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Napster 2.0 gets a double scoop of disappointment

Before there was Kazaa or The Pirate Bay, or the slew of other P2P and torrent services in existence today, there was Napster which made P2P a household name.  Napster in many respects wrote the history book for P2P.  While it was not the first P2P engine, it was the first consumer engine of its scale and it also pioneered a history of legal embattlement with the RIAA and the music industry that persists to this day, a continual war of attrition.

When Shawn Fanning, the man who created Napster as a teenager, gave up the company it was in financial ruins, after being pillaged by the music industry and struggling under the weight of enormous legal expenses.  From a peak of 26 million users, Napster was reduced to bankruptcy and put out of commission. 

That's when Chris Gorog, CEO of Roxio, stepped in with a plan to buy Napster's name and logo for $5M USD.  He quit Roxio and took on a new position as CEO of his revived internet nameplate, Napster 2.0.  He made big promises, promising that millions of subscribers would come pouring in thanks to Napster's iconic kitty logo and name recognition.

However, the dreams never came true.  Apple launched its iTunes store just months before Napster.  With Apple controlling the majority of the MP3 player market, and with proprietary file-protection schemes placed on iPod files, Napster never really stood a chance.  It could not sell to iPod users and could only sell to the niche market of users who owned alternative players like SanDisk.

In the end, six years after the 2002 acquisition, the company has yet to make a profit.  In its latest fiscal year, which ended in March it posted $16M USD in losses on revenue of $127.5M USD, and a mere 760,000 subscribers.  Part of the expenses stem from the lucrative fees required to maintain the service's relatively large catalog of 6 million songs. 

Now, with Napster 2.0 stock continuing its steady plunge since 2002, Gorog is facing insurrection in his own ranks.  Leading the charge is Kavan Singh, a 26-year-old entrepreneur who owns a chain of the Cold Stone Creamery ice cream stores.  Mr. Singh, a loyal Napster user is joining with two colleagues to try to oust Gorog and revamp Napster at the company's annual September 18th shareholder meeting.

Napster has shown some signs of growth, thanks in part to finally being able to offer tracks for the iPod.  However, its subscription services have not grown as hoped.  Part of the problem is a tight market.  Aside from dominant iTunes the only real challenger is RealNetwork's Rhapsody service.  Rhapsody boasts 1.9 million subscribers, more than doubling Napster's base.  As Russ Crupnick, senior entertainment industry analyst at market research firm NPD puts it, "The [subscription] audience is limited.  Rhapsody got there first."

Napster has worked out a trial deal with AT&T to provide cell-phone downloads, but this has yielded little profit.  Part of the problem is simply the tiny profit margins associated with the business; Napster makes 10 percent revenue on music downloads.  These margins have led many competitors like AOL and Yahoo to give up on the music provider business.  Steven Frankel, an analyst at Canaccord Adams concludes that there is little Napster can do to save itself, stating, "This is a company that has tried strategy after strategy and has no meaningful traction."

However, Mr. Singh and his supporters believe much of the struggles is due to Napster's reputation as a P2P founder inherently leading to an association with illegality, something Mr. Singh contends Gorog and the company have done little to counter.  Thomas Sailors, 49, manager of personal investment holding company Cloverdale Investments, one of Mr. Singh's two partners running for a board seat fumes, "When you tell people they should get Napster, they say, 'What are you trying to do? Get me arrested?'  That tells me management is doing a poor job of communicating what this company does."

Mr. Singh and his colleagues are considering a move to sell Napster.  Such a move could yield a healthy profit for shareholders.  A prime candidate is RealNetworks, who might look to merge Napster's subscriber base to solidify its position and provide more competition against iTunes.  Whether the ice cream owner and friend succeed, it is one of the most interesting proxy battles of the year, perhaps even surpassing billionaire Carl Icahn and company's efforts to sell search-engine Yahoo to Microsoft (the other largest proxy event).  

