Talks began 11 months ago about developing some sort of partnership between RealNetworks (Nasdaq: RNWK) and MTV Networks (NYSE: VIA). After considering several different models, the two eventually settled on forming a JV called Rhapsody America that would offer subscriptions and sales of digital music, which as we noted earlier, gives Real 51 percent of the new entity while MTVN gets 49 percent. The day was bracketed with an 11 a.m. conference call for the press involving Real, MTVN and Rhapsody America’s mobile distribution partner Verizon Wireless, and a 5 p.m. call for investors held solely by Real. Among the areas covered in the Real call were:
— Advertising and marketing: One of the deal’s key points involves the level or marketing spend. Rhapsody America is committed to spending $230 million in advertising on MTVN cable channels over five years, said Rob Glaser, Real’s chairman and CEO. In addition to that, there’s also a bunch of integrated marketing, promotional inventory that the companies declined to put a dollar figure on. The first promotion involves Rhapsody.com’s promotion of the upcoming MTV Video Music Awards, a marketing initiative Glaser called a “down payment” on future integrations. From a financial perspective, “funding of the advertising commitment results in a gain to Real that is equal to its 51 percent ownership share,” said Michael Eggers, Real’s CFO.
— The Role Of Verizon Wireless: Real began an active dialogue with Verizon about a year ago on extending the companies’ relationship beyond ringtone-related services. While Glaser said the focus of today’s calls were on the business alliance between the three, he did allude to the creation of additional product launches. “You can look at all three companies and ask ‘What would be some obvious things that would make them work together really well?’ When you download music on your PC with Rhapsody, you want to be able to move that to your mobile phone in smooth way. That’s logical block and tackling… We brought Verizon in to create scale in a market that, up to now, has been pretty fragmented.” Later on, in answer to a question about whether the current agreements with record labels have been renegotiated – “in some instances, you might be selling the same song three different times” – Glaser said that given the complexities of the deal, it was considered too much to bite off to alter any existing arrangements with music companies. “If a consumer decides to buy a song three different places, we obviously won’t stop them. But we do want to make it easier for them to exercise dual delivery options, which already do with Verizon to some extent.”
— Transitioning Urge Users: The company declined to say how many members MTV’s existing digital music store Urge has, saying those numbers will be revealed as part of Real’s Q3 earnings report. Leaving that aside, Eggers said that Real will realize a consolidated revenue increase by the addition of Urge’s subscribers, while expenses will also rise as the company brings MTV’s Urge employees on to run Rhapsody America. For Q3, Real expects the new entity to generate $500,000 in revenue and about $2- to $3 million for the remainder of the year. Webcast
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