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Rhapsody Goes DRM-Free and Ala Carte

rhapsody changesIt takes money to make money sometimes.  Will $50 million be enough to steal some cash and market share from Apple’s dominant iTunes digital content store?  That is a question digital music service Rhapsody is hoping to answer.

Under a new strategy revealed Monday, Rhapsody will begin selling a la carte, single-song MP3 downloads without restriction.   All of the music will be offered at a variable bit rate of 256kb and it will have no digital rights management encryption (DRM).  Accordingly, it will be playable on any device, including iPods and iPhones. 

Music bought over an internet connection will be priced at 99cents a song, or $9.99 an album.  Music bought through a Verizon mobile phone via vCast will cost $1.99. The higher mobile premium will include one direct download and a second “master copy” sent to a home computer.

The changes break from what had long been Rhapsody’s approach to music sales.  Previously, the company had centered on a subscription service that gave members an unlimited capacity of streamed songs for $13 to $15 a month.  (They also offered ala carte songs but they were encrypted with restrictive DRM.)

The original streaming service has often been criticized as being a “rental service” or “on-demand radio” that doesn’t provide value because it provided no ownership interest.  A customer’s access to music expired on termination of the contract.  It was pay to listen, not pay to own.  Like most early entrants to the music market, Rhapsody music was also encrypted with DRM and only playable on a selection of devices.

Now, while Rhapsody will continue to support the old subscription services and will still offer them to interested customers, the new plan, and the appearance of DRM free portable music, will finally give Rhapsody a chance to serve the wider market.

Acknowledging the change, and recognizing the need to cooperate to compete, Rhapsody VP Neil Smith said, “We’re no long competing with the iPod, we’re embracing it.”

To support and introduce the changes, which the company is billing as “Music Without Limits,” Rhapsody will spend as much as $50million on advertising and promotions over the next year.   A sizable portion of that will likely take advantage of airwaves and channels controlled by Rhapsody co-owner MTV Networks (MTV, VH1, Spike TV etc).

The relationship was built last August when Rhapsody merged with MTV’s Urge music service to form a joint venture called Rhapsody America.  Under that deal, Real Networks took 51% of the new company and Viacom’s MTV Networks the remaining 49%.  As part of the deal, Rhapsody America was obligated to buy $240m in advertising from MTV Networks cable channels.  The Rhapsody footprint further expanded with a Yahoo deal in February.

So, Will Rhapsody Siphon a Few Bucks from Apple’s iTunes?

That is certainly the plan – not just of Rhapsody executives but of the broader group of major music labels too.  Since finally accepting the need for open, portable DRM-Free music last year, the Big 4 labels (Sony BMG, Universal, Warner Music and EMI) have licensed their catalogs to several high profile digital stores including Amazon, Wal-Mart and European service 7 Digital.   They  also embraced MySpace in April

At the same time, in an obvious effort to reduce iTunes market power, all but EMI have kept Apple isolated on a DRM island and refused to license iTunes their catalogs without encryption.   At present, about 1/3 of Apple’s music catalog is unencrypted.  Amazon, in contrast, is 100% DRM-Free.

The hope of the labels, it seems, is customers will favor portability (DRM-Free music plays on most devices, encrypted music is severely limited) enough to bypass iTunes for other stores, even if the music they buy is ultimately destined for enjoyment on an iPod or iPhone anyway.

As recently as this past April, that dream hasn’t developed as expected.  Data then revealed by the NPD group showed just 10% of Amazon’s digital music customers were iTunes defectors.  The vast majority, a pool big enough to push Amazon to the number two slot in the digital sales hierarchy, were new customers.

Apple, DRM Blockaded and all, still sells seven out of ten legally downloaded songs and has moved more than 5 billion total songs to date.  As of April, the NPD data showed iTunes outselling Amazon by more than 10x.

So back to Rhapsody: Will DRM-Free songs sold ala carte make a difference?  In a word: absolutely.  It’s an essential offering if they want a shot at being competitive.  The prior model of streaming and sale of encrypted music was a shackle to growth. It kept a substantial portion of potential music buyers (those using incompatible players) out of reach.  As to chasing down iTunes though? That’s not so likely.  Being equipped to compete is far different from being able to unseat, or even shift, the markets dominant leader. Until data starts to show Amazon denting iTunes marketshare, its a longshot Rhapsody will do any better.


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