Consumer electronics giant Best Buy announced Monday that it will acquire digital-music pioneer Napster for $121 million. Under the terms of the agreement, Napster shareholders will receive $2.65 for each outstanding share. The companies expect the purchase to be completed in the fourth quarter.
Brian Dunn, president and COO of Best Buy, said the deal will give the retailer's customers an expanded range of options for the delivery of electronic media.
"This transaction offers Best Buy a recognized platform for enhancing our capabilities in the digital-media space and building new, recurring relationships with customers," Dunn said. "Over time we hope to strengthen our offerings to consumers, who we believe will increasingly seek devices and solutions that enable them to access their content wherever, whenever and however they want."
Best Buy does not plan to make any significant changes to Napster's management or relocate the company from its current headquarters in Los Angeles.
The Next 'Geek Squad'?
Among the assets Best Buy will acquire in its purchase of Napster are the service's existing 700,000 music subscribers, a Web-based customer-service system, and various mobile music delivery options.
Napster is not Best Buy's first foray into the service industry. In 2002, the retailer purchased the computer repair service Geek Squad and two years later established a Geek Squad "precinct" in every Best Buy store.
Whether Best Buy can be similarly successful with Napster is an interesting question. Unlike Geek Squad, Napster is up against entrenched and successful competitors, including Apple's iTunes and Amazon's rapidly growing MP3 store. As a result, the company has had trouble attracting customers to its $12.95-a-month subscription plan.
But for Best Buy, it may not be just about the music. "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.
Expanding Into Digital Media
Zippy Aima, an industry analyst of digital media for ABI Research, thinks the deal offers Best Buy a number of important advantages.
"Best Buy is aiming to cash in on the opportunities offered by the online music business," Aima said, "probably as a result of seeing the success of Apple iTunes. Also, the merger will enable Best Buy, which is already one of the largest retailers, to have a digital store with an existing 700,000 subscribers (from Napster)."
Aima also suggested that Napster's long history with the music industry and its existing MP3 store will help Best Buy expand into the digital-media space, while Napster will benefit from the promotional strength of one the country's strongest retailers.
Despite the fact that Napster lags far behind Apple's iTunes Store in number of customers, Aima thinks a subscription model can be successful. "A subscription model lets you buy tracks for a specified fee per month, rather than pay for each download," Aima said. "I think subscription-based models give access to a larger library of content."
But whether Napster, even with Best Buy's help, can remain competitive with iTunes and Amazon remains to be seen.