Best Buy to Buy Napster

Best Buy Co. Sept 15 said it had entered into a definitive $121 million merger agreement with music download and streaming pioneer Napster.

The transaction, which includes $67 million in cash and short-term investments and $54 million in stock, is expected to close in the fourth quarter.

Napster CEO Chris Gorog and key senior management entered into employment deals with Best Buy, and the Los Angeles-based service’s 140 employees will be retained in the near-term, according to Best Buy.

It wasn’t immediately clear how the transaction would affect Best Buy’s current music-download service with Rhapsody or Circuit City Stores’ co-branded Napster site.

No. 1 consumer electronics retailer Best Buy said Napster’s easy-to-use service (including foreign and mobile operations) and strong name recognition helped cement the deal.

“We can foresee Napster acting as a platform for accelerating our growth in the emerging industry of digital entertainment, beyond music subscriptions,” said Dave Morrish, EVP of connected digital solutions with Best Buy. “We believe Napster will be an outstanding addition to our already robust portfolio of partners and offerings in the digital music space.

In 1999, Napster ushered in the era of the music download as a free MP3 file-sharing service created by Northeastern University student Shawn Fanning.

It quickly ran afoul of the recording industry for alleged copyright violations, was shuttered and bankrupt following a court verdict and lengthy trial in 2002, and re-emerged with new ownership as a legitimate pay service with about 700,000 subscribers — a far cry from the millions who once used it daily.

The service posted a loss of $16.5 million in fiscal year 2008 (ended March 31) on revenue of $127.5 million — a 15% increase from the prior-year period when it recorded a loss of $36.8 million.

Edward Woo, media analyst with Wedbush Morgan Securities in Los Angeles, said Best Buy believes it can leverage its in-store relationships with music while also migrating entertainment sales to the digital world. He cautioned that the crowded market for music downloads would make it hard, even for Napster, to differentiate from the market leader, iTunes.

“But Best Buy has the deep pockets and the in-store relationships to stand out and give it a shot,” he said.