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Napster Nips at iTunes' Heels

The online music business is heating up again. Napster (Nasdaq: NAPS  ) -- once the No. 1 peer-to-peer network for free music downloads -- has a plan to go up against Apple Computer's (Nasdaq: AAPL  ) iTunes. In the latest battle to attract more music junkies, the company unveiled a subscription service that allows users to download an unlimited number of songs for a flat fee of $14.95 a month.

Touted as the world's first portable music service, members can fill and refill compatible MP3 players without paying per track. Think of it as your own local music store with unlimited access and a paid club membership. Called "Napster to Go," the new service works with music players from companies such as Creative Technology (Nasdaq: CREAF  ) , Dell (Nasdaq: DELL  ) , Gateway (NYSE: GTW  ) , and iRiver, but not with Apple's iPod. That is a key part in the marketing campaign, and here's why.

Apple chose to keep both the iPod and iTunes closed off from every other music service, so Napster decided to take advantage of this perceived weakness. Pay-for-download services can be more expensive and antiquated in comparison to Napster's subscription model. For the price of a CD per month, users can fill and refill their compatible MP3 players without paying for every track.

Here is the selling proposition, as laid out in Napster's nifty new television commercials: It would cost $10,000 to fill up a 40GB iPod with tracks purchased at $0.99 each, while it costs only $15 a month for an unlimited number of downloads with a "Napster to Go" capable player. If this seems like an exaggerated number, it is. Currently there are no 40GB players offered with the Napster service anyway, but the point is the company hopes people will buy into the prospect of paying one price for access to 1 million songs.

Napster plans to spend some big bucks -- up to $30 million -- on TV and at retailers like Best Buy (NYSE: BBY  ) to promote the mobile music service. Those ad dollars need to be well spent, because Apple has a much higher advertising budget. The payoff for the big A has been some 230 million songs and an estimated 10 million-plus iPods sold to date. By comparison, Napster ended 2004 with 270,000 paid subscribers.

To keep customers paying, Napster has employed some management technology by Microsoft (Nasdaq: MSFT  ) called Janus, which can detect whether a subscriber's account has lapsed. If so, the music goes away. So forget about canceling your monthly bill and listening to the tunes on your player.

I see more competition on the way. As prices for songs get cheaper, it's not only the number of tunes being sold; the player market is just as important. Since price sells everything, iRiver, Creative, and Dell are offering MP3 players on Napster's website at prices well under $300. In fact, those who pay for a one-year subscription can get a free iRiver player. Giving away the players -- or selling them at a discount -- will certainly attract newcomers to online music. Prices could eventually be below $100, creating tougher competition for Apple's traditional iPods. (Apple itself is trying to breach the under-$100 market with its new iPod Shuffle.)

To browse and download an unlimited number of tunes without paying for every song is quite appealing. A subscription service can be a reliable source of revenue, which in turn could be enough to push Napster toward profitability. If the idea, as promoted, catches on, Apple has reason to sweat.

For more Foolish coverage of this topic, check out Naughty Napster Plays Nice and Apple Wreckers.

Fool contributor Kelvin Taylor does not own shares of any of the companies mentioned.

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