Rhapsody's New e-Music Download Service Takes on iTunes

The subscription-music site Rhapsody (owned by RealNetworks (RNWK)) on Monday said it will start selling unprotected songs online as it tries to drum up sales and challenge the dominance of Apple Inc. (AAPL) and its popular iTunes service. Rhapsody previously offered consumers access to its library of 5 million songs for a monthly fee, but its service does not work on Apple's iPod. It also sold songs individually, though the music was encoded with anti-piracy DRM software. Under its new strategy, Rhapsody will sell music in an unprotected MP3 format and those songs will now be playable on an iPod or iPhone. The music will be compressed at a variable rate of 256 kilobits - double the rate used by iTunes for its DRM-encoded songs

There are many reasons why this move will have little or no effect on iTunes. Let us analyze the $15-a-month subscription service. Music subscriptions are a really bad idea, because no one wants to be locked into a monthly fee or a contract.

Rhapsody is also touting its $0.99/song price, which is DRM-free. In my opinion, it requires more than a cheaper price and unlimited downloads to beat iTunes. Most importantly, it is still to be seen if Rhapsody has the collection of songs that iTunes has. In my 5 years of using iTunes, there is not one song which I did not manage to find there. I have been able to find music from every part of the world, including songs from regional Indian films. As the iPhones and iPods attain cult status in India, watch out for the iTunes market to expand.

I do not see much difference between Rhapsody's music service and Amazon.com's (AMZN) which was launched last year. A report by NPD earlier this year showed that though Amazon.com's music service was slowly gaining market share, it was hardly stealing share from iTunes. It's revenues were coming from new customers. While this is great news for Amazon, its good news for Apple too. People who have used Amazon will sooner or later hear about iTunes, and the ease of using iTunes might make them switch to iTunes. In fact, Amazon sells many songs only for $0.89 and it still could not manage to dent iTunes' market share.

Another reason why iTunes is so popular is the iTunes gift card. A survey of my local Best Buy store showed me that on an average, $100 worth of iTunes cards are sold everyday. That might not seem like a lot, but remember that's at one store. Amazon.com does not even have gift cards.

Apple's advantage has always been its ability to make the consumer's life easier and make the consumer feel special, through its iPod, iPhone and iTunes line. Anyone who owns an iProduct really likes their stuff, and will not trade it in for any inferior alternative, no matter how much cheaper it is. Apple's competitors still do not understand this simple fact about user experience. With iTunes, the user experience is phenomenal. You plug in your iPod, and everything else is at the click of a button. No need to open popup-infested players like Rhapsody or Emusic player.

Though the Rhapsody news might be given a lot of e-space for a few days, I believe it takes a lot more than a cheaper music player (Sansa, Zune, etc., etc.) or a cheaper subscription service (Amazon.com, Rhapsody) to throw a gauntlet to Apple's iTunes. When consumers are willing to pay $100 more than competing devices for an iPod or iPhone, I'm sure they will not mind staying with iTunes for a user experience which is ahead of competitors' by leaps and bounds.

In the end, Rhapsody's service is gonna end on a whimper, like the other iPod-killers and iPhone killers.

Disclosure: None

Comments

[Jonathan Liss:]

Prashanth,

Really good piece - tasty food for thought!

I have one disagreement - you say that "In my 5 years of using iTunes, there is not one song which I did not manage to find." In ;my own personal experience, there are often songs I can't find on iTunes. A recent example: the soundtrack to the movie Snatch, which I looked for in iTunes today and couldn't find. It's not exactly an obscure movie or soundtrack.

This fact means there will probably ultimately be room for more than one online 'mega' music store. I think if their content is differentiated enough, there will be room for both to thrive. After all, it's the content consumers are ultimately looking for - they don't care whether they buy it at Tower Records or Virgin - and I don't see why consumers won't use both online stores to buy music, with one complementing the other when they can't find what they want.

2008 Jul 01 07:05 AM

[brando:]

You obviously don't know much about music, and even less about the music business. Nobody is trying to out-iPod Apple...not Rhapsody, not Napster, not Amazon. These music stores are vying for slices of what is hoped will be a larger overall legal music pie (the real problem is piracy and why the law is not shutting it down -- but I digress). iTunes sales are plateauing as people realize Apple's content is locked by its proprietary DRM into Apple devices. Secondly, you sound like what the technology community refers to as a "fanboy", i.e. neither logic nor reason can infect your love of anything Apple. Lastly, subscription music is not "a really bad idea." I and thousands of others who subscribe to Napster's and Rhapsody's subscription product think it's a really good idea and love the value proposition. What people need to understand is that subscription music isn't necessarily a replacement for owning a collection of music (although I choose to use it in that manner). It drives my home stereo system, my son's stereo in his room, and another system we have by the pool. It also fills and re-fills 3 different mp3 players that my family shares, one of which happens to be my cell phone that also can purchase tracks over the air via ATT. All this for $15 per month. It's the best entertainment value proposition I know. I tried Rhapsody and it's fine, but I like Napster better. They have over 6 million songs and you can purchase them DRM-free if you like.

