It was announced this morning that retail giant Best Buy will buy Napster for $121 million. Given Napster's $67 million in cash and short term investments, the net price of the acquisition is $54 million. Best Buy will offer $2.65 per share, a 94.8% premium over Friday's close.

In today's press release, Brian Dunn, President and COO of Best Buy, pointed to stronger relationships with its customers. "Over time we hope to strengthen our offerings to consumers, who we believe will increasingly seek devices and solutions that enable them to access their content wherever, whenever and however they want."

There is a good deal of head scratching going on over this deal. TechCrunch proclaimed that "Best Buy just wasted $121 million." It's far too early to say that with much certainty, but at best we're looking at coin toss odds. Subscription services have to overcome years of miscalculations and losses, stagnant products and increased competition from free services.

There are two key points in this acquisition. First, it is part of a larger plan to increase Best Buy's presence in the mobile market. By the end of the year, Best Buy will launch a $4.2 billion joint venture with British mobile giant Carphone Warehouse. Second, the Napster service can be sold (individually or maybe bundled) with products sold at Best Buy retail locations. It is this hands-on salesmanship that offers the most potential for Napster. Napster currently has about 700,000 subscribers. It would not take a huge increase in the number of subscribers to earn back the net purchase price in just a few years. And I do not think Napster has maxed out the number of subscribers it can have.

Posted by Glenn at 11:10 AM | Link
|Brick-And-Mortor Retail||Napster|

Music service Napster is showing more cracks. It's subscriber level dropped in Q2 to 708,000 from 760,000. Now the company has reportedly killed its Napster on Campus program.

In an effort to boost its number of subscribers, Napster is offering a discount on Napster To Go. It has a promotion of 6 months of the subscription service plus 50 free MP3 downloads for $69.99.

Will a bundle of MP3s lure new customers? Will Napster be able to retain a good percent of those new customers? Some and sort of. Using MP3 tracks as bait ignores the serious, fundamental problems that face the company. Even if it has modest success with this promotion, Napster is saddled with a product that has limited appeal.

Using MP3 files as bait strikes me as an act of desperation. It's not a coincidence that both Napster and Rhapsody are using MP3 files as bait -- Rhapsody hopes its new MP3 store will help grow its subscription service. Ownership, the marketplace believes, trumps access. And access is becoming easier to get for free (last.fm, imeem, etc.)

When Rhapsody and Napster started selling MP3 files, I wasn't sure it was a good idea to place side by side DRM-free tracks and subscription tracks with DRM. It sends mixed messages. A consumer looks at that and has to wonder, What is the product here? If it's a subscription service, why can't you just stand behind your product? Why mix the two?

As a company, Napster should consider having one identity and sticking to it. If it's going to be a subscription service, then it should try to be the best subscription service it can be. That may mean getting MP3s out of picture. In an effort to get some incremental MP3 download revenue, it may be harming its main product. Looking at its financials, however, I think Napster may almost be out of time.

Posted by Glenn at 10:51 AM | Link
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In this USA Today article about Rhapsody's new plan of attack for its subscription service, JupiterResearch's David Card predicts subscription revenue will grow 20% per year for the next five years, and Rhapsody will still be the #1 service. That would put consumer spending at $600 million in 2012.

In the same article, Inside Digital Media's Phil Leigh is less optimistic. "I think Rhapsody will wither away, and eventually reincarnate as an ad-supported business."

I'm neither as optimistic nor pessimistic as the two analysts, but I'm on the side of Leigh. Subscriptions, as they exist now, are going to have to survive with a cult following and can do so as long as the company isn't a pure play (a bad sign for Napster).

Analysts, I believe, are right in one aspect of their assessment: broad demand for subscriptions exists. But it's a latent demand, meaning current products will not satisfy the demand. If that 20% growth materializes it will likely come from a new generation of mobile subscriptions. If mobile subscriptions (think Nokia's Comes With Music) gain traction and even come close to expectations, growth will be more than 20% per year. If in the coming years the subscriptions category includes ISP-based services (fixed number of MP3 downloads for a monthly fee) then subscriptions definitely have growth potential exceeding 20% per year.

Neil Smith, VP of business management for Rhapsody America, said subscriber acquisitions were "doing much better than we had expected" but offered no details.

Analysts have been overly optimistic with their forecasts this entire decade (everybody but Leigh) and regularly tone down their forecasts. JupiterResearch has already lowered its January 2007 growth estimate from the 32% annual growth rate it predicted for 2007-2011. In November of 2005, Jupiter was saying subscriptions would come in at $250 million for the year. In 2002, Forrester forecasted 2007 subscription revenues at $313 million (to be fair, a forecast that far in advance is hard to get right). Right now, Forrester estimates 2008 subscription revenue will grow 15% to $287 million.

I'd be surprised if consumer spending in the U.S. reached $287 million, and I wonder about the estimates of market revenue. The RIAA put 2007 subscription trade revenue at only $103.3 million. That figure was $98.5 million in 2006. For the sake of argument, if we apply Napster's cost of revenue, most of which is royalties for subscription services, to the RIAA's 2007 trade revenue number, we get only $148 million in consumer spending. With RealNetwork's lower cost of revenue for music, we get consumer spending of $184 million. Even if you combine the music revenue from Napster and Rhapsody for their most recent fiscal years, you get only $276 million for all territories in the world -- and that includes revenue from a la carte downloads and advertising. (In 2007, RealNetworks got 63.5% of its revenue from the U.S.)

Verizon would have to do a great job selling Rhapsody to its mobile subscribers. It is, basically, the same product that consumers have greatly ignored for years. Verizon should gain some untapped demand just on the basis of its sales and marketing. Hopefully future SEC filings will shed some light on their progress.

