Rhapsody, the longest-lived subscription music service–it’s been around since 2001–is celebrating the fact that it now has 800,000 subscribers. Its president, Jon Irwin, says that “exceeds the lifetime total of all new U.S. competitors combined”–by which I presume it means other services such as MOG, Napster, Rdio, and Slacker. That would mean that fewer than 1.6 million people in the U.S. subscribe to any of these services. Which, given that the companies who offer them have had a decade to try and get the world interested, may mean that the concept simply isn’t all that appealing.  (I like it–I happily pay for Rdio–but at what point does the industry stop insisting that subscription music will be a huge hit once everyone understands how great it is?)

How are content providers going to react to Apple’s new App Store rules, which mandate that providers of music, video, e-books, and other stuff sell their wares using Apple’s in-app purchasing and subscriptions–at least as an option–and give Apple a 30 percent cut when they do? Music purveyor Rhapsody is the first company I’ve seen to respond in public. And it’s taking an almost-hard line–it doesn’t say it’s pulling out of the App Store, but it does call Apple’s 30 percent fee “untenable” and says it “would not be able to offer” Rhapsody under Apple’s new terms.

It issued this statement by Rhapsody’s President, Jon Irwin:

Rhapsody is the leading digital music subscription service in the U.S.,with 750,000 subscribers.  Music fans can access the service using free apps from any Internet-connected device, be it on an Android, Sonos, Tivo, BlackBerry, iOS or personal computer. Today, Rhapsody subscriptions are available for purchase exclusively via Rhapsody.com.

Rhapsody offers a content-based subscription service that makes millions of tracks available to fans pursuant to longstanding partnerships with thousands of rights holders, all of which then distribute revenues to artists and other creators.

Our philosophy is simple too – an Apple-imposed arrangement that requires us to pay 30 percent of our revenue to Apple, in addition to content fees that we pay to the music labels, publishers and artists, is economically untenable.  The bottom line is we would not be able to offer our service through the iTunes store if subjected to Apple’s 30 percent monthly fee vs. a typical 2.5 percent credit card fee.

We will continue to allow consumers to sign up at http://www.rhapsody.com from a smartphone or any other Internet access point, including the Safari browser on the iPhone and iPad.  In the meantime, we will be collaborating with our market peers in determining an appropriate legal and business response to this latest development.

Sounds like someone’s going to have to call someone’s bluff here: Either Apple reduces the fee, or Rhapsody pulls out (unless it chickens out and stays in). That’s assuming that the reference to “appropriate legal…response” doesn’t turn into a lawsuit.

Apple says that content companies need to abide by the new policy by June 30th. It’s going to be an interesting four and a half months…

Rhapsody’s new iPhone/iPod Touch version with offline listening is live in Apple’s App Store. I’ve been giving it a whirl, and the new features are pretty darn straightforward–and overall, they do a good job of filling in a major hole in the original iPhone edition of the music service. It’s the first music service for the iPhone that offers both streaming and downloading. (For U.S. users, at least–in Europe, Spotify has has both. And maybe Apple will see fit to unleash the wonderful unreleased LaLa app it now owns in some form someday.)

As before, whenever you’ve got a 3G or Wi-Fi connection you can search for albums and artists, pull up playlists (including ones you created on a PC or Mac), and stream an unlimited quantity of music from Rhapsody’s millions of tracks. But now your playlists have a Download button–tap it, and all the songs in that list get downloaded so you can listen to them when you don’t have an Internet connection (or have one that can be spotty, which is often the case when you’re driving).

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Rhapsody says its iPhone app with offline playlists goes live Monday morning. It may be the most compelling form of the music service to date, although it won’t really achieve something close to an equal footing with iTunes until iPhone OS 4 ships, enabling Rhapsody to play in the background while you use other apps…

When I write about the Rhapsody music service, I usually say nice things but express some caution about its pricing: $15 a month if you want to be able to listen on both computers and mobile devices. Well, the service just spun off from parent company RealNetworks, and its first big move as an independent entity is a major price cut. Rhapsody is now $9.99 a month for a plan that includes unlimited listening on computers and via an iPhone/iPod Touch (and presumably iPad) or Android device.

