MTVN And RealNetworks Talking On Reorg of Rhapsody Music JV; Could Include Spinoff/Sale

RealNetworks Rhapsody

This is not a surprise considering the continued decline of Rhapsody music service in the face of lots of new competition and the general malaise in the digital music market: MTV Networks (NYSE: VIA) and RealNetworks (NSDQ: RNWK) are talking about restructuring their Rhapsody America music JV, according to an SEC filing just filed by RNWK. The relevant part: “to enable Rhapsody to operate more independently of either party. If these discussions result in a definitive agreement, RealNetworks may agree, among other things, to adjust the corporate governance and/or management structure of Rhapsody and to reallocate the ownership of Rhapsody between RealNetworks and MTVN such that RealNetworks’ percentage ownership of Rhapsody could be reduced from 51% resulting in both parties owning 50% or slightly less.” What that likely means is bringing an outside investor in the JV, if not an outright sale of the venture. BW’s Arik Hesseldahl did a good piece recently about the rationale to sell off Rhapsody, and it seems the companies are listening. Considering that MySpace is picking up the assets of all troubled digital music assets, maybe that’s the best party to bring in or sell to? Especially if MySpace Music JV with labels is dismantled and brought in-house.

Update: Spoke to a RealNetworks spokesperson, who said that the talks are in very early stage and anything is possible.

The only reason they had to disclose these talks at this point is because Real also filed for a new tender offer to issue new stock, which has very strict disclosure policies, he said, and that’s why the filing about the JV reorg. This comes as Rhapsody has done small cuts in multiple rounds through the last year, including laying off 12 people earlier in late summer.

Update: The new tender offer is to allow employees to exchange underwater options for fewer options at a new strike price.

The full filing text: RealNetworks, Inc. (“RealNetworks”) is currently in discussions with MTV Networks, a division of Viacom International Inc. (“MTVN”), relating to the possible strategic reorganization of its jointly owned and operated business-to-consumer digital audio music service, Rhapsody America LLC (“Rhapsody”). These negotiations are focused on a potential restructuring of RealNetworks’ and MTVN’s relative economic rights in the joint venture and on their relative abilities to exercise control over decision-making to enable Rhapsody to operate more independently of either party. If these discussions result in a definitive agreement, RealNetworks may agree, among other things, to adjust the corporate governance and/or management structure of Rhapsody and to reallocate the ownership of Rhapsody between RealNetworks and MTVN such that RealNetworks’ percentage ownership of Rhapsody could be reduced from 51% resulting in both parties owning 50% or slightly less. These discussions are currently in the preliminary stages, and RealNetworks cannot predict whether they will result in a definitive agreement or, if a definitive agreement is reached, the final terms and conditions of any such agreement, or the impact of a restructuring on RealNetworks’ financial statements or results of operations.

The full details of the JV contract on Rhapsody America, started in Aug 2007 after MTV ditched its own Urge service: From the latest RNWK 10Q:

Formation
On August 20, 2007, RealNetworks and MTVN created Rhapsody America to jointly own and operate a business-to-consumer digital audio music service. Under the Rhapsody America venture agreements:

Comments have been disabled for this post