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Napster rising from the grave
Roxio says it will relaunch the once-popular file sharing network as fee-based site within the year.
February 20, 2003: 6:22 AM EST
By Andrew Stein, CNN/Money Staff Writer

NEW YORK (CNN/Money) - If Roxio Inc. has its way, the death of Napster may prove to be greatly exaggerated.

At an event to launch Roxio's new Easy CD & DVD Creator software product in New York, Roxio Chief Financial Officer Elliot Carpenter told CNN/Money that the company likely will launch a service allowing users to download songs for a fee before the end of the calendar year in a move to diversify its product offerings beyond software.

He added that Shawn Fanning, the creator and founder of Napster, is working for Roxio as a consultant.

"Napster is a great brand with wide recognition, and when we do roll something out it has to be easy, fun, have the broadest range of artists, and the price must be right," Carpenter said. "We're looking at something before the end of the calendar year."

The early knock on sites where users can download music for a fee has been the limited scope of the artists offered and the cost, as users can access a wider range of artists for free through file sharing networks such as Grokster, Kazaa and Morpheus.

"The fee-based online music services such as Rhapsody and eMusic don't have to report their numbers, but I doubt any of them are making any money," said Michael Kim, digital media analyst with Roth Capital Partners. "If the Napster service is going to be successful, the [file sharing networks] will have to be shut down and the company will have to go to the major labels to secure a broad range of artists."

Major music labels, which have increasingly laid the blame for tumbling CD sales on downloaded music, sued Napster for copyright infringement and essentially shut it down in July 2001.

Napster subsequently filed for bankruptcy protection in June of 2002 and received several offers to acquire it, including one from Barcelona, Spain-based adult entertainment company Private Media Group (PRVT: up $0.04 to $1.86, Research, Estimates) for $2.4 million in stock.

Roxio eventually bought Napster's assets in November 2002 for about $5 million cash and 100,000 warrants to purchase stock.

Beyond software

Napster also is part of Roxio's effort to diversify beyond its CD and DVD software suites, something Jefferies & Co. Inc. analyst James Lin said he has been waiting to see before he upgrades the stock from a "hold."

"Their software products are great and very easy to use, but we'd like to see more diversification in their offerings," Lin said. Jefferies & Co. does not have an investment banking relationship with Roxio nor does Lin own any of its shares.

In its most recent quarter, the company received more than three-quarters of its revenue from its CD and DVD software products, with 56 percent coming from retail sales and about 28 percent coming from original equipment manufacturers (OEMs), such as PC makers or CD recording device firms,

"OEM used to account for two-thirds of its sales and its heading to below 10 percent," Roth's Kim said. "The OEM side puts up a nice revenue number, but the margins are increasingly becoming squeezed and this is a trend I don't see reversing. So they're becoming more reliant on the retail side."

Roth Capital Partners does not have an investment banking relationship with Roxio nor does Kim own any of its shares.

Roxio's Carpenter added that the company also will see a boost in sales as additional PC makers abandon floppy drives and increasingly rely on CD-recordable drives for storage. Dell Computer recently said it will eliminate floppy drives in some of its higher end products as it turns to CD drives and flash memory devices.

In its latest completed quarter, Roxio swung to a loss of 38 cents a share, including a 21 cent per share charge to settle a lawsuit, on sales of $26.4 million, down 27 percent from its sales a year earlier when it reported a profit of 19 cents a share.

The company expects to return to profitability in its fourth quarter with income of 19 cents per share on sales of $32 million, and Carpenter said the launch of its new software suite "is critical" to that forecast.

A Roxio spokesman said the company sold about 10 million to 15 million of its Easy CD Creator 5 and anticipates a 4 percent upgrade rate, which would indicate sales of 400,000 to 600,000 copies of its Easy CD & DVD Creator 6 just from people upgrading their current versions. The product retails at $99.95 boxed and $89.95 as a download.

The spokesman did not indicate the company's sales target for the new version, but Jefferies & Co.'s Lin said the firm probably is looking at about a 10 to 15 percent total increase in sales from its previous version.

Wall Street expects the company to earn 17 cents a share in its fourth quarter, according to Thomson First Call.

"The company should be profitable," Roth's Kim said, adding that he has a 12 month price target of $5 on the stock and a "neutral" rating.

While shares of Roxio gained nearly 5 percent Tuesday and looked to post another strong gain Wednesday, Kim added that the shares are nearly fully valued, as they are trading at about 24 times their 2003 profit estimate of 2 cents a share.  Top of page

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