Music download and subscription service Napster announced that they’ve hired an investment bank to assist them with a sale of the company earlier today. This move was “in response to recent third party interest in establishing strategic partnerships or potentially acquiring the company.”
At first glance the company looks very healthy, with annual revenue of over $100 million and another $100 million in cash. The problem, however, is that their business has extremely low margins. This last fiscal quarter the company lost nearly $10 million from operations (or $40 million annualized). Getting Napster to profitability isn’t going to happen in this very crowded music market. For more on Napster’s competitors, see our recent analyses of the music download services and music subscription services. Napster does not offer the best, or cheapest, product in either category.
That doesn’t mean Napster won’t sell for a lot of money, though. A good investment bank sells based on fear and greed. And lots of players fear being left out of the music revolution occuring right now. Napster may be just what they are looking for. For a recent example, see Montgomery Securities recent sale of Grouper to Sony for $65 million in cash, something no one expected would happen.
Gee, the music retail business has crappy margins…
There’s a surprise.
Whoever buys that company should know that Apple will bury it within a years time.
this is awesome…
i know the content business well; and currently there is a big drive to the bottom…which will drive most out of business.
we’ve (www.tamago.us) decided not to play this game; plus we can sell many things besides music. Anything digital…
don’t worry, we’re still hush hush…
Which is why Apple didn’t “give away the razor and charge for the blades”, as Dare notes:
http://www.25hoursaday.com/web.....01961fd01b
Wow, what an empty article. Do you have any justification for your statement of why they aren’t “a healthy company” ? So they’re not profitable yet, but their burn rate is declining, and they’ve got the cash for it.
Next time, try doing real analysis of any potential growth factors. Try looking into the mobile download market, and international subscriber growth, and see how Napster is positioned there, which is where the real growth will be. In the US, all the iTunes competitors are fighting over 20% of the market - overseas, its a very different story.
Napster is still a good brand– but their service is just not compelling enough,
We want 100% DRM free music
We want to only pay for music we actually listen to (why pay $17.99 for an album with one good song)
We want to make sure the artist is compensated
We want to learn about good music through friends and other people
Will anyone figure this out (legally)?
I wonder if Napster has any brand left these days. It’s been so long since the RIAA killed the original.
If the guys who run The Pirate Bay have any balls, they’d buy it.
Eric - I think the piratebay guys have plenty of balls.
NAPS Stockholder - unlike you I have no conflict of interest here. The company is burning $40 m per year in a highly competitive market with an inferior product. I think putting it up for sale is a good move.
Whats the expected valuation of the company? I can’t see any potential buyers - only someone who buys them to protect their own market share and scoop up the last bit of napster users.
Hey Michael - Quick Question. Your RSS readers hit over 500k on sunday - was this a bug or a sunday tradition? Just wondering.
If I were Napster I’d be looking to dump my company right now. Itunes will be the dominant player in the market over the next decade and if they can digitize the movie industry onto their Ipod’s and then through Itv, there will be no stopping them. Napster is inferior and although it was cool back 7 or 8 years ago when it was free, thats just it.. it was free and innovative. Napster would most likely be my last choice for use now and I believe thats the mentality of many others.
no one will make any money until the bands start to sell direct and bypass the greedy “old” labels. “New labels” like Nettwerk get this…
it’s probably not apple that’s scaring them at this point. it’s the unknowns: zune, snocap+myspace, (spiral frog?). they’re probably getting tired…
as long as my math isn’t too off, this should be fairly cheap for someone that can use the userbase (500k-1M users) - maybe YME? Real? Sirus!? If they have $100m in cash on hand, then that means it’s really only a net loss of $60M plus a premium and any debt (based on market cap of 160M as of close on 9/18/2006). a company like yahoo/real could slash most of the staff since they already have such resources. this would also make the market simpler for them to compete in. However, I’m probably being too shortsighted. I’m sure it’ll end up being somebody random like IAC.
collegekid - it was an error that feedburner caught and corrected.
Apple and Itunes actually appears to be going the other way on a downward spiral. The Ipod was a cool fashion accessory but like all fashion trends it’s slowly losing it’s street cred. Will Apple be so successful once the mobile phone becomes the all-in-one device you use to carry and play your digital content on-the-move? Their continued success is certainly far from guaranteed.
