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Commentary: Bertelsmann gets a bargain

Analysts at Gartner say the new Napster will likely set the trends for the way music content is distributed, sold and marketed over interactive channels--providing Bertelsmann funds it properly.

CNET staff
2 min read
By Charles Abrams, Gartner Analyst

Bertelsmann, Europe's second-largest media group, will buy Napster for $8 million. This fire sale price provides Bertelsmann with valuable andsubstantial lists of subscribers that will be used for marketing purposes as the company seeks to expand its myplay.com music service.

The launch of Napster in May 1999 marked the start of a profoundtransformation in the music industry--away from distributing hard-copycontent on CDs to providing services distributed over the Web and otherinteractive channels. Before it was forced to close down its Webmusic-sharing service last July, following a court injunction forbiddingit from offering copyrighted material, millions of people used Napster toexchange downloads of copyright and noncopyright materials.

In September, Napster agreed to pay damages

See news story:
Bertelsmann to buy Napster for a song
and advanced royalties tocopyright holders, and hoped that concession would enable it to resume itsservice. So far that hasn't happened, but the deal with Bertelsmann willenable Napster to be relaunched as a paid subscription Web digital musicservice that complies with U.S. copyright law. The deal also keeps KonradHilbers (CEO) and Shawn Fanning (founder) with the firm, both of whom hadquit a few days earlier because of concerns that growing legal, financialand technical problems would finally kill off Napster.

Before it closed, Napster had built a substantial brand identity amongyounger technology-aware consumers. Its future success depends onBertelsmann exploiting that brand through the sale of subscriptions andancillary marketing revenue to provide a range of innovative, profitable Websubscription services. Napster can also sell advertising and could also actas a paid intermediary for artists (including big names) to bypass recordcompanies and sell their recordings directly to consumers via the Web.

Provided it is adequately funded by Bertelsmann, the new Napster will likelyset the trends for the way music content is distributed, sold and marketedover interactive channels. Music companies and other paid content providers,including new media publishers and entertainment distributors, shouldidentify innovative ways of earning revenue from Web services so they canrespond quickly when that change is completed.

The new Napster will also position Bertelsmann strongly relative to AOL TimeWarner and Vivendi, the other two main contenders in the music distributionmarket. Both of those competitors will likely respond by launching new Websubscription music services either through current media divisions (AOL TimeWarner) or through acquisitions (Vivendi).

(For a related commentary on copyright issues with regard to digital format, see gartner.com.)

Entire contents, Copyright © 2002 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.