Shawn Fanning, legal music downloading sites
Damian Dovarganes/AP

Best Buy Portfolio Downloads Napster

September 16, 2008 06:11 PM
by Anne Szustek
The Minneapolis-based consumer electronics retailer is buying the file-swapping service from Roxio for almost $127 million. Will the takeover resuscitate the mystique of the once-renegade brand?

Best Buy Acquires Napster

Reports vary as to exactly how much Best Buy is paying for Napster. Press releases from the big-box retailer state that it’s shelling out $121 million in the all-cash deal. The Associated Press, basing its calculations on the $2.69 for each of Napster’s 47.5 million outstanding shares, puts the total price at roughly $126.9 million. Best Buy accounts for the disparity by pointing out unvested Napster employee stock options. Analysts are quick to say that in actuality, Best Buy is only paying some $54 million, as the music download service has some $67 million in cash and in short-term investments.

Whatever the price tag may be, however, the fresh exposure this deal accords Napster and the chance for Best Buy more firmly to slap its imprimatur on the digital music market should prove invaluable. Napster has had sluggish performance since music software firm Roxio took it over in 2002 in the wake of a series of lawsuits. It now operates as a paid subscriber business. In August Napster reported losses of $4.4 million, or some 10 cents per share, according to AP statistics. This is just part of its market decline of 62 percent over the past year. Its subscribership dwindled by some 54,000 between March and June this year, reported the Minneapolis-St. Paul Star Tribune.

The deal won’t be finalized until at least sometime during fourth-quarter 2008, pending legal and regulatory approval. Best Buy plans to keep Napster’s staff in Los Angeles, although it is unknown what brand name the purchased music service is going to use.

Napster’s price-per-share went up 86 percent, or $1.17, on Monday on the back of news of the deal. Best Buy has had its hands in a number of deals of late, including last week becoming the first independent retailer to sell the Apple iPhone and embarking on a $2.1 billion joint venture with British cell phone company Carphone Warehouse. Its mobile phone sales have seen a “nearly triple-digit gain,” writes The Wall Street Journal, thanks largely to the large outlay the company has made in its Best Buy Mobile unit. However, sales as a whole have been slumping. Best Buy’s second-quarter 2008 fiscal net income dropped 19 percent, less than what analysts expected.
Napster could be a plumper for Best Buy’s balance sheets. It already has been offering gift cards for music sites such as Napster for a few years. Michelle Quinn, technology writer for the Los Angeles Times, says in her blog, “Best Buy's job now is to hang on to Napster's cool image but get the word out about what Napster is about today.”

Best Buy launched its own digital music store in 2006 to help assuage the loss of declining CD sales during the digital music age, according to the Star Tribune. And Best Buy’s purchase of Napster instantly affords it hundreds of thousands of subscribers. “We can foresee Napster acting as a platform for accelerating our growth in the emerging industry of digital entertainment, beyond music subscriptions,” Dave Morrish, Best Buy’s executive vice president of connected digital solutions, told the Minnesota paper.

Key Player: Shawn Fanning

Shawn Fanning, born in Brockton, Mass., on Nov. 22, 1980, developed Napster, the peer-to-peer online music sharing platform that would eventually lead to a music industry shift from album-based rock to downloadable singles.

While a computer programming student at Boston’s Northeastern University, Fanning got the idea to develop a program where people could trade MP3s, an audio file format often used in digitized music. The inspiration to develop the peer-to-peer sharing system “was rooted out of frustration not only with, Lycos and, but also (the desire) to create a music community,” he told the BBC.

Fanning dropped out of college in the winter of 1998 to work on developing the music sharing system full-time. Along with his uncle John Fanning, who had given him his first computer a few years earlier, he set up the company in May 1999 with capital from “business angels.” Named for Fanning’s hairstyle at the time, Napster went online in June 1999.

Historical Context: Napster strikes a chord with public, clashes with recording industry

Napster’s popularity exploded thanks in large part to word-of-mouth publicity on U.S. college campuses, boasting some 70 million users at its peak. It ate up campus bandwidth at several higher education institutions. But most importantly, "it energized consumers to the idea they could be getting access to media over the Internet, it turned MP3 into a standard, it scared the hell out of Hollywood," Forrester Research Josh Bernoff told the San Francisco Chronicle in 2002.

Napster caught the media sector, particularly the recording industry, snoozing during Web. 1.0’s heyday. But the Recording Industry Association of America fought back on Dec. 8, 1999, filing a copyright infringement lawsuit against Napster for $10,000 for every song available on the service, worth a total of $20 billion.

Given that it technically was a file-sharing service rather than a site that sold music, in its original incarnation, Napster never generated any income. On top of a series of additional lawsuits, Napster was left bankrupt. It filed for Chapter 11 bankruptcy protection in June 2002 and shut down about a month later. German music conglomerate Bertelsmann AG agreed to buy Napster for $85 million in May 2002; however Delaware bankruptcy Judge Peter Walsh blocked the sale in September the same year because, in his words as cited by the San Francisco Chronicle, former Bertelsmann exec and then-Napster CEO Konrad Hilbers "had one foot in the Napster camp and one foot in the Bertelsmann camp.”

California-based firm Roxio, now part of Sonic Solutions, acquired Napster through a 2002 bankruptcy auction and later purchased the rights to the Napster name.

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