Napster Inc. (NAPS)
Share price as of Monday's close: $3.12
Share price now: $3.91
Volume: 51.9 million shares, daily average 651,700
Last time this high: Oct. 19, 2005
52-week high: $9.84
52-week low: $2.95
Forward P/E before news: n/a
Forward P/E after news: n/a
IS THE BIGGEST INTERNET name about to join forces with what was once the most notorious brand in digital downloads? According to a published report, quite possibly. According to Google (GOOG), the Web giant in question, not a chance.
Shares of Napster (NAPS) jumped 25% to $3.91 Tuesday after a New York Post story said Google is considering a digital-music alliance with the company. The Post, citing unnamed music industry sources, suggested Google might even buy Napster outright, sending the latter's shares as high as $4.95 in early trading. Google's subsequent denial erased some of the gains. Google's stock price inched up 1% in regular trading but plunged after-hours on a fourth-quarter earnings miss announced after the bell.
"We have no plans to acquire Napster," says Google spokeswoman Sonya Boralv. "Nor do we have plans to develop a music store at this time. Google recently introduced a music search feature. For certain music-related queries, we display links to third-party sites where interested users can purchase music directly."
The idea holds plenty of appeal for Napster. Big Internet companies have in recent years bought music distribution companies to fill out their multimedia strategies - think Yahoo's (YHOO) purchase of MusicMatch and Real Networks (RNWK) scooping up of Rhapsody. Napster remains one of the last pure plays in the sector. Earlier this month the International Federation of the Phonographic Industry said global sales of music tripled in 2005 to $1.1 billion, largely on demand for downloaded songs.
Napster was founded in 1999 as a peer-to-peer service that allowed users to swap files, often in violation of copyright law. By 2002 the music industry had driven the company into bankruptcy. Roxio, a maker of CD-burning software, bought the name that year, sold its software business and transformed itself into the current subscription music service.
Over the past year Napster's paid subscriber base doubled to half a million. Still, that hasn't translated into profitability. For its second quarter ended Sept. 30, the Santa Clara, Calif., company posted a net loss of $13.6 million, even as sales soared 151% year-over-year to $23.4 million.
"I think the killer for Napster's business is the customer acquisition costs," says David Card, senior analyst at New York technology market research firm Jupiter Research. "It's not profitable because of what it's spending on subscriber acquisitions." (Jupiter Research does business with Napster and Google.)
Card says a partner would substantially cut these costs, especially one that would drive tremendous traffic to Napster. In addition, Google's advertising business could give Napster another revenue stream.
Frederick Moran of Houston investment bank Stanford Group calls it an interesting speculation that a $130 billion company like Google would take a liking to a $200 million company like Napster. "Napster is so small, it's hardly on Google's radar screen," says Moran. "Still, Napster does have a strong brand name in downloaded digital music."
On Jan. 6, Google announced the launch of the Google Video Store, a video marketplace where consumers can buy or rent a wide range of video content. Then last week, Bear Stearns analyst Robert Peck wrote a report suggesting Google was in the midst of creating its own competitor to Apple's iTunes music service. Calling it the logical extension of the video marketplace, Peck dubbed the concept "Google Tunes" and said he expected a rollout within six months. At the same time, an industry publication said Napster was up for sale. Napster denied the report of a sale or significant layoffs, but did cut 10 middle managers. (Bear Stearns has a non-investment-banking relationship with Google.)
Stanford's Moran says a Napster purchase probably wouldn't interest Google.
"I'm not even sure an acquisition is worth its time and effort," says Moran. "But if Google wants quick and easier access to music digital downloads, it's certainly possible. I think given that Napster has $2.50 a share of cash on the books, that the rest of its business, including its brand name, is getting fairly low to no real valuation ascribed to it. There is some value here and it could be of interest to another Internet player. But it's in a sector with a lot of competition and a lot of losses, and that may be a barrier to a takeover."
P.J. McNealy of Greenwich, Conn., research firm American Technology Research is even more dismissive. He says the whole idea doesn't make sense because Napster's service remains an unproven business model.
"On top of that, Google has a tremendous brand name," says McNealy. "How much value the Napster brand could add is debatable." (McNealy owns shares of Google.)
Quote: "It makes sense for Google to enter the music business as it's already in the video business," says Phil Leigh, president of Inside Digital Media, a Tampa, Fla., market research firm. "But it stepped over the music business and now it needs to go back and fill that in. For Google, the key question is: make or buy? And I think Napster is a good candidate. I think the subscription model makes a lot of sense, and Google would offer Napster the ability to promote the service throughout Google's universe."