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Roxio's Rhythm

I tried downloading music from the Internet a couple of years ago. I ended up with a few songs and a bunch of spamware.

It was obvious to me that downloading music for free was an activity relegated to people with time for frivolity (i.e. kids, college students, recent and not-so-recent college grads). In other words, people who aren't likely to be buying a lot of music, anyway -- or the modern equivalent of the mix tape demographic.

I recall having a blank tape in the deck with the play, record, and pause buttons pushed. When a song came on the radio that I liked, I would leap across the room and un-pause the recorder. The tapes were a bizarre combination of Ozzy, KISS, Joan Jett, ABBA, and Eddie Rabbitt.

So when people started asking why anyone would pay to download music when it's all over the Net for free, the answer was obvious. I would. I don't want to be inconvenienced and I don't want to get pinched. Pay services, like Roxio's (Nasdaq: ROXI  ) all-grown-up Napster, are making downloading easy and orderly.

Roxio released its fiscal fourth-quarter earnings after the close yesterday, and the numbers impressed investors, sending the stock up 7% today. Roxio's revenues were slightly down versus the prior quarter, and it posted a loss of $0.20 a share compared to a profit of $0.12 last year. But that was all better than had been anticipated.

Figuring out how to value Roxio is a challenge. All we know with any certainty is that paying for downloading music has a lot of potential and download prices will have to fall to grow the market. The risk to investors is that the competition from Apple (Nasdaq: AAPL  ) , Time Warner's (NYSE: TWX  ) America Online, Sony (NYSE: SNE  ) , and Wal-Mart (NYSE: WMT  ) is steep and only getting steeper.

There are also upstarts in the mix, such as Musicmatch. Yahoo! (Nasdaq: YHOO  ) has plans to get in and there's speculation that (Nasdaq: AMZN  ) will, too. If Amazon jumps into the fray, it could be game over for many of those mentioned. Then there's also less direct competition from streaming music services like RealNetworks and Live365.

Roxio has a head start and a loyal following, but being a small public company, my best guess is that some big dog will want to use it to buy or partner its way into the market -- though it's a gamble to be sure, and the bigger firm could just as likely be crowded and priced right out of the market, too.

I'm not sure how much music downloading I'll be doing eventually. I know it will be some, but for now, I'm very pleased with being able to stream just about any kind of bad music imaginable through Live365. I just got to hear Dio's "Holy Diver" and Rainbow's "Stone Cold" and "Street of Dreams." Ronnie James was so much better in the Rainbow days. Don't you agree?

Time Warner and are both selections for Motley Fool Stock Advisor. To learn more, or sign up for six months risk-free, just click here.

Fool contributor Mark Mahorney doesn't own shares of any companies mentioned.

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