The truth about the Rhapsody-Napster tie-up

October 4, 2011: 9:20 AM ET

As Rhapsody and Napster join forces in trying to corner streaming music subscriptions, it is actually Spotify that aligns more with Napster co-founder Sean Parker's original vision.

By Richard Nieva, contributor

napsterFORTUNE -- Rhapsody is nowhere near throwing in the towel as it fights for relevance in the online music market. The paid subscription service announced Monday that it will acquire former competitor Napster.

This comes amid a newly energized marketplace for paid subscriptions in digital music. Companies in the industry have been clamoring to catch up to the European-based Spotify, the clear front-runner in the race.

Rhapsody, which pioneered the paid music business model 10 years ago, sought to capitalize on its head start in subscriptions. Right now, it is the largest amount of paid users in the U.S. "If we can grow intelligently, through acquisitions, we're going to do it," said president Jon Irwin. "It's all about extending our lead." The company also recently made a deal with Metro PCS (PCS), the 6th largest wireless provider in the country, to include Rhapsody service with certain data plans.

Yesterday's deal adds Napster's several thousand members to Rhapsody's 800,000 strong subscriber base. Rhapsody will release a revised number of subscribers once the deal becomes official at the end of November, but previous reports from Napster indicate that company had several hundred thousand subscribers. Irwin declined to discuss specifics of the deal. Best Buy (BBY), which acquired Napster for $122 million in cash in October 2008, will receive a minority share in Rhapsody.

The task that lies ahead for Rhapsody is making sure Napster's users transition seamlessly into Rhapsody's services. This includes integrating users' libraries, playlists and histories. "We want to make sure the Napster customers feel like they've gained something," said Irwin.

There is discrepancy between the music catalogs of the two services. Rhapsody offers some 13 million songs, while Napster tallies 15 million. Because of different label agreements, there was no direct exchange of music tracks as a part of the assets acquired in the deal. But Irwin assures that the difference is negligible. "We'll be closing that gap, once we identify those songs," he said. All of the most popular user songs are already there, he added.

Napster was the reincarnation of the free service that forced the industry to redefine its business model in 1999. After shutting down due to copyright and legal troubles, the company Roxio acquired its name and assets in 2003 and made it a paid service. The response has since been lackluster, the long-awaited putsch against Apple's (AAPL) iTunes never quite materializing.

As Rhapsody and Napster join forces in trying to solve the paid subscriber conundrum, it is actually Spotify that aligns more with Napster co-founder Sean Parker's original vision. Parker, now a Spotify investor, recently reflected on his relationship with both Spotify and the original Napster: "This is actually very similar to what I dreamt of 10 years ago."

While Parker has made Spotify the flag bearer for his original cause, the veteran Rhapsody isn't backing down. The effectiveness of the merger will become known in time, but Irwin hopes that the bigger user base will allow for more visibility on social networks like Facebook. What remains to be seen is whether or not Rhapsody can rely on its almost-doubled user base to help it compete with its runaway rival.

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