Then came Roxio (ROXI
). Last October, soon after buying the Napster brand name out of bankruptcy, the PC software maker unveiled a legit, for-pay online music site called Napster 2.0. Roxio CEO Christopher Gorog felt it could be every bit as influential as the infamous file-swapping site of old, largely because he felt the Napster name would quickly put Roxio on a par with digital music superstar Apple (AAPL
So far, it hasn't worked out that way. Napster remains a distant second in market share to Apple's (AAPL
) popular iTunes service. And management upheaval at Roxio has raised fears about Napster's future once again. Just days after the launch, respected Universal Music executive Lawrence Kenswil resigned his seat on Roxio's board. Since then, a stream of executives -- including Roxio Chief Financial Officer Elliot Carpenter and Napster division President Mike Bebel -- have left as well.
All this has spooked investors, who have driven Roxio's shares from $10.50 at the time of the launch to around $3.80 as of Feb. 26. "I'm not willing to say Napster is toast, but there's certainly a lot of smoke," says Gartner G2 analyst Mike McGuire.
GOODBYE, KITTY? But hold on. The cat in the Napster logo hasn't run out of lives just yet. It sells far fewer songs at its online store than Apple, which sells roughly 75% of the 3 million songs that are sold online each week. But Gorog points out that based on the latest weekly data from Neilsen SoundScan, Napster's share equals all other rivals combined, including services from Wal-Mart (WMT
), MusicMatch, and Best Buy (BBY
). He says the data show that Napster 2.0 is holding its No. 2 position against Apple in this music-download business.
Napster could start to increase market share in the more profitable business of selling monthly subscriptions, where customers can listen to -- but not own -- as many songs as they want each month for $9.95. While Napster is far behind RealNetworks' (RNWK
) Rhapsody service, AOL's (TWX
) MusicNet, and others, it's taking the lead again in the old Napster's stomping ground: college campuses.
In part to wean their students off illegal file-sharing sites, Penn State University and the University of Rochester's Eastman School of Music intend to offer free Napster subscriptions to thousands of students in coming months. These are just pilot programs, and Roxio granted big discounts that will keep profits negligible at best, say insiders. But the hope is that the students will become paying customers for years to come. "Smart," says Kenswill.
LIP SERVICE. As for talk of internal chaos, there may be less there than meets the eye. Insiders say the main reason for Kenswil's departure was that Universal did not want a seat on Roxio's board, for fear other music services would be concerned it was playing favorites.
Other recent executive departees left because Gorog consolidated music operations that had been spread between Los Angeles, New York, and Silicon Valley into the L.A. area, to be closer to the record labels, he says. And former CFO Carpenter had planned on leaving for personal reasons for months. "It's a tempest in a teapot," insists Gorog, who says layoffs cut less than 10% of the staff.
Some insiders worry that Gorog, who used to head Universal's splashy theme parks, wasted the company's opportunity to make an initial big splash of its own with the acquisition of the legendary name. Rather than invest in a huge advertising push like Apple, Gorog figured word-of-mouth and press clips would do the trick. Roxio's few ads have been mostly whimsical spots built around the widely recognized cat-with-headphones logo, rather than efforts to tout the service's many features. "He didn't listen to people who know [the music business] better than he does," says one insider.
CUSTOM BLEND. Analysts agree that the merits of the service may be getting short-shrift, with all the focus on the brand. Consider that while Apple offers only an online store for buying songs outright, and Rhapsody focuses primarily on subscriptions, Napster weaves both ways of getting music into one package. That means you can buy your favorite songs -- or get access to a far larger portfolio for rent.
Subscribers can also see what others are listening to, which can lead to new discoveries. Says Forrester Research analyst Josh Bernoff: "The Napster service is extremely well designed. They've built something that's really terrific, but they have to get people to use it."
And fast. With heavyweights such as Sony (SNE
) and Microsoft (MSFT
) planning to launch services in coming months, Roxio will be under more pressure than ever to hold its market share. Gorog insists the Napster service is "precisely on plan" to reach its profitability goals.
LAST CHANCE? "We've created a hell of a defensible position. I couldn't be more pleased," he says. Depending how the deals with colleges work out, Gorog says the music business will grow to anywhere from $20 million to $40 million in sales in 2004.
Problem is, Roxio doesn't expect profits any time soon, and the competition is only going to get tougher. Worse, Roxio's core business of selling CD-copying software to PC makers is hurting, as well. In the quarter ended Dec. 31, Roxio lost $25 million on revenues of $18.8 million, with software revenues contributing to that loss. Roxio predicts that the PC software business should turn profitable this quarter, based on a new product release.
That leaves Gorog with little room for error as he pursues his grand music ambitions. Cats may indeed have nine lives, but ultimately, Roxio -- or somebody else -- will have figure out how to leverage Napster's valuable brand and innovative services into a business model that turns a profit. By Peter Burrows in San Mateo, Calif.