Card sounded less optimistic in a recent Billboard article. "Rhapsody's a great product if you're a sophisticated music fan, but it has not proven to have mass-market appeal yet," he told Antony Bruno. "Putting it on a phone may not make that much difference."

Given Apple's domination and the iPod's entrenchment, the success of the iPhone and iPod Touch as music players, and the limited commercial appeal for binging on tethered downloads, I see little reason to believe subscriptions -- in their current incarnation -- have significant growth in them.

Posted by Glenn at 2:58 PM | Link
|Napster||Online Stores/Services||Rhapsody|

Bloomberg's Don Jeffrey has an excellent article on Napster's low stock price and financial woes. The company's market cap is so low -- currently about $18 million less than its cash holdings -- that it has become a prime target for a takeover. Some investors are snapping up shares in anticipation of an acquisition.

RealNetworks is a potential bidder and could certainly stand to add some or all of Napster's 760,000 customers to its Rhapsody service. But the company currently has different plans to grow its subscriber base. Rhapsody will spend $50 million -- or just $8 million less than Napster's market value -- to promote its "Music Without Limits" campaign that showcases its mobile service, PC-based services and MP3 store.

Posted by Glenn at 10:26 AM | Link
|Napster||Rhapsody|

When Napster launched its six-million-track-deep MP3 store earlier this week, I wrote that depth of catalog is important but only to a point. The marginal value of the million least-popular songs is far from the value of the second million or the third million. People rarely get that deep into the catalog. Even with my out-of-the-mainstream tastes, I probably have no interest in much of any store's tracks and rarely want an album that a store does not have.

Just how often would I delve further than five million tracks into a download store's catalog? To find out I selected 16 albums to compare at five stores: Amazon.com MP3, eMusic, iTunes, Napster and Wal-Mart. The albums were a mix of titles I recently purchased (both CD and digital), CDs randomly pulled from a rack next to my computer and a couple local artists from Nashville that have independently released EPs.

The results show there is some difference between the stores' selection but a considerable difference in prices. What eMusic lacks in catalog it makes up for in price. Napster and iTunes had the best selection (just barely) but also had higher prices than eMusic and Amazon.com.

iTunes had 15 of the 16 titles, the best ratio of the five stores, but only five of those are available in MP3. Napster had 14 out of 16 and Amazon.com had 13 out of 16, and all of them MP3s. eMusic had 12 of the 16 and the lowest price by far. For the four albums not found at eMusic, the lowest prices can be found at Amazon.com.

The titles I picked are not Top 200 stuff but aren't the slowest-moving tracks in the stores. Cinema Verite is ranked 20,475 at Amazon.com. Fresh Pair of Eyes is ranked 17,522. The Bruno Pronsato EP is not at Amazon.com, but his Silver Cities album is there and has a ranking 117,036.

Napster deep catalog was missing one relatively popular album and one that is slower moving. It did not have Orbital's Live at Glastonbury, which is ranked 23,987 at Amazon.com. Nor did Napster have Justin Earle's The Good Life, which is ranked 657 at Amazon.com. To put those rankings in perspective, Amazon.com currently lists 445,176 albums and 5,230,187 songs.

A few notes about the titles. It's a small sample that represents only my own listening preferences. Somebody else would most certainly get different results based on their purchases and preferences. I lean toward music that is a bit out of the mainstream. Some of the titles have major music group distribution while some are distributed by companies such as IODA, Iris, Finetunes or CD Baby. I acquire a good deal of tracks at eMusic (65 per month) but included only a few albums in the survey that I acquired there.

And a couple of things about prices. I pay $15 a month for 65 tracks at eMusic. Because it's a subscription store, tracks and albums do not have assigned prices. For the sake of this exercise, I divided the $15 monthly fee by 60 (instead of 65 because I sometimes do not use all of my alloted downloads) to get an average track cost of $0.25. Album prices equal $0.25 times the number of tracks on the album. Lastly, Napster charges $9.95 for every album or EP regardless of the number of tracks. Rather than use $9.95 for every title Napster stocks, I calculated the cost of downloading each track individually at $0.99 apiece.

The above chart compares the prices of the albums that two stores have in common. For example, Napster and Amazon.com have 11 titles in common from this sample of 16 albums. For those 11 titles, Amazon.com's average price is $8.12 and Napster's average price is $8.67. eMusic's prices are by far the lowest. Of the stores that carry major labels, Amazon.com had the lowest prices, followed by Napster, iTunes and then Wal-Mart.

A combination of eMusic and Amazon.com nets 16 titles (100%) in stock. When thinking about getting an album, the best way to shop is to first visit eMusic and then go to Amazon.com. In only one case did Napster have a lower price than Amazon.com. That was Johann Johannsson's A User's Manual. Napster lets you download the tracks individually, Amazon.com does not. Since the album has only five tracks, Napster's price is far better (but far higher than the cost at eMusic, which also allows for individual track downloads).

Posted by Glenn at 3:39 PM | Link
|Amazon||Napster||Wal Mart||eMusic||iTunes|

The other day I gave a poor review to Napster's web-based MP3 store. Jupiter's Mark Mulligan weighed in on the strategy and warned that Napster's MP3 store undermines its core business.

By adopting MP3 they are tacitly accepting that the best consumer proposition is with MP3 but that means they’re also implying that their core premium customers are having to tolerate the inferior proposition of DRM.

I'm not so sure about that. It may be possible for an a la carte store to coexist with a DRM-based subscription store. But it's tricky to mix rented and purchased. Placing an MP3 next to a rented track highlights the differences in their value propositions and gives the consumer a reason to ponder the shortcomings of DRM.

