Can MP3s Save the Music Strategy at RealNetworks?

RealNetworks is now transitioning into an MP3-based catalog on Rhapsody, at least on a-la-carte downloads.

But is that enough to save its music strategy?

On Thursday, the company pointed to steady music revenues during the recent, second quarter.  Specifically, music-related sales moved to $37.2 million for the period, up one percent from the year-ago quarter.  But music-related earnings slipped into the red, dropping $4.62 million pre-tax for the period, according to the company.

RealNetworks has been the force behind subscription and music ecommerce platform Rhapsody for years, though the company recently tied with MTV Networks to become a joint venture partner on the service.  But the broader picture on subscription-based music has been tepid.  MTV recently abandoned its unsuccessful Urge, and Yahoo is now outsourcing its subscription services to Rhapsody after floundering on Yahoo Music Unlimited.

That gives RealNetworks a growing market share position in an unproven and difficult segment.  During the most recent period, total music subscribers – mostly from Rhapsody and the premium RadioPass – stayed flat at 1.87 million.

Now, the focus falls on an MP3-based, “Music Without Limits” initiative, one that includes distribution arrangements with Verizon Wireless and iLike.  “We also launched a major initiative — Music Without Limits — that substantially strengthens Rhapsody by integrating mobile music and legal MP3s from all major labels,” RealNetworks chief executive Rob Glaser said during a Thursday call.

But the MP3s only started flowing after the quarter ended, and the transition towards DRM-free remains ongoing.  Now, the question is whether consumers will substantially increase their a-la-carte downloading through Rhapsody, and in turn, migrate upward towards the subscription platform.

Overall, RealNetworks revenue bumped 12 percent to $152.6 million, though losses totaled $1.3 million, a reversal from a year-ago gain of $1.3 million.

Paul Resnikoff, Publisher