Good and Bad in Napster’s Latest Quarterly Results

Napster Inc. continues its dubious legacy of never having posted a quarterly profit since it first began trading publicly, but it is pointing to its first quarter of positive cash flow as a sign that it is heading in the right direction.

I’m not so sure. Marketing expenditures are down, and that’s helped the balance sheet, but Napster will have a difficult time attracting new subscribers if it continually slashes the marketing budget. In fact, Napster’s subscriber based declined in the latest quarter, falling at an adjusted rate of about 2.5 percent.

What’s more, Napster continues to bet its future on a market transition that foresees people shifting from listening to music on portable MP3 players to using music-capable mobile phones. There’s some evidence that such a trend is occurring, at least in certain markets such as Japan, but the often exorbitant over-the-air charges and other toll fees levied by grasping wireless operators threaten to scupper Napster’s best-laid plans for markets such as North America.

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