September 15, 2008, 12:00 AM

Best Buy hopes to make sweet digital music with its purchase of Napster

To expand its digital entertainment portfolio, Best Buy is spending $121 million to buy digital music service Napster Inc. But even with Napster in hand, Best Buy still faces an uphill challenge against market leader Apple`s iTunes.

Using its stores and BestBuy.com as a base, Best Buy sees big potential in the market for mobile commerce and digital content, especially entertainment. To expand its portfolio, Best Buy, No. 12 in the Internet Retailer Top 500 Guide, is spending $121 million to acquire digital music service Napster Inc., No. 113. The deal is subject to regulatory approval. Best Buy and Napster haven’t set a final closing date.

Under the terms of the deal, Best Buy will pay Napster shareholders $2.65 per share for all outstanding shares and use its own funding to complete the transaction. The deal also includes approximately $67 million in cash and short-term investments held by Napster.

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 mobile devices, the retailer says. The combined capabilities of the two companies will allow Best Buy to build stronger customer relationships, expand the number of subscribers and capture recurring revenue by offering a diverse mobile digital platform, says Dave Morrish, executive vice president, connected digital solutions, at Best Buy.

“Napster brings us excellent capabilities in the mobility space, as well as international operations and an established team of technology experts,” says Morrish. “We can foresee Napster acting as a platform for accelerating our growth in the emerging industry of digital entertainment, beyond music subscriptions.”

The purchase by Best Buy includes Napster`s approximately 700,000 subscribers, its digital customer service base and mobile capabilities. Napster introduced digital rights management-free MP3 music downloads to its online store in May, and the company reported July sales of music tracks were up 5% over June while track sales per subscriber increased by 10%. Digital rights management is used by Apple’s iTunes and others to limit the copying of music and other digital media.

Napster also announced this year that AT&T; would offer the Napster Mobile service for downloading music and ringtones to an additional 12 million subscribers. But Napster has been struggling financially. For the company’s 2009 fiscal first quarter ended June 30, revenue was $30.3 million, compared with $32.3 million in the same quarter last year. The net loss widened about 3% to $4.38 million from $4.24 million a year ago.

“Best Buy is uniquely positioned to benefit from our digital entertainment distribution platform,” says Napster CEO Chris Gorog. “We are looking forward to combining our digital media capabilities with Best Buy’s resources and global network to extend our digital content platforms.”

Best Buy’s purchase of Napster is its latest deal to help it move quickly into the emerging market for digital entertainment and mobile commerce. In July, Best Buy completed a bid to reach the European mobile phone market through a joint venture with The Carphone Warehouse Group PLC. Best Buy paid Carphone $2.1 billion for a 50% share of the new business. In 2006, Best Buy also opened its own digital music store powered by RealNetworks Inc.’s Rhapsody music service. “We’re excited to add these capabilities to leverage our existing relationships with the labels, the studios and the hardware providers,” says Morrish. “We believe Napster will be an outstanding addition to our already robust portfolio of partners and offerings in the digital music space.”

Best Buy is making the acquisition of Napster the centerpiece of its emerging digital entertainment business. But Best Buy and other competitors are still trailing Apple and its iTunes music store. Apple, which ranks No. 7 in the Internet Retailer Top 500 Guide, reported in July that online music shoppers have now purchased and downloaded over 5 billion songs from its iTunes store. Customers and visitors to iTunes also are renting and purchasing over 50,000 movies every day, says Apple. The iTunes store now carries an inventory of more than 8 million songs, 20,000 TV episodes and over 2,000 films.

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