January 18, 2006 9:38 AM PST

Napster on the ropes?

Is Napster on the verge of going down for the count--for a second time?

The digital music subscription company says absolutely not, strongly denying reports that it is planning to make major layoffs, reorganize the business or even liquidate the company.

Napster said Wednesday that it has surpassed 500,000-subscriber mark, marking a doubling of its paid subscribers in the past year. The company made the announcement on the heels of an industry report that cast a dark cloud over its future.

Citing "sources inside the organization," the Web site Digital Music News reported Tuesday that a substantial round of layoffs is expected within weeks and that company officials are "considering various exit options, including a fire sale or liquidation."

In a statement Wednesday, Napster CEO Chris Gorog disputed the claims.

"Doubling our subscribers over the last 12 months demonstrates the mass market potential of our music subscription model and the powerful appeal of Napster to music fans who want it all," he said. "With a track record of robust growth, exciting new developments in the pipeline and over $100 million on our balance sheet, we are extremely excited about the future of Napster."

Napster will report its third-quarter financial results on Feb. 8. The company reported a loss of $13.6 million for the previous quarter on revenue of $23.4 million.

Whatever the financial picture, Napster has indeed fallen far behind industry giant Apple Computer, which reported last week that its iTunes Music Store has grabbed 83 percent market share.

Unlike iTunes' a la carte system, Napster is relying on the conversion of the digital music market to the subscription model, where users pay a monthly fee of $14.95 for unlimited downloads and transfers to CDs and devices.

Among subscription services, RealNetworks' Rhapsody is the clear leader with 1.3 million paying subscribers as of its earnings call last October.

In its earnings report in November, Napster said it had 448,000 subscribers, meaning that it has added at least 52,000 subscribers since then. The company said 50,000 college students subscribe to the service through Napster's university program.

Yahoo has been tight-lipped about subscriber numbers for its Yahoo Music Unlimited service.

Although Napster trails far behind both its nearest competitor and the dominant force in the digital music game, some industry analysts aren't ready to give up on the company.

Piper Jaffray analyst Gene Munster issued a report Tuesday saying he was confident that Napster's subscriptions would rebound given the company's marketing push in the latter part of 2005.

He also wrote that Napster's slow overall subscriber growth was not a death knell, saying the focus is now largely on Napster's Web-based initiative, which Gorog alluded to in the company's last earnings call but has given little details about since.

"While adding new subs is clearly a critical component of the Napster story, we believe that over the next few months investor focus will shift to the new Napster.com initiative and what it means to the long-term viability of the company," he wrote.

Some say the company's most vital asset remains its connection to its previous, free-music-laden incarnation, the one created by Shawn Fanning that ignited the digital music revolution.

A report last month from Ipsos Insight indicated that all might not be lost for Napster. The report noted that 79 percent of downloaders recognized the Napster brand, while only 57 percent were aware of iTunes. Dubbed "Tempo Digital Music Brandscape," the report was based on an August 2005 survey of 1,088 U.S. downloaders ages 12 and older.

Jim Welte of MP3.com reported from San Francisco.

13 comments

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People want to own their music
Also 14.95 is alot to pay just for music isnt it? There is cable, dish, or Sirrus Sat.
Posted by kieranmullen (1070 comments )
Reply Link Flag
Naprap
What I don't like about Napster is that if you cancel, your music is gone. I've got Dish, the Internet.
Posted by paulsecic (298 comments )
Link Flag
The power to choose.
You can have it both ways. I've used Napster and their library is quite robust. I changed to Yahoo Music when they came out at $5 a month. You can't beat that.

I still use iTunes though. I think it's a good starting place to shop for music.

I hope Napster's got a good business plan. I like the idea of having different plans to choose from. Let's see what MTV and MS have concocted with their music service.
Posted by Dead Soulman (245 comments )
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Ares
Ill stick with downloading the music (Which I already own ;)) for free.
Posted by mrpeabody3119 (101 comments )
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I predicted Napsters fall long ago..nobody wants subscriptions RIP
Why do these "music services" try to keep ramming them down our throats? $$$ That's why.

