Napster's DRM-Free Music Store Will Struggle

Music subscription service Napster Inc. (NAPS) has announced the launch of an online store that will sell 6 million downloadable songs in the DRM-free MP3 format. For the first time Napster will offer a product playable on iPods and iPhones, as well as various other devices, priced competitively with Amazon.com Inc.'s (AMZN) downloads, which are also DRM-free. The Napster tool will also work with Apple Inc.'s (AAPL) iTunes store, which continues to sell some song files that are only compatible with a certain number of devices.

Napster's bread and butter remains its subscription service, in which users gain access to a large library of music for a basic monthly fee, starting at about $13 a month. The recurring-revenue model is relatively novel for the music business, but it hasn't proven popular enough to bring Napster remotely close to profitability--it lost $36.8 million on sales of $111 million in 2007, and its share price also has taken a beating.

Napster's store will have a hard time luring customers away from other available options, especially without an obvious value-add. It will initially market MP3s to people already paying for its subscription service. I do believe that customers will eventually migrate away from online stores that sell tracks with DRM, although those stores themselves may in time cease to exist. (Apple already sells DRM-free songs from EMI, a struggling label that is ready to experiment, as well as some indies.) Besides, selling 99-cent songs isn't a high-margin business. For Apple it's a low-margin mechanism that spurs sales of its iPod, while for Amazon it's a supplement to a wide range of offerings largely outside of the music sphere.

Comments

[wallawallab...:]

Let's face it, no company will offer online music as effectively and efficiently as Apple.

They've got the model down pat.

They know it's merely an entree, fishfood of sorts, to get folks introduced to the ecology of the Mac, via the iPod. They've priced it accordingly and have taken the confusion and difficulty out of downloading to the extent that an acolyte can do so with ease.

When users start to perceive the care and ease of use that Apple builds in with every experience, they become potential customers of the company's other offerings. Genius.

It's about the experience!

Go Apple.

2008 May 21 06:41 AM

[K. Lewis:]

A valid subscription service for iPod users is a value add to the available options if you ask me. Apple's model provides nothing for music fans looking for legal access to a vast array of music at a set monthly price. They will eventually have to once one of their competitors gains some traction. It may be Napster. Who knows?

2008 May 21 02:42 PM

[drewys:]

Competition is typically good. Unfortunately for consumers, Napster just seems, well, confusing to use. The different member packages (including the option of its slightly different MP3 store) leaves much to be desired. As a consumer, I'd like to learn (right away) what my options are in clear and concise fashion. Some will like Napster's model...but as the author said, "Napster's store will have a hard time luring customers away from other available options." True IMHO. iTunes is just easier, more convenient, at prices that are clear, and let's not forget, seamless with the ubiquitous iPod. As a consumer it's at the point where it's just too much an obvious decision to make...Buy an iPod, load iTunes, and enjoy!

2008 May 21 04:30 PM

[brando:]

I've been a Napster subscriber for over three years and love it. Subscription music is the only way to go as far as I'm concerned. Piracy is not an option and iTunes is not nearly as user friendly as having over 6mm songs available on command. Now I can start a library of DRM-free high bitrate files that I own...but frankly, I don't care. Once you try the subscription route you probably won't want to purchase. Napster's challenge is getting people to try it and realize the potential.

2008 May 21 09:59 PM

[chief22:]

since the fiscal year for the company ends on 3/31, the currently completed year is actually fiscal 2008 and the numbers that you have reported are a year out of date. the correct numbers for the last 12 months are $127.5 million of revenue and a net loss of $16.5mm. still a money loser, but trending in the right direction and also note that there have been four consecutive quarters of cash flow break even and the company's cash balance has acrually risen by $3mm over the past year.

2008 May 22 12:59 PM