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I’m at the amazing South by Southwest Interactive conference in Austin, where I ran into a couple of folks from the Rhapsody music service who gave me a quick peek of something I’ve been waiting for since Rhapsody hit the iPhone in September: an update to the iPhone app that lets you download music over 3G or Wi-Fi to the phone so plays directly from the handset rather than streaming over the Internet. The company says it’s finishing it up and planning to submit it to the App Store shortly.

Caching music locally guarantees that a song won’t die in midplay if your Internet connection flakes out. It lets you listen in places where the Internet doesn’t go, like most airplanes. And it uses way less battery power. Basically, it should make a $15-per-month Rhapsody to Go subscription look a lot more attractive. (The usual rules of subscription music apply: You can listen all you want as long as you pay the monthly fee, but if  you cancel service all the albums you’ve added to your collection go away.)

Once Rhapsody for iPhone does offline music–I’m assuming Apple will approve it without delay–the one feature it’ll lack that you’d want is the ability to play in the background while you use another app. That’ll only happen if Apple enables third-party multitasking. But Rhapsody says that it plans to add music downloading soon to its Android app, which already runs fine in the background.

Here’s a video preview of the iPhone app from Rhapsody:

If you measure Rhaspody for iPhone’s success by the downloads it has accumulated — over a half million — it would be a hit. But looking at Real’s quarterly results, which reported subscriber numbers for the service, a different story is told. Rhapsody is still steadily losing subscribers, definitely not good news for the company.

Around 700,000 or so are paying accounts, down from about 750,000 in the previous quarter, and 800,000 the quarter before that. Obviously, from the steady decline, Rhapsody for iPhone has had little effect if any on Real’s bottom line.

In fact, in the results conference call, CEO Rob Glaser admitted that it was not seeing “a significant number” of new signups as a result of its iPhone venture.

The results show that a large majority of those who downloaded the application (myself included) did so just to check it out, obviously with no intention to sign up. What does this mean overall for Rhapsody? Hard to tell exactly, but I’d venture to guess consumers are finding other means to get their music fix, whether it be legal or illegal.

Let’s not call it an abject failure just yet and give Real the benefit of the doubt and another quarter. Either way, these early results are not promising.

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Bill Gates’ Macworld surprise revisited.

I’ve blogged before about subscription-based music services, an idea that the tech industry has poured millions into, and which rationally makes sense–but which has never caught on with teeming masses of consumers. Today, Napster–which is part of Best Buy these days–is trying again, with a new plan that offers unlimited streaming and five MP3 downloads a month–for $5. It’s not quite a return to the original Napster’s “pricing plan”–all the MP3s you could steal for $0 a month–but it’s a vast quantity of music for very little money.

Naspter’s closest competitor, Rhapsody, charges $12.99 a month for a similar streaming plan that doesn’t include the MP3 downloads; there’s a good chance, presmably, that it will be forced to match Napster’s price. (Both companies still charge a relatively-hefty $14.99 a month for plans that let you download unlimited music to an audio player or phone.) Apple, meanwhile, will likely continue to offer only pay-per-song downloads–and will continue to utterly dominate digital music.

I don’t know the economics behind Napster’s new pricing model, but perhaps Best Buy hopes that all those $5 subscribers will be more likely to do their buying of DRM-free downloads from Napster than from another online merchant. Or perhaps it’s just thinking about the day (coming soon!) when all those CD sections in Best Buy stores go away, and thinking that it’s worthwhile to maintain some relationship with music fans, profit or no profit.

Five bucks a month isn’t free, but it’s close enough that it pretty much removes the cost factor from the question of whether subscription music has any appeal to the masses or not. If you aren’t willing to plunk down $5, you most likely won’t be more interested at $4, $3, $2, or a buck. It’ll be fascinating to see if the new pricing makes a difference–as a lover of competition and low prices, I hope it does, but I make no predictions.

Me, I’m slightly embarrassed to admit that I’m still as likely to buy a CD as to download tracks. (Okay, not that embarrassed, but the time is coming when purchasing CDs will be as much of a nerdy affectation as collecting vinyl is today. I once subscribed to Napster but let my service lapse years ago; maybe now’s a good time to give it another chance.