Newly Independent Rhapsody's Subscriber Base Still Shrinking

If music subscription service Rhapsody hoped that adding mobile phone applications would turn its fortunes around, a new quarterly report from primary stakeholder RealNetworks (s RNWK) suggests otherwise. Newly independent Rhapsody’s subscriber base shrank for the third consecutive quarter in the final three months of 2009, falling below 700,000 by year’s end for the first time since mid-2008, meaning that its mobile apps aren’t winning over new customers fast enough to replace cancellations.

Rhapsody launched its iPhone application in September and saw quick uptake, with hundreds of thousands of consumers test-driving the app in its first few weeks of availability. But that didn’t translate into sales right away, as its paying customer base dipped to 700,000 during the third quarter of 2009 from more than 750,000. (RealNetworks typically reports the size of Rhapsody’s subscriber base as “greater than” some number.) Now that it’s had a full quarter to prove itself, the results are no better: Rhapsody now counts somewhere between 675,000 and 700,000 subscribers.

Music subscription services have generally hoped that the “any song, anytime, anywhere” promise of mobile applications would rekindle interest in a model that has flagged somewhat over the years. Rhapsody and longtime rival Napster now face competition from upstarts such as MOG and Spotify, which offer updated models that have attracted venture investment and attention.

RealNetworks announced this week that Rhapsody would be spun out as an independent company. The restructuring will make RealNetworks and current minority stakeholder Viacom into equal partners holding less than 50 percent of Rhapsody. RealNetworks pledged $18 million in cash to Rhapsody, while Viacom-owned MTV Networks “will contribute a $33 million advertising commitment.” The independent entity may seek outside investors as well.

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