Napster Dances Higher on AOL Deal

Around 350,000 paid subscribers on AOL's old music service will migrate to Napster

How can CEO Chris Gorog make a profit on Napster (NAPS)? His digital music company has lost hundreds of millions in recent years. He's facing tough rivals like Apple (AAPL), which dominates the market with iPods that aren't compatible with Napster services (see BusinessWeek.com, 5/2/06, "Napster: New Tune, Same Chorus?").

But Time Warner's AOL (TWX) just gave Gorog a new foothold in his battle for survival. His company will become the exclusive music subscription provider integrated into AOL Music, replacing AOL Music Now, according to a press release Jan. 12.

Around 350,000 paid subscribers on AOL's old music service will migrate to Napster. That's a significant amount. Napster said Jan. 4 that it expects to report 566,000 paid worldwide subscribers when it releases financial results on Feb. 8.

AOL will also promote Napster with links to the Napster service throughout AOL's free music site, AOL Music. It should take less than 60 days to complete the deal.

"We are pleased to provide our subscribers the opportunity to seamlessly transition to Napster, which will become the only music subscription service integrated into AOL Music," said Mike Rich, Vice President, AOL Entertainment, in the press release.

Gorog was upbeat too. "Napster's new relationship with AOL provides us with an excellent opportunity to aggressively grow subscribers through deep integration," he said in the press release.

Napster stock jumped 7.9% to $4.12 on the Nasdaq, on heavy volume of more than 6.3 million shares.

However, Gorog is not out of the woods yet. Napster is up against not only Apple, but also others who are scrambling to make a buck on the latest hot technology gimmick. RealNetworks' Rhapsody service has emerged as a solid No. 2 to Apple's iTunes. The Internet giant Yahoo! (YHOO) built a music download service in partnership with the privately held MusicNet -- but on the other hand, so had AOL (see BusinessWeek.com, 9/19/06, "A Needy Napster Searches for Takers"). At least now Napster has one less rival to deal with in the online music arena.