May 19, 2003 8:29 AM PDT

Pressplay bid points to Napster remix

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Roxio on Monday announced that it plans to buy the Pressplay online music service and merge it with another recent acquisition, the long-muted Napster.

Roxio, a developer of CD-burning technology, will pay $12.5 million in cash and 3.9 million shares of its common stock to Universal Music Group and Sony Music Entertainment, the joint owners of Pressplay. Accounting for Roxio's stock price as of Friday, the acquisition is valued at $39.5 million, excluding $1 million in transaction fees.

Sony and Universal will also be able to earn up to $6.25 million in positive cash flow from the new Napster, and each will provide a member to Roxio's board of directors. Pressplay president Mike Bebel will report to Roxio CEO Chris Gorog, and Pressplay's senior management team and its offices in New York and Los Angeles will not change.

Roxio expects to spend $20 million to relaunch Napster, according to the company, and will incur negative cash flow until the new service gains popular appeal--though that's not guaranteed.

Roxio pulled Napster from the cut-out bin in November when it bought the service's assets from German media giant Bertelsmann for $5 million. In February, Roxio lured Napster inventor Sean Fanning to help it build a legal version of the service.

The Pressplay acquisition marks another twist of fate in a musical realm still trying to find its equilibrium since Napster burst onto the scene in the mid-1990s, attracting millions of people--and no small measure of controversy--to a technology that allowed easy, no-cost swapping of music files across the Internet. Universal and Sony joined other recording giants in a copyright violation lawsuit that eventually put Napster out of business. The labels claimed Napster's technology infringed on copyrights by creating a peer-to-peer network that allowed people to download virtually any song from other users' hard drives.

Also in response to the Napster craze, Universal and Sony launched Pressplay in an attempt to sell their music through an online subscription service. A similar service called MusicNet, supported by Warner Music Group, BMG Music, EMI Recorded Music, AOL Time Warner and RealNetworks, also took a run at selling music through the Net.

However, both services have struggled to attract subscribers, suffered delays and witnessed management turnover. In a March filing with the U.S. Securities and Exchange Commission, Universal said it had lost $30 million on Pressplay and that under the terms of the venture, both sides had agreed to spend up $50 million to cover operating losses.

Meanwhile, free peer-to-peer services such as Sharman Networks' Kazaa remain popular. In addition, a recent court ruling said that services such as Streamcast Networks and Grokster were not liable for copyright infringement that took place using their software.

The launch of the new Napster will revive the most recognized name in online music, but the similarities between the old and the new are likely to stop there. When Roxio brought Fanning on board, the company said it would not include a peer-to-peer element in the relaunched service, planning instead to play strictly by the rules set out by the recording industry.

Reuters contributed to this story.

 

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