Best Buy acquires Napster; Eyes digital music distribution

Best Buy is gobbling up Napster for $121 million, or $2.65 a share, double the online music service's closing price on Friday. In a statement Monday, Best Buy outlined its rationale:

Best Buy intends to use Napster’s capabilities and digital subscriber base to reach new customers with an enhanced experience for exploring and selecting music and other digital entertainment products over an increasing array of devices. Best Buy believes the combined capabilities of the two companies will allow it to build stronger relationships with customers, expand the number of subscribers, and capture recurring revenue by offering ongoing value over a mobile digital platform.

That's shorthand for saying that Best Buy can't continue to sell CDs forever as rivals such as Amazon and others distribute music digitally. While the move seems a bit quirky, it makes sense from Best Buy's perspective. For starters, Best Buy needs to diversify to be something more than a bricks-and-mortar retailer. And in some respects Best Buy has already made that move because it has launched various home installation and support services. Napster adds more of an online component to the retailer's strategy and given the deal is nominal to Best Buy the acquisition makes sense.

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With the Napster deal, Best Buy gets roughly 700,000 subscribers, a Web customer service platform and mobile reach. Napster management such as CEO Chris Gorog have all agreed to stay around once the deal is closed. Best Buy said it plans no significant changes for Napster.

Brian Dunn, president and operating chief of Best Buy, hinted that the retailer plans on increasing its digital offerings. The possibilities for Napster are interesting. Aside from the usual cross-selling in the store and online Best Buy could also leverage the music service to expand its mobile footprint to encourage more Web shopping.

Most of the color on this deal you'll see in Best Buy stores as the two carry out their plans. Given that Napster had fiscal 2008 revenue of $127.5 million it's a rounding error in Best Buy's results.