Music service Rhapsody's not afraid to take on iPod

Rhapsody still believes online subscription music has a real shot.

The music service, which offers access to over 5 million songs for a monthly fee, is still plugging away, despite challenges during the last few years.

Unlike online download purchasers, subscribers to online music services don't own the songs they listen to. For about $15 a month, they can play as many as they want — but they no longer have access if they cancel their subscription.

That's a big stumbling block. Despite years of rosy projections from analysts and music executives, many consumers have shunned subscriptions — sometimes called "music rental" — in favor of a la carte downloads.

Yahoo Music gave up the good fight, and will shutter its subscription music service in September. (Yahoo sold its assets to Rhapsody.) Napster, which lost about 75,000 subscribers in the last year, recently introduced an MP3 download store, in addition to its subscription service.

Rhapsody, co-owned by Real Networks and MTV, recently opened an MP3 store as well. It also just began a new alliance with Verizon Wireless that puts its subscription music in front of nearly 70 million Verizon customers.

Verizon customers who subscribe to Rhapsody (they must also have an eligible data plan) get access to the songs in the Rhapsody catalog, and can move them to their phones via a PC — but not through over-the-air access. The dream, Rhapsody general manager Anu Kirk says, is for Rhapsody customers to get the urge to hear a song and pluck it directly into their phone from wherever they are, without a PC.

But that day isn't here yet, due to Verizon's concerns that unlimited over-the-air downloads would slow down its network.

Still, Kirk says Verizon — and a new alliance that promotes the music service on social networks — is Rhapsody's best shot in a long time.

Success without the iPod

In addition to cellphones, songs downloaded on Rhapsody can be listened to on a computer or via certain portable devices — but not on the world's most popular MP3 player, the Apple iPod. Apple chooses not to participate in subscription music, and thus, the Microsoft software that makes subscription music portable isn't compatible with iPods.

Apple's iTunes Store dominates online music with such magnitude that in 2008 it bypassed Wal-Mart, Best Buy and Target to become the No. 1 music retailer in any medium, according to researcher NPD Group.

Apple, which sells most songs for 99 cents apiece, has sold 5 billion songs since opening for business in 2001. Rhapsody has 1.85 million subscribers, down from 1.9 million earlier this year.

Kirk says the Verizon deal will help Rhapsody expand without Apple. "The iPod has done fantastic business, but it still pales in comparison to the number of cellphones sold every year," Kirk says.

Rhapsody Vice President Tim Quirk also disputes the notion that consumers don't want subscription music. "I liken it to paying your electric bill. You don't rent electricity."

John Harrobin, senior vice president of Verizon Wireless, believes subscription music never took off because it was tethered to the PC and had limited distribution. Rhapsody is now marketed for cellphones in 2,000 Verizon Wireless stores, "where it's being heavily promoted," he says.

Seeking a wider audience

Neil Smith, vice president of business management for Rhapsody America, the joint venture of Real Networks and MTV Networks that owns Rhapsody, says the Verizon alliance, which began June 30, is already starting to show traction.

"We had concerns about the willingness of consumers to add another subscription charge to their phone bill, but it's not as much of a problem as we had thought. We're doing much better than we had expected." He declined to provide specifics.

But despite his rosy outlook, Phil Leigh, an analyst at Inside Digital Media, thinks it's unlikely to change consumers' perceptions about subscription music.

"What killed Rhapsody's chances for success was the iPod," he says. "It just took too long to iron out all the kinks, and the dominance of the iPod left Rhapsody out of the mainstream."

The deal with Verizon won't help Rhapsody that much, he believes, because the iPod is still going strong, and the hot new phone in town — Apple's iPhone — doesn't work with Rhapsody. "I think Rhapsody will wither away, and eventually reincarnate as an ad-supported business," he says.

JupiterResearch analyst David Card is less grim. He forecasts $600 million in U.S. subscription sales by 2012, still dominated by Rhapsody, up from $235 million in 2007. "That's 20% growth a year, a healthy business," he says. "It's just not a mass-market product."