Best Buy to Acquire Napster 2.0 for $121 Million

The news may have been missed by some, but there is word that Napster could very likely be sold to Best Buy for $121 Million.

Note: This is an article I wrote that was published elsewhere first. It has been republished here for archival purposes

Napster has had quite a run with the media and Napster 2.0 seemed to make the headlines on a fairly regular basis with it’s supposedly revolutionary business model of a subscription service for an unlimited archive of music encoded with Digital Rights Management. Things were going well for the company back in 2005 with backing of the major record labels and an influx of subscribers willing to buy in.

While the company capitalized on their gains with glamorous press releases and places in major news outlets over their successes and gains, their losses were kept rather quiet – typical for a company that relies on image to help with their business. Even government laws forcing Universities to use services like Napster wasn’t anywhere near enough to keep the company afloat which since experienced a decline of 95% on the stock exchange.

With an ever shrinking subscription rate fuelled by an increase in price for subscriptions, the company fell on to comparatively hard times. It was so much so that the company was forced to find ways to sell the company late last month.

In spite of a dismal outlook for the company at this point, Best Buy justifies this move to acquire the company saying that Napster had a 15% increase in profits. From the press release

Best Buy believes that Napster has one of the most comprehensive and easy-to-use music offerings in the industry, including streaming music, music subscriptions, the ability to purchase individual tracks, albums and mobile offers. Napster has approximately 140 employees, with its headquarters in Los Angeles. At this time, Best Buy does not plan to relocate Napster’s headquarters or to make significant changes in personnel.

“This transaction offers Best Buy a recognized platform for enhancing our capabilities in the digital media space and building new, recurring relationships with customers,” said Brian Dunn, President and COO of Best Buy. “Over time we hope to strengthen our offerings to consumers, who we believe will increasingly seek devices and solutions that enable them to access their content wherever, whenever and however they want.”

Best Buy intends to use Napster’s capabilities and digital subscriber base to reach new customers with an enhanced experience for exploring and selecting music and other digital entertainment products over an increasing array of devices. Best Buy believes the combined capabilities of the two companies will allow it to build stronger relationships with customers, expand the number of subscribers, and capture recurring revenue by offering ongoing value over a mobile digital platform.

“We believe Napster brings us excellent capabilities in the mobility space, as well as international operations and an established team of technology experts,” said Dave Morrish, Executive Vice President Connected Digital Solutions of Best Buy. “We can foresee Napster acting as a platform for accelerating our growth in the emerging industry of digital entertainment, beyond music subscriptions. We’re very excited to add these capabilities to leverage our existing relationships with the labels, the studios, and the hardware providers. We believe Napster will be an outstanding addition to our already robust portfolio of partners and offerings in the digital music space.”

Interestingly enough, Napster called on UBS Investment Bank to help with the selling of the company – a bank that has recently suffered a $5 Billion loss as a result of the collapsing US financial sector prior to government intervention coincidently enough.

If Napster proves to be a bad investment for best Buy, it wouldn’t be the first time. Companies have invested in software companies based on file-sharing technology before that seemed like a great idea at the time and, in turn, become unhappy with their investment when the product fails to return a profit. One of the most famous examples was eBay acquiring Skype three years ago. “Don’t call it a bust just yet,” the article from last year, while assessing how good of an investment it really was, reads, “but it’s fair to say eBay executives aren’t thrilled with what they’re getting out of Skype, which the auction king bought for $2.6 billion two years ago.”

Additionally, if Napster does, indeed, crash for the retail giant, it wouldn’t be the first online music service to crash. Yahoo! had a music service, but when the internet giant failed to get sufficient profits, the company ended up contemplating the idea of pulling their servers offline. Microsoft thought it could make a successful music service online through MSN, but was forced to shut the service down in 2006. While far from a complete list, these are just two DRM based music services that had great outlooks that ended badly.

When Napster 2.0 came into existence, many observers saw the DRM (Digital Rights Management) based model as a backwards business model that would ultimately fail (as shown in the above examples). While the company may be on it’s last leg currently, many of the sceptics of the model may be smiling over the fact that, from the looks of things, they may very well be right at the moment for Napster as well.

One of the major issues people took aim against the Napster model was the fact that the moment you stopped paying for the music subscription is the moment all of the music downloaded disappeared. Even though Napster was the first file-sharing network to attract mainstream attention due to its novelty back in 2001, the novelty of using the network after the shut down seems to have worn off even for many die-hard Napster fans. This case could very well be the latest example of the dangers of treating music fans like criminals.

Drew Wilson on Twitter: @icecube85 and Google+.

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