Best Buy Puzzles With Napster Acquisition

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Best Buy announced today that it has acquired Napster for $121 million in cash. The company said that it will keep Napster’s executive team and will leave the Napster service and its estimated 700,000 users in place without changing much in the near-term.

During the 2008 fiscal year ending March 31, Napster had revenue of $127.5 million, and a loss of $16.5 million. The loss was an improvement over its last fiscal year, though, when it lost $36.8 million.

Best Buy ostensibly believes that it can eventually make Napster turn a profit or, at the very least, provide a service that is valued by its customers (Best Buy inked a Napster distribution deal with the company’s then-parent company Roxio for $10 million in 2004).  But how does acquiring Napster help the company in any way?

Napster’s competition is simply too fierce and too far ahead for the once-popular service to stay relevant.

iTunes is the world’s largest music store and there’s no sign of that service losing the top spot any time soon. Worse, Amazon’s DRM-free MP3 store is coming on strong and now that MySpace is starting to get into the music game with free ad-supported streams, there’s little room left for Napster to cement itself in the market.

So where does Napster fit into that equation? Granted, it’s still servicing 700,000 customers and its revenue is quite high, but how much longer can it compete in an environment where at least three services are better and its user-base is minuscule compared to its competitors’?

Napster’s business model is simply too similar and too out-dated for it to compete in this market. The company uses a subscription-based model to let you download songs and also offers freenapster.com for those that want to stream music for free online. Of course, the only problem is the songs sound awful and paying $12.95 per month isn’t worth it to most users, given the success of iTunes and Amazon’s store.

And with new business models on the way from MySpace where it will try ad-supported streams, how can Napster regain its status as the most popular service in the industry by maintaining status quo?

Under the guise of “improving” itself, Best Buy has engaged in a mercy acquisition of Napster in the hope that somehow it will materialize into something worth using. Napster was always the haven for illegal downloads and ever since it went legit, it lost its allure and fewer people have found reason to use it.

Best Buy just wasted $121 million.

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