• by Mark Walsh  @markfwal, July 1, 2008

Verizon Wireless may not challenge Apple's dominance of digital music any time soon, but its new DRM-free music initiative could help boost its mobile data business and broaden the market beyond iTunes.

Powered by RealNetworks' Rhapsody service, Verizon's upgraded V Cast Music store offers unprotected MP3 tracks via a $15 monthly subscription, as well as individual downloads to mobile devices or PC.

The subscription buys unlimited access to 5 million songs from all four of the major labels--Sony BMG, Universal Music Group, Warner Music Group and The EMI Group.

Anyone, including non-Verizon subscribers, can use the service to download DRM-free tracks to a PC for 99 cents each. Subscribers can also buy songs directly through their mobile phones for $1.99 apiece, with an extra copy downloaded to a customer's PC.

Rhapsody subscribers can also sync their phones to the new V Cast service.

With the move, Verizon and Rhapsody join others in distributing digital music free of encryption software, including wireless rival AT&T (with Napster), Amazon and Wal-Mart. But so far, none have managed to put a dent in the 80% market share Apple commands through its iTunes store.

Consumers to date have shown a decided preference for 99 cent downloads via iTunes and the iPod to music subscriptions from services such as Rhapsody and Napster.

Wireless and Internet analysts do not necessarily expect the new Verizon service to spark a dramatic shift. But the carrier is poised to become a bigger player in digital music and improve its mobile media revenues through V Cast.

"This is where the subscription model can perhaps finally find a mainstream audience," wrote Michael Gartenberg, a vice president and research director at JupiterResearch, in a post on the firm's analyst blog Monday. "More importantly, it's a differentiated offering that can potentially have some appeal."

Overall, Jupiter projects that digital music sales, including subscription services and downloads, will triple to $3.4 billion in 2012 from $1.04 billion in 2006.

By pairing with Rhapsody, Verizon is more than doubling its music catalog on V Cast and offering a competitive subscription price at $15 a month, according to William Ho, a senior wireless services analyst at technology research firm Current Analysis. Verizon also hinted during a conference call Monday that over-the-air downloads would be added to subscriptions at some point.

"This is all about adding stickiness and increasing ARPU (average revenue per user)," Ho said.

While Verizon declined to disclose how many subscribers the existing V Cast music service has, a company spokesman said millions of customers use it each month.

Verizon has the biggest share of the mobile audio market among the five largest carriers--at 38%, according to Nielsen Mobile. That includes realtones, ringbacks, ringtones and full-track downloads. But songs made up only 16% of Verizon's audio sales.

Nielsen estimated the wireless audio market in the first quarter at $268 million.

Analysts emphasized that a strong promotional push from Verizon and Rhapsody would be required for the new music initiative to be successful. "Let's see just how aggressively Verizon markets both Rhapsody and paid downloads, and whether they can make cell phones as cool as iPods," wrote David Card, a vice president and senior analyst at Jupiter, on the firm's blog.

A Verizon spokesman said the carrier planned to promote the music service in print, broadcast "and a full range of advertising elements to come," though providing few details.

During the conference call, RealNetworks founder and CEO Rob Glaser also said the new V Cast service would be a key part of marketing efforts tied to its related "Music Without Limits" initiative announced Monday to sell MP3 downloads directly via Rhapsody.

That service, which allows users to listen to up to 25 tracks per month before buying songs, will be syndicated across MTV.com, CMT.com, VH1.com and Yahoo.

MTV Networks, which owns 51% of Rhapsody America, has agreed to provide $200 million in TV marketing related to the Rhapsody service over the next five years, Glaser said.

To help counter the iPod, Verizon also plans to introduce a new handset--the LG Chocolate 3--next month as its first device designed specifically with the new music service in mind by streamlining the process of downloading and transferring music from PC to phone.

In the meantime, several other existing Verizon handsets have been "retrofitted" to handle the service, including the Decoy and Dare from LG and the Samsung Glyde.