Napster faces challenges within and without

By Antony Bruno

DENVER (Billboard) - When Napster reported its fiscal first-quarter results in August, it tried to paint a positive picture to investors who were growing increasingly nervous about the company's future.

Revenue had held steady from the previous quarter at around $30 million, the company was enjoying its fifth straight quarter of positive cash flow, and it had recently converted the service to a Web-based system featuring downloads free of digital rights management (DRM). The company that set out to re-create the original Napster experience of unlimited access to music sought to convey the message that it is on the right track.

But investors and analysts haven't seen it that way. Napster's stock bounced off an all-time low in mid-July and is trading at less than half its year-earlier price. Subscriber levels slipped 7 percent from the previous quarter, while the company's fiscal first-quarter net loss widened slightly from the same period last year. And most recently, a group of dissident investors initiated a proxy battle to gain seats on the board.

STRONG BUT STRUGGLING

"It's kind of damned if you do and damned if you don't," Napster chairman/CEO Chris Gorog says. "The bottom line is, five years ago we were No. 2 or 3 in this industry, and five years later we're still No. 2 or 3 in this industry."

Although it has survived the harsh birth of the digital music market when bigger and richer companies failed, the company has struggled to convince Wall Street that an unlimited, all-you-can-eat subscription service is the model of the future.

Despite Napster's efforts to convince music fans of the same, none of its initiatives so far have moved the needle. The addition of Napster to Go mobile devices was tempered by uninspired devices and shaky technology. The napster.com ad-supported free streaming service, which also is meant to replace the now-defunct university outreach program, has been scaled back to a "hidden" unpublicized URL (free.napster.com).

So the focus now is on DRM-free sales and mobile distribution to lure new users. Both efforts have shown encouraging early results. Track sales per subscriber have increased 10 percent from June to July, and overall sales were up 5 percent during the same period. First-quarter mobile-originated sales were up 44 percent over the previous quarter.  Continued...