BusinessWeek: Napster Down But Not Out

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Napster is no stranger to the online music business. Once the pillar of file sharing on the Internet, it has evolved (or perhaps devolved, as some might say) in form as many times as it has changed ownership. Each stop along the way has unearthed more and more trouble for this once-prominent brand. BusinessWeekis Peter Burrows takes a look at The Nine Lives of Napster in his latest column, concluding that Napster may once again be down, but by no means is out:

So far, it hasnit worked out that way. Napster remains a distant second in market share to Appleis popular iTunes service. And management upheaval at Roxio has raised fears about Napsteris future once again. Just days after the launch, respected Universal Music executive Lawrence Kenswil resigned his seat on Roxiois board. Since then, a stream of executives -- including Roxio Chief Financial Officer Elliot Carpenter and Napster division President Mike Bebel -- have left as well.

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But hold on. The cat in the Napster logo hasnit run out of lives just yet. It sells far fewer songs at its online store than Apple, which sells roughly 75% of the 3 million songs that are sold online each week. But Gorog points out that based on the latest weekly data from Neilsen SoundScan, Napsteris share equals all other rivals combined, including services from Wal-Mart, MusicMatch, and Best Buy. He says the data show that Napster 2.0 is holding its No. 2 position against Apple in this music-download business.

Napster could start to increase market share in the more profitable business of selling monthly subscriptions, where customers can listen to -- but not own -- as many songs as they want each month for $9.95. While Napster is far behind RealNetworksi Rhapsody service, AOLis MusicNet, and others, itis taking the lead again in the old Napsteris stomping ground: college campuses.

In part to wean their students off illegal file-sharing sites, Penn State University and the University of Rochesteris Eastman School of Music intend to offer free Napster subscriptions to thousands of students in coming months. These are just pilot programs, and Roxio granted big discounts that will keep profits negligible at best, say insiders. But the hope is that the students will become paying customers for years to come. "Smart," says Kenswill.

Mr. Burrows goes on to discuss that the high-profile defections from the Napster unit may not be as critical as they would seem to indicate. In addition, the most important part of Napster, he claims, is the blending of a subscription service with regular music purchasing. But there are more competitors coming, and there will be more trials coming for Napster in the future. While CEO Christopher Gorog believes they are in a good position, Mr. Burrows finishes by examining just what trouble Napster will be facing:

Problem is, Roxio doesnit expect profits any time soon, and the competition is only going to get tougher. Worse, Roxiois core business of selling CD-copying software to PC makers is hurting, as well. In the quarter ended Dec. 31, Roxio lost $25 million on revenues of $18.8 million, with software revenues contributing to that loss. Roxio predicts that the PC software business should turn profitable this quarter, based on a new product release.

That leaves Gorog with little room for error as he pursues his grand music ambitions. Cats may indeed have nine lives, but ultimately, Roxio -- or somebody else -- will have figure out how to leverage Napsteris valuable brand and innovative services into a business model that turns a profit.

More information on Napster and where it may be going can be found in the full BusinessWeek article.

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