Rhapsody Fails to See iPhone App-induced Bump

rhapsodyThe theory that mobile applications will boost interest in music subscriptions has its first test subject in RealNetworks’ (s RNWK) Rhapsody, which released an iPhone (s appl) app in early September that has since been downloaded more than half a million times. Most of those downloaders were non-subscribers testing out the service, making them potential new customers. But the early evidence shows that Rhapsody’s subscriber base isn’t expanding as a result of the app — in fact, it’s shrinking.

RealNetworks said this afternoon that its subscriber base as of the end of the third quarter was somewhere north of 700,000, down from 750,000 during the previous quarter and 800,000 in the first three months of the year. (RealNetworks always reports these numbers as “greater than” some round number; it never provides an exact figure.) The dwindling subscriber base suggests that Rhapsody’s paying customers are either switching to other services — possibly because the price point of such services has fallen — or opting to use free streaming services, legal or otherwise.

Such numbers don’t bode well for any music service expecting to rely on mobile apps to give their revenues a shot in the arm. European startup Spotify is dangling a mobile app that only works for paying customers in front of its free users in the hopes that it will get enough subscribers to cover the cost of its free streams, but recent estimates suggest that its conversion rate is still below 2 percent.

A Rhapsody spokesman declined to say how many people who downloaded the iPhone app became new customers, but RealNetworks CEO Rob Glaser said in a conference call that the company has “not yet seen a significant number of new subscribers” as a result of the app. RealNetworks’ overall net revenue from music, including Internet radio subscriptions, MP3 sales and other channels, dipped to $38.8 million in the latest quarter from $40.5 million during the previous quarter.

Rhapsody is still planning some upgrades to its app, and to be fair, it hasn’t even been out for a full quarter. But the early returns still indicate that all those app downloads aren’t yet enough to reverse the customer exodus, and suggests that most of those new users experimenting with Rhapsody aren’t buying yet.