Napster’s Assets Go Up for Auction

For sale: One of the world’s best-known brands, with 60 million former customers. New and improved technology included, with no liabilities from past legal unpleasantness. May come with generational icon.

The assets of file-sharing service Napster Inc. went up for auction Friday with an asking price of $25 million and a deadline eight business days away.

A securities firm hired by Napster’s creditors will try to drum up interest between now and the Aug. 21 bid deadline, pitching everyone from venture capitalists, music retailers and media firms to major record labels that drove Napster into bankruptcy this year.

“We’re just going to be keeping our heads down and marketing up to the last minute,” said Rick Chance, managing director of Trenwith Securities in Costa Mesa.

German publishing giant Bertelsmann, which had advanced Napster more than $85 million in loans, is funding the Redwood City, Calif.-based firm’s operations during its bankruptcy reorganization. It promised in writing to bid $9 million more at an auction to be conducted at an Aug. 27 hearing, bringing the total value of Bertelmann’s bid to more than $100 million.

But the creditors committee named by the bankruptcy judge is hoping it can do better, and it hired Trenwith to try.

The committee, which includes the law firm of former Napster litigator David Boies and some music and software companies, thinks the judge might not count most of Bertelsmann’s initial $85 million, in which case the winning bidder could put up as little as $25 million.

That’s still a lot for a dormant business, even with the bankruptcy process washing away liability from the labels’ massive copyright infringement lawsuit. Napster’s new service allows for payments to be made to song owners, but it hasn’t yet struck deals with major labels to put music on it.

But over time, authorized online music distribution will be a billion-dollar business, and Napster is the brand to beat, Chance explained in a 14-page brochure and an interview.

“This kind of a play is more long term,” Chance said. “You first need a belief that this is going to be a major distribution channel.”

The brochure says that although competitors such as Listen.com are getting more digitized music from labels, burning CDs still is difficult. And Chance said pirate services are losing more court battles, so legitimate services eventually will do well.

In that contest, Napster’s service is easy to use and can tap its old customers, the brochure says: “According to a Harris Interactive poll taken when the Napster site was operational, 70% of Napster users indicated they would be willing to pay for the service.”

The current economic environment isn’t a good one for technology sales, Chance said.

“Obviously, this is a tough time for any marketing of assets,” he said.

Chance’s efforts may benefit from the recent ouster of Bertelsmann Chief Executive and Napster champion Thomas Middelhoff.

Bertelsmann’s new leaders haven’t told Napster CEO Konrad Hilbers and founder and Chief Technology Officer Shawn Fanning what they plan on doing with Napster if or when a sale is consummated, Hilbers said Friday.

Napster had been slated to become part of Bertelsmann’s direct-sales group under executive Klaus Eierhoff. But Eierhoff was fired last week.

Earlier this month, when Hilbers hadn’t heard anything from Middelhoff successor Gunter Thielen, he said he “personally contacted Eierhoff and explained the strategy. Now, unfortunately, he is gone too.”

Under the deal with Bertelsmann, Napster’s executives are barred from trying to shop the company to someone else.

But the upheaval in Germany means they probably will be more responsive to prospective bidders who come to ask questions. They also are more likely to stick around if someone else wins the auction.

Asked whether Fanning, 21, would sign up with a different Napster owner, Hilbers said it depended on the buyer’s intentions.

“The current management team is committed to building a digital music platform,” he said. “If someone comes in and wants to use the Napster brand for an MP3 player, they don’t need the management team to do that.”