RealNetworks makes big deals, but Napster may battle back.

After a flurry of deal-making body blows, the two middleweight contenders in the subscription music service ring--Napster Inc. and Real Networks Inc.--have gone back to their corners.

Who'll remain standing in the next rounds has yet to be seen, but Napster, whose stock price has taken a beating, is vowing to come out swinging--but not until February.

Napster recently dove into Germany and Japan with Tower Records, signed agreements with XM Satellite Radio Inc., partnered with Dell Inc. and BellSouth Corp. to sell music players, and signed a deal with Clear Channel Communications Inc. to offer live concerts.

Meanwhile, RealNetworks settled a $761 million lawsuit with Microsoft Corp., forged an alliance to promote its Rhapsody music service on Windows, replaced iTunes as embedded software in Hewlett Packard Co. PCs, and signed an agreement with cable operator Cox Communications Inc.

For now, RealNetworks appears to be ahead on points. At this time last year, Napster's stock was trading in the $9 range. It has since plunged to the $3 range. RealNetwork shares were trading in the $5 range last January, and recently soared to almost $9 per share. RealNetwork's Rhapsody music service claims 1.3 million subscribers, while Napster reports almost 450,000 subscribers.

Napster has been somewhat cryptic about the service it plans to launch in February. Chief Executive Chris Gorog has offered few specifics, saying that it will be a free, Web-based music portal. Some are calling it the MySpace of Napster, referring to the popular social and music networking site MySpace.com, now owned by News Corp. Napster has also said it will be advertiser supported--adding a much-needed revenue stream for the company. "Yes, there will be opportunities for advertisers to tap into Napster's very desirable demographic," Gorog said on a recent conference call.

Subscription boost

He's counting on the launch to boost subscriptions and expand Napster to a degree that none of its previous campaigns has. But most analysts are waiting to update their investment ratings until the details emerge.

Both Napster and RealNetworks are fighting to spread the subscription-based model for digital music--where users rent songs for a monthly fee, rather than buying-to-own songs for their personal library. There's also Yahoo Music to consider, MTV just announced a new subscription service with Microsoft called Urge, and Google Inc. is making moves to offer its own music service. But ITunes remains the market leader with its buy-and-own model.

RealNetworks seems to be making inroads in establishing distribution channels with major partners, such as Cox, the third largest cable provider in the U.S. Rhapsody is being offered through its high-speed DSL service, and through the deal with H-P, Rhapsody will be the default music player and subscription service on PCs shipped in the U.S.

L.A.-based Napster was the early leader in the subscription space, based on a strong brand name left over from its days as an underground, free peer-to-peer file sharing service in the late 1990s that was ultimately ruled illegal. Its struggles as a legit paid service are weighing it down.

Deep discount

Napster has focused its efforts on the university market, touting its strategy of getting the biggest music consumers on board when they're young, hoping to retain them afterwards. But at what price, some analysts wonder. Napster has to offer its service at a deep discount to universities, resulting in a subscription fee of roughly $2 per student per year at schools like the University of Washington in Seattle, which released the terms of its Napster contract. That's considerably less than the $9.95 or $14.95 per month Napster charges its regular customers.

"The college crowd means nothing, financially speaking," said P.J. McNealy, an analyst with American Technology Research.

The company is still forging ahead with its university courtship programs, although it's a loss leader for the company. "We want to help these MP3 player manufacturers get their players out to students," said Avery Kotler, senior director for business and legal affairs, adding, "We'd like to do more deals with statewide university systems."

Napster's new program with XM Satellite radio, scheduled to launch next month, will bring the company into peoples' cars, breaking down a key barrier for consumers, according to George Sutton, analyst at Craig-Hallum Capital Group. A recent deal with telecom carrier Ericsson will deliver Napster into phone handsets in the next few months.

While the company has been tight-lipped about the upcoming launch, two top execs are showing plenty of confidence. Gorog and another company director have purchased more than 60,000 shares of Napster stock in the open market over the past six weeks.

HILARY POTKEWITZ

Staff Reporter