Rhapsody Revenues Rise in Second Quarter

Rhapsody hasn't made its music subscription service profitable, but it's definitely growing. Revenues grew 22.3 percent to $42.4 million in the second quarter, according to figures detailed in the latest earnings release from RealNetworks, which owned about 45 percent of Rhapsody at the end of June.

The current run rate of $170 million marks a solid gain over previous years. Rhapsody took in revenue of $143.7 million last year and $127 million in 2012.

But like its music streaming peers, Rhapsody can't have both growth and profits just yet. The company posted a net loss of $4.7 million, slightly worse than the $4.4-million net a year earlier. Losses have been a regular occurrence. Rhapsody had net losses of $13.6 million and $12.2 million in 2011 and 2010, respectively.

Revenue growth follows subscriber acquisition. Rhapsody announced last month it surpassed 2 million global subscribers, just 3 months after it revealed it had 1.7 million subscribers. The growth spurt comes after Rhapsody added two new investors, Columbus Nova Technology Partners and mobile giant Telef√≥nica (which invested in the Rhapsody International subsidiary), overhauled management and laid off 15 percent of its staff. 

The numbers suggest that expenses related to Rhapsody's expansion to new markets is squeezing margins. While revenue in the second quarter grew 22.3 percent from the prior-year period, operating expenses grew by 33.3 percent. The same trend is seen in the numbers for the first half of the year: revenue grew 23 percent while operating expenses grew 29.6 percent.

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Higher operating expenses add difficulty to an already difficult business model. Rhapsody's gross profit percentage declined to 18.5 percent in the second quarter from 25.3 percent a year earlier. Back in 2011, the company had a gross profit of 30.8 percent.

A music subscription service can expect to pay out about 70 percent of revenue in royalties. The trick in making the business model work is growing revenue so the remaining 30 percent of revenue can cover expenses. But that assumes turning a profit is the main goal. It isn't. Music subscription services are currently in a land grab, trying to outmuscle their competitors for new customers and new markets. Growth comes first. After the dust clears, what services remain will focus on the bottom line.

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