It’s well-known cat-with-headphones logo notwithstanding, Napster Inc. has always been the underdog.
The Los Angeles-based music file-sharing service is famous for putting up a good scrap whether against the record labels when it was pioneering free downloads or more recently against Apple’s monolithic iTunes system. But it’s also famous for losing.
The gutsy little download service remains unbowed and even a little defiant. It’s rolling out an ad-based business model and a new mobile distribution plan.
“We’ll see what happens,” Napster chief operating officer Laura Goldberg said. “We’re doing what we’ve always done, putting out the best product in the market.”
As St. George would have been just another knight without his dragons, Napster wouldn’t be Napster without some fearsome adversaries. Universal Music recently jumped into the music download fray with Spiral Frog, a free service that draws on the massive Universal catalog. Microsoft reportedly will roll out its Zune music player and a corresponding download music service this fall.
Big deal, Goldberg said.
“People like Yahoo and MTV have entered this market and have not been able to surpass us,” she said.
Though its subscription numbers have grown 26 percent in the last year, the service has only about 10 percent of the market. It lags way behind Apple’s iTunes, which carries about 69 percent of that market, and eMusic with 12 percent. It beats out RealNetworks’ Rhapsody and RealPlayer services, each with about 4 percent of the market.
New model
In May, Napster launched its free download service, which has been receiving about three million unique visitors a month and averaging more than 60 million page views.
Under the plan, Napster users can listen to any track in the catalog for up to five times for free. Members can then purchase the cuts for 99 cents each or they can subscribe to Napstertogo.com for $14.95 a month and listen all the time. Once members stop paying fees, however, the service is revoked.
As part of Napster’s new, ad-driven strategy, Evan Cowitt, the vice president of ad sales on the West Coast and East Coast ad director Mike Owen are working with advertisers to tailor campaigns with sponsored features like custom playlists, co-branded music players and Flash-in-flash video.
They’ve signed contracts with a slew of high-profile advertisers. The firm has made a deal, for example, with Samsung to bolster its sponsorship of the NFL. The service uses the Samsung Web site to feature players’ favorite songs on game days; fans can listen for free through a co-branded Flash player provided by Napster. Other deals include Walt Disney Studios and its Buena Vista Home Entertainment, MSN Rockstar, Toshiba, Maxell and the U.S. Navy.
Another key component of Napster’s strategy is its pact with SunCom Wireless. It allows the company to sell $2 tracks over its network, so that music will be available on cell phones and users will be able to download. It’s currently available in the Carolinas and Puerto Rico, but Goldberg said it should have potential nationwide ultimately.
“The deal with SunCom allows you to buy music over your cell phone and then to download it into your cell phone,” Goldberg said. “If you have a cell phone and a hard drive on it, then you can essentially use it as a portable device.”
It appeals to the younger demographic, which the industry is convinced is Napster’s bread and butter.
“Everyone I know under the age of 30 thinks (the mobile music) is the greatest invention ever,” Goldberg said.
Street skepticism
While the underdog image plays well in the press, it doesn’t carry much weight on Wall Street.
“The scrappy little start-up comes to battle with the big bad record labels and flies right,” said Aram Sinnreich, an entertainment industry analyst with Radar Research. “The reality is that there is almost no relationship between the old Napster and the new Napster other than the name,” said Sinnreich.
“The executive team is different. The technology is different. The business model is different. Is it the same company?”
Founder Shawn Fanning’s Napster exploded onto the scene in 1999 as the first widely used music sharing service. It changed the way consumers, particularly college students, used the Internet by music fans to easily share song files with each other. (Fanning has left Napster and now heads another called Snocap.)
That led to copyright lawsuits from the music industry, which saw its cash cow music properties appropriated via computer clicks. Though its original service was shut down by court order, Napster paved the way for decentralized file-sharing programs such as Kazaa and BearShare, which have been harder to control and became an icon in the computer and entertainment fields.
The big clash with the music industry made Napster by far the most recognizable brand in the file-sharing universe. It went legit in 2002 after being purchased by Roxio and its legal music service, Napster2.0, was started in the United States in October 2003. Last year, Napster started the world’s first portable music subscription service, Napster To Go, followed by a global mobile partnership with Swedish communications giant Ericsson Inc.
Napster, which is headquartered on Melrose Avenue in West Hollywood and employs 146 workers in Los Angeles, New York City, Frankfurt and London, continues to lose money. The stiff competition Napster is facing has reignited talk of a sale. Earlier this month, shares of Napster rose when cell phone maker Nokia Corp. acquired digital music distributor Loudeye Corp., driving speculation that Napster may be the subject of a similar acquisition or merger. In the past year, the company’s stock traded between $2.55 and $5.10.
During the most recent Napster earnings report, Napster chief executive Chris Gorog said a sale is a possibility, but not a priority.
“We do not have our heads in the sand regarding a possible merger or acquisition,” Gorog said. “We continue to receive a lot of interest in the company and would like to assure our investors that we will always carefully weigh any value creation alternatives against the opportunity and risk associated with continuing as a stand-alone company.”
The likelihood of a Napster acquisition may hinge upon the developing role of the cell phone in the digital music player market.
George Sutton, an analyst at Craig-Hallum, wrote in a July note to investors that Napster “has positioned itself to benefit from the emergence of cell phones as the ultimate delivery device for music.”
But will cell phones really outstrip MP3 players anytime soon?
“I liken it to camera phones,” said JMP Securities analyst Ingrid Ebeling. “Almost every cell phone now has a camera phone function, but you don’t necessarily get rid of your camera.”
