Peter Kafka

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Viacom, Real Networks Spin Off Rhapsody Music Service

Real Networks and Viacom are reorganizing Rhapsody, their joint-venture music service and will be spinning it off into an independent company, they told the Securities and Exchange Commission today.

Rhapsody, along with Best Buy’s (BBY) Napster, sell music via monthly subscription, as opposed to Apple’s (AAPL) a la carte download offering. But neither service has been able to gain much traction, despite years of effort.

Real Networks (RNWK) currently owns 51 percent of the Rhapsody, which it started, and Viacom’s (VIA) MTV the remainder. Restructuring will give both companies a 49 percent share, and “one or more minority stockholders” will own the rest.

There are a few other details, spelled out in the SEC filing below (for instance, Real needs to pony up some cash, and MTV gets released from some of the marketing agreements it signed on for a couple years ago). But the takeaway is this: Both companies get to move the money-losing music service off their books, and the new structure may theoretically give them a better chance of finding a buyer for the thing.

Last month Real’s founder, Rob Glaser, announced he was stepping down from the company’s CEO spot. But this reorg has been in the works for a bit: Real alerted shareholders to a possible move back in November.

Here’s the relevant text from the SEC filing:

On February 9, 2010, RealNetworks, Inc. (“Real” or “RealNetworks”), RealNetworks Digital Music of California, Inc., a wholly owned subsidiary of Real, MTV Networks, a division of Viacom International Inc. (“MTVN”), DMS Holdco, a wholly owned subsidiary of Viacom International Inc., and Rhapsody America LLC, a Delaware limited liability company (“Rhapsody”) and joint venture formed by Real and MTVN (together with the other parties listed above, the “Parties”), entered into a Transaction, Contribution and Purchase
Agreement (the “Transaction Agreement”), which contemplates a restructuring of Rhapsody. Real and MTVN formed Rhapsody in August 2007 to jointly own and operate a business-to-consumer digital audio music service. Real currently owns 51% of the equity of Rhapsody and Viacom owns the remaining 49%.

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.

Real expects that the transactions contemplated by the Transaction Agreement will be completed late in the first quarter of 2010, subject to the satisfaction of customary closing conditions. At the closing, the Parties will enter into a Stockholder Agreement that contains provisions regarding the governance of Rhapsody, stock transfer restrictions and approval of certain corporate transactions. Rhapsody will
be initially governed by a Board of Directors with two directors appointed by each of Real and MTVN and one independent director appointed by mutual agreement of Real and MTVN. At the closing of the transactions, the Parties will also amend certain existing agreements, including the expansion of the technology and intellectual property licenses from Real to Rhapsody relating to the core technologies for the Rhapsody audio digital music service to provide worldwide, perpetual licenses and certain rights for use of the core technologies in business-to-business audio music services.

Upon the completion of the transactions contemplated by the Transaction Agreement, Real expects that it will no longer consolidate Rhapsody’s financial results with Real’s consolidated financial statements.


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