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Run a promo
By FITCamaro on 7/31/2008 8:42:25 AM , Rating: 2
Buy some ice cream, get a free song download. Or vice versa.

Mmmm......Cold Stone......

RE: Run a promo
By ImSpartacus on 7/31/2008 9:34:23 AM , Rating: 5
Cold Stone is just so expensive. Spartacus prefers cheap ice cream that his meager budget can afford.

RE: Run a promo
By MrBlastman on 7/31/2008 9:58:52 AM , Rating: 5
You are missing the value proposition of Cold Stone... You might prefer cheap ice cream... but,

The women prefer Cold Stone and its aphrodisiac-inducing powers of eating Ice Cream out with their man.

Guaranteed to give you a good time elsewhere.

I'd call that a cheap date - cheaper than going to some uber fancy x1000 $$$$ restaurant.

Not to mention the Ice Cream there is good.

RE: Run a promo
By FITCamaro on 7/31/2008 10:07:37 AM , Rating: 4
Peanut butter ice cream + Reese's Peanut Butter Cups + blender = delicious peanut butter shake of epic proportions.

RE: Run a promo
By BMFPitt on 7/31/2008 10:14:12 AM , Rating: 2
That one used to be my favorite, too. Until...

Cookie dough ice cream (most locations don't have it, but can make it if you say you'll be back in a few days) with cookie dough in it, and chocolate chips. Worth every overpriced penny.

RE: Run a promo
By theapparition on 7/31/2008 11:53:18 AM , Rating: 2
Chocolate and Cake Batter ice cream mixed with brownie.

Mmmmm......think I'll pick one up tongight, then jog the mile home.

RE: Run a promo
By Alexstarfire on 7/31/2008 4:06:36 PM , Rating: 5
Gonna have to jog a lot farther than that.

RE: Run a promo
By amanojaku on 7/31/2008 10:16:31 AM , Rating: 3
I haven't seen a thin woman eat ice cream in years! Somehow, the aphrodisiacal qualities of Cold Stone is less than appealing when the target is a fat-ass. ;-)

Speaking of which, anyone heard of this new PS3 game Fat Princess? :-D

RE: Run a promo
By MrBlastman on 7/31/2008 10:23:35 AM , Rating: 2
You must live around a bunch of pretentious thin women ninnies then who don't ever get out. :P

My wife's thin, petite, and enjoys ice cream. :)

They do exist, you just have to look in the right places.

RE: Run a promo
By FITCamaro on 7/31/2008 11:46:58 AM , Rating: 2
Seriously. I don't think I'd date a woman who didn't eat ice cream unless she was lactose intolerant.

RE: Run a promo
By michael2k on 7/31/2008 12:30:49 PM , Rating: 2
They have Sorbet!

My wife loves their lemon or raspberry sorbets.

RE: Run a promo
By MScrip on 7/31/2008 8:55:11 PM , Rating: 2
It's not that expensive. The last time I ate at Cold Stone, my cup of ice cream with a few items mixed in was like $4. I had strawberry ice cream, cheesecake ice cream, strawberries and graham cracker crumbs. I was full.

I don't consider that expensive for a dessert. How much is normal ice cream somewhere else? Have you compared any restaurant prices to what you can make at home?

At least it's not a $4 cup of coffee...

RE: Run a promo
By mondo1234 on 7/31/2008 11:04:43 AM , Rating: 2
How about
"Buy a song..Download 'Heartbreak Hotel'

By martinrichards23 on 7/31/2008 8:58:09 AM , Rating: 5
niche market of users who owned alternative players like SanDisk

I know iPods are popular, but to say everything that isn't an iPod is a niche is crazy.

RE: niche?
By Newspapercrane on 7/31/2008 9:13:31 AM , Rating: 2
I know plenty of people who don't even own an ipod but still use itunes. Compatability aside, itunes is just about idiot proof, and everyone's heard of it.