2008 Jul 01 04:50 PM

[manseated:]

while i respect your opinion, at least state when it is what you're spouting. "No one wants to pay a monthly subscription" for music is just that--an opinion. When i first encountered Rhapsody, i thought i'd pay that much just for someone to organize my music, much less give me the instantaneous reward for merely thinking of a song -- and not a :30 sample, with an invitation to pay (only)$0.99 for the song, (*those first $1.04 charges to Apple seem so "cute" on your statement) restricted to one devicesphere..But the whole song. It may be that 1979 classic-- hearing it on demand is the best (The Buckinghams' "Mercy Mercy Me" was my song). It dawned on me that music, for some, is a utility --you want it there when you need it, and the expert and helpful suggestions and associative playlists are great for discovering music when you didn't even know you wanted to. Just click "Add to Library" and the track is saved. Albums become albums again -- no charge to listen to an artist's intended format. I'm not saying sales of singles harken the death of the album but what's the cost of the time expended in the terrible browsing experience in the iTunes store, compared to a subscription to the cleaner, clearer, more tuned in (and not so mouse-oriented) voice of Rhapsody. My vote's for them.

2008 Jul 01 08:46 PM

[K. Lewis:]

Many of the articles and comments I read on this subject take the stance that there will be one winner and many losers. I believe Apple will remain the largest player in this space until someone offers EASIER access to a media library that plays on the iPod. I use an iPod and every time a new service is announced, I check it out. If there was a library available as big as iTunes that I could access unrestricted via subscription, I would use it. What will probably happen is that as soon as that level of service becomes a reality, Apple will match the offer. That'll be a great day for me.

2008 Jul 03 02:51 PM

[Schmitie:]

First off. Kudos to wyly: "Secondly, you sound like what the technology community refers to as a 'fanboy'". You made me laugh.

I have to say Apple iPod is a very popular product, but..... only in the U.S. You are forgetting the entire world around you. In the U.S., the only easy accessible mp3 players are iPod, Samsung, Sandisk, Zenith, and sometimes Creative. But outside
"Amurica's" (Amurica is the U.S. America is North and South America. It's sometimes considers impolite to refer to the U.S. as America. I had a Brazilian exchange student.) little box of joy there are many other brands all fighting for a place on consumers shelves. I recently went on a trip to Europe. Its very different. There when you want to buy an mp3 player you can choose from over 30 different brands not just four.

Main point I'm trying to make is Apple is not that big. They have a very strong base in the US. And many other places. But they are slowing in sales in different places.

If you want to choose an mp3 player the choice on music services will be very important (vice versa). If you want to go main stream go with Apple iPod and iTunes. If you want to be different or just like a different company go with Archos, AT&T(Cingular), Cowon, Creative Labs, Denon, Digitrex, D-Link, Ericsson, Insignia, iriver, Kyocera, Motorola, Nokia, Palm, Pioneer, Philips, Roku, RCA, Samsung, SanDisk, Sonos, Sony, and Toshiba. Use these products with the "plays for sure" combo of Rhapsody and eMusic. And if you like using your cellphone as your mp3 player use Sony Ericsson (best phones in the world, not opion, fact, jk), or Samsung's many phones watched with AT&T(Cingular) in combo with Napster (this is based off of a U.S. citizen stand point. Napster is supposedly better in Europe and hella good in Japan- a soon to be top economic powerhouse.)

Personally I love Cowon. Best shit in the world. I paid 200$ for the Cowon D2. 8 gb of internall memory. 35$ for 4gb sd card external (where are the sd card inputs on iPods). touch screen. 52 hours of battery life!!!!!!!!!!!! and very good software (a bit confusing but very good). and most important: MADE TO LAST MORE THAN ITS WARRENTY. iPods are only made to last one year. then they break.
THEY WILL BREAK. That means you'll end up spending more on your iPod nano video 8gb ($200) than i will on rhapsody music to go ($15 a month) over a 2 years time. 200 * 2 = 400 - (15 * 12*2) = $40.

That makes me want to cry. thats saying your using illegal downloads. with downloads off iTunes your broke or spoiled. :-)

With Love,
Schmitie

2008 Jul 18 01:37 AM