Betting it all on Napster

By any measure, Napster Chief Executive Chris Gorog is one of the world's biggest believers in digital music.

Eighteen months ago, his company, Roxio, was a successful, if unspectacular, player in the CD-burning software market. Then, in a rapid-fire corporate transformation, he purchased the Napster brand name at a bankruptcy auction, bought the record-label-backed Pressplay subscription service and relaunched the Napster brand as an iTunes song store rival and online music subscription service.

A few weeks ago, he took the final step, selling off the old Roxio business and changing the company's name to Napster altogether. The move has won him kudos from those who saw the old business slowing down, along with head-shakes of disbelief from those who think Napster is outmatched against bigger rivals such as Apple Computer, Microsoft and Sony.

That chutzpah is being thrown into relief this week, as Microsoft prepares to launch its MSN digital music store. Gorog has been one of the most vocal backers of Microsoft media technology, but the new Microsoft store will compete directly with his download business.

Still, he says he's no more worried about this than he was about Sony or Wal-Mart Stores. Both are big competitors, but Gorog claims that neither has cut into Roxio's market share.

CNET News.com recently spoke with Gorog about his company's radical bet on digital music and his potentially conflicted relationship with Microsoft.

Q: Your decision to sell your old business in favor of Napster was a big one. What helped make the final decision?
A: Well, this move enables us to focus 100 percent on the online music space, which is the primary strategic focus for our company. Obviously, it's an area that has had explosive growth, and is expected to be a multibillion-dollar industry over the next handful of years. We have secured a very prominent position in the early development of the space, and we wanted to make sure that we had the opportunity to bring 100 percent of our focus to this.

Had this been the idea ever since buying the Napster name?
I wouldn't say it was a plan that began to gel 18 months ago. But it is certainly something that has been on our minds for the last year or so. The online music sector is growing fast, the optical recording sector for consumers has really begun to mature, and growth has slowed down considerably.

Were there any specific events that tipped the scale--that made you decide to get out of the old business and into the new?
No, there wasn't any event that was a catalyst. It was the recognition that a small company has to be laser-focused on its primary objective, and our company's primary objective is to remain very dominant in digital media.

Right now, you've got Sony as a competitor, and Apple is dominating the space. You've still got Virgin, you've still got Microsoft, you've still got a lot of potentially very powerful brands coming into this space. Is that worrisome to you?
Well, I'd like to first address one of the comments you made--that Apple is dominating the space. Currently, Apple is not even in the subscription business. It's not even on the playing field yet. I think that's very significant and very important for anyone following this space to remember.

Currently, Apple is not even in the subscription business. It's not even on the playing field yet.

As to the others entering the space--obviously, it's a very competitive space, because we are all in the process of trying to get a piece of a $40 billion business. The global record industry is approximately $40 billion, and virtually everyone who follows the space has a recognition that all of that money could be moving online. This is why it is attracting major players like Wal-Mart, like Microsoft. In one sense, I think that it really validates why we as a company made the decision to double down and be serious about this opportunity.

Secondly, as to our competitive position, one of the things I think that is very noticeable is that Sony and Wal-Mart--obviously two massive global organizations--have both entered the online music space in the last few months, and our market share, as reported weekly by Nielsen SoundScan, has not declined an inch.

That's market share of downloads, or market share of revenue?
Market share of downloads, because there is no market share report on revenue.

Our market share of downloads, since Wal-Mart and Sony entered, has not declined at all. We think that's very significant, and it makes us feel very confident that we have secured a very defensible position with the biggest brand in the industry.

What is your market share right now?
In downloads, Apple claims to have 70 percent. We have approximately 15 percent. That leaves about 15 percent to all the other players.

You said margins on subscription services are about 40 percent, compared with just 10 percent on downloads. Is that correct?
Right.

How do you see those margins evolving, and why?
We think that the margins for downloads and subscriptions will be stable. We think that it is incumbent on us as a company to grow the top line as aggressively and as fast as possible so that we can get into a profitable position. We also are doing things that are helping add higher-margin products to our portfolio.

What kind of products would those be?
We have a number of things in development--but nothing that we're publicly disclosing.

You said you do want to keep focused on the music space, as opposed to other downloadable subscription content, however.
Right now, we're going to stay focused on music. Clearly, with the Napster brand, it gives us the opportunity to be electronic distributors of motion pictures, spoken work, electronic games, etc., all of which are very likely on our road map. But our concentration right now is doing an exceptional job in music.

There's been a big tussle over technology and interoperability. You've said you're comfortable using Windows Media, because it's the most widely used player. Do you believe there needs to be more interoperability, or is the market OK as is?
I think that it is certainly bad for consumers that Apple has not opened up its platform with the iPod to other services. I think that it's also bad for Apple and the iPod that they are trapped in the very limited experience that iTunes brings.

I think that a strategy like that will ultimately catch up with Apple, if they continue to cloister their customers in an environment that is not competitive and limits choice. In the meantime, I think that it has stunted the growth of other services in their early days to not have access to what is currently the most popular player on the market.

I am highly confident in our decision to build all of our technology around Microsoft Windows.

All of that said, I am highly confident in our decision to build all of our technology around Microsoft Windows. That has also really been borne out by conversations we've had throughout the industry. For example, at a major U.S. retailer, I was told by the head of merchandising that they expect Apple's market share to be less than 10 percent within 24 months. That's very consistent with what I think that a lot of people feel--that as this consumer opportunity moves to mass adoption, people want choice.

Do you have any concern, as a Microsoft technology customer, that Microsoft is now becoming a competitor to you on the store front?
We're no more concerned about the entry of MSN than we were about the entry of Wal-Mart or the entry of Sony. We take all of these competitors very seriously, but we wouldn't rate the level of threat higher from the MSN service.

You've been one of the biggest backers of Microsoft's Janus technology, which allows the subscription-based downloads to be played on some portable devices. Do you see that being a large part of your business in the next 12 months?
We just returned from doing focus groups, and it validated what we all intuitively knew--that portable subscription-based music really looms as being the potential killer app for digital music. We already know that the experience of a music subscription is infinitely better than a download store.

Any users of a subscription service would tell you that the only thing missing is the opportunity to move those tracks onto their MP3 player. In our recent focus groups, our individuals polled overwhelmingly identified the portable subscription content as the No. 1 thing they'd like to see.

So you do indeed think that Janus will be a large part of your business fairly soon?
Yes. I think that, certainly a year from now or a year from the release of the Janus technology, that the lion's share of our subscribers will be using portable subscriptions. It will be very important to us.