RealNetworks, Inc. (NDAQ: RNWK) share rose sharply today after the digital media company announced a new partnership with Yahoo Inc.
(NDAQ: YHOO) under which Yahoo! Music will now be handled by Rhapsody
America. The move will increase Rhapsody’s user base by a substantial
number - a move that RealNetworks hopes will boost its own service and
drive revenues. Shareholders shared the optimism today as they hope
that the move may be just was RealNetworks needs to boost its share
price.
RealNetworks currently has around 2.7 million subscribers, but this
new partnership should bring that number up to around 23 million
subscribers. This substantial increase will definitely increase
Rhapsody’s exposure, but the margins may end up suffering (as a large
cut likely goes to Yahoo). Interestingly, Yahoo! Music was once
considered to be the Rhapsody killer, but it now appears that Rhapsody
is the one doing the killing. Yahoo! Music subscribers will be switched
over to Rhapsody’s $12.99/month plan when their existing contracts
expire.
The new partnership is welcome news for shareholders who have seen
the value of their stock slip in recent times. Shares are down around
42% since their highs in the beginning of 2007 amid poor earnings and
questionable acquisitions. Many are bullish on this partnership that
could prove to give shares some upside. However, there is one big
problem in the way - Microsoft. It will be interesting to see if this
partnership stays in tact post-acquisition given RealNetwork’s poor
relationship with Microsoft.
In the end, this deal is great news for both Yahoo and RealNetworks.
Yahoo benefits by being able to shed a relatively non-profitable
division while still being able to monetize it while RealNetworks has
substantially increased the size and value of its network of users.
There is some risk that this partnership may fall through with the
Microsoft acquisition, but the situation is still one that is
definitely worth watching!
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