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

Includes: AMZN, RNWK
by: Prashanth Cherukuri

The subscription-music site Rhapsody (owned by RealNetworks (NASDAQ: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. (NASDAQ: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 (NASDAQ: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