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Monday, June 30, 2008, 08:50 am PT (11:50 am ET)

Real embraces Apple's iPod with new Rhapsody MP3 service

RealNetworks said Monday it's switching gears in its quest for a larger slice of the legal music download market with the launch a DRM-free a la carte MP3 store that will cater to iPod owners directly rather than through unauthorized hacks of the past.

The move represents an about-face for the Seattle-based firm, which has long built its online music business around subscription-based services that offer subscribers temporary access to an unlimited number of copy-protected songs each month for a set fee.

Although Real had also previously offered a Rhapsody "To Go" service that sold tracks and albums outright, media files — like those from its subscription services — came wrapped in proprietary software that made them incompatible with Apple's industry leading iPod player.

Real said songs purchased from its new Rhapsody MP3 service can be played on virtually any MP3 player, including Apple's iPod and iPhone. Like iTunes customers, shoppers will be able to sample 30-second segments of each track before making their purchase, and all purchased tracks will immediately be funneled into either Rhapsody, RealPlayer or iTunes.

The service presently serves up more than 5 million songs from all four major music labels — Universal Music Group, Sony BMG Music Entertainment, Warner Music Group, and EMI — and an extensive number of independent labels. Most tracks are sold inline with Apple's pricing at $0.99 a song or $9.99 per album.

By contrast, Apple has thus far managed to secure only the music catalog of EMI in unrestricted AAC format for sale on iTunes. Threatened by overwhelming success of the iTunes service, the remaining labels have refused to come to terms with the iPod maker on sales of unrestricted tracks out of fear that such concessions would only increase the company's stronghold on the market.

In particular, labels have complained about Apple's unwillingness to allow flexible pricing on iTunes, as well as its unwavering approach to album sales, which mandates that customers be able to purchase individual songs from each and every album on the service rather than be forced into full album sales for particular works.

As part of its deal with the labels for Rhapsody MP3, Real has agreed to place throughout its store "a strong emphasis on the digital album with merchandising centers for 'new album releases,' 'old favorites,' and 'who's on tour.'" However, like similar deals between the labels and Amazon, Real is able to offer prices for its MP3 service that are on par with iTunes — a move the labels hope will reduce Apple's influence on digital music sales.

Real, which commands just 1 percent of the online music download market, once attempted to boost adoption of its Rhapsody service by reverse engineering a hack called Harmony that allowed songs purchased from the service to be converted to Apple's proprietary FairPlay format for use on iPods.

Apple, which said in a statement that it was "stunned" by Real's adoption of hacker tactics to "break into the iPod," later issued a firmware update for its digital media players that dismantled the hack.

As part of its announcements Monday, Real said it will leverage the marketing power of Rhapsody's relationship with MTV Networks to launch a "Music Without Limits" ad campaign to support its new MP3 service that will include broadcast, online and print advertising.  

The company said it anticipates spending more than $50 million in the next year, including more than $15 million in the third quarter alone. As part of the campaign, it is giving away a free album to the first 100,000 people (US only) who sign up for the new MP3 store by July 4th.