Bulked up with AOL service, Napster enters Japanese market: reinvented music download pioneer has gone on global expansion spree.

THE acquisition of AOL's on-demand music service has armed Napster with what it claims is the largest subscription base in its industry. Now, it's catapulting into Japan.

In the coming months, L.A.-based Napster LLC will begin tapping into more than 40 million subscribers of Japan's largest wireless carrier NTT DoCoMo and provide wireless access for unlimited downloading. This is on the heels of a similar deal with au/KDDI, Japan's second largest mobile network with more than 20 million subscribers.

"Napster is aggressively growing the business," said Laura Goldberg, the company's chief operating officer. "The AOL transaction and activities in Japan have bolstered our position and there's a lot more interest in the company."

In January, the company bought America Online Inc.'s Music Now offering for about $15 million and took over 225,000 subscribers, which fattened Napster's subscriber base to 830,000.

Goldberg described the transaction "an inexpensive way to acquire more subscribers." It also eliminated Napster's key competitor.

Since the acquisition, the company has been focused on targeting cell phone subscribers with what the company calls "over the air" music subscription service. Internationally, not only is Napster's penetration in wireless handsets expanding to Japan, but also to Ireland and Portugal. A global mobile partnership with Swedish communications giant Ericsson Inc. recently yielded a contract with Cellular One to allow its 1.6 million U.S. customers to download music onto their handsets.

"We believe the emergence of cell phones and specifically, music-enabled cell phones, will far eclipse any sort of portable device out there today," Goldberg said. "It's an exciting time of change in the landscape of the portable music industry. Right now, it's dominated by iTunes and I think that's going to change."

In March, Napster struck a deal with AT&T where its users can get free unlimited access for a year to more than 3 million songs through Napster To Go. The service, which otherwise may have cost users $180 a year, allows wireless and broadband subscribers to customize playlists on their PCs and transfer songs to wireless phones and music devices. The agreement is supported by an aggressive national advertising campaign funded by AT&T.

In addition, the Napster brand will begin appearing in Circuit City stores across the country, in the form of subscription cards and branding initiatives. Virgin Digital will also exclusively market Napster to Virgin Digital's music subscription and Internet radio customers.

"You have to give the business development group at Napster credit. They have done their job well," wrote George Sutton, an analyst at Craig-Hallum Capital Group LLC, in an April note to investors. "Despite these deals, the stock has remained stuck near $4. In a market where many stocks hit new highs every day, this is one that looks odd by its absence."

And the company continues to lose money, even though it brought in $28.4 million during the third quarter of fiscal 2007, up 21 percent from the same period the previous year. Goldberg is OK with that. "If you look at the guidance, we didn't say the company would be profitable this quarter," she said.

If all goes according to the Napster executive plan, the new marketing initiatives and partnerships will translate to more subscribers and allow the company to break through to profitability.

Which is not unlikely. The company is one of the greatest comeback stories in the industry, built on a brand that pioneered free downloading and became the first to get pummeled in a litigation battle with the recording industry. Roxio made it legit when it purchased the company in 2002. Last year, Napster launched Napster To Go, the world's first portable music subscription service.

Potential sale of the company is still under consideration. In October, Napster hired UBS in October to explore strategic alternatives.

By BOOYEON LEE

Staff Reporter