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October 3, 2011 at 10:34 AM

Rhapsody buying Napster, Best Buy gets part of Rhapsody

In response to growing competition in the subscription music business, Seattle’s Rhapsody is buying Napster from Best Buy.

As part of the deal, Best Buy is getting a minority stake in Rhapsody, which was spun out of RealNetworks last year.

Rhapsody and Napster are the two largest “premium” subscription music companies in the U.S., the companies said. Combined they may stand a better chance against a wave of new and retooled music services being rolled out this year.

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“This deal will further extend Rhapsody’s lead over our competitors in the growing on-demand music market,” Rhapsody President Jon Irwin said in the release.

The sale is expected to close on Nov. 30, after which Napster subscribers will be shifted to Rhapsody. The notorious Napster brand will be dropped.

Napster’s selling price and the combined total subscribers weren’t disclosed.

The deal cements Rhapsody’s position as the largest provider of “all you can eat,” paid subscription music services in the U.S. and gives it a toehold in Europe, where Napster has a presence.

It also comes as the company faces new competition from younger challengers such as Spotify, Rdio and MOG.

At the same time, Netflix-era consumers may be warming up to the concept of paying about $10 a month to access huge online music libraries from computers, mobile devices and connected stereos.

Irwin said in an interview that Rhapsody is interested in additional acquisitions “that make sense” and further its growth.

“We’re going to go after those aggressively,” he said.

Consolidation was inevitable and could lead toward larger deals by Internet giants whose online music services don’t have as much traction.

As smartphone and Web tablet use soars and mobile broadband proliferates, Microsoft, Google, and Apple will all vie to store and stream consumers’ digital music collections on their networks.

Google, Amazon and Apple each introduced “cloud” services that provide online storage and access to digital music this year, but they don’t yet offer all-you-can-eat subscription services. Microsoft has the Zune music service that’s linked to Windows Phone and Xbox consoles and, with the upcoming Windows 8 operating system, it’s going to put a bigger emphasis on storing, syncing and streaming digital content.

The Napster deal likely gives Rhapsody more than a million customers — with esablished billing relationships. That will make it a more appealing acquisition target or at least give the company enough heft to compete with the big players.

Asked about the acquisition potential, Irwin said: “Our focus is going to be 100 percent on growing, providing the music experience for our customers and building value in the service we deliver for them.”

His comments in the press release emphasized the importance of scale.

“This is a ‘go big or go home’ business, so our focus is on sustainably growing the company,” Irwin said.

Scale also benefits the new social features the company added, including its new partnership with Facebook, he added.

Rhapsody has about 800,000 customers and expects to break even later this year. It lost $7 million on sales of $32.5 million in the quarter ending March 31. It has 150 employees — including about 120 in Seattle — and has sales of about $130 million a year.

Streaming music plans are increasingly bundled with cellphones, and Rhapsody’s major focus lately has been expanding partnerships with carriers such as Verizon Wireless.

Napster began as a rebellious music sharing site that was shut down by record companies, but the brand lived on after software company Roxio bought the brand name in a 2004 bandkruptcy sale.

Napster then was built into a subscription music service that had about 700,000 paying customers when it was sold to Best Buy in 2008 for $121 million. At the time Best Buy was hoping the deal would help it better compete with Apple’s iTunes store for music buyers.

Apple has continue to lead digital music sales but it’s been slow to develop a subscription offering. It acquired streaming music provider Lala in 2009 but discontinued the Lala service.

Napster employs about 120 people, most at its offices in Los Angeles and San Diego. There are likely to be significant layoffs, as Rhapsody plans to close the Southern California offices.

“We’ll be working with the Napster team to migrate the customer base and, to the extent that there are openings for Napster employees to join the team, we’ll be discussing those opportunities with them,” Irwin said.

The music libraries offered by Napster and Rhapsody mostly overlap so customers aren’t likely to see much change. Napster subscribers will have their favorite tracks and other saved lists shifted over to Rhapsody after the deal closes.

Rhapsody’s business, meanwhile, should continue growing through partnerships and acquisitions, Irwin said.

“I like our position — I like where we’re sitting,” he said.

Comments | Topics: amazon mp3, Digital media, Facebook


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