Michael Robertson (of MP3.com, MP3Tunes) gave it a far more favorable review. The main difference between our assessments was the number of tracks available.

I don't think the price difference between any of the major stores is meaningful, so it comes down to catalog size and consumer experience. Amazon has one click access and requires only a web browser to browse and shop. Napster matches these features, but has 3 times the catalog size. In addition Napster has music discovery methods beyond Amazon's "customers who bought this also bought this."

Two things. First, there are significant price differences -- especially with albums -- between Amazon.com and the other stores. (I will show that in a separate post.) Not only does Amazon.com's MP3 store have the digital equivalent to promotional, midline and budget pricing (as seen here at the Special Deals page) but the site lets customers search by price. Second, I pointed out yesterday that Napster's music discovery was hit and miss. While it does list more similar albums than does Amazon.com, its recommendations are not always good.

But this really comes down to the importance one places in the existence of six million tracks at a download store. I place far more importance on the popular and middle tail titles. While it's good to know that Napster is six million deep, it gives me little comfort knowing that I will rarely dip into tracks number three million to six million. In the vast majority of cases, tracks I search for are unavailable due to licensing reasons (Husker Du and the Warp Records catalog, for example). Many of the less popular tracks I want to buy can be found at eMusic for far less money (if you are a subscriber).

I have seen the surveys and studies that show consumers care more about selection than interoperability. Obviously people want to be able to find the music they want. But can you tell the difference between a store than has three million tracks from one that has six million?

To be continued...

Posted by Glenn at 11:52 AM | Link
|Napster|

Napster, known mostly as a struggling subscription service, has launched an MP3 download store. According to the press release, the Napster store has 50% more tracks than any other MP3 store and comes in at over six million songs.

First impressions are important, and the web version of the store -- which is available to non-subscribers -- did not make a good first impression during my visit. I am not a Napster subscriber and did not install the Napster software application on my computer to test the better version.

The web version, which one assumes is supposed to poach customers from other download stores, does nothing to indicate MP3 shoppers will leave their current store of choice. It is light years behind iTunes and Amazon.com's MP3 store. The mere existence of MP3 files and a wider breadth of catalog do not make up for the disappointing quality of the actual store.

The layout is plain and sparse. No information is given on the artist or album, and there are no customer reviews. The recommendation function is hit and miss. Results for albums by George Straight and Billy Bragg were solid, but following the "other members like" link at the page for Janet Jackson's new album resulted in a list with two completely unrelated bands (Pinback and the Maxwell Implosion) and over a dozen unknown artists currently residing at the farthest reaches of the long tail. Album prices are visible only if the cursor rolls over the album button and track prices are not listed next to the song titles. Since the press release says "most albums" are priced at $9.95, it would be helpful to have the album's price in clear view. (Single tracks are priced at $0.99.)

The Napster web version is compatible with Firefox and Internet Explorer browsers for Windows and the Firefox browser for Mac computers. Tracks are encoded at a 256Kbps bitrate.

Posted by Glenn at 12:52 AM | Link
|Napster|

• According to BusinessWeek, Sony BMG is "finalizing plans to sell songs without the copyright protection" and "will make at least part of its collection available without so-called digital rights management, or DRM, software some time in the first quarter." (BusinessWeek.com)

• U.S. and Canadian concert revenues rose 8% to $3.9 billion in 2007. That figure shows considerable growth in smaller scale concerts: revenue from the top 20 concerts dropped about 15%. (Forbes.com)

• Just as Napster quietly increased its monthly price to $12.95, Bear Stearns declared that "the pure-play music business faces significant challenges." (paidContent)

• Sirius Satellite Radio ended the year up 38% in subscribers, to 8.3 million. (Radio Ink)

Posted by Glenn at 10:06 AM | Link
|DRM||Napster||Sirius||Sony BMG|

• Singer-songwriter Jewel has signed a multi-album deal with the Valory Music Company, a new label created by Big Machine Records' president and CEO Scott Borchetta. (Billboard.biz)

• Pali Research's Rich Greenfield has put a "sell" recommendation on Warner Music Group's stock and set a target share price of $7.50. (Silicon Valley Insider)

• Here are a few recaps of Wednesday's FCC hearing of media ownership in D.C.: Washington Post, Washington Times and New York Public Television.

• PassAlong Networks inked a deal to include the Razor & Tie MP3 catalog in its StoreBlocks music library. The StoreBlocks platform in behind f.y.e.'s download store, among many others. (Press release)

• Napster narrowed its losses in Q2 2007 to $5.1 million on revenues of $30.5 million. That was a good improvement over last year's $9 million loss. A $5 million loss is expected in Q3. Napster reported 750,000 subscribers at the end of the quarter, down from 770,000. In January 2007, Napster announced it would pay $15.6 million for the 350,000 subscribers to AOL's shuttered music service. Napster's year-end estimate was 566,000 subscribers. With AOL's subscribers the year-end estimate was bumped up to 916,000. Those AOL subscribers -- the ones that stuck around -- have boosted Napster's subscriber base but it looks like about half or so didn't stay with the service. (AP)

• Today I will moderate a panel at Net Impact called "Greening the Music Industry." You can follow Net Impact throughout the weekend at OwenBloggers.com's Net Impact page.