RE: niche?
By jay401 on 7/31/2008 9:26:22 AM , Rating: 4
On the other hand I own an iPod touch and i -don't- use the iTunes store. Never have, most likely never will. Amazon's mp3s are DRM-free and usually higher quality. That and I don't listen to much new music so most of my mp3s are ones I ripped from the CDs I've owned for years now.

RE: niche?
By AntiM on 7/31/2008 10:55:27 AM , Rating: 2
Definitely. I find Amazon to be quite usable. I don't see the appeal of iTunes at all, considering Amazon is DRM free.

RE: niche?
By kmmatney on 7/31/2008 1:09:02 PM , Rating: 3
Another Ipod user who has never used the Itunes store. I do find the iTunes software to be very good (except for the QuickTime portion, but that's easy to take care of).

RE: niche?
By chick0n on 8/1/2008 12:05:31 AM , Rating: 1
but you gotta remember. most of the iIdioits(or Apple zealots, whichever u want to call them) does NOT know any better. they have been so brainwashed that it made them believe that iTunes is the "only" thing that will work with iPods.

Hell I never own any Apple products, they're nothing but overpriced piece of garbage. I got my first computer in 1988, I was only 8 yrs old. and I already know Apple sells overpriced garbage.

RE: niche?
By Brandon Hill on 7/31/2008 9:16:03 AM , Rating: 2
Isn't SanDisk's MP3 player marketshare in the single digits?

RE: niche?
By atwood7fan on 7/31/2008 9:30:00 AM , Rating: 2
It might be but when you also add up all the companies like SanDisk, Creative, Archos, Microsoft, Samsung, and others, I think combined they are at least in the double digits.

RE: niche?
By ats on 7/31/2008 2:49:58 PM , Rating: 1
yes they are in the double digits but split between 3-4 sub sectors based on services, etc.

In the end, anything outside of Ipod really is a niche, a 20% niche, but still a niche.

RE: niche?
By jnn4v on 7/31/2008 3:43:33 PM , Rating: 2
Not according to this WSJ article published yesterday:

Although you're close. They've got it pegged at 11%.

RE: niche?
By unfies on 7/31/2008 11:07:42 AM , Rating: 2
I know iPods are popular, but to say everything that isn't an iPod is a niche is crazy.

No kidding, I agree with parent. When looking at friends and coworkers, the iPod is perhaps in the plurality, but it is definitely not a majority.

With Apple controlling the majority of the MP3 player market, and with proprietary file-protection schemes placed on iPod files, Napster never really stood a chance.

Lets not forget that the industry wanted DRM... yet there have been cries from other people in the industry that the FairPlay DRM is proving to be anti competitive/monopolistic in nature from the other manufacturers etc... simply because Apple is doing what they're supposed to be doing - keeping a tight control on their DRM files and playback options.

The only immediate link to corporate complaints bout FairPlay is from 2004 (but I'm sure there's been more recent ones from hardware manufacturers):

And then there's the some personal suits such as:

For the record, I've owned a couple MP3 players, an iPod classic 5g, and an iPhone. I'm not a music whore and leech lots of music I don't want to listen to -- much like I don't own hundreds of DVD's I don't want to watch.

RE: niche?
By UNHchabo on 7/31/2008 11:52:59 AM , Rating: 2
Especially when you consider the phones that have come out with built-in audio players, like the Chocolate and its rivals.

I have a Sansa, and so do three other people I know. Honestly, I'd be surprised if Apple has a 75% marketshare among people I know. If they do, it's only because every iPod owner I know has more than one. One of my friends has a 2nd Gen Shuffle, a 1st Gen Nano, a 2nd Gen, a 4th Gen, a 5.5 Gen, and a Touch.

RE: niche?
By iFX on 7/31/2008 4:24:13 PM , Rating: 2
My Samsung A900 has a built in MP3 player and it's going in four years old I think. I've never used it though.

RE: niche?
By jnn4v on 7/31/2008 3:42:23 PM , Rating: 2
Apple has 71% while Sandisk has 11% of the market, according to this WSJ article that came out yesterday:

I guess it just depends on how you define niche.

