Best Buy purchases Napster for a song

Best Buy Co., in a bid to boost its infant digital music service, has agreed to pay $121 million for the 706,000 subscribers of online music retailer Napster Inc.

Under terms of the all-cash deal, the Richfield-based consumer electronics retailer will pay $2.65 for each Napster share, a 95 percent premium over Napster's closing price of $1.36 last Friday. Analysts, however, noted Best Buy is really paying only $54 million for Napster, which holds about $67 million in cash and short term investments on its balance sheet.

The price "is a very insignificant amount of money [for Best Buy] and it buys them decent technology," said Stephanie Hoff, a retail analyst with Edward Jones Investments in St. Louis. Best Buy gets "some opportunity to compete in a more meaningful way against people who do digital music well, like Apple and Amazon. [Napster] gives Best Buy a little more ammunition to play in that venue."

Best Buy executives envision using Napster to distribute content beyond music, including movies and television shows.

"We can foresee Napster acting as a platform for accelerating our growth in the emerging industry of digital entertainment, beyond music subscriptions," said Dave Morrish, Best Buy's executive vice president of connected digital solutions.

The retailer launched Best Buy Digital Music Store in 2006, partially as a way to counter declining CD sales in the wake of the enormous popularity of Apple's iTunes service.

Sales of digital songs hit $844 million last year compared with $143 million in 2007, according to NielsonSoundScan. CD sales fell to $279 million from $428 million in the same time period. (Best Buy declined to disclose performance of its digital music store.)

"I think they are getting Napster fairly cheap," Binger said.

The deal, expected to close in the fourth quarter, represents the latest reincarnation for Napster, a controversial brand that arguably launched the online digital music revolution in the late 1990s.

Invented by college student Shawn Fanning, Napster allowed users to share music over the Internet. Napster's wild popularity earned it the wrath of the recording industry, which argued that the service violated copyright laws. A series of unfavorable court rulings forced Napster into bankruptcy. In 2002, music software maker Roxio Inc. acquired Napster and eventually took its name.

Napster has struggled under its new owners. Its shares have fallen 62 percent in the past year, it's losing money, and it lost about 54,000 subscribers between March and June.

Last month, dissident investors launched a proxy battle to replace some Napster directors and called for sale of the company.

It's not yet clear whether Best Buy will rename its digital music service Napster.

"The Napster name does have a great deal of recognition among consumers so I'm sure that will be taken into consideration as we move forward," said Best Buy spokeswoman Susan Busch.