With the apparently raucous success of Apple's (Nasdaq: AAPL) iTunes as a backdrop, music file-sharing pioneer Napster came online yesterday in test form. Its scheduled launch is Oct. 29, at which time Napster 2.0, as it's called, will offer its catalog of more than 500,000 songs for downloading at a cost of $1.00 each.
Napster went off the air two years ago, the victim of massive lawsuits from record companies TimeWarner (NYSE: AOL), Sony (NYSE: SNE), and others that accused the company of violating their copyrights by allowing users to trade music for free. Napster's Peter Pan image played well among its audience and spawned right-of-use legal arguments that continue today.
In the end, Napster, which never figured out how to make a single penny off its efforts, couldn't withstand the pressure of mounting legal bills and pulled itself off the air. CD-burning software company Roxio (Nasdaq: ROXI) bought Napster's carcass for a song, and got to work developing a service that allowed for music swapping while not falling afoul of copyrights. In fact, Roxio's proxy offers an interesting tidbit -- the company is nearly 15% owned by two record labels, Sony and Universal. So a couple of record labels have indirect ownership of Napster.
In some ways, Napster went from being the scourge of the music industry to a potential savior. What filled the void left by Napster were such file-sharing companies as Sharman Networks, owner of Kazaa, which has a distributed corporate structure (based in Vanuatu) that makes it functionally untouchable by the long arm of the law. Instead, record companies have elected to go after end users, dropping hundreds of lawsuits on grandmas and the parents of file-swapping children alike, all in an effort to deter people from theft of intellectual property.
My, how times have changed. When last seen, Napster was lead sled dog in a pack of renegades. Now, the file-sharing companies have their own trade association. Napster's re-entry as a for-pay service has bolstered the music industry's hope that it can take customers from Kazaa, Morpheus, BearShare, and other free-download companies. Mike Bebel, Napster's new CEO, put it this way: "Free means you're downloading headaches." Given the preponderance of spyware now used by these organizations and the recording industry's willingness to fight back, he very well may be right.
The hope for Napster and Roxio is that people will view a buck per song as a small price to pay not to sweat being sued by a deep-pocketed and angry plaintiff.
At any rate, record companies have spent the last two years lamenting the loss of the devil they knew. Now Napster's back, and its rebirth is viewed by many in the music industry as a reason to have a glimmer of hope at regaining control of their intellectual property.
Incidentally, while I'd love to like Roxio as an investment, I can't get around the fact that the company granted nearly 8% of its share count in employee options last year and has an automatic escalator to make the lesser of 6% or 2 million shares available for grant each year (at a current share count of 27 million, it will be some time before 2 million becomes "the lesser"). That is an astoundingly high level of dilution for an established company. Add back the cost of these options and Roxio's operating earnings from years past are a mirage -- and its fiscal 2003 loss of $0.51 gets a heck of a lot worse.
I wish 'em luck, but not with my investment dollars. Yes, this is promising going forward, but for whom?
Bill Mann's three-year-old loves Gomez. Is that cool or what? Bill appreciates feedback on his columns at billm@fool.com.
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