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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.

    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 and substantial 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 profound transformation in the music industry--away from distributing hard-copy content on CDs to providing services distributed over the Web and other interactive channels. Before it was forced to close down its Web music-sharing service last July, following a court injunction forbidding it from offering copyrighted material, millions of people used Napster to exchange 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 to copyright holders, and hoped that concession would enable it to resume its service. So far that hasn't happened, but the deal with Bertelsmann will enable Napster to be relaunched as a paid subscription Web digital music service that complies with U.S. copyright law. The deal also keeps Konrad Hilbers (CEO) and Shawn Fanning (founder) with the firm, both of whom had quit a few days earlier because of concerns that growing legal, financial and technical problems would finally kill off Napster.

    Before it closed, Napster had built a substantial brand identity among younger technology-aware consumers. Its future success depends on Bertelsmann exploiting that brand through the sale of subscriptions and ancillary marketing revenue to provide a range of innovative, profitable Web subscription services. Napster can also sell advertising and could also act as a paid intermediary for artists (including big names) to bypass record companies and sell their recordings directly to consumers via the Web.

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

    The new Napster will also position Bertelsmann strongly relative to AOL Time Warner and Vivendi, the other two main contenders in the music distribution market. Both of those competitors will likely respond by launching new Web subscription music services either through current media divisions (AOL Time Warner) 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.