ROXI). By sending Roxio's shares up nearly 13% Monday -- in the opposite direction a company's stock usually goes after the announcement of a major purchase -- Wall Street effectively decided that a micro-cap money-loser with declining revenue is a lesser fool, as far as online music goes, than two of the five most powerful music companies in the world. Or perhaps it's just a supply-demand inequity for online music investment opportunities in general. Encouraged by Apple's ( AAPL) announcement of success with its new online music store, investors may simply see Roxio as a purebred horse on which it can make its online music bet -- a gelding carrying less baggage than, say, Apple's computer business or the record labels' ailing traditional business. Shares in Roxio, which peaked at $7.83 Monday, traded at $7.70 in the afternoon, up 80 cents. Clearly, Roxio CEO Chris Gorog thinks that his company -- which bought the assets of the late file-swapping pioneer Napster last fall -- will bring enthusiasm to the online music business that the major labels have lacked. The majors, says Gorog, are finally recognizing that online music is a legitimate retail channel, one to which they need to market. That hasn't always been true, says Gorog, even when the majors set up their online businesses in late 2001 -- Universal Music Group and Sony behind Pressplay, and Bertelsmann, AOL Time Warner ( AOL) and EMI backing the rival MusicNet. "I don't think that there was a universal acceptance across the board at the major labels," says Gorog. "The forays with Pressplay and MusicNet were experiments."
Since last fall, however, a number of changes in the traditional music business have improved the odds for music businesses online, says Gorog. MusicNet and Pressplay have been able to license one another's content, the labels have become more agreeable to the 99-cent downloads that can be burnt onto recordable CDs -- as opposed to simply music subscription models -- and they've loosened prior restrictions on allowing transfers to portable MP3 music playback devices, he says. But now that Pressplay is in independent hands, where it can be "aggressively entrepreneured," in Gorog's words, the question remains to be answered whether legal online sales of digital music files will soon be a sustainable, money-making business. Obviously, that's what Gorog and Roxio think, having spent $5.3 million in cash on Napster's remains last November, and now $12.5 million in cash for Pressplay, plus shares representing roughly 17% of Roxio. The company plans to relaunch Pressplay under the Napster banner by the end of its current fiscal year, which runs until March 31, 2004. Roxio has some reasons to be optimistic. Apple says customers downloaded two million songs, at 99 cents apiece, in the first 16 days its new iTunes store was open. But it's not yet clear how profitable the store will be in the long run, given the royalties Apple must pay to record companies and the cost of running all those iTunes ads on TV. Roxio could also follow in the footsteps of RealNetworks ( RNWK), another software company that has branched into the consumer entertainment business, to little ill effect.
But Roxio's adventure promises to be costly. Judging from the company's Dec. 31 balance sheet -- plus the proceeds of an April asset sale -- Roxio has about $40 million in ready cash on hand, once the payment in the Pressplay deal is subtracted out. The company says it will spend $20 million to relaunch Napster, then endure negative cash flows "until the service is widely adopted." Roxio, which is scheduled to report March 31 quarter results on Wednesday, may at that time give some insight into how long that wide adoption might take, and how negative the cash flows might be. Sony and Universal reportedly spent a total of $60 million on Pressplay before giving it the heave-ho. In that context, it will be interesting to see if Roxio will go from being a rescuer of the online business to yet another victim.