Napster Gives It Away For Free (AAPL, NAPS)

Napster (NAPS) has decided that marketing its music subscription service to potential customers is just too expensive. So it's come up with an innovative solution: give away the music for free. Here's how it's supposed to work. You go to Napster.com to get your free music, and then you decide to pay for lots more. Oh, and while you're listening to all that free music, Napster makes money from ads on its web site. As CEO William Goog says in the quote below, "music fans are really getting it". It's just that Napster's shareholders aren't.

Napster's woes are generally good news for Apple (AAPL). But desparate measures like this are bad news for Apple. Apple, of course, gives away about one song a week on iTunes, but it probably gets paid for the promotion by the record labels.

Who am I to talk?, I hear you ask. Seeking Alpha gives away everything for free, including conference call transcripts which cost us a fortune. And we have hardly any ads on our site, and nobody clicks on them anyway. How's that for a dumb business model? If you want to send us a donation to keep us in business for a few more days, just email me.

Meanwhile, here's Napster's explanation of the service from its web site, my suggestion for an addition to Napster's web site, and the quote from the CEO:

From the Q&A about the free service on Napster.com:

Can I Really Listen to Napster Music for Free?

Yes. Here's how it works. You can listen to every track in our 2,000,000 song catalog up to 5 times for FREE. That's 10 million free plays! After the 5th free play of any single track, you can either purchase the track or become a Napster subscriber. As a subscriber, you can download an unlimited number of full-length songs to your PC. As a Napster To Go subscriber you can transfer those tracks to your compatible portable player without paying per track.

Seeking Alpha's suggested addition:

Can I really listed to a track 5 times for free, then decide that I like it enough to buy it from iTunes?

Yes. Because if you really like a track, you'll want to own it, not rent it. But because you can't buy it from us as a download, you'll have to buy it from Apple or another one of our competitors. That means you come to us for the free stuff, and then got to iTunes to make a real purchase and give your money to Apple. Aren't we dumb! Hey, but at least we get to show you an ad when you're looking for the free stuff. Guess what? Apple said they'll advertise on our site!

Napster CEO William Gorog explains the business case for the free give-away on the conference call:

..."Free music at home -- why, it's almost like the heyday of Napster." This quote from the Los Angeles Times pretty well sums up what we were indeed trying to do when we created the new free music service at Napster.com. So, we were delighted that the L.A. Times and so many others in the media got it. In fact, Napster offering free music was such a surprising and exciting story, our PR agency has advised us total impressions from this news event exceeded 90 million. But, we are even more pleased that music fans are getting it. In our first two weeks since launch, visitation to Napster.com has increased 133% over the prior two-week period, increasing our visitation even beyond our Super Bowl levels.

Our Napster links tool immediately got picked up by the Internet music community, and free Napster music links are beginning to sprout up around the web. And fans are discovering the Narchive and beginning to contribute to the people's history of music. Napster.com, Napster links, and the Narchive were designed to work together to create a viral effect to drive visitation and in turn drive upgrades to subscription and increase track purchases. In our first two weeks, we were very pleased to see little or no evidence of paid subscriber defectors to the free service, as our paid subscribers seem to quickly understand the value of remaining a subscriber. We were also very pleased to see robust track sales over the last two weeks, up 15%, which we think is particularly notable since the 5 plays per track limit has not really begun to kick-in for the most part.

This begins to provide important evidence that the more sampling and playing, the more transactions. Although it is quite early to draw conclusions, these preliminary results are very encouraging to us. From the perspective of our paid subscription business, the key thing to understand about Napster.com is we believe its viral potential to drive visitation will help us to significantly lower our subscriber acquisition cost. We are in the process of substantially reducing our cash burn and working to accelerate our drive to profitability, and believe we now have a very important tool to help us with this critical goal. As free Napster content becomes more pervasive on the web, more and more users should come to Napster directly without requiring the high levels of paid advertising we used to jump-start our business.

Those visitors will discover the excitement of Napster's unlimited access model and freedom from 30-second clips, and we will initially monetize that traffic via advertising. We believe that over time, many free users will become interested in trying our subscription service. And what should emerge is a much more informed customer and a customer that is much more likely to stay with our service for a longer period of time. Lowering SAC, decreasing churn, increasing the lifetime value of our customers, are key goals of Napster.com. While the free music experience at Napster.com has certainly been designed in part as a marketing tool for our paid music products, we also believe we have created the foundation for an important stand alone media property on the web.

...Although we do not ask personal information from our visitors to Napster.com, we can still tell a lot about them, which enables us to add value to advertisers through refined targeting and by creating more relevant contextual messaging for users.

Excerpted from the full NAPS conference call transcript.