Rhapsody Eyes Deals After Napster Acquisition Lifts Subscribers

Rhapsody International Inc., the largest U.S. music-streaming service, is considering acquisitions and partnerships as the company looks overseas to double its more than 1 million subscribers.

The Seattle-based company, which bought Napster’s U.S. business from Best Buy Co. (BBY) in November, may announce deals early next year for Napster’s U.K. and German operations, Rhapsody President Jon Irwin said in an interview. That would turn up the heat on London-based Spotify Ltd., a rival service founded by Daniel Ek that has 2.5 million paying users worldwide.

“We’re looking to grow internationally,” Irwin said. “We’re looking for scale, and there’s not many large players out there. I suppose I could make Daniel Ek an offer.”

Rhapsody is talking with wireless providers in the U.S. and internationally about agreements like the one it has with MetroPCS Communications Inc. (PCS), which bundles music with prepaid text and data plans, Irwin said. Closely held Rhapsody, spun off from RealNetworks Inc. (RNWK) in 2010, is profitable, Irwin said, while declining to provide figures.

Irwin isn’t convinced that offering free or advertising- supported services, as Rdio Inc. and Spotify do to draw in paying subscribers, is an efficient way to sign up customers. While those services are free to listeners, the companies still pay for each song.

“We’re not burdened with paying a huge sum for free music in order to create a funnel to convert listeners into paying users,” Irwin said. “That’s a subscriber acquisition cost, and it’s a very expensive one.”

Subscription Plans

Rhapsody subscribers pay $5 a month for unlimited access on computers or $10 a month for access on PCs and mobile phones. The company provides a 14-day free trial. Most choose the $10 plan, Irwin said.

For the first time, Rhapsody streamed more music this year to people listening on equipment other than a PC, with about 40 percent going to mobile devices, the company said in an e-mailed statement.

Rhapsody also is working with automakers to make its service available in vehicles, a path Internet-radio provider Pandora Media Inc. and Spotify already are taking.

“Like Steve Jobs said, we are in the post-PC era,” Irwin said. “It’s about mobility and having your device with you. The devices out now are fully capable of allowing you to take your music with you wherever you go.”

When Rhapsody split from RealNetworks in April 2010, the service had 650,000 subscribers, Irwin said. It had 800,000 users when Rhapsody acquired Napster last month from Richfield, Minnesota-based Best Buy, which retains a minority stake in the service.

Now, at Rhapsody’s 10-year anniversary, Irwin says the company has grown “quite well beyond” 1 million subscribers.

“We’ve been advocates of the streaming business well ahead of its time,” Irwin said. “What’s changed is that music fans now understand they can have the ease of these models with them wherever they go.”

To contact the reporter on this story: Andy Fixmer in Los Angeles at afixmer@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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