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April 7, 2010 at 5:19 PM

Q&A: Rhapsody boss on IPO, Apple, Zune and more

As Rhapsody, the online music service, announced Tuesday that it was finally independent from RealNetworks, I spent some time with Rhapsody President Jon Irwin, talking about the company’s future and competition from other music services.

Irwin, a 49-year-old veteran of telecom companies such as Boingo Wireless, EarthLink and WorldCom, joined Rhapsody last year as chief operating officer and chief of staff.

He planned and oversaw Rhapsody’s spinoff from Real and co-owner Viacom and is now the subscription music service’s top executive, heading 150 employees in Seattle and satellite offices in San Francisco and New York.

Here’s an edited transcript of the conversation.

Q: Will you need to add to — or reduce — the number of employees?

A: We believe a team of around of 150 is the size we need. We’ve got a very experienced team in the digital music subscription business and understand the technology and market around the space. I think that will carry us for quite awhile.

Q: Will you have challenges maintaining the size of Rhapsody’s 9.5 million-track library, negotiating as a smaller company than Real?

A: It kind of goes the other way. We’re going to continue to grow the catalog, work with the labels and add new independents as they come on.

Q: You won’t have reduced leverage with record labels?

A: If anything it might be stronger — they’re dealing just with Rhapsody.

Q: Will you try and grow the music download business and compete more with Apple and Amazon.com?.

A: The growth will be in subscriptions. The downloads come along with it.

Q: Do you have plans to expand beyond the U.S.?

A: With the new structure we do have the rights to expand internationally if we choose to. Our focus right now is on the U.S. We’re going to nail this market — that’s our key focus for right now.

Q: How concerned are you about competition from free streaming music services like Europe’s Spotify?

A: Spotify — they’re not here yet, No. 1. They’re having some challenges. Spotify or other startup companies like MOG, they’ve got a big hill to climb. They’re a long way from producing $130 million in revenue in this space. They’ve got to come in and build their position from scratch. I’ll take our position over theirs.

Q: How are you going to compete with Microsoft’s Zune Pass subscription music service? It’s going to get a higher profile later this year when it appears on Windows phones, exposing it to millions of people.

A: They’re a player. To the extent it’s a single platform or its in the hardware, in terms of how hard they’ve pushed the Zune Pass, it remains to be seen how effective that is. A benefit we will have is being device agnostic, carrier agnostic. It allows us to reach the broadest audience with our service, as opposed to one of them. We’ll play on that.

Q: But their marketing budget is probably 10 times the $30 million in ad credits you have with Viacom.

A: Companies like Apple, like Microsoft, pushing these models help validate the model we’ve been evangelizing.

Q: Do you expect Apple to offer a subscription service?

A: Clearly their acquisition of [Web music site] Lala moves them in that direction, where they’re thinking of delivering a cloud-based service of some kind. It could be an access-based service or purchased based [where you] buy the music once, put it in the cloud and access it from anywhere, vs. you have access to it on a subscription basis. Having them enter the market in some way validates the model we’ve been advocating.

,,, I’d rather have the resources we have at our disposal, the existing business we have, the marketing muscle we can put behind it, to compete with them in that space vis a vis some of the other startups that are going to enter the business and try to compete with them from scratch.

Q: Are you going to pursue more deals with phone companies, so they can offer an alternative to the Zune Pass?

A: One other piece of the resources we have at our disposal is we’ve got a strong history of some very solid partnerships, one of which is with Verizon. It’s not just a matter of making Rhapsody available to their customers, but having the billing integrated with them. If you look at the integrated billing with the carriers, that’s’ something that can really help propel subscriptions.

Q: Are you going to work with RIM to get your service onto BlackBerrys?

A: We hope so. Now that we’re an independent company I think the partnership possibilities from a marketing and strategic standpoint are just a lot more opened up for us.

Q: Were you unable to make deals with, say RIM, before because of contracts Real had?

A: The spinoff does allow us to go out and compete freely for other carriers whereas before the business-to-business relationships with those carriers was the domain of Real.

Q: You’re at the scale of a company that could go public. If you were at startup with $130 million in revenue and growing, you’d probably be talking about an IPO.

A: Our focus right now is to look at this market, the opportunity we see in subscriptions the next 18 months and beyond, and build the best possible business around that and get to profitability, grow revenue. That opens up options then. The team here is 100 percent focused on getting that business and taking advantage of what we think is a great time in the market.

Q: So could you start talking about an IPO in 2011?

A: The focus right now is, let’s build the best business right now and that opens up those options. You don’t take care of that business, you don’t have that option.

Q: How about adding video to your service?

A: There are a lot of compelling video services that are out on the Web right now. Potentially in some relationship we could integrate video into the service, but right now our focus is to deliver the best possible music subscription business.

Q: To get Rhapsody into cars, would you work with telematics service and software providers?

A: We’ve had some direct conversations with some of the automakers. We’re going through those right now.

Q: How about the hardware business? Would you ever offer a Rhapsody device, like the Sansa or Slacker’s player?

A: It’s not on the horizon right now. There are people building devices that are pretty darn capable, and in my view competing on that front would be more of a distraction. Providing the greatest product and service that works on the sexy devices that everybody owns right now is the way for us to succeed in the space.

P.S.: After talking with Irwin, I learned that people who have been subscribing to Rhapsody won’t automatically get the new lower $10 monthly price the company announced Tuesday. They’ll continue to pay $12.99 unless they change their account settings online or call Rhapsody customer service, although the last time I checked the account Web site hadn’t yet been updated

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