Napster faces proxy fight with 3 investors

With its stock trading at $1.34 and subscribers leaving its digital music service, the Los Angeles company is facing a proxy battle from three investors who together own about 1% of the company. They each want a seat on the board and are pushing Napster's management to turn around its stock slump or pursue a sale.

The company, which bought its name from the defunct file-sharing network, said today that it was continuing to look for suitors through UBS Investment Bank. But its executives are fighting back, dismissing the three shareholders as a musician, an ice cream franchisee and a middle-management banker who are "unqualified" to run a digital music business.

The dissident group has put forth "no substantive plan for how its nominees will enhance value for our stockholders if elected," Napster said in a letter to shareholders today.

The three shareholders are attacking in advance of the company's Sept. 18 annual meeting.

In its current incarnation, Napster has been a high-profile example of the challenges faced in finding a winning business model in the uncertain world of digital music, which Apple Inc. dominates with its iTunes store.

Napster has begun several initiatives, including a digital download store to complement its subscription service. The efforts have done little to lift the stock, which is down 31% this year, but company executives argue that they are poised for a comeback.

"The fundamental strategy is absolutely, unequivocally unchanged from Day 1," Chris Gorog, Napster's chairman and chief executive, said in an interview. "Unlimited access to the world's music catalog any time, anywhere. That's been our vision, our mantra. Everything else along the way are milestones toward achieving that."

Napster was once the name of the free music-sharing service used by more than 60 million people before lawsuits filed by the recording industry shut it down. From the ashes of the bankruptcy filing in 2002, Napster's name, its kitten-face logo and some of its technology were acquired by Roxio Inc., a CD burning software firm. Roxio adopted the acquired name in 2004.

The new Napster Inc. created a music subscription service and now has more than 700,000 subscribers paying $13 a month to listen to a library of more than 6 million songs. It has a free music streaming service called FreeNapster, which is ad-supported. And it opened its digital music store, which sells songs without copyright protection, in May.