The Roaring Mouse: Rhapsody Faces Its Future

Mark Mulligan recently commented on an announcement from Rhapsody that trumpeted the Seattle-based granddaddy of streaming music’s impressive growth over the past couple years.

His analysis:

Enter investment firm Columbus Nova who acquired an undisclosed stake in Rhapsody in September 2013. A reorg and a repositioning process followed paving the way for strong subscriber growth. Rhapsody had 1.5 million subscribers one year ago. If it continues to grow at its present rate it should hit 3 million by July this year. And if it sustains that growth into the start of 2016 it could find itself the second biggest subscription service globally. Current number two Deezer appears to be slowing so 2nd place could be a realistic target for next year. Quite a turn around for a service that looked like it was falling by the wayside 5 years ago. 

Surprisingly, Mark’s blog piece was extremely thin on the particulars about Rhapsody’s turnaround. I was surprised as he is one of the sharpest analysts in digital music.

Rhapsody’s growth is impressive. But the seeds of Rhapsody’s recent growth were sown years before Columbus Nova showed up to the party. When the company spun out as a standalone entity from its parent, Real Networks, it was given a few on-air marketing dollars from its other owner, Viacom Networks. Previously Viacom had poured hundreds of millions of dollars in advertising credits to Rhapsody, which it used to advertise the service on MTV, Comedy Central and other on-air properties. The efficacy of those dollars was questionable, as the company had around 800,000 paying subscribers. It was just too early to market on-demand music to a mass audience.

After the spin-out, Rhapsody was left without a sizable marketing budget nor the money to invest in a free tier like Spotify or Pandora. So the company was forced creatively figure out how to attract customers. One of the hardest things streaming services faced then–just like now–is getting consumers to plop down their credit card to pay to them. The president at the time, Jon Irwin. opted to partner with companies who already had access to credit cards—cellular carriers.

Precarious Partners
Before we get into that, here’s a little bit about the economics and goals of partnerships between carriers and music services. These kinds of deals have been seen by the music industry as the answer to building mass audiences of subscribers. Customers might ask themselves why they are paying $10 a month for Rhapsody, but if the charge is included in their cellphone bill, they might never see it. It’s always considered better to tap someone else’s customers than build your own.

Deals like these are extremely difficult to navigate. Labels are terrified of offering discounts for the service, which is a requirement to get carriers to agree to the deal. Carriers are reticent to pay for content that customers may or may not use. And everyone wants someone else to take a margin hit. It’s up to the streaming service to get everyone on board and craft a deal that will be successful.

The best deals are ones where all parties–and the consumer–are happy.

Sometimes it works, sometimes it doesn’t. A couple terrible examples: Deezer has built a massive worldwide audience of paying subscribers, and yet the rate of people who actually use the service is pathetic. Mark Mulligan reported that it could be as low as 20 percent. A low active rate infuriates subscribers and, therefore, carriers. While there will always be some level of inactives in a service, when it becomes huge, you aren’t building a distinct brand and service. Muve Music, which previously was offered through the Cricket pre-paid cellphone service, also had massive inactive users and really awful economics due to licensing deals it signed with music labels.

It’s critically important to build the right offering when selling the service. Music services on carriers come in two varieties: a bundled offering and a bolt-on service. In a bundle the consumer is buying a tiered plan that includes the music service. So for $70 a month, you subscribe to the Cellphone + Music and a bunch of other services. The bolt-on is much simpler and cleaner: add music for $5 or $10 a month. As a product guy, I much prefer the bolt-on. Why? Most of the inactives reside in the bundle and all those people represent a time bomb just waiting to blow up. Customers who quit in droves are expensive for everyone, but it tolls the death knell for the service.

And that’s the weakness with the marketing and distribution partnership through carriers. Specifically:

  • Sure the music service gets the massive benefit of not having to capture the credit card, but it also cedes control of the relationship with the customer.
  • With two parties involved, the company’s already thin margins selling music get deeply eroded, requiring the music service to rely on its own retail customers to prop up the distribution costs.
  • The service is completely reliant on the carrier to market to their customers, and the carrier may not be very motivated to do so.
  • The service can quickly lose brand equity, as the carrier might just call the service ‘Comes With Music’ instead of promoting its brand. If the customer is just subscribing to a generic music service this is a very bad thing, as the carrier could replace it at any time.

So the music services must walk a fine line:

  • Build and hold onto a strong brand presence that will motivate the carrier to do the deal in the first place.
  • Make sure the carrier does the right thing in selling the service and focus on the brand.

Do it wrong, and you end up like Muve Music, which AT&T sold to Deezer at auction prices earlier this year after acquiring what was left of the struggling Cricket Wireless. Do it right, and hockey stick growth follows.

A former colleague thought the relationship between the powerful carriers and little music services reminded him of a blend between Aesop’s fable about the lion and the mouse and the Roald Dahl story about the crocodile and the dentist mouse. In my colleague’s telling of it, the powerful and hungry lion wants to eat the mouse, but to do so will ruin his only hope for repairing the tooth. So the mouse has to convince the lion to not eat him before he can fix the tooth. I’m sure you can imagine who is the lion and who is the mouse.

Dialing Up Deals
After months of negotiations, Rhapsody announced its first partnership with the pre-paid carrier MetroPCS in 2011. In the next few years the company announced deals with European carriers, followed by a global deal with Telefonica and then T-Mobile’s offering.

So far, so good. Solid growth. But it’s an open secret that Rhapsody’s brand has been fading for quite some time now. And the partnership strategy isn’t helping develop a strong brand identity. In their thirst to make the deal, the company is making their brand look more like a quilt than something unified. The service is known as Rhapsody on MetroPCS, Unradio on T-Mobile, MTV in Germany, Napster in Greece, Spain, Sonora in Latin America.

It’s an open question if it will be able to maintain its presence with Spotify taking up all the oxygen in the room with customers while YouTube Music Key and Apple’s iStreaming launches. The company has faced issues before and has been written off time and time again. It remains to be seen if it can grow, in particular in the U.S.

As the partnerships ramp, expect the company to face downward margin pressure. Those thin margins will start to eat into the overall revenue of the company. Growth is fantastic, but it could also harm the company’s bottom line.

Maybe even more important, the company needs to answer the hard question about what position it seeks to occupy in the marketplace. There probably is room for a white label music service that works well with big distribution partners like carriers and cable companies. But without a solid brand and a strong direct retail subscriber base, the company could start to see more pressure to deliver meaningful value. It’s far from clear if a mousy little Rhapsody can roar in a den full of lions.

Disclosure: I worked at Rhapsody for nine long rewarding, frustrating, awesome and ridiculous years before last year’s layoff.

More Rhapsodizing

Music Industry Blog: How Rhapsody Became A Top Tier Player Again

Music Ally Rhapsody’s Napster expands across Europe and plots ‘laddered’ pricing strategy

Billboard Why Streaming (Done Right) Will Save The Music Industry

GeekWire Rhapsody Tops 2.5M Subscribers, Up 60% From Last Year

2 thoughts on “The Roaring Mouse: Rhapsody Faces Its Future

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s