Bad week for Napster. Their re-launch is still on hold because the labels still won’t play ball, and now their exit strategy is being foiled thanks to a seed investor squabble.
Probably at stake is the severe penalty that Napster investors will pay in the acquisition. They will probably suffer a loss from the dilution of this purchase price, even at $30M — but then again they should have acknowledged this when Bertelsmann loaned the company $100M.
For BMG it’s still a big risk and they could end up owning a big pile of junk unless it’s clear that the other labels will do the deal in licensing their material for distribution via Napster. IF BMG buys Napster first, then the likelihood of the company sealing that deal is even lower — after all, why would a label want to license their content to a competitor?
To this end, BMG needs to distance itself from Napster so that all of the dominos can fall in order. Napster as a semi-independent entity is more likely to close deals with the other labels and would be more flexible to include them in the upside of the company.
Napster’s only hope is to survive with an arm’s length relationship to BMG and hope that the table in the ongoing court case takes a big turn in their favour. This will bring Big Music to the table and Napster can cut them in on corporate ownership.
So in other words, BMG’s backing away from Napster should play in its favour assuming they have enough cash to go it alone. Recent Napster layoffs will help. Judge Patel’s rulings in the big court case are probably the biggest determinant. The internal squabble is likely between the camp that understands this, and the camp that just wants to get out and wash their hands of the situation.
In any case, and I’m not much of a betting man, the odds are slim.
-Ian.