Posted by Glenn at 11:00 AM | Link
|Napster|

• AT&T will offer Napster's catalog -- over five million songs -- available for wireless download next month. The service will not work with the iPhone even though the device uses AT&T for wireless service. Here's the bad news: songs will cost $1.99 each or $7.49 for five downloads per month. Slightly better news: mobile downloads come with a free-to-the-PC download. No word yet on the file format of either the mobile or PC downloads. It's good to see the growth of mobile music service, but I'd be surprised if this gains much traction. Its per-download price is not competitive for a market of sideloaders, and the service does not offer the all-you-can-eat music buffet for which Napster is known. I'm in agreement with Silicon Valley Insider: this pricing scheme is a non-starter. At the very least, this service gets AT&T up to speed with its competitors. (New York Times)

• Terra Firma's Guy Hands is hoping to sell off EMI's pension fund if it can get squared away with the Pensions Regulator over contributions. (This Is Money)

• Canada has set a tax of three cents for single downloads and one and a half cents for album track downloads. Personalized radio stations such as Pandora and last.fm will pay 6.8% of their subscription fees for the tax. (Radio Ink)

• Live Nation is reportedly in talks to buy merchandising company Signatures Network for $50 million. The company has the rights to license and market such artists as Bruce Springsteen and U2. (New York Post)

• The International Music Score Library Project, home to public domain musical works, has shut down after receiving a cease-and-desist letter from music publisher Universal Edition. (Slashdot)

• An article on EMI Publishing's new digs, a renovated 65,000-square-foot former textiles warehouse in Manhattan. Roger Faxon is using this space to get a formerly fractured staff under one roof and improve the way they work. "Faxon terms the system 'neighborhoods,' designed to encourage communication and collaboration between disciplines such as licensing, copyrights, and royalties." (BusinessWeek.com)

• CMJ is over. Here's a link to the New York Times' blog entries on the annual music festival. (Arts Beat)

Posted by Glenn at 1:27 AM | Link
|Mobile Music||Napster|

• Napster's free, ad-supported music service has been laid to rest. (Digital Music News)

• Australian music sales fell 13.64% in value in the first half of 2007. CD sales were down 15.72% in units and 17.34% in value. Downloads and ringtones rose by 89.67% in unit value and only 47.48% in dollar value. (Billboard.biz)

• Monday Night Football unveiled its new music features last night. Snippets of a song by Kanye West, who has a new album out today, were played before commercials and during the halftime show. In the coming weeks, MNF will offer a prime-time audience for new releases by Foo Fighters, Matchbox Twenty, Kid Rock, Eddie Vedder (who has a solo album coming) and Irma Thomas & Marsha Ball. (Billboard)

• Another CD Baby post. (Why not? They're good stuff.) This time we have a breakdown of the value of CD Baby digital sales at all services. iTunes has accounted for 67.8% of all sales. iTunes Europe is at 5.5% and iTunes UK is at 4.6%. With its other territories, Apple accounts for 82.8% of total CD Baby digital sales. At number four is the best non-Apple store, Rhapsody, which has 4%. Napster is fifth at 3.6%. Further down the list are eMusic (2.3%, which may seem low but this is dollar value, not unit sales), Sony Connect (0.4%) and Ruckus (0.1%). (CD Baby, via Digital Audio Insider)

• SpiralFrog has had a rough four years but doesn't rule out going public. ZDNet points out the company must begin paying the interest on the $10 million in raised through the sale of secured notes. (ZDNet)

• Qtrax, the legal P2P service that will hopefully launch of these years, has hired a chief technology officer. Qtrax's CEO told Silicon Alley Insider the service would be ready by mid-September. Place your bets. (Silicon Alley Insider)

Posted by Glenn at 10:33 AM | Link
|Napster||P2P|

I'm a day or two late on this, but I finally browsed through Napster's earnings release for Q1 2007. Here are the quick bullets:

• Revenue rose to a record $32.3 million, a 15% increase year over year.
• Net loss for the quarter was $4.2 million, an improvement from last year's $8.5 million loss.
• Subscribers dropped 2.5% as the company lost 40,000 university students.
• Cash flow from operations was positive -- $1.6 million versus negative cash flow of $8 million last year.
• Cash on hand dropped 28% to $30.6 million
• Gross margin dropped to 27.3% from 32%, though operating expense as a percent of revenue dropped sharply to 44% from 69%.

Overall, the quarterly earnings release was very encouraging. Napster now has 770,000 subscribers and its financials are coming around. I listened to part of the conference call. Management is betting on wireless to carry its earnings growth, especially in Japan. They're looking at new hardware partners this fall. Marketing has been shifted from ad buys to partnerships, which should be good for cash burn. Napster didn't break out the number of AOL subscribers it added but did say "it is living up to our expectations." The company has no plans to change its pricing but did not say much about it. Lastly, over the next fiscal year, Napster expects 20 million compatible mobile phones.

Posted by Glenn at 10:21 AM | Link
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• Monterey Peninsula Artists and Little Big Man will be integrated into parent company Paradigm Talent Agency, and both names will be retired. The agents expect the change to give them more time to spend developing their artists and use the resources of the larger, combined agency. (Billboard.biz)

• Universal Music Group has purchased Sanctuary Music Group for £44.5 million ($90.7 million) As part of the deal, UMG will take on £59.8 million ($121.8 million) of Sanctuary's debt. The goal is to integrated Sanctuary's other services such as merchandise and artist management. (The Guardian)

• The New York Post reported that Universal Music Group is ready to sell BMG's European publishing assets. As part of a deal with anti-trust regulators, UMG will sell the European rights to Zomba U.S., Zomba U.K., Rondor U.K. and 19 Entertainment. (FMBQ)

• Napster has hired Christopher Allen to be its new Chief Operating Officer. He starts on Monday. Allen was previously Vice President, Product Strategy, Design, and Marketing for Blockbuster Online and replaces outgoing COO Laura Goldberg. (Press release)

