Napster is one of the oddest companies. It is a deeply unprofitable startup trying to grow a business, and with a huge war chest of cash. We have the rare ability to see deep into its financial situation because it is publicly held. Napster sells music subscriptions and the odd DRM’d download. Pay $10 per month and listen to any of the music in their library. This is a tricky, low margin business. There’s lots of price competition (see our comparison of the space here), and the labels and credit card companies take the vast majority of the revenue. In the last fiscal quarter, Napster had nearly $26 million in revenue but just $7 million of that didn’t go the labels and other costs of goods sold. Caving into this margin pressure, Virgin Music bailed out of the U.S. market just a few days ago. Napster hired an investment bank in September to sell themselves. At the time they were losing $10 million in cash per fiscal quarter, and had $100 million in the bank. I called them unhealthy. Since that time, they’ve reported another fiscal quarter. They had stellar subscription growth, adding 48,000 subscribers. But they lost even more cash – another $11.6 million. This is a company with operating margins of -38%. And they were sued for patent infringement just a week and a half ago. Now they’ve announced the acquisition of AOL Music’s subscription service. They’ll add 350,000 new subscribers, get promotion on AOL, and pay just $15 million in cash. It’s not a bad deal, except it adds more unprofitable customers to the struggling company, and the company’s war chest just got significantly lighter. That’s one less fiscal quarter Napster has in operating cash. It’s unusual to see a company make acquisitions when it is itself on the market. Maybe this is Napster’s signal that the sales process isn’t going well. Or perhaps they just took this opportunity to further consolidate the market. Either way, I’m looking forward to next quarter’s financial results, which should be announced shortly. One point of clarification. The New York Times reported that Napster paid just $43 per AOL subscriber, compared to their own valuation of $328 per subscriber. Their calculations were incorrect – they used the Napster stock price after the deal was announced, which had spiked sharply. And they failed to take into account that the majority of Napster’s → Read More
Back when pirating music was in vogue, a guy named Shawn Fanning made a little program called Napster. It enabled P2P file sharing and piracy to skyrocket in less than a year. So after Shawn sold Napster, got some cash, and got sued, he apparently sat down and got really into this game you may have heard of: World of Warcraft. Fanning is now working on a social networking site called Rupture, which is named after a Rogue talent found in WoW. The concept is sound and bringing WoW players together outside the game is a great idea, but what does Fanning want to do exactly? → Read More
A representative for Shawn Fanning called TechCrunch today to make it clear that the social networking site that the Napster founder plans to launch next year will indeed be compliant with World of Warcraft’s (WoW) terms of use. BusinessWeek reported that Fanning, the founder of Napster and Snocap, is in the development stages for a new social networking site called Rupture. The site will have a WoW plugin so that players can network within Rupture directly from the game. Early blogging on the subject speculated that Rupture might “run afoul of Warcraft’s terms of use.” Fanning’s representative insists that this isn’t the case and that Rupture is “absolutely consistent with World of Warcraft.” Rupture will reportedly allow social networking from other games in addition to WoW. We requested an interview with Fanning but he is not taking them until the site launches, which his rep could only say will be in the first half of next year. For now, visitors to the site can request additional information when it becomes available by providing their email, guild, and realm. Fanning told BusinessWeek he raised capital for the site from a group of investors including Ron Conway and Joi Ito. → Read More
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. → Read More
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