RealNetworks announced Q4 2008 and full-year earnings last week (read SEC filing). Taking into account digital trends, RealNetworks' music gains are fairly disappointing. The company's music revenue increased 8% for the entire year and 8.2% in Q4. Those gains are well behind the increase in U.S. digital download revenue (about 30% in 2008) and the high adoption rates of free, ad-supported services for both PC and iPhone.

In 2008, RealNetworks launched an MP3 download store with a multi-million advertising campaign (from this press release, $50 million over a year and $15 million in Q3 alone). In addition, it has a partnership with Verizon Wireless that effectively gives it a nationwide sales force -- Verizon customers are now able to sign up for Rhapsody at Verizon retail locations and the Verizon Wireless web site.

Yet with all the new developments, RealNetworks is missing out on much of the the digital music boom. iTunes' growth most likely mirrors the 30% growth in digital downloads. Amazon.com has grabbed MP3 market share -- although it is taking a loss on many of those bargain album sales. New services are capturing the attention and affection of the media and marketplace. In comparison, Rhapsody is stuck in the mud.

The earnings release says music revenue increased 8% in 2008. Where is RealNetworks' revenue growth coming from? Based on the numbers provided in the earnings release, almost half of the growth has come from the Rhapsody subscription service and the rest is from digital downloads.

The company said it added 175,000 Rhapsody subscribers from Q4 2007 to Q4 2008. In Q3, 150,000 new subscribers were added. In Q4, another 25,000 subscribers were gained. If we assume those subscribers were obtained at an even rate over those six months (a mid-point method of estimation) and each paid $15 per month, that's an increase in Rhapsody revenue of $5.34 million for all of 2008.

RealNetworks' music revenue increased about $12.9 million in 2008. If you take out a $5.34 million increase in Rhapsody revenue, you're left with $7.5 million that is accounted for by MP3 store sales and Verizon over-the-air downloads. It's not a terrible number, but it shows what little success Rhapsody has had in selling more digital downloads. And that's a problem. Part of the company's music strategy is to lure MP3 buyers to its higher-margin subscription service. Few new MP3 buyers means few potential subscription customers.

The company just started disclosing the number of subscribers it has had going back to Q1 2007. The problem here is that its declared number of subscribers looks fishy. If we trust their numbers, we are to believe Rhapsody stayed flat at 600,000 subscribers from Q1 2007 through Q2 2008 and then jumped by 25% after its deals with Verizon and MTV Networks started. Those partnerships started in May 2008, which is in Q2 2008, but subscribers didn't jump to 750,000 until Q3 2008. Not only is the timing of the subscriber increase odd, six straight quarters level at 600,000 subscribers is really odd. Since RealNetworks' music revenue has steadily increased over time, I think it's safe to assume the number of Rhapsody subscribers has increased over time as well. A jump in Q3 is understandable given the Verizon partnership, but six straight quarters stuck at 600,000 subscribers is not believable.

Given all of the above, it's difficult to properly assess RealNetworks' performance in digital music over the last two years. We know revenue growth is lower than the overall growth in digital music spending. We could safely guess that Rhapsody's MP3 store isn't gaining much traction. Beyond those items, there's a lot of guessing going on.

Posted by Glenn at 11:27 AM | Link
|Earnings Releases||RealNetworks||Rhapsody|

After browsing around RealNetworks' Q3 earnings release, I saw decent results from its Rhapsody division. Music revenue -- which can be mostly attributed to Rhapsody -- grew 24% to $37.7 million from $30.4 million in Q3 2006. The number of music subscribers -- Rhapsody, Rhapsody-to-Go, premium radio and Music-on-Demand -- rose to 2.75 million, an increase of 50,000 in one quarter and a big improvement over the 1.65 million subscribers in Q3 2006. Judging from the conference call, Rhapsody is key to the company's growth plan. RealNetworks Chairman and CEO Rob Glaser started the call with information about developments and partnerships relating to Rhapsody.

