3 Reasons Why Best Buy Is Unloading Napster

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We can call this tune Rhapsody in Best Buy (BBY) blue.

The consumer electronics giant is handing over its Napster subscribers and other related assets to Rhapsody in exchange for a minority stake in the combined company.

You may not see the white flag, but this is Best Buy essentially surrendering the music subscription service that it acquired for $122 million just three years ago.

Why is Best Buy giving up Napster? Let's go over the three likely reasons behind the move.

1. Physical music sales don't translate into digital success.
Wal-Mart
(WMT), a company that sells more CDs than Best Buy, surprised the market this summer when it decided to stop selling MP3 downloads through Walmart.com. CD sales peaked in 1999, so why was the country's largest retailer putting all of its musical eggs in shrink-wrapped compact disc cases?

Let's just say that it wasn't Wal-Mart's decision. Consumers are the ones that decided that they would rather buy their digital singles and albums from Apple (AAPL) or Amazon.com (AMZN) than lean on the websites of bricks-and-mortar chains.

Best Buy continues to sell music downloads, but its limited in-store promotion of Napster apparently wasn't enough to make it succeed.

2. The competition is getting fierce.
The Napster brand has come a long way. It was the poster child of the peer-to-peer file-sharing network until the record labels had their day in court. Then Napster changed hands and re-launched as a legal music subscription service.

A few years ago, the market consisted largely of companies including Rhapsody America, Zune Pass, and eMusic charging roughly $10 a month for unlimited access to millions of songs. These days, the market darlings are Pandora (P), Spotify, and other free ad-supported streaming websites. It's getting harder to stand out -- even with a brand that once defined the renegade music-discovery experience.

3. Best Buy and music just aren't meant to be together.

Napster isn't the first music-related purchase that didn't exactly pan out for the consumer electronics giant. Best Buy also acquired the Musicland chain of 1,300 CD stores 10 years ago, just as CD sales were peaking. When it couldn't achieve good things with Sam Goody, Best Buy sold the chain at a loss.

Best Buy just hasn't been able to get it right. It got a better deal on Napster, but only because music subscription services were already in a state of decline.

What's an investor to do?
Investors that want some skin in digital music should not be eyeing Best Buy. The real leaders here are Apple and Amazon, with their thriving digital storefronts. Risk-tolerant growth stock investors may also even want to consider Pandora, if they value the stellar top-line growth over a lack of actual profitability.

Best Buy fading out on digital music? It's really not much of a surprise.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Best Buy, Wal-Mart Stores, and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Wal-Mart Stores, and Apple; creating a diagonal call position in Wal-Mart Stores; and creating a bull call spread position in Apple.



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