Telefonica Takes A Strategic Stake In Rhapsody, Will Bring Napster Into Latin America, Deeper Into Europe

In the allegro-paced race between music streaming providers to see who will be the first to achieve profitable scale, today Rhapsody got a significant leg up, courtesy of Telefonica. The Spanish-based mobile carrier, which has some 316 million customers globally, is making a strategic investment in Rhapsody, which will include a deal to bundle and resell Rhapsody’s Napster music service and catalog of 20 million tracks to Telefonica mobile and broadband subscribers.

The deal marks the first time that Napster will go into Latin America, and it will instantly add hundreds of thousands of new users to its service in the region. That’s because as part of the deal, Telefonica will be transferring all existing users of its Sonora streaming music service to Napster, beginning November 1. In future, Telefonica will also be bundling Napster on its Firefox phones to encourage more takeup of the new devices.

“This is our first move into Latin America,” Thorsten Schliesche, Napster Senior Vice President and General Manager Europe, tells me. The reason why Napster had yet go there? It simply didn’t seem ready until now, particularly for Napster to enter it on its own, he says. “It’s a market that we have watched very intensively but didn’t see the [right] broadband and smartphone penetration and general awareness of music streaming. The opportunities as we see it are for partnering. And with the opportunity for taking over the Sonora base, this is definitely the right point in time for us to do this.” As part of the deal, Rhapsody has set up an office in Sao Paulo to support this deal and “future commercial launches throughout Latin America.”

It’s also tapping into growing interest in music streaming that has motivated Telefonica to ink this deal. “As demand for streaming music services takes off, our Rhapsody partnership will allow us to deliver a compelling music proposition to our customers, leveraging Napster’s heritage, brand and strong position in this market,” noted Stephen Shurrock, CEO of New Business Ventures at Telefónica Digital, in a statement.

The size of the investment has not been disclosed (we’re trying to find out) but Telefonica has confirmed that it will have an equity stake in Rhapsody as part of the deal. With a little bit of skin in the game and not just a friendly cooperation agreement, Telefonica says it plans to bundle and resell Napster music services “to its hundreds of millions of subscribers across its global footprint.”

Napster currently has 1.2 million users worldwide, all of whom are paying to access its service. That puts it some way behind the market leader at the moment, Spotify, which most recently revealed 6 million paying users and tens of millions using its free, ad-funded service (these numbers are from some months ago and are likely to have changed). Schliesche won’t comment on overall profitability of the service today but says that “in Europe, we are able to cover our costs.” Telefonica’s investment is not the first for Rhapsody: the company in September took funding of an undisclosed amount from Columbus Nova and also laid off about 30 staff to cut costs. (It’s another example of how being the first mover isn’t always the best position: Rhapsody was one of the pioneers in music streaming in 2001.)

Although Napster currently has no free tier, this Telefonica deal will likely see it start to introduce more pricing alternatives. “We are watching market developments,” Schliesche says. He added that one possibility they are likely to have will be a “weekly tier” so that users “will have an opportunity to join the service at a much lower price point.”

This is a big deal for Napster, and could potentially help catapult it into better striking distance of Spotify and also Rdio and Deezer. These three have had large capital injections (and at least one, Spotify, is reportedly yet again raising a large round).

But more to the point of today’s news, though, Spotify, Deezer and Napster have already been making a lot of headway, picking up lots of premium (that is, paying) subscribers by partnering up with both mobile and broadband carriers. In the case of Deezer that has also brought it an investor, in the form of France’s Orange.

Napster, for its part, works with Vodafone in Spain, the Netherlands and Greece; with E-Plus in Germany; SFR in France and MetroPCS in the U.S. The agreements are all different and sometimes are bundled with data usage, and sometimes just bolt-ons to other packages.

This brings up another issue, though: Napster is working with Telefonica competitors, in one case right in Telefonica’s backyard. Telefonica in Spain actually currently has a deal with one of Napster’s competitors: Spotify. “All parties have agreed that we appreciate all partnerships so we execute against contracts,” Schliesche says diplomatically. “All are willing to execute against those deals. Afterwards? Those things may change.”

For carriers like Telefonica, partnering with content providers helps them stand apart from their rivals’ offerings, and potentially helps them pick up more traction with existing users, beyond basic voice and data services. Telefonica has been pushing this idea a lot for a while. In some cases, it has been putting its money where its mouth is in other cases with strategic investments (others include Boku for payments and search app

Just last week, it announced a deal with Pinterest to preload a widget linking to the social network on the home screen of all (non-iOS) mobile handsets that it sells — starting with Android devices. The pair did not disclose any commercial details around that deal.

Schliesche says that today for Napster, Android and iOS account for the vast majority of traffic on its platform, altogether around 80%, with iOS more dominant. The rest is split between BlackBerry and Windows Phone, he says.

Napster already has a Firefox OS app. It will be worth seeing whether Telefonica’s special attention to Firefox, and now new attention for Napster, will lead to growth on that platform, too.

[Image: Flickr/Mombojó]