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Napster Posts Loss Despite Surge in Sales

February 09, 2006|Dawn C. Chmielewski | Times Staff Writer

Napster Inc., the name that launched the digital music revolution, is burning through cash and struggling to find an audience as a viable subscription service.

The company reported a loss of $17 million for its fiscal third quarter -- a smaller deficit than Wall Street had expected. Revenue soared 94% to $23.5 million. A year earlier, the company had a profit of $12.8 million, reflecting earnings from discontinued operations.

Napster shares, up 3 cents to $3.61 in regular trading, rose to $3.72 after hours following the release of the report for the quarter ended Dec. 31

Nonetheless, the results underscored Napster's difficulties in persuading music lovers to stop collecting music one song or CD at a time and to instead pay $14.95 a month for access to more than 1 million tunes.

One big problem: Napster's service is incompatible with the most popular digital music player on the market, Apple Computer Inc.'s iPod. The portable devices that do work with Napster's service lack the cachet or simplicity of an iPod.

Napster touted a corporate milestone -- reaching 526,000 premium and college subscribers -- even as the Los Angeles company laid off 10 of its 175 employees in recent weeks.

Analysts said the company was trying to conserve cash as it waited for subscription services to catch on with music aficionados and as it braced for new competitors such as MTV to launch online music services.

"Changing consumer behavior does not take place overnight," said analyst P.J. McNealy of American Technology Research in San Francisco. "So the expectations for subscriptions need to be on a longer ramp."

Napster was arguably the most recognizable brand in online music in November 2002, when Roxio Inc. acquired the file-sharing pioneer's name and assets from Bankruptcy Court, where Napster had sought refuge from music labels that sued Napster for fueling music piracy.

Roxio's Napster 2.0 bore no resemblance to the original file-swapping service that attracted an estimated 60 million people in its heyday in the late 1990s.

Napster has raised $90 million from private sales of stock and $69 million from the sale of its software division. But it has struggled to add subscribers.

The company tried a variety of partnerships and promotions to break through the buzz created by Apple, including deals with Best Buy Co. and Blockbuster Inc. It offered a version of its service for college students for free or at a deep discount. It also attempted to match the portability of the iPod with its own "Napster to Go" program, charging subscribers a monthly fee to move music to compatible MP3 players.

But a Super Bowl ad in 2005 launching "Napster to Go" highlighted the marketing chasm between Napster and Apple's acclaimed iPod commercials. Napster's ad ranked last in USA Today's viewer poll.

Napster says it is slowly gaining ground. The number of premium subscribers has grown by 110% over the last year, and revenue from its music service grew to $23.5 million, up 94% from a year earlier. On Dec. 31 it had $111.4 million in cash and short-term investments -- enough, the company estimates, to cover its operating costs through 2007. Six months earlier, the company had $158 million in cash and short-term holdings.

Chief Executive Chris Gorog spoke optimistically to analysts Wednesday about Napster's prospects, denying rumors that the company is for sale. He trumpeted the service's December launch in Germany and its expected launch in Japan this year in partnership with Tower Records Japan. He also noted a deal with XM Satellite Radio to let XM's 6 million subscribers download songs heard on XM.

"We believe that this partnership with the No. 1 player in satellite radio will prove to be a very cost effective way for us to promote Napster," Gorog said.

Despite Napster's struggles, the music industry remains optimistic about the potential for subscription music services. Recording Industry Assn. of America Chairman Mitch Bainwol predicted that these services would be "really hot" within 10 years.

Whether Napster will be part of that success depends on its ability to gain ground on Apple and sign up subscribers.

"It's actually a pretty good brand," said Michael Gartenberg of Jupiter Research. "Consumers actually recognize the name from the heyday even though the product is different. But the problem is, in a market so dominated by Apple and iTunes, it's difficult for them to be heard."

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