A Needy Napster Searches for Takers

The well-worn music service has hired UBS Investment Bank to help it consider a possible sale of the company

Napster, the subscription music-download service, is looking for a buyer. The company—which got its start as a free music-download, file-sharing site—said Sept. 18 that it has hired UBS Investment Bank to find a major strategic partner or to be acquired completely.

The possible sale is the latest sign of the pressure facing music-download sites, many of which are allying with makers of music-playing consumer electronics devices. Napster (NAPS) lags far behind market leader Apple (AAPL), with its iPod-iTunes combination, and RealNetworks (RNWK), owner of the Rhapsody service. Microsoft (MSFT) plans its own music player, called Zune, and download service later this year (see BusinessWeek.com, 9/15/06, "Coming Zune: Microsoft's Music Player").

Napster has appeared ripe for a buyout since wireless phone giant Nokia (NOK) acquired Loudeye (LOUD) in August (see BusinessWeek.com, 8/9/06, "Nokia Goes Ear-to-Ear with Apple"). "It just goes to show in a market dominated by overlapping and incompatible services there is just not going to be room for every player," says Michael Gartenberg, a digital media analyst with Jupiter Research. He says that between Apple, Real and SanDisk (SNDK), Nokia and Loudeye, Microsoft, and Sony's download service, there are no fewer than five distinct and incompatible music services, and that more may emerge before the end of the year. "There is no way the market will be able to support all these closed ecosystems," he said.


  Napster sought bankruptcy protection in 2002 amid pressure from music labels. It re-emerged on the digital music scene after Roxio, a digital media software concern (now a unit of Sonic Solutions [SNIC]), acquired the rights to the name and the pressplay music download service, which had been a joint venture of Universal Music (V) and Sony Music Entertainment (SNE).

The service was relaunched under the well-known but also well-worn name of Napster 2.0 in October, 2003. Reaction to the launch was underwhelming, and it showed little real business. The main reason for its failure to gain much traction was that by the time of its launch, Apple Computer's iTunes Music Store had already been in business for six months, selling a million songs.

Since then, RealNetworks' Rhapsody service has emerged as a solid No. 2 to iTunes (see BusinessWeek.com, 9/19/06, "A Real Rival to Apple's iPod?"), while other online media outlets, including Yahoo! (YHOO) and Time Warner's AOL (TWX), have built music download services in partnership with privately held MusicNet.


  Possible acquirers might include Creative (CREAF), which is finding its role as an also-ran vendor of digital music and media players under attack by SanDisk and could use its own service to integrate with its players. Or with attention on music downloads quickly shifting away from dedicated players toward mobile phones, wireless phone manufacturers such as Motorola (MOT) or South Korean electronics giant Samsung might show interest. Samsung not only sells wireless phones but digital music players as well, and on Sept. 1 announced a plan to launch a music download service aimed at markets in Britain, France, and Germany in partnership with MusicNet.

Samsung and Napster have a history of partnerships, including the creation of a Samsung-made, Napster-branded player launched in 2003. Other partnerships with Blockbuster, XM Satellite Radio (XMSR), and Ericsson (ERICY) all showed results, but failed to give Napster the substantial boost in subscriber base it has been seeking.

As of the quarter ended June 30, Napster had sales of $28.1 million with a $9.8 million loss. It reported a subscriber base of 512,000, compared with 1.61 million subscribers to RealNetworks' Rhapsody service.

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