Best Buy Steals Napster for a Song

Nice move, Best Buy (NYSE: BBY  ) .

The consumer electronics superstore chain is buying Napster (Nasdaq: NAPS  ) for $2.65 a share. It will give Best Buy a foothold in the digital music subscription market where Napster competes against services like RealNetworks' (Nasdaq: RNWK  ) Rhapsody.

The beauty behind the $121 million deal is that Best Buy won't have to shell out that kind of money. Napster closed out its latest quarter with roughly $1.40 a share in cash and short-term investments. Best Buy will have to pay just over $53 million to make up the difference.

What's in it for Best Buy? Plenty. Napster's membership base has been declining lately, but it still has approximately 708,000 paying subscribers. These are hardcore music fans, likely to be receptive to Best Buy pitching new digital players, accessories, and music their way.

It's also the correct tactical approach to combat competition. Retailers like Best Buy, Wal-Mart (NYSE: WMT  ) , and Amazon.com (Nasdaq: AMZN  ) have been selling MP3s for some time. Best Buy's digital music store is actually powered by Rhapsody. Acquiring Napster would give it a brand with pedigree papers.

This doesn't mean that Best Buy will butt heads with Apple (Nasdaq: AAPL  ) . Best Buy is an ally of Steve Jobs, especially with its recent move to become the only third-party retailer in the country to sell iPhones.

However, Best Buy isn't a slave to Apple's products. It also has other products for music lovers to buy, like satellite radio receivers, rival portable players, audio equipment, and even real world CDs. Adding a music subscription business to the other offerings makes the deal with Napster a win-win.

You see, from its perspective, Napster is coming off of five consecutive quarters of positive cash flow. It certainly was in no rush to cash out, unless it feared that Apple or Amazon would have a proprietary music subscription product out soon. Isn't that inevitable at this point?

Handing off its model to Best Buy is likely to result in a boost in subscribers, too, as Best Buy markets the suddenly more credible service to its sea of shoppers.

Yes, this is sweet music to everyone's ears. Well, everyone except Rhapsody.

Other catchy headlines you can sing along to:

Wal-Mart Stores and Best Buy are Motley Fool Inside Value picks. Best Buy, Amazon.com, and Apple are Motley Fool Stock Advisor picks. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz isn't a subscriber to any digital music service, even though he does have satellite radio. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On September 15, 2008, at 2:17 PM, canndogg wrote:

    Rick -

    Good article... wish I had $50M... I'd buy Napster in a heart beat... positive cash, real loyal customers, ...

    other thoughts though --

    iTunes will fail… at some point in time it will be irrelevant if it remains the same. They did nothing but take a twelve-pack and begin to sell by the bottle. Guess what… nothing changed… it is a loss leader to sell little hard drives that come in pretty packages… they make crazy margins on hard drives and lose money or “break even” as they would have you think through cleaver accounting on each song purchased.

    iTunes and Apple haven’t brought anything new to the industry… portability was already there, MP3 were already there, someone was already forcing you to have software on your computer to get the songs, “inteligent” shuffle has existed for quite a while, voice recording on a portable has been around since fall of 2005 (IAudio x5)… one thing they did bring was the cool factor - can’t deny that… cool and they have continued the downward spiral for the labels that are dinosaurs trying not to die

    I can give you more analysis whenever you want… email me… it will be thorough and really isn’t biased towards any company as I don’t get ad revenue, pub, nothing for my thoughts.

    Cheers

    - Cannon

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