• Satellite radio companies' biggest problem is attrition, says Bridge Ratings. "Because XM and Sirius calculate churn differently, official churn rates are difficult to nail down. However, our interviews with current and former satellite radio subscribers coupled with gross and net subscriber figures reveal attrition is growing placing extreme pressure on new subscriber acquisition strategies for both companies." (Radio Ink)

• The average computer has 880 MP3 files. (Digital Music News)

• Sort of a good point from a PC World columnist. On the Verizon deal for AC/DC's catalog: "That’s too bad for the industry. The latest report from UK-based Entertainment Media Research say here in the US music piracy is down. You can thank the ease, price, and flexibility of finding and buying music on iTunes part for that." One or two of these deals, though, does not do anything to hinder the availability and compatibility of digital music. To draw a parallel, exclusives at Best Buy and Circuit City have lead only to bickering between retailers. From what I can tell, consumers have accepted them. (PC World)

• Denton, TX, currently a hot spot for indie rock, has a new record label. Magilum Records aims to capture the ""bizarre folk scene in Denton" and "start a whole new subgenre (of folk)." (Star-Telegram)

• In-Stat analyst Mike Paxton predicts ditching DRM "will likely be viewed as a music-industry-only experiment, albeit one that will be closely monitored to see if a viable business model emerges." (Twice.com)

Posted by Glenn at 8:26 AM | Link
|Agencies||Napster||Publishing||Research|

• The European Commission cleared Terra Firma's takeover bid of EMI. Today is the last day of Terra Firma's extended bid period. (Dow Jones)

• The rootkit is back in the news. Sony BMG has sued The Amergence Group (formerly SunnComm), the maker of the anti-piracy technology included in Sony BMG CDs that resulted in public outcry, lawsuits and government investigations. (AP)

• Senator Russ Feingold is checking in with the radio industry to make sure they're complying with the FCC's directive to enforce the ban on payola practices. He sent a letter to executives at Clear Channel, CBS Radio, Citadel and Entercom that asked for information on access the companies have given to artists and labels. "Have you taken any efforts to increase the amount of access provided and to facilitate submissions?" he asked. (Billboard.biz)

• The Wall Street Journal's Sarah McBride has an article on radio stations' analysis of P2P traffic to help create playlists. Clear Channel's Premiere Radio Networks has a venture with BigChampagne that offers traffic data to radio stations. She tells the story of Shop Boyz' "Party Like A Rockstar," which was big with file sharers but wasn't getting requests. Eventually, the requests started to roll in -- especially in text messages from mobile phones -- and track downloads increased as well. (Wall Street Journal)

• Fox and the production company behind "Laguna Beach" and "The Hills" are planning a reality TV series called "Nashville" that will follow musicians trying to make it in Music City. The show will feature Sony BMG artists Chuck Wicks, Matt Jenkins and Mika Combs. (Music Row)

• Just as Kelly Clarkson's My December album dropped 60% in its second week, rumor is that RCA pulled Clarkson's summer TV and print campaigns and are focusing on the upcoming Carrie Underwood album. (Kings of A&R)

• Swiss consumers will have to pay a tax on digital music players and some types of A/V recorders. (SwissInfo)

• Napster unlimited over-the-air download service launched with NTT DoCoMo in Japan. The service is integrated with the PC-based Napster To Go service. Here's a new twist for Napster: Customers have the option of paying for Napster through their DoCoMo bill. Whether or not mobile subscription services will take off is still up in the air, but these are positive steps. I like the billing option a lot. (No link to press release yet.)

• EMI and management company Union Entertainment Group have formed a joint venture record label called Audionest. The label will be distributed by Caroline. UEG manages rock bands Nickelback, Default and Candlebox. (Billboard.biz)

Posted by Glenn at 8:09 AM | Link
|EMI||Napster||P2P||Payola||Sony BMG|

• According to figures just released by the IFPI, the global recorded music market shrank by 5% in 2006. Digital accounted for 11% of shipments (odd that the word is used for a product that really isn't shipped) versus 2% in 2004 (ringtones are not included). Labels' income from performance rights collections rose 8% to $728 million. (Billboard.biz)

• Feisty Russian download store AllofMP3.com has been shut down. The site was singled out by U.S. trade representatives as Russia sought entry into the World Trade Organization. The same company that operated AllofMP3.com has already launched a similar site called mp3Sparks.com. (Times Online, via paidContent)

• The Kelly Clarkson saga continues. The singer has left The Firm and joined Starstruck Entertainment for management. (Bilboard.biz)

• T-Mobile has launched a mobile service in the U.K. that offers over 500,000 tracks at £1 each. The dual download service is called Mobile Jukebox. Each purchase results in an AAC file for the mobile device and a WMA file for the PC. (Mobile Choice U.K.)

• It probably won't have any effect on physical music, but the majors old Minimum Advertised Pricing (M.A.P.) came to mind when I read about the Supreme Court's decision that allows for minimum pricing by manufacturers and retailers. In a case that put Leegin Creative Leather against Kay's Kloset, Leegin defended its minimum pricing system by arguing in part that smaller retailers would be able to compete against discounters. Sounds just like majors labels' argument for their M.A.P. that denied cooperative advertising funds to retailers that advertised below a certain price. After the F.T.C. forced labels to drop M.A.P., mass merchants began their predatory pricing practices that has, along with digital downloading and the accompanying shift in listening habits, has helped put thousands of music retailers out of business. (AP)

• The final 700 or so employees of U.K. music chain Fopp were dismissed today. The company owes £10 million to suppliers who are not interested in extending new terms. Good call. Maybe they learned something from keeping Tower on life support as it failed to adequately update itself for a changed market. (Times Online)

