New Subscription Service Real’s Threat to iTunes, Napster

Bidding to grab market share from both iTunes and Napster, RealNetworks today said it would launch an upgrade of its Rhapsody subscription music service that allows users to listen to songs they download on portable MP3 players.

The new version of Rhapsody is just the second subscription-style service — after Napster To Go — that enables users to put what is essentially rented music onto a portable device. The RealNetworks service will use Microsoft-developed technology that essentially erases the songs if a user lets his subscription lapse.

Free Access

To generate interest, RealNetworks said it would begin offering free access to a reduced version of Rhapsody, giving users the ability to download and listen to up to 25 songs per month from the full 1 million-song library. The company said it believes many free users would upgrade to subscription services once they were exposed to Rhapsody.

The announcement of the upgrade came with abundant hype and a free concert at New York City’s Radio City Music Hall, a likely hint that RealNetworks plans to heavily promote the service in a bid to wrest market share from portable music leaders iTunes and Napster.

“With the new Rhapsody, millions of people can now experience and share digital music — legally, and with no strings attached,” RealNetworks CEO Rob Glaser said. He said the service stood to “transform digital music.”

RealNetworks said its strong relationship with the music industry and other partnerships, including a deal with Google, make the free music download offer possible.

However, analysts said the most significant change is the Rhapsody To Go service, which is just the second portable subscription service to become available. Analysts expect a flood of similar services to be available before long, as companies look to match iTunes by offering monthly access, positioned successfully by Napster as a low-cost alternative to paying 99 cents per track.

Going Portable

Subscription rates will be around US$15 per month for unlimited downloads, about equal to what Napster charges for its service. The tracks will be playable on compatible MP3 players, including those made by Creative, iRiver and Samsung.

ITunes now dominates largely because buying a track is still the predominant approach, Inside Digital Media analyst Phil Leigh told the E-Commerce Times.

This year, for instance, pay-to-download sales will reach about $350 million in the U.S., compared to $200 million for subscription services, where Real competes with Napster and Yahoo’s MusicMatch.

However, Leigh said, “it’s still very early in the game,” and the eventual form of the digital music industry is still to be determined. Clearly, iTunes will remain a force even if it adheres to its current business model. “The expansion of subscription-based choices and the availability of feature-rich options will help grow that part of the business as a whole,” he added.

Surging Ahead

In fact, Jupiter Research now predicts that subscription sales will surpass buy-to-own download sales within four years, when subscription sales will be worth $900 million and iTunes-style sales around $800 million.

The new services were announced just a week after RealNetworks said its Rhapsody subscription service had surpassed the 1 million subscriber level, including a batch of users who receive the company’s streaming music service over their cable TV connections through a partnership with Comcast. Rhapsody had been limited to playback on PCs, however, which analysts said represented a long-term impediment to additional growth.

RealNetworks is enjoying the surge in digital music buying. The company recently increased its outlook for the first quarter, saying revenue would come in comfortably above earlier predictions and likely hit record levels.

Roxio, the parent company of Napster, has also raised its revenue forecasts, citing stronger-than-expected sign-ups for its subscription services. Napster launched its own To Go service late last year and backed up the launch with an advertising blitz that included Super Bowl commercials touting the relative cost of using its subscription service versus Apple’s per-song approach.