Shares of RealNetworks have been on a roller coaster lately. Consider the two-day period in early September, when the stock surged 7 percent on news that its music subscription services would be available on the iPhone — only to give up those gains the following day, after a bearish report from an analyst.
Six months earlier, on Mar. 9, the company had tumbled to an all-time low of 2, leaving its market value below its cash — a sign of a company that’s either undervalued or headed for trouble. RealNetworks’ stock has rebounded since then, closing at 3.80 on Sept. 28, but the company still faces a raft of challenges, many related to its subscription music business, Rhapsody. To keep the stock headed in the right direction, RealNetworks executives may want to consider exiting the consumer music business altogether.
Expenses at the music business are outpacing top-line growth just as an already crowded streaming music field may need to accommodate another player — the formidable Apple. RealNetworks has other businesses to fall back on. Its largest, the products and services group, helps text and multimedia messages cross competing wireless phone networks and could be augmented through acquisitions. RealNetworks also has a casual gaming business.
One of the toughest obstacles for the Rhapsody music business is the pace of expense growth. In its most recent quarter, music sales rose 9 percent to $40.4 million, or 30 percent of the company’s total revenues. Expenses rose more than twice as much, increasing 21 percent to $25 million, accounting for 62 percent of the total. As Rhapsody attracts more subscribers — the tally rose 150,000 from a year earlier — it has to pay more in royalties to record labels. “The ideal Rhapsody subscriber is one who doesn’t use the service much because the more you use…