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Real Networks, MTV to Spin Out Rhapsody

RealNetworks and MTV have confirmed plans to spin off their joint digital music play Rhapsody into an independent company in a deal expected to close in the first quarter of 2010.

The restructuring will see RealNetworks (NASDAQ: RNWK) shed its majority stake and operating role in the money-losing music subscription service as it looks to focus on more profitable segments of the online media business.

Under the current arrangement, Real holds a 51 percent stake in Rhapsody, with MTV, a division of Viacom, controlling the remaining 49 percent. The spinoff would see the two companies retain a minority stake in Rhapsody, with Real contributing $18 million and certain intellectual property to the standalone business, according to a filing with the Securities and Exchange Commission.

MTV agreed to commit $33 million in advertising to support an independent Rhapsody, voiding its previous marketing obligation of $111 million.

"Separating Rhapsody into its own independent company is a significant first step in making RealNetworks a more focused and profitable company," Robert Kimball, Real's president and acting CEO, said in a statement.

Kimball assumed the top spot at the Seattle-based firm on an interim basis in January, following the resignation of RealNetworks founder Rob Glaser, who stepped away from day-to-day operations after 16 years at the company's helm, but still serves as chairman of Real's board.

Rhapsody has long been a leader in the online subscription-music business, but has generally been considered an also-ran to the more popular pay-per-download model, led by Apple's (NASDAQ: AAPL) iTunes. In June 2008, Rhapsody rolled out its own music download shop, entering a crowded space that Apple continues to dominate.

Nevertheless, Kimball struck a hopeful note for Rhapsody's prospects as an independent.

"Rhapsody will be the largest pure-play digital music service in the market," he said. "We have provided Rhapsody with the right team, and financial and intellectual property assets to succeed in the competitive market for digital music."

Analysts were mixed in their reactions to Real's move to spin off Rhapsody, which had been rumored for months.

"We think that separation of Rhapsody should allow the company to focus on more promising businesses, such as games," JP Morgan analyst Vasily Karasyov wrote in a research note. Karasyov noted that Rhapsody had incurred $34 million in operating losses during the first nine month of 2009, and had dropped 50,000 subscribers in the most recent quarter.

Standard & Poor's analyst Scott Kessler had a different take, writing that the spinoff would not help Real "address real issues related to competition and pricing," and reiterating his "sell" opinion on the company.

RealNetworks is scheduled to report its fourth-quarter earnings tomorrow.

Kenneth Corbin is an associate editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.