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Napster Reports Wider Quarterly Loss, Stock Tumbles

Online music service Napster reported a wider quarterly loss on Wednesday, and gave a lower-than-expected revenue outlook, sending its shares down as much as 10%.

Shares of Los Angeles-based Napster fell to $3.67 in extended trading following the earnings report but recovered to $3.88. The stock had closed up 9 cents at $4.07 on Nasdaq.

Its net loss increased to $8.5 million, or 20 cents per share, for the fourth quarter ended March 31, from $4.4 million, or 10 cents per share, a year earlier, when it posted a gain of $5.4 million gain from the sale of its consumer software division.

Revenue rose to $29.1 million from $26.8 million. Napster expects revenue to increase to about $31 million in the June quarter, below the average analyst expectation of $34.2 million.

Napster has been pursuing a strategy of partnering with third parties or acquisitions to build its subscriber base in recent months.

At the end of March 31, Napster's total paid subscriber base was 830,000 after adding 225,000 AOL Music Now subscribers who joined the service that month.

Chief Executive Chris Gorog told analysts on a conference call the company has retained its relationship with UBS to assist in evaluating merger and acquisition opportunities but is also maintaining its focus on the business. The company hired UBS last September after it said it received inquiries from prospective partners.

"It was nice to hear that they are still pursuing both options," said Barbara Coffey, an analyst at Kaufman Bros.

The Napster name started life as a renegade free MP3 file-sharing service in 1999 founded by then-college-student Shawn Fanning. The Napster brand name was bought in 2002 and used for the current legal service which uses copy protection software called digital rights management (DRM) to prevent the illegal sharing of songs by consumers.

Gorog told analysts that he would guess major music companies would follow the example of number-three EMI Group and drop DRM protection within a year.

EMI has announced major partnerships with online retailers including Apple's iTunes and Amazon.com to sell its artists' music online without copyright protection.