Other notes from the release and the conference call:

• Company revenue increased to $145.1 million with EBITDA of $13.6 million.
• Sales & marketing as a percent of revenue decreased to 36.4% from 40.1%.
• The company booked $7.7 million in advertising with MTV as part of its Rhapsody America joint venture.
• Rhapsody America, a partnership with MTV, is a joint venture that puts Rhapsody's technology platform behind MTV and leverages MTV's marketing muscle to push the venture. A second wave of ads (which I have not yet noticed) has already launched. Rhapsody America is in the consumer awareness phase right now, so there aren't many results to speak of.
• A partnership with Verizon will put Rhapsody's in the hands of Verizon's customer base and generate awareness through Verizon's 2,300 retail outlets. Phase 1 will come in Q1 2008.
• Glaser busted out Metcalfe's Law in explaining the growing potential of Rhapsody. In short, the law says the value of a telecommunication network is proportional to the square of the number of users.

Posted by Glenn at 1:48 PM | Link
|RealNetworks|

As an amendment to my previous mention of the MTV-RealNetworks mobile music service joint venture, here's some information (via paidContent) on the deal. RealNetworks filed a Form 8-K that contains some specifics on the financial side of the venture. This looks like a marriage of necessity for RealNetworks (which needs to expand Rhapsody's mobile subscriber base and needs a big checkbook) and one of very few options for MTV (URGE has faltered, and mobile subscription has got to be a big strategy for the Viacom-owned company).

The joint venture is a limited liability company agreement. MTV will contribute a five-year, $230 million note, and RealNetworks will be obligated to buy $230 million in advertising on MTV cable channels -- which will include integrated marketing -- over five years. Real will control 51% and MTV will control 49%. Neither can transfer their interests for five years, and MTV gets a right of first refusal if Real decides to sell its interest. Expectations for 2007 revenue are between $2.5 and $3.5 million.

Here are some sections of the filing.

• "The assets contributed by Real generally consist of its Rhapsody service subscribers, a cash contribution, certain employees, contracts, revenue from existing Rhapsody subscribers, marketing materials, player hardware, rhapsody.com and related URLs, and distribution arrangements."
• "Real will also license certain assets to Rhapsody America, including Rhapsody content, the Rhapsody brands and related materials."
• MTVN will contribute cash, a five-year note for $230 million and other assets, including its existing URGE subscribers and marketing materials.
• "MTVN will also license certain assets to Rhapsody America, including URGE content, brands and related materials."
• "Real expects the formation of Rhapsody America to generate incremental revenue of approximately $0.5 million for the third quarter of 2007 and approximately $2 to $3 million for the remainder of 2007."

Posted by Glenn at 3:12 PM | Link
|Mobile Music||RealNetworks||URGE|

• RealNetworks, MTV and Verizon are teaming up for a mobile music service called Rhapsody America. MTV's URGE music service will join with RealNetworks' Rhapsody subscription service to create a music service that can be accessed via PC, mobile phone or (compatible) portable media device. Verizon's V CAST will be the service's mobile platform. (Press release)

• Wal-Mart has announced the launch of $0.94 MP3 downloads and $9.22 MP3 album downloads. The catalogs of EMI and Universal Music Group are available in the MP3 format at 256 kbps. The original, 128 kbps WMA tracks will also be available. The first things I noticed at the music download page were links to $3.88 MP3 albums (which are all EP's and singles), $5.88 MP3 albums (catalog titles like Bon Jovi's Slippery When Wet) and $7.88 MP3 albums (Norah Jones' Come Away With Me, for example). Unfortunately, Wal-Mart's updated digital store does not support Firefox. (Press release)

• Solange Knowles, sister of Beyonce, has signed a worldwide co-publishing deal with EMI Music Publishing. Knowles is currently promoting Baby Jamz, a hip hop-oriented toy line created by Planet Toys and Music World Entertainment, her father's company. (Press release)

