Napster's Rollin' Along

Rollin' on a river. Listen to the story now. -- "Proud Mary," Ike and Tina Turner

In the world of downloaded music, Napster (Nasdaq: NAPS) is a-rollin'. Last month, the company raised revenue guidance for the coming quarter to $15 million from $14 million. Today, that guidance was raised to between $16.5 million and $17.5 million. "Listen to the story now... "

Napster has been high-profile since it ran two ads during this year's Super Bowl. The subscriber base -- business word-fog for who's buying the music downloads -- has blasted from an end-of-year 270,000 subscribers to 410,000 now, a 53% increase -- and 56,000 are university students, a coveted customer base among marketers.

Napster's CEO says he believes Napster is the fastest-growing music subscription service. It needs to be, because there's a lot of competing going on out there. From Apple (Nasdaq: AAPL), the current king of the hit download parade, to that technology for the nerdy, Microsoft (Nasdaq: MSFT), there is no shortage of suits looking to make a centavo off every download.

Worthy of consideration, Apple owns exclusive rights to music downloads for its stalwart iPod: None of the other downloading services interfaces with it. Napster's service does not work with iPods, restricting Napster's access to a valuable pocket of the market. Furthermore, it's unlikely that the two will create an alliance anytime soon, given that Apple holds a healthy and continuous revenue stream in downloaded songs.

For the MBAs thinking there's a familiar ring to "subscriber base," look no further than satellite radio -- yes, the forever Foolishly debated XM (Nasdaq: XMSR) and Sirius (Nasdaq: SIRI). But these two have an exclusive deal -- they own the sky. Not so for the hip Napster. Heck, even Wal-Mart (NYSE: WMT) offers music downloads, and the emergence of future competitors, resulting in lower costs to consumers (and lower profit margins for the likes of Napster), represents something of a foregone conclusion as downloading's popularity continues to grow.

Wall Street likes today's news and sent Napster's stock up 15% this morning. Hey, what's not to like? Napster has net cash, or total debt minus cash, of $124 million. Isn't that enough greenbacks to choke back competition? Well, let's let the analysts have the final say. They see the company losing $1.72 per share for the fiscal year ended in March and then a larger $1.79 loss in 2006.

For the sake of argument, we also might do well to consider the costs of trading off -- consumers presumably like music best when it's cheapest. Napster has cleverly inserted something of a red herring into its membership clause: Its subscribers are able to listen to songs downloaded from Napster only during their membership. That creates an incentive to stay on board.

The fundamental question -- as costs to downloading decline and competitors emerge -- is: Will Napster be able to continue its growth?

Fool contributor W.D. Crotty does not own shares of any of the companies mentioned -- but he is a music junkie. Click here to see The Motley Fool's disclosure policy .