Rockin' Roxio

Investors treated Roxio (Nasdaq: ROXI  ) like a rock star today. Shares soared nearly 30% after it raised guidance for its fiscal fourth quarter, upping its revenue expectation on account of increased sales for its software and music-downloading service, the infamous Napster.

Roxio now expects revenues of $5.5 million for its Napster unit, and $26 million at its software division, compared to revenues of $3.6 million and $15.2 million, respectively, for the third quarter.

However, in that quarter, Roxio widened its third-quarter loss per share because it spent more money for its online division, which includes Napster. Once a revolutionary force in digital music, perhaps best known for turning many regular computer users into musical bandits, Napster returned (on the right side of the law) last October. (For a refresher course in what went down, check out Bill Mann's report on the return of Napster.)

The online music business is without a doubt exciting; for several years, people have shown a willingness to ditch CDs for digital downloads. According to Jupiter Research, what is currently an $80 million market could soar to $1.6 billion by 2008.

That's why many large and varied companies vie for a piece of the downloading action. The most wildly successful entrant so far has, of course, has been Apple (Nasdaq: AAPL  ) with its iTunes site, which not only serves up downloads but does double duty as a gateway to its iPod. As things stand now, Apple claims 70% of the legal downloading market.

Meanwhile, Wal-Mart (NYSE: WMT  ) has jumped into the fray, and Microsoft (Nasdaq: MSFT  ) covets music fans as well. (Microsoft is rumored to be considering Roxio as a partner.) Just last week, word hit the street that Starbucks (Nasdaq: SBUX  ) plans to team up with Hewlett-Packard (NYSE: HPQ  ) to offer a digital music service in some of its coffee bars. It makes perfect sense -- and opens the mind to the varied sources of digital music competition that will undoubtedly hit the scene.

Much has been said here at the Fool about the future of digital music. But with so many changing and competitive forces at work, a bet on Roxio's Napster as a major contender remains risky.

Are you an iTunes junkie? Check out iTunes Music Store Playlists here at Fool.com.

Alyce Lomax does not own shares of any of the companies mentioned. She welcomes your feedback.


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