• Another Madonna-to-LiveNation? article, but this one has some numbers and word of a rival. "One source estimated the value of the Live Nation offer to be $180 million, with the touring giant potentially licensing the recording rights for roughly $30 million. ... It is doubtful that WMG, the only label Madonna has ever been signed to, would give up the Material Girl without a fight. Sources say that the company has made a counter-offer to Madonna that also includes a touring component that could be helmed by rival promoter AEG Live." (Billboard.biz)

• Said the CFO of Emmis Comminications about satellite radio, "The people that utilize satellite radio often toggle between AM and FM and satellite radio, and it really hasn’t caused a measurable effect in our business yet. ... Satellite radio is a niche business focused on people willing to spend 13 dollars per month for the radio. Which for long-haul truckers or people who are advocates of a music format which may not reach a mass market – if you’re a passionate Blue Grass listener in New York City – it probably makes sense for you. But I think they’re still challenged. It’s a challenging business model to launch a billion-dollar asset in space and try to build up a mass-market audience quickly. And with 15 million subs it’s tough, which is why they’re trying to get the merger done. In large measure they’re trying to work with the government to solve a business model problem." (Radio Ink)

• Verve Music Group has named Mitchell Cohen as its VP of A&R. Cohen was previously SVP or A&R at Columbia Records. (Billboard.biz)

Posted by Glenn at 11:37 AM | Link
|Mobile Music||Publishing||Radio||RealNetworks||Rhapsody||URGE||Wal Mart|

• Album sales were up 10% last week and were "only" 8% lower than the same week last year. For the year, album sales are down about 16%. Digital track sales rose 3% and were 43% higher year over year.

• Rolling Stone magazine has the first of a two-part series on the fall of the music industry, a situation for which "there's no hope in sight." It's a collection of previously told stories and publicly available sales statistics. As with many articles that attempt to describe labels' failed attempts over the years, the writers tell us that the industry's death blow was failing to work with the original Napster. I don't believe P2P is or ever was the cure-all it's made out to be. Assuming all or most P2P users would have or ever will pay a voluntary monthly fee is as pie-in-the-sky as it gets. (Rolling Stone)

• Quincy Jones is becoming a brand that will encompass digital media, how-to publishing, clothing and even (reportedly) shaving cream. The marketing push is being led by Jones' management team at The Firm. (Billboard.biz)

• Music and social networking continues to get more new ideas and more venture capital. One of the newest companies is Fuzz. The site allows bands to set up profiles and sell their music. (Fuzz, via CMJ)

• Seventy-two House members oppose a merger between satellite radio companies XM and Sirius. (Radio Ink)

• RealNetworks' Rob Glaser answers questions on the new Real Player 11, Real's file formats and the Rhapsody music service. (Rhapsody Blog, via paidContent)

• Australian rock band Airborne, dumped by Capital amidst the shake-up at EMI, just signed to Roadrunner. (The Age)

Posted by Glenn at 8:09 AM | Link
|Music 2.0||RealNetworks||Rhapsody||Satellite Radio|

• Navarre finalized the sale of its independent music distribution segment to Koch yesterday. Navarre received $6.5 million at closing and plans to collect $11 million from trade receivables that were not part of the transaction. The company plans to use the proceeds to pay down its credit facility. (Press release)

• EMI had agreed to give YouTube users access to its videos and music and use the content in their own user-generated content. EMI will use YouTube's management tools to track and monetize the content. EMI is the last of the four majors to come to an agreement with YouTube. (Press release)

• Ad-supported P2P (sort of) site SpiralFrog is set to launch by the end of the summer, according to company chairman and founder Joe Mohen. SpiralFrog has been in a period of upheaval with the exit of executives and directors. One bright spot: the company is currently in beta testing in Canada. (Billboard.biz)

