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Napster Lives Again--Sort Of


When Napster Inc. announced its liquidation on Sept. 4, 2002, it seemed like the end of the road for one of the Internet's most famous brands. Bled by lawsuits and unable to cobble together an agreement with the recording industry to make the service legit, the company finally called it quits. While others mourned or cheered Napster's passing, Christopher Gorog, a restless entertainment veteran turned tech exec, smelled opportunity. Napster had kick-started the digital media revolution and attracted 60 million avid fans. "It was colossally stupid that the record companies and Napster hadn't found a way to turn one plus one into two," says Gorog, who took over as chief executive of Silicon Valley-based software maker Roxio Inc. (ROXI) in 2000. "Something started brewing in my head."

Now, after a long, unlikely crusade, Gorog has brought Napster back from the dead. He is scheduled to take the stage at a New York hotel on Oct. 9 to introduce Napster 2.0. The new service is Napster in name only, at least so far. Rather than a free way to share music files, it's a legal way to buy direct from record labels. After buying Napster out of bankruptcy in November, 2002, for $6.1 million, Gorog shelved its file-sharing technology. Instead, the new Napster offers 99 cents-per-song downloads and a $9.95 monthly subscription service that gives customers extra features such as streaming songs to their PCs. Gorog is confident that the service can be as revolutionary as its namesake, helping drive the digitization of music and benefiting record companies, artists, and consumers. "We're going to make the record companies a lot of money," he says. In the future, though, the company could use Napster's patents to offer a legal form of file sharing.

Gorog's strategy could backfire quickly if music lovers decide it's a cynical attempt by corporate suits to wring profits from their icon. "Napster was an underground thing. You felt like you were part of a subculture," says Steven Sarro, a 17-year-old from Alameda, Calif., who started his music collection using Napster. "If you have to pay to use it, it's not going to do well." Even Roxio's partners are taking a wait-and-see attitude. Asked days before the launch if Gorog was smart to revive the Napster name, Dave Fester, general manager of the Microsoft Corp.'s (MSFT) division that is licensing music and video software to Napster, took a long pause before replying: "I don't know."

The revival of Napster tells much about the challenge of building a compelling, legal music service. An industry insider, Gorog knew the labels would never license music to Roxio-owned Napster unless he dropped the file-sharing technology that incited their ire. Instead, Gorog focused on creating a site where users could discover new music -- an online version of a group of college friends, sharing music tips. That way, he hopes to attract old Napster fans and anyone bored by the radio and their CD collection. Beyond downloads, subscribers will get an online magazine, exclusive live recordings of up-and-coming acts, and more extras for their $9.95 monthly fee. To woo fans for whom Napster means free, he launched an edgy marketing blitz in June, including online cartoons featuring Napster's famous cat mascot. "The brand has to seep back up from below," Gorog says.

Gorog has succeeded in establishing a solid footing for the revised Napster on many fronts. In May, Roxio doled out $39 million for pressplay , a three-year old music subscription service formed by Universal (V) and Sony Music Entertainment Inc. (SNE). Pressplay gave Roxio access to a trove of music licenses, the technology required to sell songs via the Net, and a head start on subscribers. Now, Napster consumers will be able to choose from more than 500,000 songs -- almost double rival offerings. Consultancy Adventis Corp. says pressplay had 400,000 subscribers as of this summer, twice as many as Apple Computer Inc.'s iTunes Music Store, though rivals dispute pressplay's figure. Gorog also persuaded Samsung Electronics Co. to create a portable music player tuned for Napster 2.0 -- an effort to match the easy-to-use combination of Apple's iTunes and iPod players. "When Napster becomes available, people will at least check it out," says U.S. Bancorp Piper Jaffray Inc. analyst Eugene C. Munster. Investors have already taken note, propelling Roxio's stock up 217% to $10.72 since it bought Napster.

A HOST OF RIVALS. The challenge will be getting the site to stand out in a crowd. Offering downloadable songs for 99 cents apiece and a monthly subscription of unlimited streaming music for about $10 is exactly what Musicmatch Inc. and RealNetworks Inc.'s (RNWK) Rhapsody do. And a whole host of new online music services are on the way. Apple is expected to announce a Windows version of its service later this month. By early next year, services should be available from Amazon.com (AMZN), Sony, and Wal-Mart (WMT).

That's why making Napster fly again will face long odds. Gorog is probably right in betting that people will visit the site, especially given the pressure from the record industry's lawsuits on illegal file-sharing. But visitors may well be disappointed. Unless its six-person team can turn the magazine into a must-read or its exclusive recordings can stand out from similar fare on rivals' sites, Napster could quickly fade away. "Eighty percent of Wall Street is skeptical right now," says Piper Jaffray's Munster. More bullish than most, he estimates that Roxio will sell 1 million songs a week by Christmas. Though that's neck and neck with his estimates for Apple, it's 300,000 short of the tally he figures Roxio needs to break even.

A slow start could lead to ugly results. While Gorog focused on Napster, Roxio's core business of CD burning software has suffered. Munster expects the company to lose money for the first time since going public. Projections: Sales could shrink 17% to $100 million in the fiscal year that ends Mar. 31, 2004.

Gorog, who plays bass guitar with other L.A.-area executives, has been itching to make a place for himself in online music since 1999. Tired of running business development for Universal's theme park division, he agreed to oversee the sale of Universal's concert promotion business. By the time the unit was sold to HOB Entertainment Inc., the owner of House of Blues, Gorog was its chairman and interested in posting performances online. The tech wreck forced House of Blues to cancel those plans, but soon after Gorog got a call from a headhunter that revived his dream. Storage software maker Adaptec Inc. (ADPT) wanted to spin out a unit, later named Roxio, which made a CD burning software package that is preloaded on many home PCs.

Gorog felt he could use the software to offer more services and began pitching his vision to Roxio's board and his music industry connections. The dream quickly turned into reality when Napster went into liquidation. The day before the Napster purchase was announced, Gorog called former Universal colleague Michael J. Bebel, who ran pressplay. Gorog and Bebel quickly persuaded Universal and Sony execs that combining pressplay into a legal Napster would be the best way to spur online sales.

Roxio's marketing strategy has been carefully crafted. Focus groups showed the Napster brand had great strength. Nearly 98% of Net users knew the name and 47% said they would pay for music sold by Napster. To maintain Napster's rebellious feel, the company began posting the edgy cartoons. In one, the inscrutable cat, exuding Zen-like confidence, lands a licensing deal with haggling music executives. The company says 1 million people have watched the animations.

While Napster's launch will generate buzz, this may be its one and only chance to establish itself in the emerging online music business. It's a long shot. But if Napster 2.0 can recapture any of the magic of its namesake, the kitty will get a new lease on life. By Peter Burrows in Santa Clara, Calif.


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