Rhapsody to acquire rival music service Napster from Best Buy

Posted Oct. 03, 2011, at 6:32 p.m.

LOS ANGELES — In a sign that Best Buy Co.’s digital music ambitions have fizzled, the retail giant is selling its subscription online music service Napster to Rhapsody in exchange for an undisclosed equity stake in the combined company.

The deal comes just three years after Best Buy acquired Napster for $121 million in cash with the aim of building a vibrant digital music business to supplant plummeting CD sales. But Napster, which does not disclose its user base, has failed to gain much ground against industry giant iTunes despite promotions in Best Buy’s retail locations.

Gartner analyst Michael McGuire estimated that Napster has from 200,000 to 300,000 subscribers, down from 700,000 when Best Buy acquired the company in 2008.

Rhapsody, based in Seattle, has more than 800,000 subscribers.

The market for online music has become much more competitive in the United States recently with the launch of ad-supported service Spotify and cloud offerings from Google and Amazon.com.

In a statement, Rhapsody International Inc. Chief Executive Jon Irwin acknowledged that a key goal of the acquisition was to build scale by combining the two companies’ user bases. “This is a ‘go big or go home’ business, so our focus is on sustainably growing the company,” he said.

Best Buy, meanwhile, implicitly acknowledged that it needed help. “Rhapsody has demonstrated that it has what it takes to build a profitable business in the increasingly competitive on-demand music market,” said Chris Homeister, Best Buy’s entertainment general manager.

Rhapsody was controlled by RealNetworks and MTV until 2010, when those companies spun it off as an independent, privately owned firm.

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