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Napster urged TV viewers to "Do the math!" in a poorly-received Superbowl commercial on Sunday. But when we do the maths on Napster's business, we discover the company lost $1.36 on every $1 it earned in the last three months. Excluding income from Roxio, which Napster now classifies as "discontinued operations", Napster had revenues of $12.1m in its Q3 2005 period, posting a loss of $16.4m.

The good news is that the gap is narrowing, and the company has cash and short-term investments worth $45m - enough to see the year out at the current burn rate. The bad news is that its new services require heavy promotion: the company will spend $30m alone on promoting its Napster To Go rental service. At 20 per cent, Napster's gross margins are healthier than Apple's, but the Cupertino giant said it's prepared to run its iTunes rival at break-even or at a loss. And it can afford to, given its booming iPod business.

Overall, Napster ended 2004 with around 270,000 subscribers, 44,000 of whom are in the highly controversial university program, which in many cases amounts to a compulsory tax on students. The UK earned Napster $1.45m in income, with North America contributing the rest.

For Q3, Napster's cost of sale was $9.65m; sales and marketing expenses of $9.16m, general and admin expenses of $5.46m, and R&D costing $2.88m contributed to the overall loss.

This is the first quarter since the company formally shed the name "Roxio, Inc" on December 17, selling the consumer software business which includes Easy CD Creator to Sonic for $72.3m.

"Enforcement efforts against [the P2P services] have not effectively shut down these services, and there can be no assurance that these services will ever be shut down. The ongoing presence of these “free” services substantially impairs the marketability of legitimate services, regardless of the ultimate resolution of their legal status," the company noted in its 10-Q statement, filed today.

You could say that.

The company also warned that "online music distribution services in general are new and rapidly evolving and may not prove to be a profitable or even viable business model" - uh, huh - that it remains dependent on third party content, and that publishing royalty issues remain unresolved.

Napster lost $44m over the nine month period ending December 31. In 2003, Napster lost $41 million on net revenues of $6.69m. When flat fee models are eventually introduced, investors may well ask themselves why they didn't keep their money under the bed. ®

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