Real, Viacom to spin off Rhapsody

Real Networks and Viacom said today that they will be spinning off the Rhapsody music service into its own company, a move that will remove control by one majority owner. (Statement)

Rhapsody, a subscription-model digital music service, has struggled to compete in a new world of music that's dominated by Apple's iTunes. Consumers have preferred to own their musical tracks, as opposed to giving them up once they cancel their subscriptions.

In a statement, Real Networks' president and acting CEO Robert Kimball, said that the spinoff will allow Real - which is best know for its RealPlayer and, increasingly, its a legal battle with the motion picture industry over RealDVD - to focus on its own business. He said:

Separating Rhapsody into its own independent company is a significant first step in making RealNetworks a more focused and profitable company.

Kimball took over the CEO position when founder Rob Glaser announced last month that he was stepping down after 16 years of running the company.

Real Networks currently owns 51 percent of the company and Viacom, parent company of MTV Networks, owns 49 percent. Both companies will restructure so that neither has a majority ownership. Here's how Real described the restructuring in an SEC filing:

At the closing of the transactions contemplated by the Transaction Agreement, Rhapsody will be converted from a limited liability company to a corporation, and the Parties expect that Real and MTVN and one or more minority stockholders will hold the outstanding shares of Rhapsody such that Real and MTVN will own slightly less than 50%, but an equal amount, of such outstanding shares. Real 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. A portion of Real’s cash contribution is to repurchase the international radio business that was previously contributed to Rhapsody. MTVN will contribute a $33 million advertising commitment in exchange for shares of common stock of Rhapsody, and MTVN’s previous obligation to provide advertising of approximately $111 million as of December 31, 2009 will be cancelled. In addition, both the Stockholder Agreement, dated as of August 20, 2007, between Real and Viacom International Inc., on behalf of MTVN, and the Limited Liability Company Agreement, dated as of August 20, 2007, among the Parties will be terminated, including the put and call rights held by Real and MTVN and MTVN’s rights to receive a preferred return in connection with the exercise of Real’s put right.

The deal is subject to regulatory approval. Upon close of the deal, Rhapsody will be governed by a Board of Directors that consists of one each appointed by Real and MTVN and one independent diectors appointed by mutual agreement between the two companies. In addition, agreements will also be amended, "including the expansion of the technology and intellectual property licenses from Real to Rhapsody related to the core technologies for the Rhapsody audio digital music service..."

Real Networks saw a profit during the third quarter of 2009, but revenues were down year-over-year and, specifically, revenue from the music division were down 7 percent for the quarter. The outlook for the fourth quarter as it relates to music is expected to be flat sequentially but to decline year-over-year. The company is slated to report fourth quarter and fiscal 2009 earnings on Thursday.