'moxa1' is this possibly why e.Digital is up today ?
Big Music in post-Napster merger deal
Roxio to pay $40 million Sony, Universal for Pressplay
By Steve Gelsi, CBS.MarketWatch.com
Last Update: 12:47 PM ET May 19, 2003
SANTA CLARA, Calif. (CBS.MW) -- Shares of Roxio surged Monday after the software company agreed to buy Pressplay, an online music service jointly owned by Universal and Sony, in a $40 million deal that will resurrect the old Napster brand.
Roxio (ROXI: news, chart, profile), which acquired Napster for $5 million last year following its court-ordered closure, had said it was going to relaunch a legitimate successor under its well-known brand name. However, now it will jump start that process by drawing from music offered by Pressplay.
"The new Napster will be unrecognizable from the current Pressplay," said Chris Gorog, CEO of Roxio. "We'll have ease of use and more features and will be a friendly, easier application."
He said both the subscription model and the pay-per-download model have merit, with a final decision coming within the next few months.
The move allows Roxio to mount a direct challenge to other entrants to the online music market. Earlier this month, Apple Computer (AAPL: news, chart, profile) launched its ITunes service, which sold more than 2 million songs in its first two weeks in business.
Shares of Roxio, based in Santa Clara, Calif., rose 6 percent to $7.32 in afternoon trading, even as most U.S. stocks were losing ground.
Under the cash-and-stock Pressplay deal, Sony (SNE: news, chart, profile) and Universal, which is part of Vivendi Universal (V: news, chart, profile), each have the right to earn up to $6.25 million based on positive cash flows resulting from the new Napster service.
The terms of the pact give Roxio a legal digital music distribution framework and catalog rights with all five major music labels.
Roxio CD-burning software was featured in the launch of Pressplay in 2001 as a monthly subscription service for unlimited access to songs from all five major music companies. Customers pay extra to permanently download songs.
As for Apple, Gorog said he doesn't consider the company a competitor for now, because ITunes operates only on Apple machines, which make up about 3 percent of the market.
Even so, when ITunes becomes available for Windows-based computers, said Gorog, "We have a monster competitive advantage with the biggest brand in the online music business, and it's recognized as a music brand and not a computer brand."
Roxio said it would spend about $20 million to fund the relaunch of Napster by March of next year. "We expect that this new business will result in negative cash flows until the service is widely adopted," Roxio said.
The company will provide a more detailed outlook of the financial impact of this transaction on Wednesday with its quarterly conference call.
Roxio is adding online music sales and distribution to its core business of making the leading software for burning music and data onto compact disks.
The move is probably one of the most significant in the two-year history of Roxio as a publicly traded company.
Roxio first filed to go public on Sept. 26, 2000 with underwriter Morgan Stanley, but it withdrew the $58 million deal the following January as the bear market took hold of Wall Street.
On May 14, 2001 it became public by spinning itself off from its parent, Adaptec. Under the deal, Adaptec owners got 0.1646 shares of Roxio per share in the form of a dividend.
Roxio opened at $13 per share and climbed to $14.23 on its kickoff .
Roxio climbed smartly for a while, but shares hit a major bump in the road on June 26, 2002, when its stock fell about 50 percent on an earnings warning.
The stock continued losing steam with a low of $2.25 in October of last year.
Roxio got a boost when it announced plans to buy the defunct Napster music service for about $5 million last year.
It also hired Napster founded Sean Fanning to consult on its launch.
The stock is now once again trading over the $7 range for the first time since last summer.
As Roxio continues its push into the music business, Gorog will likely deploy more of his experience in the entertainment business.
Before joining Roxio in September of 2000, Gorog served as a consultant in the entertainment and media industry.
From 1995 to 1999, Gorog was also president of new business development at Universal Studios.
Gorog has been navigating a careful route for Roxio in the stormy waters of music copying.
On one hand, he defended the rights of consumers to make their own personal CDs from music that they buy, but he speaks out against music-swapping Web sites that offer copyrighted material for free.
Gorog breaks with the industry over experimental CDs that play on your stereo, but won't reproduce on CD burners. Several million of the encrypted discs have been introduced thus far, mostly in Europe.
"We don't think this is a viable solution," he said in a recent interview. "We think it's very antagonistic toward the consumer."
Now Gorog has a chance to show more of what he's been talking about with the plan to re-launch Napster.
While Roxio was forced to forgo the roughly $58 million it would have raised in an IPO, it's managed to become publicly traded and fight its way back from some crushing sell-offs.
Steve Gelsi is a reporter for CBS.MarketWatch.com in New York.
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