Coldstone is frozen toothpaste
By sleepeeg3 on 7/31/2008 7:37:49 PM , Rating: 2
iTunes can take it's 128kbps DRM songs and stuff it. Amazon is the only real legal alternative, but I wish a company would offer higher quality tunes. 256VBR (which somehow ends up being 247 or so) loses quality being in the .mp3 format and then from the VBR code deciding what you can and can not hear. Not only should they be offering something higher as a baseline, but they could be offering *better* than CD quality, at a premium. Wouldn't that be something!

RE: Coldstone is frozen toothpaste
By StevoLincolnite on 7/31/2008 8:28:58 PM , Rating: 2
Can you actually notice a difference in qualities higher than 128kbps? My Entire Collection is 128kbps and When I downloaded 256kbps versions I hardly noticed a difference personally, I guess it varies from person to person, but I'm far from a music buff.

RE: Coldstone is frozen toothpaste
By Jedi2155 on 8/1/2008 1:03:59 AM , Rating: 2
With a high quality audio setup, I'm betting most people can hear the difference from a 256 kbps VBR, and a 128 kbps track. But of course that requires a high quality audio setup.

By StevoLincolnite on 8/1/2008 7:02:27 AM , Rating: 3
My "High Quality" Consists of Cheap $20 USB Head Phones, or tinny speakers from my laptop, I honestly don't like my Music loud.

RE: Coldstone is frozen toothpaste
By sscilli on 7/31/2008 8:56:04 PM , Rating: 2
Better than CD quality? I could understand wanting to be able to buy your music in a lossless format without DRM, but who really needs better than CD quality? Higher quality music has been tried before and didn't take off because most people don't have the desire to listen to their music in surround sound on a incredibly expensive set up. And as far as VBR loosing quality compared to CBR, that's not really true with a good encoder. Most of the stuff I've bought off of Amazon has been encoded with LAME at V0(no cut off on bitrate but most tracks end up near 256kbps) and I think you'd be hard pressed to hear any actual difference between that and a CD.

16M loss?
By kmmatney on 7/31/2008 1:20:17 PM , Rating: 2
Can someone explain to me how a company that was purchased that had $127.5M in sales, can lose $16M, even though all they are selling are downloads? It's not like they are investing in costly factories - it's frickin' downloads - where is all the money going?

RE: 16M loss?
By sprockkets on 7/31/2008 1:35:52 PM , Rating: 2
I think it is because they "rent" music, never sell it. Which of course, is a stupid business model. Cancel your account and lose access to all your music. Just what the RIAA wants.

Well, so does Microsoft and others.

By milodog on 7/31/2008 10:22:10 AM , Rating: 2
Maybe it will sing that Cold Stone song when you purchase an album. :)

Napster Icon
By kmmatney on 7/31/2008 1:14:22 PM , Rating: 2
So how do I get rid of that stupid Napster icon (or "Urge" icon, or all of the on-line music store icons) from Media player? I do use Media player classic, VLC player most of the time, but I'm always annoyed at not being able to get rid of the nline store icon from Media player.

By hellokeith on 7/31/2008 3:48:50 PM , Rating: 2
A merger makes sense. Napster would be a good buy for either Rhapsody or Amazon.

Actually, I wouldn't mind seeing those 3 merge. Amazon certainly has the $$$ to do it. A very big DRM-free MP3 service would be serious competition to iTunes and drive the DAP market to innovation.

Apple, who needs them
By ICE1966 on 8/2/2008 11:54:28 PM , Rating: 2
I personally would never buy anything that apple makes, except maybe the iphone. I do like the iphone but will not buy because I think that the ATT service stinks. If I could get one for my service provider, I might consider it.

"This is about the Internet.  Everything on the Internet is encrypted. This is not a BlackBerry-only issue. If they can't deal with the Internet, they should shut it off." -- RIM co-CEO Michael Lazaridis

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