Napster pick-up could signal more coupling of hardware, content

Best Buy is surely hoping to give its digital-music business a boost with last week’s acquisition of Napster Inc. But what it might mean for mobile music is far from clear.
The big-box retailer agreed to pay $121 million for the once-iconic song distributor and its 706,000 subscribers. Analysts noted, however, that the transaction – which is expected to close during the fourth quarter – actually amounts to a net $54 million deal given Napster’s $67 million in cash and short-term investments.
Napster gained tremendous fame – or, if you’re in the music industry, notoriety – as a file-sharing site before a legal showdown forced its shutdown and liquidation in 2001. But the business has struggled in the wake of the crackdown on file-sharing sites, failing to turn a profit in the last few years and, according to some estimates, watching its subscriber base dwindle.
And while Napster has consistently made headlines since a 2005 partnership with L.M. Ericsson to offer a music service to carriers,its traction in wireless appears dubious. Napster Mobile has scored deals with AT&T Mobility, NTT DoCoMo and O2, among others, but its services generally require users to pay a monthly subscription, then sideload tunes from PCs onto their phones, presenting a substantial hurdle. (The company declined to disclose the number of Napster Mobile subscribers, or discuss future plans in the wake of the takeover.)
But mobile appears to be at the heart of Best Buy’s acquisition. The retailer is aggressively moving into wireless, building 200 mobile-only locations in the United States, and is working with Handango Inc. to distribute SD cards that come pre-loaded with mobile content. What’s more, Napster could help Best Buy expand its existing digital music offering, a subscription-based service powered by RealNetworks’ Rhapsody.
“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, Best Buy’s EVP of connected digital solutions, in a prepared statement. “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.”
Those “hardware providers” may be key to the deal. Best Buy earlier this year stepped up its European cellphone distribution to the tune of $2.14 billion, acquiring a 50% stake in The Carphone Warehouse Group plc’s mobile retail operations and creating a joint project that will launch Best Buy’s brand across the Atlantic. The new company will operate more than 2,400 stores in nine European countries.
With that kind of footprint, Best Buy may be looking to copy Nokia Corp.’s Comes With Music strategy, packaging access to content with the purchase of a phone or other device. After all, it’s the substantial margins from hardware, not from music sales, that have driven the success of Apple’s iTunes, which continues to dominate the online-music space.
But even that may not be enough to entice customers unless there’s some added value, according to John Barrett, director of research at Parks Associates.
“I think subscription services are hard to get your mind around; I think intuitively people like to buy tracks,” Barrett weighed in. “I think the only time you’re going to start to see some traction (in full-track mobile music) is when somebody offers a truly integrated type of service” that might include features such as filtering inappropriate content or leveraging community features.
Indeed, while Best Buy may have something innovative up its sleeve, it’s hard to see any real synergy that might move the needle in full-track downloads. Music lovers haven’t swarmed to subscription services on any platform, and consumers seem unwilling to pay a premium for the convenience of downloading tracks to their phones. And while advertising eventually may be the long-awaited savior for mobile music, analysts are skeptical that Napster’s ad-subsidized online service has attracted much attention.
“I suppose there might be some hardware/services combos in the works,” noted JupiterResearch’s David Card on his blog. “I’m more bullish about ads supporting this business in the long run than anything else right now, and this doesn’t play to any strengths there.”
So it’s likely that the retailer with toy with several different models before playing its hand in mobile music, Barrett predicted.
“I suspect it’s more just a strategy of making the acquisition and figuring out what to do with it later,” Barrett deduced. “I think for right now they’re going to sit on it and see what happens.”