The final notes are playing for Napster, notorious for upending the music industry a decade ago with its illegal music-sharing website before turning into a legitimate company.
As a result of its recently announced intention to be sold to Seattle streaming service Rhapsody International Inc., Napster will close its West Hollywood headquarters and dissolve its staff of more than 100 employees.
Napster’s general manager, Christopher Allen, said the acquisition allows Rhapsody to build up a stronger presence in an increasingly competitive digital music industry.
“If you look at the combination of Rhapsody and Napster, it’s a more formidable company,” said Allen.
Despite its well-known name – or maybe because of it – Napster struggled to gain traction with consumers since offering its streaming music via paid subscriptions. And its 2008 sale to Best Buy Co. Inc. may have hastened its demise. Some analysts estimate that the company’s subscriptions have been cut in half since the sale.
Best Buy announced Oct. 3 that it plans to sell Napster to Rhapsody in exchange for a minority ownership in the music-streaming company. Rhapsody will absorb Napster’s U.S. customers under its brand name and logo. Gone will be Napster’s blue cat logo.
Allen, along with his team of 115 employees, is working to transfer Napster’s U.S. customers to Rhapsody’s service. He hopes to have that task completed by the end of the year. Rhapsody is also planning on acquiring Napster’s international business. Napster has customers in the United Kingdom, Canada and Germany; Rhapsody does not have an international service.
Once the acquisition is complete, Napster will close its offices in Los Angeles and San Diego. All of Napster’s U.S. employees will be let go. Rhapsody is considering those employees for its open positions. Allen wouldn’t say whether his job fate has been decided.
Rhapsody and Napster have long been competitors in the digital music space, both offering unlimited streaming for a monthly subscription fee.
Napster charges $5 or $10 a month for access to about 15 million songs; the price varies depending on whether the customer wants mobile access. Rhapsody charges $10 or $15 to stream its 13 million songs, depending on the number of mobile devices the customer wants to use.
Music market
Although Napster is singing its swan song, Allen is optimistic about the potential for the subscription music business.
“We’re still just a little over halfway through what’s going to be a 20-year transition from CDs,” he said. “We’re really viewing and valuing access versus ownership. We think it is the future of music.”
But subscription music services haven’t hit all the right notes.
Rhapsody, which is one of the largest subscription music services in the United States, has only about 800,000 subscribers.
Aapo Markkanen, an analyst in the London office of ABI Research, estimates that mobile music-streaming services will approach 5.9 million international subscribers by the end of the year, with about 2.2 million of those in the United States.
Meanwhile, digital music sales are dominated by downloads. Apple’s iTunes, for example, had 200 million accounts as of March.
More recent entrants into the space have offered both subscriptions and ad-supported free services. Those include London-based Spotify and Berkeley-based MOG. The companies have been able to convince customers who try the free service to become paying subscribers. Spotify announced in September that it has 2 million paying subscribers internationally.
Spotify’s and MOG’s paid subscription plans aren’t any different than what Rhapsody and Napster offer, said Michael Pachter, managing director of equity research for downtown L.A. investment bank Wedbush Securities.
“People get all excited when they see something like Spotify because it’s new but it’s essentially the same thing,” Pachter said.
‘Brand perception’
Napster’s greatest value to Rhapsody is its subscriber list, Markkanen said.
“The extra scale, in terms of subscribers, is what Rhapsody seeks from this acquisition,” he said.
Despite changes in Napster’s business model since its founding days, the company’s name remains strongly connected to its image as a digital music pioneer.
“That obviously will always have the legacy of forcing the music industry – very belatedly – to enter the digital era,” Markkanen said of the early Napster.
Napster got its start in 1999 as a way to share music for free, but the company shut down two years later after it lost a legal battle against several record labels that claimed it infringed on copyright law. (See sidebar on this page.)
The company set up shop in Los Angeles in 2003 after Santa Clara software developer Roxio purchased the Napster name and assets for $5.3 million, and relaunched subscription music service Pressplay under the name Napster.
One of the company’s biggest challenges was reintroducing Napster to customers as a legal subscription service, Allen said.
“Certainly we had to evolve our brand perception,” he said. “Going from a free service to a licensed, paid music service was an exercise that we started back in 2003 and there are still certainly remnants of that legacy brand today.”
To do that, Napster tried to take advantage of its L.A. headquarters to forge relationships with the music industry that its predecessor didn’t have.
“Los Angeles is a great place for the intersection of music, media and technology,” Allen said. “We’ve leveraged our proximity here in L.A. to not only the major labels but the artists and talent.”
In 2008, Best Buy eyed Napster as a way to enter the digital music space and bought the company for $121 million. At the time, Napster had about 700,000 paying subscribers. Analysts now peg subscribers at as few as 300,000.
Allen, who joined the company in 2007 as chief operating officer and became general manager in 2010, said the Best Buy acquisition helped Napster find new ways to integrate its streaming-music service to devices that Best Buy sells such as mobile phones and home theaters.
But choosing to use such a notorious name could be one reason why the company has struggled to gain subscribers over the years. The name draws the wrong type of customer, said Wedbush’s Pachter.
“I was really surprised when they tried to revive that name because it’s the wrong name,” he said. “They were a free site that had a great reputation among people who liked to steal music. That brand equity doesn’t translate to people who want to buy music.”
But Allen said the company embraced the spirit and legacy of its predecessor and used the iconic name to draw attention to its new focus as a streaming-music service.
“It clearly ignited a digital music revolution,” he said of the early Napster. “We really tried to look at the roots of that and keep that as a cornerstone of the service we have today.”
