Rather than an alternative standard to MP3, the technology was completely flexible and could be set to allow a variety of standards, including MP3 and the standard recommended by the industry’s Secure Music Initiative. In addition, delivery was compatible with a variety of playback devices available in the marketplace. Gustav expected to capture Problems 219 just a tiny fraction of the $12 billion U.S. music market during 2004 and hoped to position NetTune to benefit from the fast growth of the digital music market that was projected to exceed $1 billion by 2005. Gustav was already holding advanced discussions with three major music companies, as well as with a number of independent producers for distributing pirate-proof versions of their labels.

The court’s affirmation of copyrights and injunction of Napster’s CD swaps was a timely development for NetTune. Gustav projected that NetTune would hit $32.5 million of revenue by Christmas of year 2004 and at least $40 million for the full year April 2003 to March 2004. Allen Venture Partners (AV Partners) had expressed interest in supplying

$8 million in total: $5 million for the acquisition and $3 million to launch the e-commerce site. Allen’s funding would be structured as a subordinated note for $8 million paying 12% annual interest24 plus 51% of the equity. The note and interest would be due on June 30, 2004. They further proposed to take the company public at the end of June 2004, assuming initial sales in the second quarter of 2004 (April–June) reached $7 million as projected, which would make credible the sales projection of $40 million for the year. The plan was to raise $80 million in a primary offering of common shares, which, after fees and expenses of 6%, would leave $75.2 million net proceeds. The proceeds would go to retire the outstanding debt, finance the expansion, and fund operating deficits until NetTune became cash positive by the third quarter of 2004. Both AV Partners and an investment banker brought in to discuss the IPO estimated that going public in June could be made at an enterprise value of four times full-year (April ’04 to March ’05) pro-forma revenues.

This valuation was for the enterprise value post-IPO. It already included the net proceeds from the IPO, all of which were to be spent paying back the debt plus interest and making the operation viable. NetTune would be taxed at a 40% corporate profit rate but NOLs were expected to last until 2006.