• Napster issued a statement to investors about the possibility that the iPhone, with its lack of compatibility with Napster software, could harm its business. Pretty standard disclosure for a public company, in my opinion. And besides, Napster was always going to have to hitch its wagon to another device. (Information Week, via Engadget)

• At the Huffington Post, music writer Paul Bonanos on Beggars Banquet for its download scheme for vinyl copies of The National's Boxer album. Each vinyl LP comes with a code that allows for up to three album downloads (one for yourself, two for your friends). While "home taping" is hurting the recorded music business, wrote Bonanos, those extra copies benefit other revenue streams. "We're seeing CDs turn into promotional tools for the live tours," Festival Network head Chris Shields told Matt Miller in an article at The Deal. (Huffington Post)

• European antitrust regulators are stepping up their investigation into high-definition DVDs and possible anticompetitive practices in the format war. (Wall Street Journal)

Posted by Glenn at 11:11 AM | Link
|Brick-And-Mortor Retail||Mobile Music||Napster||Research|

Napster reported its fiscal and Q4 2007 numbers yestserday (read press release). For the year, revenues increased to $110 million from $90 million. Subscribers increased 37% to 830,000. Net loss improved $37 million from $61 million. Gross margin improved to 29.38% from 28.06% in fiscal 2006.

For Q4, revenues mildly improved to $28.9 million versus $26.4 million in Q4 of fiscal 2006.

Looking at a few ratios indicate the company is becoming more efficient in generating sales: Sales & marketing is a percent of revenue decreased to 30.8% in 2007 from 54.6% in 2006. R&D as a percent of revenue improved to 9.9% from 13.9%. G&A as a percent of revenue, though, was basically flat: 21.8% in 2007 versus 22% in 2006. For a company that requires scale for profitability, these ratios are encouraging.

Napster has been a whirlwind of business development recently -- some look good, some look questionable. The joint marketing agreement with Motorola and its partnership with AT&T will test the potential of subscription services via mobile handsets. The deal with Circuit City seems years late and uninspired.

Posted by Glenn at 5:28 PM | Link
|Earnings Releases||Napster|

• Warner Music has sued social networking site imeem for copyright infringement. According to the lawsuit, "Imeem itself directly engages in much of the infringing conduct by duplicating, adapting, distributing and performing plaintiff's works through Imeem's own servers." Indeed. Take a look at the top songs at imeem and count the number that have the proper license for on-demand streaming (somewhere around zero I would imagine). (Wall Street Journal)

• The UK Parliament Committee has called for an extension on copyrights on sound recordings from 70 years from the existing 50 years. (BBC News)

• The Los Angeles Times' Jon Healey was a good article on the sometimes perplexing variation of CD price points. A theme of the article echoes some of my recent arguments about differences in price elasticities, that "there are two price thresholds: one for fans and one for the merely curious." (Los Angeles Times)

• Motorola has inked a partnership with Napster to provide subscription services to the handset manufacturer. The Motorola ROKR and Z6m will be the first phones able to download and play tracks from the $14.95-per-month Napster To Go service. Motorola buyers will be offered the first month at no charge. (PC Pro)

• Great marketing: Blue Note will sponsor an air-conditioned jazz tent at this summer's Bonnaroo Music Festival. Blue Note artists such as Ravi Coltrane and Stefon Harris will perform. (AP)

Posted by Glenn at 11:22 AM | Link
|Legal||Marketing||Mobile Music||Music 2.0||Napster||Warner Music Group|

• Circuit City will use Napster's online service to create its own branded music service called Circuit City + Napster. The prices are standard -- $15 for the subscription, $0.99 per track for downloads. I don't understand Circuit City's thinking here. Wal-Mart's download store is nothing much, and Tower's foray into download stores was pitiful. Maybe there's a great opportunity to drive traffic through in-store sales of pre-paid download cards or MP3 players, but those synergies usually turn out to be more of a mirage. (Billboard.biz)

• SoundExchange has reached out to some webcasters -- and released a press release about it -- in the wake of the Copyright Royalty Board's hike of rates paid to labels and artists. "We recognize that there may be certain needs and expectations, as expressed by webcasters in recent days, that might possibly be addressed through direct discussions," said Executive Director John Simson. (Press release)

• The Miami Herald ponders the precipitous drop in Latin music shipments and the disparity between shipments and scans (which were up 5% last year). Latin's digital sales rose by 63% in 2006. (Miami Herald)

• Sony BMG is examining business opportunities in India. (Business of Cinema)

Posted by Glenn at 1:28 PM | Link
|Brick-And-Mortor Retail||Napster||Sony BMG|

• Several music publishers will supply tracks for the PS3 and Xbox 360 versions of the video game Rock Band. Maker of the popular title, Electronic Arts, said "unprecedented deals" with labels had been signed and that record labels would provide "master recordings from the biggest songs and artists of all time." (Games Industry)

• Napster reported that in the fourth quarter of 2006 it added over 225,000 AOL subscribers and added an additional 40,000 subscribers. Those gains put fourth quarter results ahead of prior outlook. Napster claims its 883,000 subscribers is the largest on-demand music subscription customer base. Rhapsody claims over 2.2 million subscribers, which includes radio and mobile subscriptions. (Press release)

• The Good, The Bad and The Queen is the first EMI artist to release a DRM-free album. It can be purchased directly from the band's website. EMI's catalog is expected to be available without restrictions some time next month. (The Guardian)

• A Carmel Group report, commissioned by the National Association of Broadcasters, said a merger of XM and Sirius would result in "less service, less affordability, less diversity and less choice in content and hardware." In a joint statement, XM and Sirius called the report "biased" and "hostile." (Washington Post)

