When Shawn Fanning, the man who created Napster as a teenager, gave up the
company it was in financial ruins, after being pillaged by the music industry
and struggling under the weight of enormous legal expenses. From a peak
of 26 million users, Napster was reduced to bankruptcy and put out of commission.
That's when Chris Gorog, CEO of Roxio, stepped in with a plan to buy Napster's
name and logo for $5M USD. He quit Roxio and took on a new position as
CEO of his revived internet nameplate, Napster 2.0. He made big promises,
promising that millions of subscribers would come pouring in thanks to
Napster's iconic kitty logo and name recognition.
However, the dreams never came true. Apple launched its iTunes store just
months before Napster. With Apple controlling the majority of the MP3
player market, and with proprietary
file-protection schemes placed on iPod files, Napster never really stood a chance.
It could not sell to iPod users and could only sell to the niche market of
users who owned alternative players like SanDisk.
the end, six years after the 2002 acquisition, the company
has yet to make a profit. In its latest fiscal year, which ended in
March it posted $16M USD in losses on revenue of $127.5M USD, and a mere
760,000 subscribers. Part of the expenses stem from the lucrative fees
required to maintain the service's relatively large catalog of 6 million
Now, with Napster 2.0 stock continuing its steady plunge since 2002, Gorog is facing
insurrection in his own ranks. Leading the charge is Kavan Singh, a
26-year-old entrepreneur who owns a chain of the Cold Stone Creamery ice cream
stores. Mr. Singh, a loyal Napster user is joining with two colleagues to
try to oust Gorog and revamp Napster at the company's annual September 18th
Napster has shown some signs of growth, thanks in part to finally being able to
offer tracks for the iPod. However, its subscription services have not
grown as hoped. Part of the problem is a tight market. Aside from
dominant iTunes the only real challenger is RealNetwork's Rhapsody
service. Rhapsody boasts 1.9 million subscribers, more than doubling
Napster's base. As Russ
Crupnick, senior entertainment industry analyst at market research firm NPD
puts it, "The [subscription] audience is limited. Rhapsody got there
Napster has worked out a trial
deal with AT&T to provide cell-phone downloads, but this has yielded
little profit. Part of the problem is simply the tiny profit margins
associated with the business; Napster makes 10 percent revenue on music
downloads. These margins have led many competitors like AOL and Yahoo to
give up on the music provider business. Steven Frankel, an analyst at
Canaccord Adams concludes that there is little Napster can do to save itself,
stating, "This is a company that has tried strategy after strategy and has
no meaningful traction."
However, Mr. Singh and his supporters believe much of the struggles is due to
Napster's reputation as a P2P founder inherently leading to an association with
illegality, something Mr. Singh contends Gorog and the company have done little
to counter. Thomas Sailors, 49, manager of personal investment holding
company Cloverdale Investments, one of Mr. Singh's two partners running for a
board seat fumes, "When you tell people they should get Napster, they say,
'What are you trying to do? Get me arrested?' That tells me management is
doing a poor job of communicating what this company does."
Mr. Singh and his colleagues are considering a move to sell Napster. Such
a move could yield a healthy profit for shareholders. A prime candidate
is RealNetworks, who might look to merge Napster's subscriber base to solidify
its position and provide more competition against iTunes. Whether the ice
cream owner and friend succeed, it is one of the most interesting proxy battles
of the year, perhaps even surpassing billionaire Carl
Icahn and company's efforts to sell search-engine Yahoo to Microsoft (the
other largest proxy event).
quote: niche market of users who owned alternative players like SanDisk
quote: I know iPods are popular, but to say everything that isn't an iPod is a niche is crazy.
quote: With Apple controlling the majority of the MP3 player market, and with proprietary file-protection schemes placed on iPod files, Napster never really stood a chance.