How does Napster make money?
Right now, they do it by convincing young and naive venture capitalists that they willl be able to make millions ‘once things are up and running’ and the cash flow will be starting ‘real soon now’. By preying upon the goodwill and kindness of those caring and altruistic people, unsophisticated business people, who wish to give from themselves until it hurts.
Now, how they propose to return the investment is somewhat more problematic. There’s always advertising, which may already be active, given the ads for new musicians thta you see when logging in. Perhaps in the future they will come to an accomodation with the record companies and end up charging people to access the servers.
They Don’t
Like 99.99% of all internet companies, they make nothing right now. The theory is that when they get enough users, they can sell advertising to reach a very desirable demographic. Realistically, they’ll never make a dime, even if they aren’t shut down.
On the other hand, it can’t cost much to run the company. They sure as hell don’t need anyone to keep track of accounts receivable 
OK. So here is another question (sorry to hijack the thread)
Do you think that Creative, Diamond, etc (people who make portable MP3 players) will work behind the scenes to support Napster? Since they must have millions invested in technologies and their MP3 players, it must be in their best interests that Naptster survive. Any thoughts on that?
Why would they have to make their money with advertising? Once Napster has firmly established itself as the only sensible method for trading sound files, they could charge users on a transactional basis or by usage meter. The good folks at Napster could also start charging for their software. Heck, they could charge for software, connect time and a transaction surcharge while also charging for ad space and offering the sale of their user database. They’d make a mint. They’d be richer than the big, evil recording industry. Lovely.
Until the next person comes along, reverse engineers the software and sets up their own set of servers. There are already a whole range of private servers out there. Additionally, there are a few alternatives out there for trading files. Gnutella allows users to establish private networks, no dependence on the centralized servers of Napster. If Napster becomes a pay service, the trickle of users to gnutella and its equivalents will rapidly become a flood.
I suppose they’ll just have to add something unique and marketable onto their base service and charge for that. Maybe like a song suggestion system, like Amazon.com does for books. Of course, they’ll have to improve it once it becomes commonplace. And so capitalism improves the quality of goods and services.