RealNetworks released Q3 2008 earnings today (press release) and reported improved revenues and subscribers from its music store and service. Those gains were offset by large expenses for net loss operating loss for the music segment.

The numbers show productive partnerships are going to be the key in improving Rhapsody's standing. RealNetworks' "Music Without Limits" initiative partners the company with Verizon, iLike and MTV Networks for a more seamless experience. The company claimed Rhapsody now has 22% of the U.S. MP3 download market at the end of September, a nine-point increase from July. The 125,000 increase in Rhapsody subscribers brings the total to two million.

Music revenue increased 10.4% year-over-year to $41.6 million (11.9% sequentially). That means music revenues increased by $3.78 million versus Q3 2007. More importantly, RealNetworks' music segment had a net operating loss of $24.5 million after a 43% gross margin, $15.2 million in advertising and $27.2 million in other operating expenses.

Rhapsody gained bout 125,000 new subscribers (net of churn). No breakdown was given for mobile subscriptions through VCast. Verizon has been the most successful customer acquisition partner, the company said. Some new subscribers could have come from new customers to the Rhapsody MP3 store (such upstreaming was one of its main goals).

If we pretend 100% of the $3.78 million increase in revenue came from MP3 sales, that would mean an additional 3.8 million tracks were sold in the first full quarter of Rhapsody's multi-pronged partnership with Verizon, MTV and iLike. That's a good start but not a home run. Let's keep in mind the $15.2 million spent on advertising for Rhapsody America and the exposure to tens of millions of iLike users. The increase in subscribers is far better because it's far more profitable. There is better margin in subscription services and it is recurring revenue.

Notes From the Earnings Call:

• Economic Downturn: Sees opportunities in the consolidation that tends to happen during economic downturns. Real sees itself as a good candidate for M&A activity.

• Music royalties: Everything landed...in a place that is acceptable. The economics of the business with regards to stat licenses are fairly similar to where they've been. Real negotiates rates and tends not to pay statutory rates. Doesn't fundamentally change the status quo.

• Music subscription growth: Glaser did not break it down by and say how many new subscribers Verizon accounts for. But they did say Verizon has been Real's most successful customer acquisition channel.

• Best Buy Relationship: The deal has not closed, and Glaser thinks if Best Buy acquires Napster it will lower its involvement with Rhapsody. That allows Rhapsody to pursue other opportunities. Glaser sees this as an elimination of Napster as a competitor due to it being in-house at Best Buy.