Napster’s Q3 highlights are pretty brief. Revenues came in at consensus, and the company only lost 6 cents a share, when the street was expecting 12 cents.
Alas, the music subscription service’s other numbers tell the story of a company that’s tucked into the fetal position, waiting for the bad times to pass. Top line growth decelerated from 24% last quarter to 15% this go-round. And the company’s subscriber rolls dropped by 1% — from 750,000 to 743,000 — in the last quarter.
As we explained last year, Napster is no longer burning money like it used to — it says it will be cash-flow positive for FY08 — but that’s because it’s cut sales and marketing efforts in half. Like just about everyone else in the industry, Napster has concluded that its PC-based subscription business can’t grow. So it’s waiting for a boom in mobile music to turn it into a growth company.
But it’s been waiting for a while, and it may have to wait a while longer: Warner Music Group said today that it has yet to see its mobile business pick up. Most NAPS investors seem to have given up last year.
Update: During the call, CEO Chris Gorog reads our mind! He notes that while advertising costs dropped 85% y/y, the company generated a record number of subscription trials: “This means, quite simply, that our business model is working.”
And while we’re at it, we’ll present Gorog’s new growth pitch: Mobile has been slow because there weren’t enough phones that worked with the Napster, but that’s going to change this year. And move to selling DRM-free MP3s this spring will make Napster more appealing, since you can finally buy music from the service and port it to Apple’s iPods and iPhones.
We’ll have to wait and see re: phones, but we’re not sure that the MP3 switch will do more for Napster. It won’t do much for profits, since selling individual songs is a low-margin business at best. It should make the service more appealing to its existing base. But Napster’s problem isn’t keeping its subs — it’s the difficulty in getting new ones.
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