Is Napster Best Buy's Alternate Apple Strategy?

Best Buy even had a music subscription service with RealNetworks. With all these benefits, why go after Napster? The answer may be four-fold.

First, even though the company has a music subscription service, it was heavily dependent on DRM. The first version was a joint partnership with Real and SanDisk, with the latter making a player that could play the Real content. A more recent version of the music service was powered by Rhapsody, the RealNetworks music subscription service that is now powering Yahoo! Music along with other private label music stores. Napster's push in recent months has been into the non-DRM MP3 downloads, which gives Best Buy a chance to expand to a group of users (Napster apparently has almost 700,000 customers) that had shied away from DRM.

Second, Best Buy has been making significant inroads into the mobile space. It purchased a 50% stake in Carphone Warehouse in May, for a bit over $2.1 billion, with assets consisting of 2,400 stores throughout Europe and the U.S., as well as web business and insurance operations. This deal leveraged Best Buy into the European market in a way that puts its brand rapidly into nine EU countries. The Napster deal, for a much smaller amount, gives it access to customers in Europe and the U.S. that may not be regular Best Buy customers but who have a strong tendency to use their mobile devices for music purchases and playback.

Third, it sets Best Buy—a company that looks for innovative services as a way to differentiate itself from Radio Shack or Circuit City, the only other two large national players—in a position to be a stronger bargainer as the attention turns from music deliveries back to movie deliveries. Already a consortium of studios, led by Sony, excluding Disney but including Fox, Lionsgate, NBC Universal, Paramount, and Warner Bros, have launched an initiative called the Digital Entertainment Content Ecosystem. Microsoft, Cisco and Best Buy are also part of the consortium, whose laudable goal is to allow downloaded videos purchased at any outlet be played back on any device.

Best Buy has relationships with all the studios, given its strong DVD sales, so the move to buy Napster may provide Best Buy with both leverage and a distribution channel for its part in the consortium. So the inexpensive Napster deal may be as much pre-emptive as it is defensive.

Finally, Best Buy may just be acquiring Napster for an alternate strategy of a larger online presence, as the company announced today its second-quarter profit is 19 percent lower than last quarter. While this might be likely, the fact that Best Buy has been investing in the Best Buy Mobile concept (in addition to its Carphone Warehouse move) to boost in-store cell phone sales at all its current locations, probably makes Napster a strategic, inexpensive acquisition to boost the number of potential new customers for the brick-and-mortar stores.

Naptser, for its part, is betting strongly that its acquisition by Best Buy will clear regulatory hurdles. As such, all of its management team has signed on to work at Best Buy and it announced yesterday that its 2008 Annual Meeting of Stockholders, originally scheduled to be held on September 18, 2008, has been postponed.

"The postponement was made in connection with the announcement today that Napster has entered into a definitive merger agreement to be acquired by Best Buy Co., Inc," the press release stated, adding "if the merger is not completed, Napster intends to reschedule the 2008 Annual Meeting of Stockholders and notify stockholders of the date, time and location of the rescheduled meeting."