• David at Digital Audio Insider went through his latest eMusic statement and blogged about the payout increase. His band's per-song payout rose 11.3% since eMusic recently increased its payout rates. (Digital Audio Insider)

• You don't hear about retailers seeing sales of iPods and related accessories, but Sharper Image reported sales of both were instrumental in the company's 21.5% drop in revenues for fiscal 2006. (10-K)

• Industry legend Alan McGee is reportedly winding down his Poptones record label because he thinks bands should release music themselves and developing new acts is not economically feasible. "New groups will have to develop themselves," he said. (Digital Spy)

• PaidContent has an audio interview with RealNetworks' Rob Glaser. (Download MP3 or stream at this page)

• Perhaps inspired by Al Gore, the IFPI posted a list of "ten inconvenient truths about the music industry today," which includes blasts against Pirate Bay, Allofmp3.com, organized crime, file sharers and ISPs that "facilitate the illegal swapping on copyright infringing music on a grand scale." (IFPI)

Posted by Glenn at 8:34 AM | Link
|Distribution||EMI||RealNetworks||eMusic|

• RealNetworks reported record revenue of $129.4 million in Q1 2007. Music revenue increased 18% year over year. Page six of the statements of operations shows the real story: Less $61 million from the company's anti-trust settlement with Microsoft, adjusted net income was flat at $10.4 million. In Q1 2006, only $40 million in settlement money hit the income statement. This Seattle P-I article says the company now boasts "24.6 million paid subscribers to its music and online radio services." If memory serves, Rhapsody had only 2.4 million a few months ago, so I'd like to see those subscriber numbers broken out. (Press release and PDF of statements of operations)

• Koch has launched a label services division to offer marketing services to labels. (Billboard.biz)

• Warner Music Group will try out a new physical format called MVI -- for Music Video Interactive -- that is a DVD with a variety of digital content. The upcoming Rush album Snakes & Arrows will be available in MVI, and releases by Linkin Park and The Flaming Lips are expected to be available in MVI as well. (Digital Music News)

•

• ARTISTdirect.com has a partnership in the UK with T-Mobile and will provide T-Mobile subscribers with exclusive media content like downloads, videos and photos. The deal could get ARTISTdirect "more than $1.0 million for a one-year period." (Press release)

•

Posted by Glenn at 2:20 PM | Link
|Distribution||RealNetworks||Warner Music Group|

CES, the annual electronics convention in Las Vegas, is always a time for companies to reveal new products and announce new partnerships. For the music industry, yesterday's announcements showed that no one company can go it alone. As services and hardware become more integrated, we're going to see palpable shifts in how consumers -- all consumers, not the early adopters who dive head-first into any new gadget -- enjoy music. Here are a few of the key announcements thus far.

• Apple and Cingular. The Wall Street Journal reported Apple is launching a mobile phone service and a phone. Cingular will be the network provider.
• Microsoft and Clear Channel. Clear Channel will supply the HD radio content for Microsoft's MSN Direct service.
• Microsoft and Motorola. Motorola's new mobile phone will use Microsoft's Windows Media DRM to allow users to play music from such services as Rhapsody, Napster, Yahoo! Music and URGE.
• Morotola and Warner Music. The global agreement puts Warner Music content exclusively in Motorola mobile services.
• Rhapsody and TiVo. Later this year, the Rhapsody music service will be integrated with TiVo so three million songs will be accessible on consumers' televisions.
• Rhapsody and iriver. iriver announced two new Rhapsody-enhanced portable music players; one of the devices (pictured) will download music over the air from the Rhapsody music service. Both devices will be available by July 2006.
• Rhapsody and Logitech. Next week, users of Logitech's Squeezebox and Transporter players will be able to access Rhapsody without using a PC. The service will be priced at $9.99 per month.

