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Napster Hews Loss, Dims View

Updated from 5:09 p.m. EDT

Online music-subscription company Napster (NAPS) narrowed its first-quarter loss and issued lighter guidance than analysts anticipated.

Napster on Wednesday said it lost $9.8 million, or 23 cents a share, in the first quarter of 2007, improving from a year ago when it lost $19.9 million, or 46 cents a share.

The result was better than the loss of 36 cents a share estimated by the Street.

Napster's sales totaled $28.1 million, including a one-time gain of $1.9 million from prepaid card breakage, rising from $21 million in the first quarter 2006. The average estimate from Thomson First Call was $27.3 million.

For the September quarter, the company expects about $25 million in revenue, falling short of the $29.5 million forecast by analysts. Napster forecast a loss of $12.5 million, or 30 cents a share, for the second quarter, a wider loss than the analysts' forecast of 26 cents a share.

Shares of Napster recently slipped 2.2%, or 6 cents, to $2.69 on the news.

Despite the disappointing forecast for the second quarter, the company said that the growing number of music-enabled cell phones will benefit Napster over the long term, and pointed to several new deals that should boost its fortunes.

On a call with analysts, Napster said Suncom Wireless (TPC) will roll out Napster's mobile service next week. Customers will be able to purchase downloads on their cell phones, with simultaneous delivery to their PC.

Napster also announced an "alliance" with Japan's largest wireless carrier, NTT DoCoMo (DCM). Its handsets will support the Windows Media Audio (WMA) format and will be compatible with Napster To Go.

The lack of compatible, music-enabled cell phones was a barrier that "is now becoming unblocked," Napster CEO Chris Gorog said. "Our persistence and patience will be rewarded."

Gorog also addressed the looming launch of Microsoft's (MSFT) Zune music player and service.

He said that officials at the Redmond, Wash., software giant have told him they will not abandon the WMA format.

"We do not have our heads in the sand" in regards to a potential merger or acquisition, he added The company has attracted a lot of interest, Gorog said, and assured investors that it weighs all potential options.

The company's subscriber base declined 7% sequentially due to the introduction of the free Napster.com site. Design changes to the page should lead to new paid subscribers in the second part of the year.

As of June 30, 2006, Napster's total paid subscriber base was 512,000, including 4,000 university subscribers, the company said.

Excluding college subscriptions, which slow in the summer, paid subscribers grew 26% year over year.

Shares of Napster closed the regular session up 13 cents to $2.75.

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