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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