Posted by Glenn at 9:40 AM | Link
|Apple||Digital Music||Mobile Music||Portable Music Players||RealNetworks||Rhapsody|

• Google is getting ready for its entry into the radio market. The company is reportedly hiring ad salespeople in most major markets, and it paying "about 50 percent more than a typical radio sales person might make." Its Google Audio Ads is the company's strategy to allow advertisers to sell radio ads in a way similar to how Internet advertisers buy ads with its AdWords system. (Read Reuters article)

• A transcript of Monday's RealNetworks Q3 2006 Conference Call. (Read post at SeekingAlpha)

• Post-Vivendi/KKR, everybody's talking about buyouts. A thought from This Is Money: "A warning last month that underlying halfyear profits will fall by almost a third to £27m after margins shrank at its recorded music arm increased speculation that a foreign bidder would soon come along and put Nicoli and his board out of their misery." (Read article at This Is Money)

• Kidz Bop has had far more ramifications than previously thought. Parents will probably like this stuff more: V2 in lauching an offshoot family label called Little Monster Records. The first release, a Beatles tribute/storybook, was just released. Medeski, Martin & Wood will do an album in first quarter 2007. The newest signing is Robert Schneider (Apples in Stereo) under the name Robert Bobbert and the Bubble Machine (visit his MySpace page). (Read press release)

• The country music industry has its sights set on the Hispanic market. (Read AP article)

Posted by Glenn at 7:59 AM | Link
|EMI||RealNetworks|

Digital media company RealNetworks announced the results of its third quarter ending September 30th, 2007 (read press release). The company's net income was up 276% to $42,153,000. It should be noted that a generous chunk of that the Microsft impact plus other items items -- equity investment gains, stock-based comapensation expenses and tax impacts of the items -- net income was $8.7 million.

RealNetworks recorded revenue of $30.3 million in its music division, $29.5 million in media software and services and $22.5 million in games. Seventy-four percent of its revenue came from the United States. Music subscribers rose 350,000 in the quarter to 1.65 million.

paidContent has excerpts from RealNetworks' analyst call. On the company's acquisition of WiderThan, CEO Rob Glaser said, "Unlike pure content-based businesses such as ringtone aggregation which are vulnerable to commoditization, Real and WiderThan’s carrier services are technology-based and thus deeply embedded in the carrier’s network. Further, combining the strength of Real’s Rhapsody music service with WiderThan’s successful mobile music service will help us realize our vision of the future of digital music."

Posted by Glenn at 11:27 AM | Link
|Earnings Releases||RealNetworks|

• Sony BMG settled with Canadian music fans over its infamous root kit. Hundreds of thousands of consumers will get $8.40, a replacement CD and free downloads. Information on the settlement and how to fle a claim can be found here. (Read article at Vancouver Sun)

• The Zune makes an appearance on "The Ellen Degeneres Show." Degeneres gets the facts a bit mixed up; users cannot take songs from other Zunes, they can only take what is sent to them. (Watch clip on YouTube, via Medialoper)

• Rags Gupta thinks about Napster's possible suitors: wireless carriers, handset makers, cable/DSL providers and XM. For wireless and cable/DSL, Gupta floats the idea that using Napster as a customer-retention strategy could possibly make it a good investment. (Read post at Digital Music News)

• The Motley Fool's Rick Aristotle Munarriz thinks Google is the best fit for Napster. His best argument fits Napster's free, ad-based platform to Google's talent for selling ads. I dunno. Google, currently sitting on cash piles that inch toward the moon, could surely build something far better. (Read article at The Motley Fool)

• An interview with RealNeworks CEO Rob Glaser that hits on the company's parnerships with Sonos and SanDisk. "If you're on the right side of history, there's nothing wrong with starting out with a product at the high end and then riding that into the mainstream. That is the path we're on with Sonos." (TechNewsWorld)

• Delphi has introduced a new XM receiver, the SkyFi3. (Read review at CNET)

Posted by Glenn at 9:45 AM | Link
|Napster||RealNetworks||Sony BMG||XM||Zune|

RealNetworks got into the mobile arena when announced Tuesday that it will acquire mobile music technology company WiderThan for $350,000 (read press release). WiderThan (view Google FInance page) was founded in 2000 and powers ringbacks, downloads and other entertainment services to over 50 wireless companies such as SK Telecom in South Korea and Verizon Wireless in the U.S.

