Rhapsody Bets DRM-Free Downloads Can Foil iTunes

Apple iPod and Rhapsody's DRM-free MP3 downloads

Sources: Apple/Rhapsody

Online music service Rhapsody is stepping forward as the latest would-be iTunes killer, rolling out a digital music store that will sell downloadable songs that are free of copy restrictions and compatible with the Apple iPod.

In addition to its new “Music Without Limits” MP3 store, Rhapsody, a joint venture of RealNetworks (NASDAQ: RNWK) and Viacom (NYSE: VIA), also announced distribution partnerships with several companies including Yahoo, Verizon Wireless and Viacom’s MTV Networks.

“Until now, legal digital music has suffered from severe limitations on where consumers could buy it and how they could use it,” Rob Glaser, RealNetworks’s chairman and CEO, said in a statement. “Music Without Limits fixes those problems and will make digital music easier and more valuable for consumers.”

Rhapsody bills the service, which it will offer alongside its existing monthly streaming music subscription business, as a turning point in online music distribution. At the same time, the move comes as the latest in a series of challenges to Apple’s (NASDAQ: APPL) iTunes in the form of music download stores selling files without digital rights management (DRM) software, which restricts copying or device compatibility.

Like Rhapsody, similar offerings from Amazon, Napster, Wal-Mart and a forthcoming store on MySpace all rely on the notion that offering DRM-free files compatible with Apple’s market-leading iPod player will cut into the company’s dominant share of the music download market.

The major record companies also have been eager to offer their DRM-free catalogs to these alternative providers in the hopes of wresting away some of Apple’s control. Of the big four labels, only EMI has opened its catalog of music without copy restrictions to Apple.

But recent research suggests that the DRM issue might not be the wedge between Apple and digital music primacy that the industry hopes.

Earlier this year, a market analysis from the NPD Group found that iTunes had moved past Wal-Mart (NYSE: WMT) to become the nation’s leading music retailer — online or off, and the store just recently crossed the 5 billion mark for total sales.

Rhapsody is opening its download store with more than 5 million songs licensed from the catalogs of the four major labels — EMI, Sony BMG, Universal Music Group and Warner Bros. — as well as numerous independents.

The site also follows a pricing policy similar to iTunes: Most songs are available for $0.99, with full albums selling for $9.99. However, Rhapsody also offers discounts downloads for subscribers of its monthly service, selling tracks to them at $0.89 per song.

One of the signature features of Rhapsody’s store is the ability to preview an entire song; other services commonly limit previews to 30 seconds. Rhapsody’s non-subscription users are allowed only 25 of the 30-second previews per month, after which previews revert to the 30-second format. The restriction does not apply to Rhapsody’s monthly subscribers.

To better its chances of unseating iTunes, Rhapsody said it plans to promote the new store with a $50 million marketing blitz, with ad running on broadcast television, print and online. Rhapsody is also promoting the service by giving away a free album download for the first 100,000 people who register at the store before July 4.

In addition to opening the download store, Rhapsody also took a number of steps toward becoming a distribution platform.

Through the partnership with Verizon Wireless, Rhapsody is making its catalog available for mobile downloads through Verizon’s V CAST music service. As a result, subscribers paying $14.99 a month for V CAST’s will be able to purchase music from Rhapsody’s DRM-free shop. Each mobile download costs $1.99, which buys the consumer two copies — one formatted to work on select mobile devices, and one for the PC.

Consumers will now also be able to access Rhapsody’s catalog and purchase songs through Yahoo Music, and the music-discovery site iLike, which is one of the most popular music-sharing applications on social networking sites like Facebook, MySpace and Bebo.

Rhapsody has also created its own Facebook application so members of the popular social network can import music from their Rhapsody collection and share it with their friends.

Rhapsody will also become the backend provider for streaming music on MTV Networks’ online properties, including MTV.com, VH1.com and CMT.com.

Initial reaction from industry watchers viewed the moves with cautious optimism.

“Although we still see Apple’s iTunes as the world’s leading digital music service, we believe these actions will enable Rhapsody to gain ground,” Standard and Poor’s analyst Scott Kessler wrote in a research note.

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