Market Insight

Telefónica makes strategic investment in Rhapsody for global Napster push

October 16, 2013

Jack Kent Jack Kent Director, Media and Advertising

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Multinational communications group Telefónica has made a strategic investment in subscription music pioneer Rhapsody. The partnership will see the two companies offer music services to Telefónica subscribers in Europe and Latin America under the Napster brand. Under the agreement Telefónica subsidiary Terra is to close its own music service Sonora which currently operates in Brazil, Argentina, Colombia, Chile, Peru and Mexico. Telefónica has announced Sonora customers in Brazil will be offered the option of subscribing to Napster for as much as or less than they are currently spending. Beyond that, few details of the new services have been announced. The specifics of what service Napster and Telefónica offer will be decided by  the local operator. In markets in which Telefónica already has a partnership with another music provider it may have to wait until those deals expire (or pay to end them) before launching the Napster offer.

Rhapsody has also created a Napster service for the Telefónica-backed fledgling Firefox OS. Telefónica plans to preinstall Napster on smartphones running the new operating system that launch in the fourth quarter 2013.

Rhapsody has opened an office in Sao Paolo to support the deal and further Latin American expansion.

 

The Telefónica deal puts Rhapsody back in the game by addressing two of the company's key weaknesses, specifically:

  • Uncertain prospects for international growth: international growth is a key priority for the company as Rhapsody's US numbers have been broadly flat for years. Shortly after the company bought Napster in 2011 it announced 1m paying subscribers, a number repeated in mid-2013. New and existing deals with European operators have helped this number to grow. But, even as separate companies, Rhapsody and Napster had been enduring relatively stagnant subscriber growth for some time, long before mind and market share swung towards Spotify and its freemium model or Muve Music's bundled offer with Cricket. In this context it was not surprising that Rhapsody fired 15 per cent of its US staff shortly after announcing investment from Columbus Nova in September 2013.

    Rhapsody's best prospects for growth are international, but until now it has lacked a clear strategy for pursuing this. Before the Telefónica deal, European operator partnerships had helped grow its subscriber base; bundled subscribers comprise around one quarter of its base. But these partnerships, such as with French operator SFR to provide access as part of its 4G mobile plans, are ad-hoc single territory deals that take time to replicate and tenders can be competitive. Unlike other services, Rhapsody has so far eschewed ad-supported freemium models that could help grow its audience.
  • Rhapsody has been accruing losses for its entire existence and needs money to survive, let alone grow. The service has been variously passed around from being independent (listen.com) to Real, to becoming a joint venture with MTV. Before the investment by Columbus Nova earlier this year the company's losses in the first half of  2013 increased by 56% year on year to reach $9.1m.  

The Telefónica announcement addresses both of those issues head on. The investment should give Rhapsody extra room to maneuver and fund its international expansion. The involvement with a major operator provides the opportunity for extensive bundling opportunities. The partnership may prove to be particularly interesting in Latin America, where the ability to leverage Telefónica's existing customer billing systems creates the potential for Rhapsody to avoid some of the challenges to adoption that can be caused by low credit cards penetration, which international media services like Netflix often face when trying to expand into the region.  The growing smartphone user-base in Latin America should also help boost adoption. IHS forecasts smartphone penetration to grow from 18% in 2013 to over 50% by 2017.

The launch of a service for FireFox OS is a good move for Telefónica. Securing a compelling and sizeable range of content is a major challenge for any new operating system as they lack the scale to attract investment from major players. On its own, Napster availability may not be enough to help FireFox OS win over other platforms, but it is a strong step in the right direction.

By taking a stake in Rhapsody, the deal also allows Telefónica to play a much deeper role in the content and value-added services market in Latin America than it has been able to do in Europe. In Europe it can partner third parties to promote bundled deals but there is also fierce competition from established players, which reduces its ability to influence the content value chain. IHS understands that as part of the deal, music services launched in Latin America could feature Telefónica branding alongside Napster's. The deal was agreed with Telefónica Digital, its division that focuses on content and services beyond traditional communications, but the scope of the partnership underscores the operator's commitment to playing a wider role in the digital content and services business.

Organization
Rhapsody Telefonica
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