From a Reuters article: " The company said it intends to keep the WiderThan brand intact, operate the business as a wholly owned subsidiary and maintain its existing employee base."

Posted by Glenn at 6:48 PM | Link
|RealNetworks|

• SOHH reports it appears The Game has left G-Unit/Aftermath and has signed a five-album deal with Geffen that includes a distribution deal for his label, Black Wall Street. (SOHH)

• EMI has agreed to license its North American catalog -- minus The Beatles, one can assume -- to P2P service Mashboxx. (Billboard.biz)

• Rick Rubin rumored to produce the next Velvet Revolver album, Liberated. (MetalUnderground.com)

• RealNetworks announced record revenue of $89.4 million for the second quarter ending June 30th. If income from the Microsoft settlement is adjusted out, earnings drops to $4.8 million. Music revenues rose 21% to $30.1 million. (Press release)

• Download a PDF of the IFPI's 2006 piracy report. (IFPI)

Posted by Glenn at 1:44 PM | Link
|EMI||P2P||Piracy||RealNetworks||Rhapsody|

A few days ago RealNetworks announced its earnings for the first quarter of 2006. How nice of them to break out the revenue for the music division and offer previous quaters for comparison. Here they are:

• 2006 Q1: $28.9 million
• 2005 Q1 2005: $22.2 million
• 2005 Q2 2005: $24.1 million
• 2005 Q3 2005: $25 million
• 2005 Q4 2005: $26.1 million

RealNetworks had record revenues of $86.6 million for the quarter ($11 million more than the first quater of 2005).

Here's where it gets interesting. Net income for the quater was $24.9 million. Excluding the impact of the Microsoft litigation -- which added over $31 million to operating income -- net income was only $3.4 million. Yeah, not so much. But subscribers are up to 2.4 million.

Listen to the earnings conference call (MP3) and read the financials (PDF).

Posted by Glenn at 6:25 PM | Link
|Earnings Releases||RealNetworks|

A beta of a browser-based version of the Rhapsody online music store is now available at http://www.rhapsody.com. Coolfer's first impression: Nice interface, intuitively used and, typical to most betas, sometimes painfully slow.

The browser-based version in meant to provide Rhapsody access with the need to install a separate application. There is, to my knowledge, no limit to the number of computers from which a user can log in. Playing a CD in the browser-based Rhapsody won't work, nor will transfering songs to portable devices. The Rhapsody application would need to be used for those functions..

Artists should experiment with this. Imagine an artist's website, or an email to its fan list, that contained a link to its album at Rhapsody. Since the free version of Rhapsody offers up to 25 free streams a month, fans would be able to listen in an environment much better than MySpace. The catch: Registration is required. If enough bands used Rhapsody in this way the effect would be that people would be more likely to register, or would already be registered. That's the network effect, and it can make or break a product. Just ask MySpace.

Digital Music News has some thoughts on a browser-based Rhapsody:

"For starters, Rhapsody can now be enjoyed by Mac users (Coolfer: Linux users, too), at least those that are not hooked on iTunes. Meanwhile, the move lowers the barriers for new users, especially those that are hesitant to grab an application download. That could spark a nice viral wave, especially among bloggers and friends that want an easy way to share a song."

Will devoted Mac users stray from iTunes? Some, but not many. Rhapsody isn't Jobs-approved, after all. Bloggers, in my opinion, will stick with MP3 links. Streams just aren't very popular among the bloggerati. Rhapsody would be wise to target the more casual consumer with the browser-based version.

Posted by Glenn at 3:13 PM | Link
|Online Stores/Services||RealNetworks||Rhapsody|