Music subscription service Rhapsody was spun out of RealNetworks one year ago today, and the company is celebrating its birthday with a party at high noon.
The company has reason to celebrate: it has added 100,000 subscribers in the last year, and made a profit last quarter. It’s also managed to dodge a threat from Apple to start charging a 30% fee on all subscriptions sold through its iPhone app.
We spoke to president Jon Irwin ahead of the anniversary. Here are some things we learned:
- Rhapsody is about at break-even now, and expects “meaningful profits” this year.
- The record industry is loosening up — it’s more willing to be creative and strike deals for new kinds of services.
- Despite his criticism of Apple’s subscription policy, Irwin is a big Apple fan…but he carries an Android phone instead of an iPhone.
An edited transcript of our conversation is below:
Business Insider: Has your subscriber base gone up since Rhapsody left RealNetworks?
JI: Yes it has. That’s one of the measures, it’s the most visible, it tends to be the one people like to talk about. We’ve added 100,000 customers, so we’re over 750,000 subscribers.
What’s more important to me is we’re retaining our customers, they’re staying with us longer, they’re using the service more. That’s indicative of the products we’ve been rolling out across the mobile platforms. We just recently released a new desktop experience which is a project we internally called “Pixies.” It dramatically improves the experience customers have while using Rhapsody online and on a PC or Mac.
BI: What’s the use percentage of mobile vs. PC?
JI: A year and a half ago when we first launched our initial mobile app, it was down in the 1 or 2% range. That’s climbed steadily where we’re upwards of 30%. And climbing.
BI: About a year ago there was a wave of subscription music startups in the U.S., and now it seems like the VC community has recently gotten into music again — Rdio has gotten some big investments, Spotify is getting some big investments. Why is everybody suddenly interested in this again?
JI: The growth of mobile and true portability for music services is afforded by the capability of smartphones, the power and capacity of the networks out there. It’s a natural home for people to take their music. Now everybody has an iPhone, everybody has an Android phone, the sexy devices that everybody wants are now capable of delivering a compelling user experience.
BI: Spotify is supposed to launch in the US this spring or summer, Google is supposedly launching some sort of music service, Amazon launched a music locker earlier this week. If the big guys get in, how do you differentiate yourself?
JI: Rhapsody International may be turning one, but the Rhapsody service, the platform we’ve developed, many of the personnel we have, have upwards of 10 years experience pushing on demand subscription services. That gives us a platform that’s proven, that’s tested, that’s scalable. That gives us the people talent and experience to go to market. It gives us partnerships with companies like Verizon — we were recently loaded on the desktop of the new Thunderbolt 4G phone and we’ll be on other LG phones that come out.
We’ve really focused on having a strong editorial presence and focus. In this world of unlimited on-demand music, the average music fan needs a guide. They need to say “where do I go next, what should I be listening to next?” Our editorial staff are kind of like park rangers. We’ve curated that and cultivated that extensively over the last 10 years.
In the United States, we are the only company that’s had any real substantial growth. That 100,000 subscribers being added to market is by far the largest growth of anybody and probably outpaces the combined size of our nearest competitors.
The Amazon cloud service is going to do a great job of educating consumers on the power of the cloud. The same can be said for Apple or Google coming out with services that have been rumoured. Rhapsody will continue to provide that additional editorial mix, and a solution across ALL platforms — we will work on Android, we will work on iOS devices, we will work on BlackBerry.
BI: Would you ever consider adding a locker?
JI: As somebody becomes a Rhapsody subscriber, we’ll pre-populate the cloud for you. So if you’ve got 4 or 5 thousand songs that you’ve curated and spent time building playlists and libraries over the years, whether that’s music you purchased from iTunes or actual physical media, we’re in development on a product that will take that information, add it to your Rhapsody library, and take that personal music experience you’ve curated and it’s available right out of the gate.
BI: Do you find that the labels and publishers are getting a little more lenient or more willing to strike deals? Or are they still seemingly pretty scared of the digital world?
JI: I wouldn’t call it scared. They’re very thoughtful on how they’re going to move from a physical world that’s clearly declining and a download world of downloading and purchasing MP3s which is plateauing.
We work very closely with the labels on a very regular basis, and there are signs of them being more creative and more flexible. I expect that pace to accelerate.
BI: It seems hard to negotiate those licence deals and still be profitable. Is Rhapsody profitable, and if not, what’s the magic number of subscribers? Where do you turn the corner?
JI: We actually had a profitable quarter and we’re right near break even in our business right now. It is a game of scale, though. We are at scale where we’re very near being at the break even level and moving on to meaningful profits going forward. It takes a while. Being over 750,000 subscribers, operating an efficient organisation, and continuing to work with the labels and distribution partners so the margins allow you to build on that profit — we’re right there.
For other players it’s a challenge. If you’re down and you only have 10,000 subscribers, the operational expense you incur to deliver the service — you’re a long way from break even.
BI: You were a pretty open critic of Apple’s new subscription terms that are supposed to kick off this summer. They were sending mixed signals — at one point it looked like the new rules only applied to print subscriptions like the New York Times, then it looked like they applied to other types of subscriptions like Rhapsody. Did you ever reach an agreement with them?
JI: Our new app, version 2.2 of our iPhone app, it hit the iTunes store on Wednesday. That was released without any change to our subscription, using the Apple subscription API.
My comments were very direct — at a 30% revenue share to Apple, for somebody who uses the Apple subscription billing mechanism, those subscribers are not profitable. We haven’t been told when those new rules will be enforced. The deadlines of June or July haven’t been confirmed by Apple. Our discussions with them continue, they’re a valuable partner, a valuable channel.
I use a MacBook pro, I’ve got an iPad, I’ve got an iPod Touch, I’m a fan. I also carry an Android phone. Making sure we’re on all these devices is what it’s all about.
BI: A research firm recently predicted that there would be more than 160 million music subscribers worldwide in 5 years, up from around 5 million today. Do you think it’s reasonable?
JI: t will be a blend. It won’t be just full on-demand subscriptions similar to Rhapsody Premier. You’ll find people subscribing to ad-free radio and subscription radio. If you include all those digital audio experiences, and what we believe is the impending awareness of the consumer, we’re certainly going to see that. Whether 161 million is right, who knows? We like the business we’re in.
BI: A lot of that growth is happening in Asia. Are you planning on expanding?
JI: We have the ability to do it as an independent company. Previously, as Rhapsody America, we were restricted. The U.S. market is the largest and most valuable market for music, we own I believe market share that’s well north of 50% of current subscribers in the US. Protecting that position and expanding that position is a priority, but we’ll add on other areas as it makes sense.