AOL signs Napster as music subscription service

NEW YORK (Reuters) - AOL signed Napster Inc. (NAPS.O) as its exclusive online music subscription service, the companies said on Friday, sending Napster's shares higher.

Napster, which is considering putting itself on the auction block, said it will replace the online service's AOL Music Now, which has about 350,000 paying subscribers.

The storied online music service hired investment bank UBS in September to explore a sale after receiving "third-party interest," Napster said at the time.

"We're still involved in multiple conversations," Napster Chief Executive Chris Gorog told Reuters in a phone interview, declining to elaborate.

Once synonymous with piracy in online music, Napster was forced to close in July 2001 after a series of legal battles over piracy and copyright infringement.

Software company Roxio later bought Napster and relaunched it as a legal site in 2003. Roxio renamed itself Napster, and shares began trading in January 2005.

Now Napster competes with Apple Inc.'s (AAPL.O) iTunes digital music store, which accounts for more than 80 percent of U.S. music download sales. ITunes songs are unplayable on devices other than Apple's iPod digital media players, a business model that Gorog called "fundamentally anti-consumer."

Downloads from Napster and other rivals are playable on devices made by a handful of electronics manufacturers. Apple's "current business model is to create a walled garden (with which) they try to trap their customer," Gorog said.

Wall Street analysts see few signs of Apple's popularity abating after the company announced yet another snazzy device, the iPhone. The new phone combines a digital entertainment player with cellphone capabilities.

AOL MUSIC

AOL purchased Circuit City Stores Inc.'s (CC.N) online music service in 2005 to replace its previous service. As part of the latest deal, AOL will switch Circuit City's Music Now accounts to Napster in the next 60 days unless customers opt out.

AOL, the Internet division of Time Warner Inc. (TWX.N), also will promote Napster with links to its service throughout its free music site, AOL Music.

Napster will re-create customers' personal Music Now music libraries, including their playlists, the companies said. They also will keep Music Now's pricing tiers and transfer prepaid track credits that subscribers have in their accounts.

AOL separately has a deal with iTunes through which AOL members can charge iTunes purchased media to their AOL accounts.

The company last week raised its quarterly revenue forecast because of a better-than-expected increase in subscribers, which is expected to reach 566,000.

Napster shares rose 39 cents, or 10.2 percent, to $4.21 in early Nasdaq trading. Earlier in the session the shares touched $4.49.