had its iTunes,
( NAPS) was the cool kid of online music, while
provoked user frustration with its clunky, ad-infested media player.
But the companies chasing the Apple online-music kingdom have swapped reputations, at least on Wall Street: Real has made nice strides to grow its diverse media business (and declutter its media player, thankfully), while Napster is losing favor after bleeding cash and customers.
The two companies, both vying to lure music fans from Apple's tight grip, are at a disadvantage without a seamless connection to the iPod, the No. 1-music digital music player on the market.
Likewise, "they're both dealing with the fact that the subscription model is still looking for its legs," says Mike McGuire, an analyst with Gartner. Subscription services charge about $15 a month for unlimited music, as long as the customer continues to pay, while iTunes sells music downloads for keeps by song or album.
With the oomph of its brand behind it, one would've expected Napster to have a leg up on Real. But now it looks like it barely has a leg to stand on, short of getting acquired. The company soared 38% in the weeks after
hiring a banker to explore its options, but the lack of news regarding interested shoppers has started to weigh on shares, and the stock has fallen about 11% this month to $4.37.
It's left some wondering how long the company can sustain what looks like a losing business model. Though it narrowed its loss in the
latest quarter and beat analysts' expectations, the company is still unprofitable.
Napster's cash levels have been falling for the past year. Its cash and short-term investments totaled $90.3 million in the September quarter, declining 29.2% from $127.7 million in the September quarter 2005. As it spends to grow subscribers, that figure will get only smaller.
Napster recently signed deals with
in Japan and
in the U.S. to boost its mobile business, but the moves are fresh, and will take time to pay off.
"I don't think in the next one to two quarters that there will be enough revenue from the mobile component to make a material impact on the cash burn," says Mark Harding, an analyst with Maxim Group, who has a hold rating on the stock. "The only way they can do anything with the cash position is to make some fairly aggressive operating expense cuts." He does not own any shares of either companies, but his firm expects to receive or intends to seek banking compensation.
"I think there's a need to do something," says George Sutton of Craig-Hallum Capital Group. "We have been
calling for a sale for the last several months."
He's still bullish on the company, believing its back-end platform and multicountry presence will attract a buyer, and rates Napster buy. Sutton does not own shares, and his company does not have a banking relationship with Napster.
But other observers don't see enough diversification. "I'm a skeptic," says Steven Frankel at Canaccord Adams, who recommends investors dump the stock. The company is a "big single bet in online music. If the Napster brand is the bulk of the appeal, in my opinion, the brand hasn't proven to be a big money maker."
Napster has advertised at the Super Bowl, throughout the Web, and, since May, offered
free streaming music on its home page. After all the effort, customers aren't sticking around, he says.
"From our vantage point, the song remains the same: promises of nirvana in wireless music, endless losses and an ebbing subscriber base," Frankel wrote in a recent research note.
American Technology Research analyst P.J. McNealy downgraded the company to sell recently, noting that takeout speculation has driven the stock too high. He's doubtful the company would fetch the $6-$7-a-share price -- a significant premium -- some have suggested.
Napster subscribers (excluding university subscriptions) have fallen sequentially from 547,000 in the March quarter to 508,000 in the June quarter to 487,000 in the September quarter. Numbers were affected when the company launched its free site, with the trade-off supposedly being a more loyal subscriber base and the ability to generate ad revenue from the free service. Subscriber churn hit an all-time low in the latest quarter, the company said.
Meanwhile, subscriptions are on the upswing at RealNetworks. Subscribers have grown from 1.58 million in March to 1.63 million in June to1.65 million in the latest quarter. Including games and other services, Real's total subscriber base is 2.45 million.
"Real is growing its business and Napster's not," Frankel says. "Real benefits from having a diversified product mix: its games, its music, its wireless. They have critical mass in terms of customers across all those businesses."
Frankel has a buy rating on Real. He does not own shares of either company, but his firm intends to seek or expects compensation for banking services from the companies.
Real has consistently grown its revenue also has a healthy balance sheet. While its $761 million settlement with Microsoft in October 2005 certainly has helped the digital media firm, Real has continued to grow its revenue, profit and cash in the past year.
"RealNetworks is profitable, even excluding (the benefit from) Microsoft," Harding says.
Real shares are up more than 50% since the start of the year. The stock was recently trading at $11.55.
"They haven't been standing still," Gartner's McGuire says, pointing out the company's acquisition of WiderThan and its partnership with
, the No. 2 seller of MP3 players (yet still lagging iPod sales by a wide margin).
While both companies are going to face even more competition in the music business from
with its new
Zune portable player, Real seems better-positioned to fend off the challenge -- and could even benefit, says Harding.
He thinks MP3 hardware firms like
, which currently have a Windows-based platform, might be interested in deals with Real's Rhapsody.
"I think it makes sense for the hardware providers to partner with someone on software, that they aren't competing with on hardware (Microsoft)," Harding says. "I think it's helpful to Real."