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Napster faces new challenge

Tue., Sept. 2, 2008

Key investors seek shakeup role or sale

Napster Inc. has struggled to catch the ear of enough customers. Now the company is out of tune with some of its big shareholders.

With its stock trading at $1.34 and subscribers leaving its digital music service, the Los Angeles company is facing a proxy battle from three investors who together own about 1 percent of the company. They each want a seat on the board and are pushing management to turn around its stock slump or pursue a sale.

The company, which bought its name from the defunct file-sharing network, said Friday that it was continuing to look for suitors through UBS Investment Bank. But its executives are fighting back, dismissing the three shareholders as a musician, an ice cream franchisee and a middle-management banker who are “unqualified” to run a digital music business.

The dissident group has put forth “no substantive plan for how its nominees will enhance value for our stockholders if elected,” Napster said in a letter to shareholders Friday.

In its current incarnation, Napster has been a high-profile example of the challenges faced in finding a winning business model in the uncertain world of digital music, which Apple Inc. dominates with its iTunes store.

Napster has begun several initiatives, including a digital download store. But its stock is down 31 percent this year.

Napster was once the name of the free music-sharing service used by more than 60 million people before lawsuits filed by the recording industry shut it down. From the ashes of the bankruptcy filing in 2002, Napster’s name, its kitten-face logo and some of its technology were acquired by Roxio Inc., a CD burning software firm.

The new Napster Inc. created a music subscription service and now has more than 700,000 subscribers paying $13 a month to listen to a library of more than 6 million songs. It has a free music streaming service called FreeNapster, which is ad-supported. Napster has also pushed to be the mobile music service on cellphones worldwide. Its U.S. carrier partner is AT&T Inc.

But despite being an innovator, the 145-employee company’s subscriber base shrank to 703,000 from 760,000. Revenue fell 6 percent to $30.3 million.


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