It was a breakthrough deal that would have put Napster’s kitty icon on millions of Hewlett-Packard Co. computers.
But in the days leading up to Napster’s relaunch in late October, HP suddenly–and without explanation–returned Napster’s $250,000 check and canceled the agreement to install a link to Napster’s online music service on its computers.
Worse, HP in January announced a surprise partnership with Napster rival Apple Computer Inc. to feature the iTunes Music Store on Hewlett-Packard computers and sell HP-branded iPod music players.
Neither HP nor Napster’s parent company, Roxio Inc., would comment on the soured deal, whose details were confirmed by sources familiar with the agreement. But its collapse was one of several setbacks since the reintroduction of Napster, the pioneering song-swapping renegade, as a paid music service.
Napster is losing money, and top executives have left the company, including its president, chief financial officer, vice president of programming and head of corporate communications, as well a key board member.
On Wednesday, Roxio began laying off people at its Napster division. A Roxio spokeswoman said the company was “eliminating redundancies in the organization” but declined to say how many people lost their jobs.
And while Napster can legitimately claim it is the second most popular online music service, information provided by insiders at two of the major music labels shows it sells only about a quarter the number of downloads from their artists as Apple’s market-leading iTunes store. Napster declined to release download figures.
“I think it’s a very competitive market with very ugly economics, and there’s just no money in the download business,” said Steven B. Frankel, managing director of Adams, Harkness and Hill, a Boston investment bank.
Napster 2.0 launched with a celebrity-studded bash at the House of Blues in Los Angeles and the bold pronouncements of its chairman and chief executive, Chris Gorog, who hailed the reborn Napster as the best-known brand in online music.
The reality of reincarnating the one-time bete noir of the music industry into a legitimate music service proved more sobering. Napster lost $15 million in its first two months of operation.
Perhaps more telling is the state of Napster’s subscription business, which is widely perceived as more lucrative than selling 99-cent songs.
Napster declined to provide specific subscriber numbers for its service, aside from noting that downloads and subscriptions contributed equally to Napster’s $3.6 million in revenue for the last three months of 2003.
That means Napster has attracted about 90,000 subscribers in its first two months–ranking it fourth, behind RealNetworks Inc.’s Rhapsody service, America Online’s MusicNet and MusicMatch.
Gorog was upbeat in a recent conference call with analysts and investors. He expects sales to reach $20 million within 12 months, possibly even double that as the Napster service launches in Europe. He said Napster is well-positioned to capitalize on the rapidly growing online music market.
Gorog points to key retail partnerships as spurring growth. An eclectic group of 20,000 nationwide retailers–from Radio Shack to 7-Eleven and Exxon service stations–sell prepaid Napster download cards.
And this week, Target kicked off a nationwide Napster promotion, selling prepaid music cards and such kitty-branded merchandise as recordable CDs and carrying cases.
“The question is how long can they hang in there? The answer is, for a while,” said Gene Munster of the Piper Jaffray & Co., which has an investment banking relationship with Roxio.