Back to the Napster story. I’ve always liked the Napster subscription model which they pioneered. Unfortunately, with other players like Yahoo! moving into the space, they long ago lost their unique selling point to attract new customers. I’d expect a reasonable churn rate with a product that ultimately requires you to continue leasing the music you’ve downloaded for an unlimited period of time. But I dread to think what the margins are like on the subscription product. Surely around 50-60% is going to the record industry in royalties, then you have to pay for the bandwidth of all those unlimited downloads, customer support (I have seen lots of support issues regarding playback of rented music.. licensing issues) product development and marketing. Tough to turn a profit.
I’m also sure the increased competition will continue hurting Napster’s ability to bring in new customers. Especially when the likes of Yahoo expands into the same foreign markets where Napster operates. I think it’s a good time to sell off the business while the brand name still has some relevance and value in the music business.
Thats unfortunate…Thought you might have made it to everyone’s feedreader.
Well…hmmm
It’s time that Napster takes a “nap” and never wake up.
It is history, and should put to rest forever.
It has bad branding which its name doesn’t stand for revolution anymore, but disgrace and stagnant.
in 2000: Napster = revolution
current: Naptster = Napkins perhaps (meanings commodities, un-interesting + throwable and irrelevant)
Does worth anything because the spirit is dead, only the name remain.
>>no one will make any money until the bands start to sell direct and bypass the greedy “old” labels. “New labels” like Nettwerk get this…
I’m just glad that Toast isn’t going down with Napster…
So I’m Chad Hurley and I’m reading this. And I haven’t sold YouTube because…
Maybe Lars from Metallica might be interested.
NAPS stockholder - If the business model worked Napster would have made money by now. It seems that someone in Napster management understand this and is trying to save what’s left of your investment.
If your margins are that low and there is a lot of competition (with money I might add “Microsoft, Apple, Yahoo”) then IMHO you don’t have a sound business model.
Take what you can get from a sale.
Napster was more coll when it was — more or less — illegal. While the $100m revenue is great, I don’t think the brand will rebound any time in the near future, they really lost their mojo. If I were in management’s shoes, I’d have been looking for a buyer before now. I still think it’s a better opportunity than, say, a social network like Dogster, but it’s an uphill battle to say the least.
What are you to do when you become a needle in a haystack?
You sell, take the money, and innovate something new.
BTW, I _still_ haven’t heard anyone say why its an unhealthy company. Sure, they haven’t become profitable yet, but thats OK since they have the capital for it, and are moving closer to profit every quarter. And sure, they aren’t as “cool” as they used to be, but does that matter to joe-sixpack? (who’s doesn’t read techcrunch.com, but has some vague association of napster=online music). They are going in interesting directions that their competitors either don’t have or aren’t focusing on (free streaming service, ad revenue, overseas markets, etc). I invest based on growth potential, and NAPS has plenty of it.
And keep in mind that the iPod is very popular, but the Itunes Music Store is not successfull at all - the average iPod owner has bought less than 2 albums worth of tracks from it. Yahoo doesn’t break out their music store numbers, but at their prices, they’ve got to have an even higher burn rate than NAPS.
What you all hae to keep in mind is that Best Buy cut their ties to Napster recently (not sure when but could have been a few months ago). I was in Best Buy this past weekend and usually use their Napster Kiosk to aide in my CD purchases. However I found out that Best Buy is creating their own in store service where users can mix and burn their own CD’s. Haven’t verified this information but having Napster lose a bigtime contract like that must hurt its chance to hold its footings in a crowded space.
Cheers,
mrsticks1982
It’s a shame because it’s my favorite music download service. I have a $10/mo subscription to it and definately am loving it. The problem is I rarely buy tracks online prefering to buy actual CDs. I just use the $10/mo because I don’t have enough cash to buy all the CDs in a month that I would really like to purchase, so it’s a nice suplement.
I’ll tell you why they are unhealthy: the 100 mill they have is actually what is left of 180 mill they got as an infusion of investment to help them less than a year ago (I believe tmy timeline is right). The year before that they had burned through much more cash. Less than 5 years ago they were a 2 billion dollar company. Think about that: from 2 bill to a 100 mill in less than 5 years!
If not for the rumor of a buyout (and they have garnered an absurd premium), they would be valued at their cash reserves, a dollar for a dollar. Essentially, the market was pricing their customer base, music contracts, experience, staff, and all assets at ZERO DOLLARS.
More over, they are bleeding subscribers now because of the ad model. Their greatest asset will no longer exist soon. (They had 600,000+ and lost 50,000 in less than a quarter.) Their business is now a schizophrenic mix of SpiralFrog (that most credible investors have ZERO interest in) and the model which has failed for them for almost five years.
I really need free music less than 500k