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Napster Wakes Up

Updated from 11:22 a.m. EDT

A flurry of new products and deals in digital music has industry observers speculating that Napster (NAPS), the name that started it all, could be the next company ripe for a takeout.

"We're seeing consolidation; we expect Napster to be part of the consolidation," says George Sutton, a managing director at Craig-Hallum Capital Group. Sutton, who follows Napster, does not own its shares, and his firm doesn't do any banking with the digital media company.

"We're continuing to get somewhat inundated with new models and new players, but it is going to be a big market ultimately," Sutton says.

A new line of Apple (AAPL - Get Report) iPods, and details on the holiday release of Microsoft's wireless-enabled Zune player, have contributed to the digital media fervor in recent days.

Another Napster rival, RealNetworks (RNWK - Get Report), announced that it will pay $350 million for WiderThan (WTHN), a Seoul-based company that sells ringback tones, music and other mobile entertainment to more than 50 wireless carriers worldwide.

Digital music is also expanding at NewsCorp's (NWS - Get Report) wildly popular MySpace. The company recently announced a partnership with Snocap, a licensing service for digital music started by Napster founder Shawn Fanning that will enable musicians to sell songs from their MySpace pages.

The torrent of news, combined with a buy rating from new analyst coverage, sent Napster shares up 6.7% on Thursday, tacking on 23 cents to $3.67. On Friday, the stock was off by 6 cents to close at $3.61. Napster shares were recently trading at $3.53.

Napster's distribution platform, brand name, subscriber base and back-end technology make it an attractive company, analysts say. And the stock is cheap.

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