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Napster on the ropes?

Digital music company disputes reports of layoffs or liquidation, saying its service now boasts more than 500,000 subscribers.

3 min read
Is Napster on the verge of going down for the count--for a second time?

The digital music subscription company says absolutely not, strongly denying reports that it is planning to make major layoffs, reorganize the business or even liquidate the company.

Napster said Wednesday that it has surpassed 500,000-subscriber mark, marking a doubling of its paid subscribers in the past year. The company made the announcement on the heels of an industry report that cast a dark cloud over its future.

Citing "sources inside the organization," the Web site Digital Music News reported Tuesday that a substantial round of layoffs is expected within weeks and that company officials are "considering various exit options, including a fire sale or liquidation."

In a statement Wednesday, Napster CEO Chris Gorog disputed the claims.

"Doubling our subscribers over the last 12 months demonstrates the mass market potential of our music subscription model and the powerful appeal of Napster to music fans who want it all," he said. "With a track record of robust growth, exciting new developments in the pipeline and over $100 million on our balance sheet, we are extremely excited about the future of Napster."

Napster will report its third-quarter financial results on Feb. 8. The company reported a loss of $13.6 million for the previous quarter on revenue of $23.4 million.

Whatever the financial picture, Napster has indeed fallen far behind industry giant Apple Computer, which reported last week that its iTunes Music Store has grabbed 83 percent market share.

Unlike iTunes' a la carte system, Napster is relying on the conversion of the digital music market to the subscription model, where users pay a monthly fee of $14.95 for unlimited downloads and transfers to CDs and devices.

Among subscription services, RealNetworks' Rhapsody is the clear leader with 1.3 million paying subscribers as of its earnings call last October.

In its earnings report in November, Napster said it had 448,000 subscribers, meaning that it has added at least 52,000 subscribers since then. The company said 50,000 college students subscribe to the service through Napster's university program.

Yahoo has been tight-lipped about subscriber numbers for its Yahoo Music Unlimited service.

Although Napster trails far behind both its nearest competitor and the dominant force in the digital music game, some industry analysts aren't ready to give up on the company.

Piper Jaffray analyst Gene Munster issued a report Tuesday saying he was confident that Napster's subscriptions would rebound given the company's marketing push in the latter part of 2005.

He also wrote that Napster's slow overall subscriber growth was not a death knell, saying the focus is now largely on Napster's Web-based initiative, which Gorog alluded to in the company's last earnings call but has given little details about since.

"While adding new subs is clearly a critical component of the Napster story, we believe that over the next few months investor focus will shift to the new Napster.com initiative and what it means to the long-term viability of the company," he wrote.

Some say the company's most vital asset remains its connection to its previous, free-music-laden incarnation, the one created by Shawn Fanning that ignited the digital music revolution.

A report last month from Ipsos Insight indicated that all might not be lost for Napster. The report noted that 79 percent of downloaders recognized the Napster brand, while only 57 percent were aware of iTunes. Dubbed "Tempo Digital Music Brandscape," the report was based on an August 2005 survey of 1,088 U.S. downloaders ages 12 and older.

Jim Welte of MP3.com reported from San Francisco.