Betting it all on online music service as the field crowds

Friday, September 17th 2004, 2:13 pm
By: News On 6

SAN JOSE, Calif. (AP) _ Call it the kitty's third life.

Roxio Inc. bought the Napster brand name and feline logo at a bankruptcy auction two years ago and with the acquisition of another music service, pressplay, relaunched the once-renegade file-swapping pioneer as a legal music service last October.

Now in its latest reincarnation, Roxio has shed its CD-burning software business and plans to concentrate solely on selling and delivering music over the Web. It will adopt Napster as its corporate name, trading under a new ticker symbol.

The pure-play move will mark Napster's birth as the name of a public company, but more importantly, arm the company with resources to help survive the rough-and-tumble as other deep-pocketed, powerful rivals enter the crowded online music space.

In the past two weeks, Microsoft Corp. debuted its online music service, and Yahoo Inc. acquired online jukebox provider Musicmatch Inc. EMI Group's Virgin is among those expected to soon join the fray, which already includes the pioneer of legitimate downloads and the current market leader, Apple Computer Inc.

Roxio's sale of its software business to Sonic Solutions for $80 million in cash and stocks will give Napster a cash base of more than $100 million once the deal closes, expected by year's end.

``One of the most important questions for our investors is, 'Does Napster have the staying power to stay and thrive?' Having the cash answers that question,'' said Chris Gorog, chief executive and chairman of Roxio.

It will be more than enough to cover Napster until it becomes profitable, Gorog said, ``and we're on a clear path to do that.''

Roxio's revenues grew 24 percent to $29.9 million in the April-June quarter compared with a year ago, though the company had a net loss of $2.6 million, or 8 cents per share, dragged in part by the Napster unit's $8.1 million loss.

But Gorog said Napster's sales are growing at a double-digit rate _ it increased by more than tenfold to $7.9 million that quarter _ and he projected online music revenues will reach $30 million to $40 million this fiscal year.

Analysts say Napster has its work cut out.

Napster's key strategy is to ramp up its subscription service, which costs users $9.95 a month for unlimited access on their computers to more than 750,000 songs. With the debut of a ``Napster To Go'' premium service this fall _ initially set to cost an additional $5 a month _ subscribers soon will also be able to transfer the tunes to compatible portable music players.

Napster must ``deliver compelling marketing messages to educate consumers about the value of a subscription rather than a download model,'' said Mike McGuire, analyst with Gartner G2 market research firm. ``The consumer has to see that it's a better way, not just a different way, to get their music.''

The relatively easy concept behind the pay-per-download model will make it the more dominant of the two for at least the next couple of years, McGuire said.

Most music download services allow users to buy a song for about 99 cents, burn it to a CD an unlimited number of times and transfer it to some kind of portable device. You buy it; you own it.

With a subscription, songs are essentially leased. Once a customer stops paying, access to the music catalog disappears.

Napster offers both options, as does RealNetworks Inc.'s Rhapsody and America Online Inc.'s MusicNetAtAOL. But Gorog and other subscription proponents say their model gives listeners more freedom to explore music and listen to thousands of tracks without having to invest a buck apiece.

``The simple download model is not that provocatively different than how people consume CDs today,'' Gorog said, ``whereas the subscription service is being able to be immersed in a world's catalog of music. That's a big `wow' factor for consumers, something they haven't experienced before.''

By all accounts, the online subscription model has substantially higher profit margins than a la carte download sales. And unlike competitors such as Apple or Wal-Mart Stores Inc., which sell only downloads, Napster isn't using its download service to boost sales of other products, making subscriptions key to its profitability.

So if Napster's marketing efforts pay off _ it's offering prepaid music gift cards and pitching free and discounted services to college campuses _ it expects subscriptions to drive its future.

Napster's bet could be headed in the right direction.

Sales from both subscriptions and downloads are expected to soar during the next five years, and of the $1.7 billion projected for 2009, more than half will be from subscriptions, said David Card, an analyst with Jupiter Research. This year, subscriptions are only about 40 percent of the projected $271 million in online music sales, Card said.

Best Buy Co. Inc. is heavily promoting Napster as part of a multiyear marketing deal that gives Napster extra shelf space, including kiosks for customers to try the Napster service on the spot.

Scott Young, Best Buy's vice president of digital entertainment, said the electronics retail chain is banking on Napster because its mixture of subscription and download offerings playable on more than 70 devices ``is the one that's applicable to the broadest number of customers.''

Gorog believes there will eventually be five leading providers when online music reaches mass market adoption, and he aims to have Napster among them, though not necessarily at the very top.

Perhaps that crowning goal could be reserved for the kitty's next life.