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Hot off the Press - News & Commentary
August 10th, 2004 - 9AM

Roxio Bails on Software to Become Napster
News material from Mercury News

An enormous shock to Windows and especially Mac users came today from Santa Clara, California, based Roxio. Best known for their market leading burning applications Toast Titanium and Easy CD Creator, Roxio said Monday that it is selling its software division to Sonic Solutions for $80 million in cash and stock so it can focus exclusively on its Napster online music business.

Roxio will turn over its home media software, including Easy Media Creator and Toast, to Novato-based Sonic Solutions for $70 million in cash and Sonic stock valued at $10 million. Roxio will change its name to Napster once the deal closes.

Roxio Chairman and Chief Executive Chris Gorog said the transaction would give the company more than $100 million in cash to fuel Napster's growth as it expands the music service to more college campuses this fall and enters other markets.

"We are on the path to becoming a very well-funded pure play in one of the hottest sectors in the consumer technology market," Gorog said during a conference call with analysts and reporters.

The deal comes as Napster faces an increasingly competitive online music market currently dominated by Apple Computer's iTunes service. Consumer electronics giant Sony recently unveiled an online music store, and Microsoft is expected to launch a download service this fall.

Roxio announced the sale along with the company's quarterly endings for the period ending June 30. The Santa Clara company ended its fiscal first quarter with a loss of $2.6 million, compared with losses of $370,000 the previous year.

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Roxio reported first-quarter revenue of $29.9 million, up nearly 24 percent from a year ago. Consumer software division sales declined from a year ago, but its Napster online music business grew to $7.9 million, compared with $781,000 a year ago.

Analysts who participated in Roxio's conference call focused on what appeared to be the slowing growth of the Napster music service during the quarter.

SunTrust Robinson Humphrey analyst Chris Rowen noted that if he subtracted the estimated $1.5 million Napster received from one-time hardware promotions, Napster's subscription revenue is up less than $1 million.

"Napster has shown very strong growth," said Rowen, who on June 24 upgraded his stock recommendation to a "buy."

"But look on a pure revenue basis . . . it doesn't look like exponential growth. It looks like it peaked some and is slowing down," he added.

Napster said its campus music service, piloted last year at Penn State University, will expand to six colleges this fall.

Much of Napster's growth projections hinge on a new generation of music players, powered by Microsoft's forthcoming Janus technology. Janus will allow consumers to pay a flat monthly subscription fee -- Napster says about $20 or less -- for the ability to transfer an unlimited number of songs to a portable player.

"We at Napster have little question that the Windows Media Audio format will be pervasive during the mass adoption phase of digital music over the next few years," Gorog said.

This may leave a door wide open now for chief competitor Nero Burning CD, by Germany's Ahead Software.




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