Rhapsody, operated under the Napster brand outside of the United States, is showing how difficult the subscription music service business can be, losing $35.5 million on revenue of $202.0 million in 2015.
Growth wasn’t necessarily the problem. Two things hurt Rhapsody. First, the growth in expenses exceeded the growth in revenue, a not-uncommon trend for a company that puts growth over profit in order to secure market share. Second, its growth profit margin (gross profit as a percent of revenue) fell to 16.2 percent from 18.5 percent (it was 24.3 percent in 2013), meaning every dollar of revenue became more costly.
Revenue grew 16.4 percent. Gross profit (revenue minus cost of revenue) was essentially flat ($32.8 million from $32.1 million). Other expense items increased 27.6 percent. The end result was net loss that grew 66.3 percent.
In a statement, Rhapsody CFO Ethan Rudin tells Billboard that, while the company won’t comment on financials, they have “never been more excited or optimistic about a category that we helped define in early 2001.”
Rhapsody’s financial information was made available in the annual report of RealNetworks, which has a 43-percent stake in the company. The elder statesman of music subscription services, Rhapsody launched in 2001 and its parent company, Listen.com, was acquired by RealNetworks in 2003. Rhapsody turned into a joint venture in 2007 after MTV Networks invested $230 million and migrated the subscribers of its URGE music service to Rhapsody. RealNetworks provided support services, such as information technology and operational support, until 2010. In 2013, Columbus Nova Technology Partners invested in Rhapsody and restructured the company by laying off 15 percent of the staff, parting ways with former CEO Jon Irwin and forming an executive operating committee that included former Starbucks executive Ethan Rudin as CFO.
Rhapsody exemplifies the difficult financials of a growing music subscription market. Assuming it has 3 million subscribers at midyear, Billboard’s estimate based on public announcements of milestones, each subscriber represented $67.33 of revenue and a net loss of $11.83. The gross profit per subscriber, what’s left after each subscriber’s’ content and distribution costs, was just $10.92.
But Spotify’s 2014 financials weren’t much different. That year, the most recent available, Spotify generated a superior $91.93 from each of the estimated 12 million subscribers it had at mid-2014. But its loss per subscriber was $14.82, about $3 more than Rhapsody, and its gross profit per subscriber was $17.03.
Another comparison is Deezer, which generated $43.27 per revenue-generating subscriber in 2014 and $52.83 (at an annualized rate) in the first half of 2015. Its net loss per subscriber was $8.29 in 2014, in the same area as Rhapsody in 2015 but far better than Spotify in 2013. But leading up to an attempted IPO, that net loss per subscriber improved to $2.54 in the first half of 2015.
The difference between Rhapsody and Spotify is clear, however. Rhapsody currently has about 3.5 million subscribers while Spotify has about 30 million. And in the winner-take-all music subscription game, size matters.