RealNetworks' Rhapsody: Givin' Away Free Stuff

| About: RealNetworks, Inc. (RNWK)

Yesterday morning, RealNetworks Inc.'s (Nasdaq: RNWK) Rhapsody service announced it is giving away free songs and moving to DRM downloads in the release of a new online music store. The only problem with this: It sounds like a great recipe to incinerate cash.

The initial blog and news coverage have focused on the "DRM is dead" and "free preview" angles, but is this really that interesting? It's just marketing expenses, really. Where's the business sense behind this deal? Real's stock price has been in the toilet for years, and this will do nothing to help it out. It has loss leader written all over it.

Going after the Apple Inc. (Nasdaq: AAPL) iTunes model has a big problem: Apple makes all its money on the hardware platform, which is subsidized by the aggressive sale and marketing of music. Real doesn't have any such hardware platform, or business model. Its music services are money losers, according to its financial statements.

Once Apple captured the excitement and the imagination of the music market with iTunes, it was basically license to print money selling iPods and iTunes. It can then plow much of that profit back in to make exciting new hardware products which lock its users into its systems.

Plain vanilla MP3 service such as Napster and now, Rhapsody MP3, have no such luxury. Without the profitable hardware business to subsidize the music download side, they're stuck. Amazon has at least partially tried to figure this out, pushing its own hardware platform, the Kindle.

Rhapsody does claim a few innovative (at least for the moment) features in its new service. You can preview a full song. If you are one of the first 100,000 people to sign up for the account you receive an entire album for free. If you are one of those eccentric people using the Verizon's VCAST service, it will integrate with that. Rhapsody is also doing some things that aren't innovative -- in fact they look copy-cat-like -- such as moving to DRM-free downloads months after Napster and Inc. have announced it.

This move actually makes me kind of sad (sniff). As a big fan of Rhapsody's subscription music service, which I do think is unique, it's disappointing to see them caving into the commoditized work of DRM-free music downloads.

It would be less painful if there were some clear business logic to the move. Does Real -- or anybody else -- really think that price-based music downloads can do any serious damage to Apple? If anybody thinks so, they've missed the idea central to the entire Apple reign of digital music -- it's the exciting high-end hardware and software platform that captures the user's imagination, not free downloads.