Is Napster (NASDAQ:NAPS) about to be gobbled up by the world's most-valuable Internet company? Could be. Napster shares opened 39% higher -- and kept climbing -- after a story in The New York Post claimed that music industry sources were telling the paper that Google (NASDAQ:GOOG) was working on an alliance, if not an outright buyout, of the fledgling music subscription service.
Can it be? Can the "do no evil" company really be in cahoots with the pioneering bad boy of peer-to-peer music swapping?
It does make sense. Yahoo! (NASDAQ:YHOO) and Motley Fool Inside Value pick Microsoft (NASDAQ:MSFT) are Google's biggest competitors in the paid search space, and they both sell digital music products. Google is already selling video through its site, so it's really just a matter of time before it launches some form of online music service.
I've felt that Google buying Napster would be a good idea, given Google's $7 billion war chest, since I wrote about it nearly three months ago. Microsoft is already hogtied to RealNetworks (NASDAQ:RNWK) through legal settlements, Yahoo! has established itself as the low-cost subscription service, and Apple Computer (NASDAQ:AAPL) really has no reason to find a partner since it's already the top dog in digital downloads.
Napster would also come cheap. Napster's balance sheet is flush with nearly $3 a share in cash. The stock didn't close for much more than that yesterday at $3.12. The reason that Napster's stock has been so depressed, despite growing its subscriber base, is that the company is losing money hand over clenched fist, and profitability isn't in the cards anytime soon. Google would be able to acquire Napster for a relative pittance and then use its own amazing wingspan to help grow the file-sharing service to the point where it's profitable and more relevant.
This will be an interesting situation to watch unfold. Even though the buyout frenzy pushed shares of Napster as high as $4.95 this morning, it's not as if the company has much of a bargaining chip if every passing quarter sees its greenery whither. The only thing holding Google back from acquiring Napster on the cheap is that if Yahoo! catches a whiff of the deal, a bidding war may ensue.
But it wouldn't be much of a bidding war. Yahoo! already has the technology in place. Google's frenetic hiring of computing brainiacs means that there's no technological hurdle it couldn't clear, given the right amount of running room. However, digital music is an area that's clearly growing and, for those able to pull this off profitably like RealNetworks and Apple have, likely to draw the attention of growth stock investors over the next few years.
Digital music is a high growth industry that is often explored as part of the Rule Breakers newsletter service. In fact, one of the two major satellite radio players was recently singled out as an active recommendation. Find out which one with a 30-day free trial.
Longtime Fool contributor Rick Munarriz loves music but does not own shares in any of the companies mentioned in this story. He is a member of the Rule Breakers analytical team, seeking out tomorrow's great growth stocks a day early.
