During the opening panel of the Digital Music Forum yesterday, multiple people predicted that service or subscription-based music would eventually supersede the traditional paid downloads business. This had to be high-bitrate music to the ears of panelist Brad Duea, President, Napster (NSDQ: NAPS), seeing as his company has been pushing the subscription music concept for awhile, though without a whole lot of cash to show for it. After the session, I chatted with him for a few minutes on where this business was going and how it fit into the world of DRM-free digital music sales.
— The role of DRM: In January, Napster announced that its download store would go MP3 only in the first half of the year, but of course that doesn’t apply to the subscription music service. “If you come in and you stream, that’s basically an unlimited subscription… the one place that we will still have DRM is on the portable subscription.” Basically, Duea agreed that the concept of a DRM-free subscription service, at least one that allows a user to port music onto a device, doesn’t make sense, since there has to be a limitation on how that music is used and kept. He did note that the company is experimenting, on the mobile side, with subscription purchase services. So, for example, a mobile user might pay a set fee to buy a number of tracks each month. As for when the DRM-free store will open up, the official word is still in the first half of this year.
— Profitability: During the panel, Duea mentioned that after years of losses, Napster is finally pushing into positive cash flow, though I was curious how this squared with statements in the company’s 10-q filings, about the company benefiting from an impasse in establishing rates and paying music publishing fees. He admitted that the company could go back to being cash flow negative depending on the rate that is established and the level of investments the company makes this year, but overall, they’re standing by claims that Napster will generate cash this year.
— Differentiating Napster: Unlike other online vendors doing DRM-free MP3s, Napster believes its hybrid subscription-sales business will prove to be an advantage: “People can come in, discover music, get unlimited access, and then build up the collection that they own with DRM-free MP3s.” It’s worth noting, of course, that services like Last.fm are offering the discovery side for free. And although Napster plans to invest heavily in the MP3 business, it’s still the subscriptions that carry the highest margins, according to Duea. On Last.fm: “Well see if they can actually monetize the assets they have… we’ve certainly proven that we can generate subscribers and revenues off of our platform.”
— Social networking: Nothing announced yet, but with the release of an open API, expect to see more interlinking into the popular social networks.
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