Napster Troubles Grow

Music site struggles to compete with iTunes and Rhapsody

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Four months after Napster relaunched as a pay-for service, the download site and its owner, Roxio, are in serious trouble. At least four key executives have left the company since its October launch, Roxio's stock price is down more than sixty percent, and its estimated monthly revenues of $1.8 million are significantly less than both iTunes and Rhapsody.

"The press, the entertainment industry and consumers all made the mistake of thinking it would be easy to build the kind of legitimate business that could rival the pirate services," says Eric Garland, CEO of the Internet research firm BigChampagne. "Increasingly, that is not the case."

Napster president Brad Duea denies his company is failing. "We're on track," he says, pointing out that Napster has sold more than 5 million downloads and recently raised $22.5 million from investors. "We're very pleased with where we are." Duea claims that the executive departures were part of an ongoing consolidation effort. "We're moving people from New York into the L.A. office," he says. "The overall reductions are less than ten percent, and they focused on redundant positions."

But there's no doubt that Napster has gotten off to a rocky start. The company suffered an early setback in October when Hewlett-Packard, the largest PC manufacturer in the country, broke an agreement to bundle Napster with its new computers, and then offered iTunes the spot instead. Two of Napster's departing executives -- board member Lawrence Kenswil, who heads up Universal's new-media arm, and president Mike Bebel, a former licensing executive at Universal -- are taking their music-industry ties with them. (Neither Kenswil nor Bebel could be reached for comment.)

The other problem is the same at all legal download sites: how to make a profit selling songs when the record industry gobbles up about fifty cents on every dollar sale, and overhead eats into the rest. The iPod has become Apple's big revenue stream, but Napster's audio player hasn't sold nearly as well. Similarly, its premier paid-subscription service has drawn only an estimated 90,000 members -- behind Rhapsody, MusicNet and Musicmatch.

But, says Garland, the market for online music is still maturing. "It's a game of patience," he says. And Napster, though beleaguered, expects to survive. "This will be a battle waged over years and quarters, not months," Duea says. "This is a $36 billion industry that's moving online faster than anyone expected."