Napster loses money, gains subs

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Online music retailer Napster Inc. said Thursday it narrowed losses in its fiscal third quarter by adding subscribers and generating record revenue.

For the three months ended Dec. 31, the company posted a net loss of $9.5 million, or 22 cents per share, compared with a net loss of $17 million, or 40 cents per share, in the year-ago period.

Revenue totaled $28.4 million, up 21% from $23.5 million in the same quarter a year earlier.

Excluding a nonrecurring benefit from prepaid download cards that expired without being redeemed, revenue for the latest quarter was $26 million, the company said.

Analysts surveyed by Thomson Financial were looking for a loss of 29 cents per share on revenue of $28 million.

Napster said it added about 48,000 subscribers during the quarter for a total worldwide paid subscriber base of about 566,000.

The total subscriber figure for the quarter includes about 40,000 university subscribers, the company said.

For the nine months through December, Napster's net loss totaled $28.3 million, compared with a net loss of $50.5 million in the nine months ended Dec. 31, 2005.

The company said it expects revenue to exceed $26 million in the fiscal fourth quarter. Analysts were predicting revenue of $28.7 million.

"We will have a healthy fourth quarter, and we expect a very strong quarter in Q1 as we welcome AOL subscribers to the Napster family," Napster Chairman and Chief Executive Chris Gorog said during a conference call with Wall Street analysts.

The bulk of Napster's revenue is derived from monthly subscriptions for unlimited downloads. It also sells individual tracks a la carte and music downloads for Microsoft Corp.'s Windows Media Player-enabled mobile phones.

Last month, Napster stepped up its efforts to boost subscriber count by striking a deal with Time Warner Inc.'s AOL Music that made Napster the exclusive music subscription provider for AOL.

The company said Thursday the deal should increase its subscriber count by more than 50% when existing AOL Music subscribers are transferred to Napster by late March.

Gorog said he expects a majority of AOL Music subscribers to migrate over to Napster's service.

AOL had more than 350,000 computer users subscribing to its music service. Napster is also counting on enticing additional AOL users to sign up.

Gorog declined to take any questions on Napster's ongoing exploration of a possible sale of the company or partnership. But he did weigh in on the merits of the technology used to restrict unauthorized copying of songs purchased on Napster and other licensed music services.

Digital Rights Management, or DRM, technology, became a hotly debated topic earlier this week after Apple Inc. CEO Steve Jobs called on major record labels to drop DRM from songs sold online.

Gorog said DRM is harmful to the recording industry because there are different versions that cause incompatibility problems between some online music services and digital music players. Songs purchased from Napster, for example, cannot be played on Apple's market-leading iPods.

"The labels should refuse licensing to any party that is a purveyor of a closed (DRM) system," Gorog said an apparent reference to Apple.

Jobs has said making its technology widely available would make it easier for hackers to figure out how to bypass it.

Ahead of the earnings report, Napster stock rose 11 cents, or 2.76%, to close at $4.09 on the Nasdaq Stock Market. Napster shares were down 29 cents, or 7.09%, to $3.80 in aftermarket trading.
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