RIP Napster...Napster sucked anyways.
Posted by bobby_brady (765 comments )
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"Downloads Only" is not sustainable, except for Apple
Praise Napster for Peer-to-Peer networking, not music downloads. Obviously, it didn't understand the business which lead to its original demise.

Apple was the company that established a workable model for music downloads - one that everyone (artists, labels, consumers) can accept.

But there's still not enough margin in $0.99 cent downloads or even subscriptions (due to turnover, retention, customer acquisition costs, etc.) to SUSTAIN a business (do the work - more subscribers = more infrastructure costs), and at best can be considered a wash (break even).

This is where Apple has a competitive edge. They understood what it would take to run a music download business and they SET the price. And it WORKS for Apple because they are really selling iPods and making profits from that and can afford to have iTunes be a wash.

I don't see it working for anyone else yet. Nobody owns the "turnkey system" like Apple.
Posted by cagerattler (72 comments )
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So not true...
Apple's ONLY competitive edge was that it was the first to market with a player (iPod) and music service (iTunes) that worked seamlessly together. Beign first does have it's advantages but its not, by any means, the best. There are a lot of alternatives coming online. Napster, which I use, is a great deal. For $9.95 a month you have access to millions of songs (not quite as much as iTunes, but close) and can play them on an unlimited amount of computers (as long as you only stream them to one computer at a time) or you can outright download the music (but not purchase) on three computers. Downloading has the advantage of being able to play the songs offline and you can listen to downloaded music at work while your wife listens to downloaded music at home with the same sub. Now, if you want to pay $5.00 more, you can load an unlimited amount of music onto a compatible MP3 player (I use the Creative Zen). As long as you dock the MP3 player once a month, all of the songs keep playing. I have Napster at home, at the office, and on my laptop. As long as I am near a broadband connection, I can just think of a song and have it playing on my Zen in about 60 seconds. My music tastes change almost daily, so this model works for me.
I have heard all the arguments are renting vs. owning music. Heh, if I wanted to own music, I purchase it from Napster (only the songs I like, not one or two with a CD full of 9 or 10 crap songs). And I frequently do purchase individual tracks and make compilation CDs for permanent archive. The subscription model is not for everyone. There are those out there that believe that there is something to be said for "owning" something even if you don't want it. I am not one of those people. I lease my vehicles, I rent my movies, and I rent my music. If I like the car a lot, I may buy it when the lease is up. If I like the movie, I may go out and buy the DVD. If I like the music well enough to want to hear it again after my sub is up, I buy it.
Napster can work if people buy into the subscription idea. Too many old people out there just have to "own" things. Kinda sad really...
Posted by thenet411 (415 comments )
Link Flag
No reason for that to be true
I don't think Apple SET the price, they took the magic .99 figure that had already garnered some support from the public via annoucements and surveys.

But if .99 doesn't include enough margin, that's only because someone along the line is WAY too greedy. Do the math: a 15 song album costs about $15 as a CD in a store and $15 as a download. I can guarantee you that the CD costs more to manufacture, ship and stock in the store than it costs to rip the song once, store it on a server and maintain bandwidth/website. The store gets a cut of that $15 and it seems reasonable that their overhead is higher than Napster or iTunes. So how can it be that I can have a physical product manufactured and shipped to a fancy retail store near me but not buy an inferior virtual product for the same price without the virtual vendor covering their margins?

And I'll shed some light on that.
The recording industry feels that they need to make more on a download than a CD. They will justify this by saying that an individual has to spend the whole $15 on a CD even if they want one song, but the downloaders are now just buying the single song so they're only selling .99 worth of product rather than $15.
In essence they have been forcing us to subsidize all the bad music they've packed with the single we desired, in order to achieve huge profits. Now the sales model has changed and they're trying desparately to cling to the forced profits of the old model.

Their proposed solution is to raise the price of the popular singles. Somehow I suspect that if they succeed the total cost to buy an album online will go up, not down or stay the same.
Posted by skeptik (590 comments )
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