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Roxio Sells Software Unit, Bets on Napster

The sale to Sonic Solutions would allow the online music firm to focus exclusively on its pure-play service.

August 10, 2004|Jon Healey | Times Staff Writer

Two years after buying Napster's name at a bankruptcy auction, Roxio Corp. has decided to bet its future on it.

Roxio said Monday that it would sell its profitable line of digital-media software to Sonic Solutions for $70 million in cash and $10 million in stock.

The deal would leave Roxio with a single product: the Napster online music service, which has yet to turn its first profit.

After the deal closes in October, Roxio will change its name to Napster.

Dozens of start-ups have foundered in the nascent online music business, including the original Napster, which was crippled by the music industry's copyright-infringement lawsuits. Roxio launched the new Napster nine months ago and has yet to take the lead in either downloadable song sales or music subscriptions.

The company has not disclosed specific numbers of subscribers, but its latest revenue figures suggested that it had no more than 150,000, which would put it fourth in that category at best. Napster and its competitors have attracted only a small fraction of the audience drawn by file-sharing networks, where millions make free but illegal copies of hit songs.

Roxio Chief Executive Chris Gorog, who once described Napster as "synergistic" to his company's software business, offered a different view Monday: The place to be was digital music, and the software business was effectively a distraction.

The sale to Sonic is expected to boost Santa Clara, Calif.-based Roxio's cash hoard to more than $100 million, which Gorog said was more than enough to cover Napster until it started making money.

"We are on a path to become a very well-funded pure-play in one of the hottest growth sectors in the consumer technology market," Gorog told financial analysts Monday.

The sale to Novato, Calif.-based Sonic Solutions comprises Roxio's CD and DVD burning and video and photo editing products -- which compete with tools preloaded on computers running operating systems from Microsoft Corp. and Apple Computer Inc.

Analysts said Roxio was selling its software division for about the same amount as its annual revenue, which is typical for such deals.

"This deal gives Roxio needed cash to try and make it as a music pure-play," said analyst P.J. McNealy of American Technology Research. "This will also fund Napster as it experiments with new subscription models," such as offering rental music that plays on portable devices.

Napster dragged down Roxio's fiscal first-quarter results. The company lost $2.64 million, or 8 cents a share, compared with a loss of $370,000, or 2 cents, the previous year. Sales rose to $29.9 million from $24.2 million.

The online music division accounted for $7.9 million in sales, Gorog said, up from $6 million in Roxio's fiscal fourth quarter. But the division lost $8.1 million not including restructuring, amortization and stock-based compensation costs, Chief Financial Officer Nand Gangwani said.

The online music field is expected to become even more competitive this year, with such brands as Viacom Corp.'s MTV and EMI Group's Virgin expected to enter the field. But Gorog said Napster's market share "hasn't slipped an inch" despite the entry of "so-called goliaths like Wal-Mart and Sony," adding, "We're extremely confident about our ability to compete."

Roxio shares rose 16 cents to $4.14 on Nasdaq. They rose as high as $4.50 in after-hours trading, after the deal was announced.

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