• Judging from this job posting at Digital Music News, it looks like NPR is moving forward on a plan to launch an online store that will leverage its music-related assets. Last year, some news broke about just such a strategy when NPR's "A Blueprint For Growth" (read PDF) announced a plan to explore the development of a "multi-genre, digital music service." (Digital Music News Job Board)

Posted by Glenn at 9:30 AM | Link
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• EMI and Bertelsmann settled their lawsuit related to the latter's support (loans) for the Napster P2P service. Specifics were not disclosed. Universal Music Group settled for $60 million in September 2006. (FT.com)

• Napster inked a deal to provide its Napster To Go subscription service free of charge to AT&T wireless and high-speed Internet customers. Customers will be able to upload tracks to portable music players and compatible mobile phones. The offer will be free with a two-year wireless agreement with purchase of select phones. Home users will get the service if they purchase ATT&T Yahoo! or FastAccess DSL Ultra Internet service. (Press release)

• Sprint is dropping prices for over-the-air downloads to $0.99 for customers that subscribe to any Sprint Data Vision data plan. (Press release)

• Nettwerk and video game company Electronic Arts announced a joint venture label, Artwerk, to develop new and established for both physical and digital distribution. (Digital Media Wire)

• Waylon Jennings' "Theme From Dukes of Hazzard (Good Ol' Boys)" has become the first country music ringtone to reach platinum, or sales of one million. (Press release)

• Doug Morris, CEO of Universal Music Group, was named to CBS Corp's board of directors. (Broadcast Newsroom)

• Read DiMA's reaction to the U.S. Register's call for modernization of Section 115 of the Copyright Act. "A streamlined blanket music licensing system will guarantee digital music services access to more music with lower transaction costs, which in turn will encourage innovation, keep legal music prices low, grow our industry and increase royalties to all creators." (Press release)

Posted by Glenn at 8:15 AM | Link
|EMI||Mobile Music||Napster||Ringtones|

Napster released its earnings for its third quarter ending December 31, 2006. (Download PDF of 10-Q) Revenues were at all time high of $28.4 million, a 21% increase over the previous year. Its net loss was $9.5 million, also an improvement over last year. Net loss from operations was 28.3 million. Management pointed to the company's many partnerships as signs that it is poised to take advantage of growth in the mobile market.

The company's subscriber base grew 48,000 to 566,000 at the end of the quarter (including university and Japanese subscribers). Not included in that figure were any customers gained in Napster's recent purchase of AOL's subscription customers.

Other key points:

• Napster recognized as income $2.1 million from gift cards that it believes will not be redeemed (breakage).
• Advertising costs were approximately $6.9 million and $19.8 million for the three and nine months ended December 31, 2006, respectively, and $11.6 million and $31.9 million for the three and nine months ended December 31, 2005, respectively.
• Gross margin improved to 30% from 27%.

Things are improving at Napster. Management expects revenues next quarter to top $26 million and says operating expenses will drop. Let's wait and see how many AOL subscribers they retain. Cost-efficient subscriber growth is the key, and the AOL deal is far more cost efficient than the company's usual customer acquisition through marketing and advertising.

Posted by Glenn at 6:31 AM | Link
|Napster|

• Today The New York Post reported that Jermaine Dupri, recently ousted as the head of Virgin Records' urban unit, "is in negotiations with Universal Music Group about joining its Island Def Jam label." Talks are focused on his role at the label but details have not yet been determined. (Read article at New York Post)

• Napster Mobile has launched on au/KDDI, Japan's second-largest mobile network with over 20 million subscribers. The service is already on Japan's i-Mode platform. Napster Mobile requires a $3-per-month access fee, and users buy credits that are redeemed for over-the-air song downloads and ringtones. (Read press release)

• Digital distributor IRIS Distribution has inked deals with dance/electronic labels Neurodisc, Scion and Subliminal Records. Artists added to the IRIS catalog include Erick Morillo, Bob Sinclair, Harry "Choo Choo" Romero and Spank Rock. (Read press release)

• Digital Music Group Inc. signed a three-year deal with Apple to sell its video content at iTunes. Two weeks ago, the company announced a distribution deal for nearly 200 hours of video content for content such as ""Hopalong Cassidy" and "My Favorite Martian." DMGI's shares rose more than 30% on the announcement. (Read article at Sacramento Business Journal)

• Apple's FairPlay DRM is illegal in Norway ruled the Consumer Ombudsman in Norway. (Read article at The Register)

Posted by Glenn at 8:45 AM | Link
|Digital Distribution||Napster||Online Stores/Services||Universal Music Group|

AOL has dropped its Music Now music service and is migrating its 350,000 customers to Napster (read press release). It's a great -- although expensive -- windfall for Napster, which raises its subscriber base to 916,000 from its year-end estimate of 566,000. (Napster will release financial results on February 8, 2007.)

Today Napster filed an 8-K with the SEC (read PDF) that has some dollar amounts and specifics. Napster will pay AOL $15.6 million for its 350,000 subscribers (along with "certain related assets and liabilities"), or $445.71 per subscriber.

As a part of the deal, Napster will get exclusive advertising rights throughout AOL Music Channel for one year. The agreement will be subject to renewal if certain, unnamed milestones are hit.

Napster's losses from operations are falling but are still losses, and there are worries about the company's liquidity. Even so, the acquisition of AOL's subscribers was pricey but the correct move. The bottom line is the company needs far more subscribers in order to reach profitability. Between April 1 and September 30, 2006, Napster spent $19 million on advertising and marketing and lost 60,000 subscribers (excluding college subscriptions, which are seasonal), part of the reason for the drop was the introduction of the free Napster Light streaming service. In comparison, paying $15.6 million to acquire 350,000 subscribers -- which increases its subscriber base by 38% -- was a bargain.

