Napster (Nasdaq: NAPS ) -- the former renegade song-swapping network -- was singing a happy tune last week when the online music company boosted its revenue guidance for its fiscal fourth quarter by $1 million to $15 million. However, earnings are still expected to be in the red with a loss of $0.63 a share.
The boosted forecast comes from robust demand for subscriptions to its new "Napster To Go" service that lets users download an unlimited number of songs for a monthly fee.
When adding the increased sales for Napster-compatible music players from iRiver, Creative Technology (Nasdaq: CREAF ) , and Dell Computer (Nasdaq: DELL ) , all the ingredients come together for a rosy quarter.
This raises a question: Will subscription-based services through which users rent their music steal business away from pay-per-song download sites like Apple's (Nasdaq: AAPL ) iTunes? Let's take a close look and see.
"Napster To Go" is the first subscription service that allows you to move an unlimited number of songs -- which are encoded in Microsoft (Nasdaq: MSFT ) Windows Media Audio (WMA) format -- to portable music players. (But not to iPods, which won't play WMA files.) RealNetworks' (Nasdaq: RNWK ) Rhapsody and Yahoo!'s (Nasdaq: YHOO ) MusicMatch are unlimited, too. This gives music fans much more flexibility and choice. All the music you want at one price. Nice, very nice.
Last quarter, Napster's subscriber base grew 50% from the prior period to end the year with 270,000 users. Even with the revised revenue forecast, it's still only a drop in the bucket compared with Apple's sales of an estimated 100 million downloads each quarter. Yet the trend is the key point here. Subscription-style plans will outpace downloads by the year 2009 -- generating $890 million in revenues vs. $800 million for pay-per-song download sales -- according to Jupiter Research.
So far, however, challengers have had little effect on the big A's sales. Apple has sold some 300 million songs through its iTunes store since 2003, and iPods generated more than 80% of the total sales of hard-drive-based music players last year. At first glance, Napster is just a pesky fly that can easily be swatted away. But unlike pay-per-song sites, the company is betting that its unlimited, on-demand music selection will be more appealing.
Think of it this way. A music subscription model is like cable TV, providing a host of different channels for a monthly charge. But iTunes is like your utility bill: The more kilowatts you use, the higher the bill. Those with limited budgets are more likely to see the subscription idea as a more cost-effective way to enjoy their tunes. With a constant revenue stream from monthly paying consumers, investors will be watching to see whether this plan will move Napster toward the goal of profitability.
The popularity of the iPod is what has made iTunes successful -- not the price per tune. But the availability of unlimited music selections and cheaper yet stylish players does pose a threat. If music junkies decide the $14.95 option is the real deal, then the erosion of Apple's dominance is just a matter of time.
For more on Napster's move on Apple's turf, check out:
Fool contributorKelvinTaylor does not own shares of any of the companies mentioned.