Best Buy Co. has given up on the increasingly crowded digital music market, selling its struggling Napster online music service to competitor Rhapsody in exchange for a minority stake in the combined company.
The deal comes three years after Best Buy paid $121 million to acquire Napster Inc., the first wildly popular source of Internet piracy that morphed into a legitimate paid music service. It gives Rhapsody more power to compete against hot digital music upstarts such as Spotify, MOG and Rdio.
"Scale is extremely important in this business," said Rhapsody International Inc. President Jon Irwin. "It helps us to have the resources to stay up to date and expand, to build new partnerships, and to accelerate the network effect on social networks."
With more than 800,000 subscribers, the Seattle company is the largest paid online music service in the U.S. But Spotify and others are gaining ground in part through extensive free offerings.
Gartner Inc. analyst Michael McGuire estimated that Napster has 200,000 to 300,000 subscribers, down from 700,000 when Best Buy acquired the company in 2008.
Despite efforts to promote Napster at Best Buy's approximately 1,100 locations, the retail giant has struggled to grow the service's user base or public awareness. Napster will now be shut down, with its subscribers being migrated to Rhapsody.
"Napster looked like an attractive purchase at the time, but it didn't do much for Best Buy at all," McGuire said.
Although more people are accessing music online, persuading them to pay is a growing challenge because Spotify and its many rivals offer some music at no fee, supported by advertising. The European company, which launched in the U.S. this summer, has said that more than 2 million people worldwide pay for an upgraded, ad-free offering.
Rhapsody offers a 30-day free trial to new users but does not have an indefinite ad-supported option.
Like competitors, the company is pushing aggressively to find more users on mobile devices and via social networks like Facebook, which recently more deeply integrated music and other media into its website.
Rhapsody and Napster are two of the oldest brands in digital music. After launching in 2001, Rhapsody was acquired by digital media company RealNetworks two years later. In 2007 it became a joint venture between RealNetworks and MTV Networks, taking over the cable company's much smaller online service Urge.
Last year Rhapsody spun off into an independent company in which RealNetworks and Viacom Inc.-owned MTV still hold minority stakes.