AOL has dropped its Music Now music service and is migrating its 350,000 customers to Napster (read press release). It's a great -- although expensive -- windfall for Napster, which raises its subscriber base to 916,000 from its year-end estimate of 566,000. (Napster will release financial results on February 8, 2007.)

Today Napster filed an 8-K with the SEC (read PDF) that has some dollar amounts and specifics. Napster will pay AOL $15.6 million for its 350,000 subscribers (along with "certain related assets and liabilities"), or $445.71 per subscriber.

As a part of the deal, Napster will get exclusive advertising rights throughout AOL Music Channel for one year. The agreement will be subject to renewal if certain, unnamed milestones are hit.

Napster's losses from operations are falling but are still losses, and there are worries about the company's liquidity. Even so, the acquisition of AOL's subscribers was pricey but the correct move. The bottom line is the company needs far more subscribers in order to reach profitability. Between April 1 and September 30, 2006, Napster spent $19 million on advertising and marketing and lost 60,000 subscribers (excluding college subscriptions, which are seasonal), part of the reason for the drop was the introduction of the free Napster Light streaming service. In comparison, paying $15.6 million to acquire 350,000 subscribers -- which increases its subscriber base by 38% -- was a bargain.