Rhapsody Looks to MP3 Sales to Topple iTunes

Digital music seller Rhapsody is launching a $50 million marketing assault on Apple’s iTunes, offering songs online and via partners including Yahoo and Verizon Wireless, Rhapsody said on Monday.

The songs will be sold in MP3 format, which means users of the Rhapsody service will be able to play them on iPods.

Before now Rhapsody, jointly owned by RealNetworks (NASDAQ: RNWK) and Viacom’s (NYSE: VIA) MTV Networks, had focused on a subscription service, allowing unlimited song streaming for $13 to $15 a month, rather than selling downloads.

But Rhapsody Vice President Neil Smith said the fact the service has not been compatible with Apple’s (NASDAQ: AAPL) top-selling iPod digital player has limited Rhapsody’s reach.

“We’re no longer competing with the iPod,” Smith said. “We’re embracing it.”

Rhapsody also will be the music store back-end to MTV’s music Web sites and iLike, one of the most widely used music applications on social networking site Facebook.

Rhapsody will be available on mobile phones via the Verizon Wireless VCAST Music service. Buyers of a song over-the-air directly from phones also will be able to download that song to their computer. Verizon Wireless is a joint venture of Verizon Communications (NYSE: VZ) and Vodafone Group (NYSE: VOD).

Rhapsody executives describe the strategy as “Music Without Limits.” They said it would be backed by a marketing blitz worth up to $50 million in media space over the next year in part by leveraging co-parent MTV’s TV networks and Web sites.


Rhapsody is the latest player to challenge iTunes’s 70 percent-plus market share of U.S. digital music sales.

Last month digital music service Napster launched an MP3 store. Both Wal-Mart Stores and Amazon.com launched stores last year.

None of the new stores has made much of a dent on Apple’s lead. Early this year iTunes became the biggest music retailer in the United States. It has sold more than 5 billion songs since it launched in 2003.

Its success has been due partly to a seamless interface between iTunes and the iPod and because it provides a good user experience, said analyst David Card of Jupiter Research.

The new digital MP3 stores have been made possible because the four major record groups last year started to experiment with allowing retailers to sell music without digital rights management (DRM) software to prevent illegal sharing of music.

Analysts believe the move by Vivendi’s Universal Music Group, Sony BMG, Warner Music Group and EMI Group will help open the market for retailers and music companies.

“I think we’ll see retailers begin to compete the way they usually compete with pricing, merchandising and promotions, rather than due to some arbitrary technology,” Card said.

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