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Roxio sells software division, focuses on Napster

Software company sells old business for $80 million and stakes future on digital music.

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Roxio said Monday that it will sell its consumer software division for $80 million and focus wholly on its Napster digital music business in the future.

The company plans to officially change its name to Napster, taking the brand of the onetime file-swapping revolutionary that it purchased nearly two years ago. For the last nine months it has operated Napster as a paid digital music download and subscription service, competing in part with Apple Computer's iTunes.

The decision marks a dramatic and relatively rapid change in the company's identity and strategy. Once a leading company aimed at helping consumers burn CDs, it has seen that business slowly decline as other software programs such as iTunes have added their own automatic disc-burning capacity.

The digital music business is expected to grow substantially, however. Although far behind iTunes in terms of revenue, the Napster division is now making about $7.9 million a quarter, and is on track to reach $30 million to $40 million for its fiscal year.

"With the news today, we are on a path to become a very well-funded pure play in one of the hottest sectors in the consumer technology market," Napster CEO Chris Gorog said.

The deal, in which Roxio will sell its consumer software business to Sonic Solutions, will likely leave the slimmed-down company with close to $130 million in cash to help fund the marketing and development of the digital music business.

As part of the conference call announcing the sale, executives gave some details on how the service has performed over the last nine months.

More than half of the company's digital music revenue comes from its monthly subscription services, as opposed to the kind of per-song downloads offered by Apple's iTunes, Roxio executives said. It also earned close to $1.1 million selling Napster-branded MP3 players to partners.

The company said that gross margins on per-song downloads were just 10 percent, while margins on subscription service sales were closer to 40 percent.

Roxio executives noted that they have made substantial inroads into universities in recent months, offering the Napster subscription service to more than a half-dozen campuses. However, these student services were so deeply discounted that the contribution to Napster's bottom line is "immaterial," Gorog said.

The company also announced that its total net revenue for its first fiscal 2005 quarter was $29.9 million, up from $24.2 million the previous year. That reflected a net loss of 8 cents a share, substantially better than its guidance of a loss of 26 cents per share for the quarter.

Gorog said the company was in the middle of focus-testing a new version of its service based on , which will allow subscription-based downloads to be moved to portable devices for the first time.

The company has agreements with all five major record labels to release that service on schedule this fall, he added. Pricing has not yet been determined, but will likely be in the "sub $20" per month range, Gorog said.

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