Napster Reports Decline in Subscribers, May Be Sold

Napster Inc. (NAPS) on Wednesday provided a disappointing outlook for its online music service and said its subscriber base had fallen 7 percent as it focused on promoting a new free Web site.

On a conference call with analysts, Chief Executive Officer Chris Gorog said he would not rule out a sale of the company.

"We do not have our heads in the sand regarding an M&A (merger and acquisition) transaction. We continue to receive a lot of interest in the company. We will always carefully weigh any valuation alternative against the opportunity and risk associated with continuing as a stand-alone company," Gorog told analysts on a conference call.

"Napster's still trying to find a working business model, which is bad from an operating standpoint. But we see an increased likelihood the company will consider a sale, especially since management mentioned it on the call," said Kit Spring, analyst with Stifel Nicolaus & Co Inc.

Napster reported a net loss of $9.8 million for the first fiscal quarter compared with a year-earlier loss of $19.9 million. Revenue rose to $28.1 million from $21 million.

Napster said its loss narrowed but its subscriber base fell 7 percent over the March quarter as it focused on its new free Web site.

Gorog noted that while the company expected a negative impact to its subscriber growth due to the new free Web site, he expects Napster to get back on track. He said the new site should improve the conversion from free users to paid subscribers.

Napster's total paid subscriber base as of June 30 was 512,000, including 4,000 university-paid subscriptions. Excluding university, the number of paid subscribers grew 26 percent year-over-year.

Napster was originally set up as a song-swapping site in 1999 and was forced to shut down in July 2001 after a series of legal battles with record labels over copyright infringement. It re-launched as a legal download site in 2003, having been bought by software company Roxio.