Posted by Glenn at 2:16 PM | Link
|Napster||Online Stores/Services|

Napster released its results for the fiscal second quarter ending September 30, 2006. The financials show a company that continues to grow, continues to better its positiion, but continues to land in the red. The launch of a mobile service shows a foreward-thinking strategy but was too recent to make a financial impact.

Revenues were up 9% to $25.5 million while the net loss improved to $9 million from $13.6 million. (Read press release.) About Napster's outlook, the company's CFO said the company continues "to expect solid double-digit annual revenue growth for fiscal 2007." Revenue in the next quarter is expected to be $27 million, although marketing expenses will increase as well.

A look at the balance sheet reveals one important change: Cash and cash equivalents declined to $31 million from $46.8 million since the end of the second fiscal quarter of 2005. Working capital -- the difference between current assets and current liabilites -- dropped to $60.1 million from $74.4 million in the last six months.

Napster reported 9.0 million registered users; Its paid subscriber base is 518,000 and it has 31,000 university subscribers. The company claims the launch of its free, ad-based Napster.com website has "increased the user traffic to Napster.com to over 4 million unique visitors per month."

Posted by Glenn at 12:26 PM | Link
|Earnings Releases||Napster|

• Sony BMG settled with Canadian music fans over its infamous root kit. Hundreds of thousands of consumers will get $8.40, a replacement CD and free downloads. Information on the settlement and how to fle a claim can be found here. (Read article at Vancouver Sun)

• The Zune makes an appearance on "The Ellen Degeneres Show." Degeneres gets the facts a bit mixed up; users cannot take songs from other Zunes, they can only take what is sent to them. (Watch clip on YouTube, via Medialoper)

• Rags Gupta thinks about Napster's possible suitors: wireless carriers, handset makers, cable/DSL providers and XM. For wireless and cable/DSL, Gupta floats the idea that using Napster as a customer-retention strategy could possibly make it a good investment. (Read post at Digital Music News)

• The Motley Fool's Rick Aristotle Munarriz thinks Google is the best fit for Napster. His best argument fits Napster's free, ad-based platform to Google's talent for selling ads. I dunno. Google, currently sitting on cash piles that inch toward the moon, could surely build something far better. (Read article at The Motley Fool)

• An interview with RealNeworks CEO Rob Glaser that hits on the company's parnerships with Sonos and SanDisk. "If you're on the right side of history, there's nothing wrong with starting out with a product at the high end and then riding that into the mainstream. That is the path we're on with Sonos." (TechNewsWorld)

• Delphi has introduced a new XM receiver, the SkyFi3. (Read review at CNET)

Posted by Glenn at 9:45 AM | Link
|Napster||RealNetworks||Sony BMG||XM||Zune|

• There's a controversy brewing about a 2004 report on media ownership. Former FCC Chairman Michael Powell says he never saw the report, which found that increased media ownership decreases the amount of local news reported on local television stations. (Radio and Records)

• Amazon.com launches a "CD on demand" service today called CustomFlix that will allow independent musicians and small labels to create just-in-time CDs. The services costs a $50 flat fee for musicians and labels, plus $4.95 to $7.95 per CD. (Seattle Times)

• Napster has a secret admirer. The company announced yesterday that it has "recent third party interest in establishing strategic partnerships or potentially acquiring the company." (Press Release)

• Rising Virgin rock band 30 Seconds to Mars has left The Firm? (Kings of A&R)

• Can the Internet alone break a band? "Internet activity alone does not break a band," says the manager of YouTube celebrities OK Go. "The Internet is a great tool for reaching people and getting the word out, but it doesn't sell records and it doesn't sell tickets." (Pollstar)

• JP Morgan maintains a neutral on EMI shares, but warns of tough year-on-year comparisons and sees selling opportunities ahead. Just imagine if Robbie Williams' album was pushed to the next period. (Dow Jones)

• ZZ Top parted ways with its manager as well as its $30 million deal with RCA Records. (Starpulse)

Posted by Glenn at 7:04 AM | Link
|EMI||Napster||Radio|

Napster reported earnings yesterday for the quarter ending June 30th, 2006 (read press release). The company narrowed its losses to $9.6 million (a mere 0.2% of Somalia's GDP) from $19.5 million last year. Revenues grew to $28 million from $21 million a year ago and $26.8 million in the previous quarter.

But if a one-time $1.9 million gain for "pre-paid card breakage" -- which represent those Napster prepaid cards that have expired without being redeemed -- is taken out, the most recent quarter's revenue would have been a shade lower than the previous quarter. Another $300,000 of expired prepaid card money was realized in the quarter. That's good money.

Possibly due to its free service, Napster's subscriber base decreased by 49,000 last quarter, to 508,000 from 547,000. The company expects a lag time in coverting free service customers to paid customers. "In the near term," reads the quarterly report, "we expect service revenues to decrease as prospective customers continue to delay subscribing to our premium music services while trying the free music services, which we experienced in the first quarter of this year." That is...if the carrot works.

The press release also mentioned the company will roll out Napster Mobile with SunCom Wireless next week in the Southeast United State. The service will offer over-the-air downloads with a dual delivery to the consumer's PC.

At the end of the day, this line from page 33 of the quarterly report says a lot about the company's prospects: "Our digital music distribution business has a limited operating history and a history of losses and may not be successful." No kidding.

Posted by Glenn at 8:33 PM | Link
|Earnings Releases||Napster|