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Napster Seeks To Reassure Investors

Posted on: Monday, 8 September 2008, 11:35 CDT

Napster portrayed an upbeat picture to investors while reporting its fiscal first-quarter results in August, aiming to calm growing concerns about the company’s future.  

The company reported the fifth straight quarter of positive cash flow, with revenue of $30 million, nearly unchanged from the previous quarter. 

Napster recently converted its service to a Web-based system featuring downloads free of digital rights management.  

But despite the optimistic report, investors and analysts seem nevertheless concerned. The company’s stock saw an all-time low in mid-July and is now trading at less than half its price a year ago. Subscriber levels dropped 7 percent from the previous quarter, and the quarterly net loss widened slightly over the same quarter last year. And perhaps more troubling, a group of investors have initiated a proxy battle to gain seats on the company’s board.

"It's kind of damned if you do and damned if you don't," Napster chairman/CEO Chris Gorog told Reuters.

"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 Napster has survived the brutal birth of the digital music market, despite failures among larger and wealthier companies, it has struggled to convince Wall Street that an unlimited music subscription service is the idea model.  Indeed, none of Napster’s initiatives so far have proven this out.  The addition of Napster to Go mobile devices was tempered by limitations with challenges in the devices and underlying technology, and the napster.com ad-supported free streaming service has been scaled down to a "hidden" and unpublicized URL (free.napster.com).

The company’s focus is now on digital rights management (DRM)-free sales and mobile distribution to entice new customers, both of which have shown promising early results. Per-subscriber track sales are up 10 percent from June to July, with a  5 percent jump in overall sales during that time.  And first-quarter mobile-originated sales saw a 44 percent increase over the previous quarter.

"Really for the first time, it puts Napster in a position where we can address all available customers out there," said Gorog.

However, he admits it could take up to a year before these initiatives produce a material effect on revenue or subscriber totals.

Napster’s predicament is that it may not have that long. The company's dwindling market capitalization now makes it an enticing takeover target, and it has now hired the investment bank UBS to field offers. Although the dissident investors seeking board seats to change Napster’s direction, which together own less than 1.5 percent of the company's stock, have not proposed any specific plans, the proxy battle illustrates the level of investor aggravation.

Amid this backdrop, Napster continues to face fierce competition, including that from chief rival Rhapsody America, a joint venture between MTV and RealNetworks. And new competition from ad-supported streaming sites such as Last.fm, meem and others have both Rhapsody and Napster facing the same challenge. Namely, why would a consumer pay a monthly subscription fee to stream songs online when they can use other streaming services at no cost?

But Gorog questioned the threat these new ad-supported services pose, pointing out that none are thought to be profitable.

"We have a $130 million business with 700,000-plus customers and positive cash flow for five consecutive quarters," he said.

"So I think the day imeem can stand up and say they're doing business like that is the day I'll pay close attention to what they're doing."

Gorog remains upbeat that music subscription services will have their day, even if the path ahead is not yet clear.

"There's no question that the subscription model has not yet reached its potential," he said.

"The biggest challenge remains ... to find new, more effective ways to get consumers to understand the benefits of unlimited access to the world's music catalog."
 
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On the Net:

• Napster

Source: redOrbit Staff & Wire Reports

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