Who needs Napster?
Not Microsoft, not Google溶ot even its own subscribers. Maybe there's no room for a pure play in digital music.
By Owen Thomas, Business 2.0 online editor

SAN FRANCISCO (Business 2.0) - At its height, before the music industry won the legal victory that shut it down, Shawn Fanning's Napster had 70 million users swapping billions of files.

Today's Napster (Research)葉he product of the original Napster's bankruptcy and a whirl of wheeling and dealing擁sn't nearly as popular with users. Currently, just over 500,000 subscribers pay $9.95 or more for unlimited music downloads that will expire if their subscription lapses.

Napster, which is set to report their fiscal third quarter earnings Wednesday after the close, hasn't been all that well-received by Wall Street analysts either. The digital-music vendor has three buy ratings, three holds, and two sells.

No partners for Napster

The stock, which closed at $3.58 on Tuesday, has traded below $5 since last August, with rumors of a Google (Research) partnership or acquisition providing the only recent lift. (Google denied the rumors.) Some sources in the music industry believe that Microsoft (Research) took a look at buying Napster and decided to pass.

Why the lack of interest? While Napster is likely to report double-digit revenue growth this quarter, it shows no signs of closing the considerable gap between its revenues and its expenses. In the most recent quarter, it lost $13.6 million on sales of $23.4 million. Those numbers sing a simple song: Napster 2.0, like Napster 1.0 before it, lacks a viable business model.

Its subscription business suffers from a high "churn rate"葉he percentage of customers canceling accounts. The rate could be as high as 30 percent a quarter, estimates P.J. McNealy, an analyst at American Technology Research.

That suggests that a large percentage of Napster's customers simply don't see much value in the subscription service it offers after giving it a try.

Even with a library of 1.5 million songs, Napster pales in comparison with the vast selection once available擁llegally, to be sure葉hrough its predecessor's file-sharing network.

A disconnect with iTunes

And Napster songs can't be played on Apple's (Research) popular iPod, which dominates the MP3 player market, a critical disadvantage in competing against Apple's iTunes Music Store.

Unlike the competition, Napster isn't using music as a loss leader for other products and services.

While Apple says its music store is profitable, it makes most of its money in music by selling iPods. Likewise, most of Napster's competition have other more significant revenue streams than selling music. Yahoo (Research) sells advertising as well as music subscriptions; Sprint (Research) offers music to boost sales of its wireless data plans; Microsoft sells songs primarily to make sure its Windows Media software is the way most people listen to music on PCs; and RealNetworks (Research), whose Rhapsody music service has 1.3 million subscribers, offers video and online gaming subscriptions as well.

"It's hard to be a standalone pure play in digital music," says McNealy of American Technology Research.

Given that, the most likely outcome for Napster is a sale. In a recent research report, investment bank Stifel Nicolaus laid out several outcomes. In the worst case, Napster would be sold for $1.97 a share -- the value of its cash on hand and the value of its brand. At best, say Stifel Nicolaus analysts, a bidding war that valued each subscriber at $200 might have Napster selling for $4.86 a share.

But it's unlikely that a bidding war will break out for a service which can't seem to hang onto its subscribers, or for a brand so diminished.

While the company has said it has enough cash to last it two years, it could face problems sooner than that. Just as suppliers have demanded faster payment from troubled companies in the airline and auto industries, Napster's suppliers--the record labels--could start demanding cash upfront.

That would leave Napster facing a second bankruptcy sooner than expected. Haven't we heard this song before?

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: テつゥ 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices テつゥ S&P Dow Jones Indices LLC 2018 and/or its affiliates.