April 21, 2003 5:20 PM PDT

RealNetworks seeks Listen.com buyout

RealNetworks has agreed to buy Listen.com for about $36 million in cash and stock, a deal that could alter some key alliances in the online music business.

The two companies announced an agreement Monday, under which RealNetworks will pay $17.3 million in cash and 4.1 million shares of stock for privately held Listen. Real had already taken a minority stake in the San Francisco-based company in February.

The companies said that bringing Listen's online music subscription service, dubbed Rhapsody, closer to RealNetworks' RealOne product will help both services in the market--despite the fact that Rhapsody technically competes with a rival that is partly owned by RealNetworks.

"We see this as doubling down on our business," RealNetworks CEO Rob Glaser said in a conference call with reporters. Listen has spent more than $100 million over the years, creating a service that Real would be hard-pressed to recreate on its own, he added.

The Listen.com acquisition is perhaps most notable for the shadow that it casts on RealNetworks' ongoing relationship with MusicNet, the rival subscription service it helped create in 2001, and in which it is still a near-40 percent owner. Real is a joint owner of MusicNet with Bertelsmann, AOL Time Warner and EMI Group.

MusicNet recently launched a new version of its year-old subscription service, along with America Online, offering what reviewers said was a flawed but vast improvement over its previous incarnation. RealNetworks continues to offer the older version, however, and stopped short of saying it would upgrade to the new MusicNet technology.

RealNetworks and AOL are longtime partners, although they have recently begun to compete against each other on some fronts as AOL begins to develop premium broadband services such as its AOL Radio product and various video offerings.

Sources familiar with the companies have said that RealNetworks has spent considerable time over the past weeks and months assuring its MusicNet partners that it still is committed to the joint venture, despite its pending Listen purchase. To those partners, RealNetworks has said Listen simply will be an alternative distribution channel--a little like the Clear Channel conglomerate owning two radio stations in one media market, the sources said.

In the conference call, Glaser said that Listen had created a "best of breed" consumer experience, while MusicNet was still aimed at providing underlying technology to other companies such as AOL. RealNetworks will maintain its support for MusicNet, but Listen is a good fit for Real's "consumer face," Glaser said.

"Now that the doors are open (for online music services) it's time we (step) back and say, 'What are the things that are necessary for a good consumer experience?'" Glaser said. "That's what Listen has done in a way that is unique in the marketplace."

MusicNet and Listen's Rhapsody have different distribution strategies. Because it requires a connection to the Internet to operate, Listen has focused on distributing its service through broadband Internet service providers, while MusicNet's audience--particularly America Online subscribers--still encompasses a dial-up demographic.

The deal follows some other recent cross-alliance consolidation. Sony, part-owner of the Pressplay service, recently took a small stake in MusicNet, according to a report from the Reuters news agency.

Harmonious unions?
"We've seen a bloom of Internet music providers over the last three years; it is clearly time for consolidation," said Ryan Jones, an online music analyst with The Yankee Group. "This makes good sense that a larger fish is eating the smaller fish."

Listen.com is one of the few survivors of a pre-Napster generation of music companies that blended Silicon Valley-style start-up funding and ambition with an attempt to stay in the good graces of the traditional music industry.

Launched with minority funding from all five of the big major music labels, Listen originally saw itself as a directory service for online music--finding, cataloging and pointing to MP3s all over the Web in much the same way Yahoo originally did with more general Net content. Listen hired scores of San Francisco musicians as editors, writers and listeners to lend legitimacy to its cataloging and recommendation services.

When Napster shifted Net music fans' attention away from the Web and toward peer-to-peer file-swapping services, Listen's fortunes began falling. The dot-com collapse exacerbated troubles, and ultimately the company turned its attention wholly to developing its own proprietary music subscription service.

That service, dubbed Rhapsody, launched in early 2002, alongside label-backed rivals MusicNet and Pressplay. Initially an underdog, it has won kudos from reviewers for ease of use and has attracted a long list of distribution partners, including many of the top broadband Internet service providers (ISPs). Critics note that its streaming subscription services, which recently added the ability to burn CDs, limit subscribers' ability to download and listen to music while offline.

RealNetworks' full plans for the acquisition remain unclear. Under the terms of last month's investment, Listen had already planned to shift the technology underlying Rhapsody from Microsoft's Windows Media Audio to RealNetworks' audio technology. The companies said at that time that they would "explore collaborating on future services," but gave no further details.

The acquisition also gives RealNetworks the potential to bolster subscriber growth in its RealOne service, which has slowed as it has neared 1 million members. Last quarter, it announced more than 900,000 subscribers, up from 850,000 the quarter before, a considerably lower growth rate than in previous quarters.

The companies declined to detail exactly how many subscribers Listen's Rhapsody has, saying only that the number is in the "tens of thousands." Several promotions have provided months of access to Rhapsody for free, however.

In their conference call Monday, the companies said Rhapsody would almost immediately be promoted through RealNetworks' RealOne service, but stopped short of saying when or if it would replace MusicNet in that product.

The two companies' strategy for wending their way into homes beyond the personal computer have aligned, however. During the last year, RealNetworks has aggressively sought to have its codecs, or audio technology, supported in consumer electronics devices. Listen has started working with consumer electronics and home networking companies in anticipation of consumers using its service beyond the PC.

 

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