtime president Jon Irwin stepped down along with 15% of its staff. The company is now run by an executive operating committee of Rhapsody executives including chief technology officer Brian Ringer, senior VP of the Americas Paul Springer, senior VP of Europe Thorsten Schliesche and new CFO Ethan Rudin.

IF: If Rhapsody/Napster gets significant traction in Latin America's fast-growing market for digital music, it could inject fresh confidence into its U.S. operations as well as a much stronger argument in negotiations with U.S. mobile partners. So far it has only been able to convince Metro PCS of the advantages of rolling out a mobile partnership. An early sign of how quickly things can change is that Telefonica is already planning to preload Napster on mobile devices that it sells in Brazil and three other Latin-American markets during the current quarter. And since Telefonica is also a significant player in Europe, the deal offers expansion opportunities there too.