News

Napster may rise from the dead and live again, this time as a commercial venture.

That's the intention behind the $40 million acquisition of subscription online music service pressplay by Santa Clara, CA–based Roxio, Inc., announced Monday, May 19. Spurred by the initial success of Apple Computer's iTunes Music Store, Roxio acquired pressplay from backers Sony Music Entertainment and Universal Music Group (UMG) for approximately $12.5 million in cash and 3.9 million shares of Roxio stock. Best known for its "Easy CD Creator" CD-burning software, Roxio has an installed base of about 100 million consumers who use its products.

The deal will boost revenues this year at Sony Music and UMG. Investors also liked it, pushing Roxio's stock up from $6.90/share to $8.09 in the first day after the news broke, a 17% jump. Roxio acquired the Napster name and assets at a bankruptcy sale in November for a reported $5 million, and plans to pump an additional $20 million into relaunching the brand as a legitimate music service by March 2004.

Pressplay will operate as usual on a $10/month subscription basis until the Napster relaunch, and will then be phased out. Most of pressplay's approximately 80 employees will work for the new Napster. Pressplay president and CEO Mike Bebel has assumed the same roles with Napster.

Roxio executives explained the Napster acquisition as simply leveraging a well-known brandname. Studies the company conducted showed that 97% of music fans recognized Napster, but only 12% knew of pressplay. "The Napster brand name emerged; it became a phenomenon," said Roxio CEO Chris Gorog. "Napster has incredibly high name recognition . . . Napster means online music," agreed Larry Kenswil, president of UMG's ELabs online division." At its peak in 2000–2001, Napster had between 60 and 70 million users worldwide. The pressplay purchase gives Roxio access to the Sony and UMG catalogs, between them accounting for as much as 40% of available recordings.

The irony is that Napster was forced into bankruptcy by unrelenting legal pressure from the music industry. Terms of the Roxio deal will make Sony and UMG minority shareholders in the new venture, with rights to derive as much as $6.25 million in revenue from the new Napster service. The exact business model is still in the planning stage, but will likely mirror that of iTunes. The biggest obstacle facing the venture will be convincing consumers that Napster no longer means "free."

The Roxio/Napster deal surfaced almost simultaneously with the release of a Microsoft-funded study reporting that the computer is increasingly the heart of most consumers' home entertainment systems. Two days after the Roxio news broke, Seattle-based online music and video provider Loudeye Corporation announced that it had signed a digital distribution agreement with British record company EMI Group. The deal will eventually give Loudeye access to more than 140,000 recordings from 3000 artists on the Blue Note, Capitol, Virgin, and EMI labels. Wall Street Journal commentator Mathew Curtain characterized the Loudeye/EMI deal as clear evidence of the music industry's sudden recognition of "digital reality."