MTVN, RealNetworks To Spin Off Rhapsody Music Venture

Viacom's MTV Networks and RealNetworks plan to spin off Rhapsody America, the digital-music joint venture they formed in 2007, with MTVN to contribute $33 million in advertising commitments to the newly independent company.

RealNetworks currently owns 51% of the equity of Rhapsody and Viacom owns 49%. Under the terms of the restructuring, which is expected to close at the end of the first quarter, RealNetworks will no longer have operating control over the venture, and Rhapsody will have no single majority owner.

In August 2007, MTVN said it would discontinue its URGE online-music subscription site created with Microsoft, merging it with RealNetworks' Rhapsody service.

Rhapsody America, which offers access to music for a monthly subscription fee, has been losing steam. The venture had 700,000 subscribers as of Sept. 30, 2009, down 100,000 from the first quarter of 2009, according to RealNetworks.

"Separating Rhapsody into its own independent company is a significant first step in making RealNetworks a more focused and profitable company," RealNetworks president and acting CEO Bob Kimball in announcing the move. "Rhapsody will be the largest pure play digital music service in the market. We have provided Rhapsody with the right team, and financial and intellectual property assets to succeed in the competitive market for digital music."

In January, RealNetworks founder and CEO Rob Glaser stepped down as chief executive but remains chairman.

RealNetworks will contribute $18 million in cash, the Rhapsody brand and certain other assets in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10 million preference upon certain liquidation events, according to a RealNetworks 8-K filing Tuesday with the Securities and Exchange Commission.

MTVN will contribute a $33 million advertising commitment in exchange for shares of common stock of Rhapsody. MTVN's previous obligation to provide advertising of approximately $111 million as of Dec. 31, 2009, will be cancelled, according to RealNetworks' filing.