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RealNetworks to Acquire Listen.com

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Times Staff Writer

RealNetworks Inc., a founder of the struggling MusicNet online distribution service, announced Monday a $36-million deal to acquire a second online music company, Listen.com Inc. of San Francisco.

Listen, which has raised and spent more than $100 million from investors to develop its Rhapsody music service, becomes the largest company in the fledgling industry to be swallowed up by a competitor. Many others have evaporated, unable to obtain the licenses they wanted from record labels or to compete with unauthorized sources of free music.

MusicNet is a wholesale supplier of licensed music to online services; Rhapsody is a consumer offering. By buying Listen, Real is “doubling down” on its bet on music, said Chief Executive Rob Glaser.

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The deal pushes Real further into the entertainment business, which it entered two years ago as a complement to its software products. Real was a pioneer in the field of Internet audio and video, but it’s lost much of that market to Microsoft Corp. and, to a lesser extent, Apple Computer Inc.

Listen sells Rhapsody, an online music service that has attracted fewer than 100,000 subscribers. An online jukebox and customized radio service sanctioned by more than 125 record labels, Rhapsody bundles its music with reviews, artist samplers and other add-ons to distinguish it from free services.

Under the deal, which is expected to close this summer, Real would pay $17.3 million in cash and 4.1 million shares of common stock for Listen, which is privately held. Founded in October 1998, Listen’s main investors were Silicon Valley-based venture capital firms as well as the five major labels, Gateway Inc. Chief Executive Ted Waitt and pop star Madonna.

Real formed MusicNet two years ago with Bertelsmann, EMI Recorded Music Holdings Inc. and AOL Time Warner’s Warner Music Group Inc. MusicNet has announced only two distributors, both of them tied closely to the company’s owners: Real and America Online.

Real is the largest shareholder in MusicNet, owning 40% of the company.

“Real wants some more flexibility that it’s not getting from MusicNet,” said P.J. McNealy, an analyst at GartnerG2. By owning Listen, Real would have “full control instead of having to ask the other 60% when they want to do something.”

Glaser said his company remains a committed shareholder in MusicNet, but he wouldn’t say much about his plans for MusicNet’s service. The company bought Listen, he said, because of the quality of its service and technology, the distribution deals it has signed, the music industry’s increasing commitment to online distribution and the public’s growing interest in online entertainment.

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Listen Chief Executive Sean Ryan said Real gives his company a technological boost that would make its service more accessible to users. The company, which already had winnowed its payroll to about 50 employees through a series of layoffs, would remain in San Francisco with Ryan as its head.

Real’s chief financial officer, Brian V. Turner, predicted that the Rhapsody service would lose as much as $4 million this year, with losses narrowing next year.

Real shares rose 6 cents to $4.64 in Nasdaq trading Monday.

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