Napster Inc.'s move to offer its entire catalog of downloadable songs for sale as unprotected MP3 files that can be played on any device generated a lot of applause among music fans.
But last week's initiative failed to impress Wall Street given the reliance of the Los Angeles-based online music retailer on its monthly subscription service, which wasn't part of the offer.
"Much of Napster's business is predicated on subscription," said Darren Aftahi, an analyst with ThinkEquity Partners LLC. "Margins on subscription are much higher than a la carte downloads. No one's going to make money in a la carte downloads."
Napster is dropping the copy protection on all single track and album downloads in an effort to capture a greater share of the digital download market. MP3 files are compatible with most portable music players, such as Apple Inc.'s immensely popular iPod devices, whereas copy protected files are not.
With this move, Napster becomes the latest digital music retailer to switch to unprotected download formats. And its move is more sweeping than Apple, Amazon.com Inc. and Wal-Mart Stores Inc., which began selling only a portion of their catalogues as unprotected music in the past year.
"The ubiquity and cross-platform compatibility of MP3s should create a more level playing field for music services and hardware providers and result in greater ease of use and broader adoption of digital music," said Chief Executive Chris Gorog in a statement.
Napster has about 5 million songs in its catalogue. Songs will retail for 99 cents each, while albums will retail for $9.95, no change from the existing price when the service changes later this year. But most of the company's $111 million in annual revenue comes from its monthly music subscription service, which will remain copy protected.
Napster has about 750,000 monthly subscribers who pay $9.95 for access to the entire catalogue a fee that is rising to $12.95 on Jan. 30. However, the songs can only be played on subscribers' computers or specified devices.
Still, Aftahi said the switch to MP3s for its a la carte downloads still is a savvy move for the company because it gives it access to a large portion of the download market iPod users.
Napster has not said exactly when it will make the switch, as it has yet to finalize agreements with the major record labels.
Many labels have demanded that their content be sold with embedded copy protection to prevent unauthorized duplication, but amid outcry from music fans and slumping sales, most copyright holders have begun to relent.
Napster got its start in the 1990s as a site for free and illegal file sharing that offered MP3 downloads. The site was shut down amid a series of lawsuits from the music industry, but came back online in 2003 as a legitimate service.
Napster shares closed at $1.93 on Jan. 10, down 6 cents for the week. The company's stock has been in a slide for two months, hurt by a poor holiday season and the resignation of the company's chief financial officer.
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