Copyright 2002 Business Wire, Inc

August 19, 2002

SECTION: No. 310
RDS-ACC-NO: 03484832
LENGTH: 988 words
HEADLINE: The Case for AOL To Buy Napster
BODY:
AOL Time Warner could use a shot of adrenaline to get over its post-synergy hangover. Problems abound at AOL Online, the once proud and dominant Internet Service Provider.
Acquiring Napster would supercharge it immediately. AOL Online would get:
1. Worldwide Recognition. AOL has spent a lot of time and money trying to develop an online music strategy (TOR No 309). The problem is that most people don't know about it. Napster could be the crown jewel of all of AOL Online's subscriber enticements. It would give AOL Online instant recognition among the world's music lovers. 2. Competitive Shield. MSN and Earthlink have been making a run at AOL subscribers. All of their music lovers would suddenly become prospects for switching to AOL Online. The terms of engagement in the ISP war would change from one moment to the next. And, AOL's churn rate would fall instantly.
3. Fame. Lots of people know AOL. But, even more know Napster, more than know even eBay or Amazon. With a stroke of the pen, AOL could acquire the single most famous name on the Internet. Looked at another way: how much would have to be spent to make Pressplay or MusicNet as well-known as Napster? The record labels don't have pockets deep enough.
4. Fortune. Couple Napster's 60,000,000 subscribers with Time Warner's music and movie content and synergy becomes profitable. Once the other labels see the quantities that AOL is selling through Napster, they'd be persuaded to sign with AOL Napster too. Pressplay and MusicNet would be forgotten like the ocean makes a tear drop disappear. Napster subscribers, ardent music lovers that they are, buy CDs too so AOL could become the number one online retailer in the world's $15 billion music business. They also buy concert tickets, tee shirts and posters. Napsterites also read books and magazines so AOL Napster becomes a profitable distribution tool for Time Warner's print media as well.
As an added incentive, the acquisition might spark a rally in AOL TW's share price, now hovering around $10 a share. Consider for a moment that when AOL and Time Warner first announced their merger in January 2002 AOL had a market cap of $164 billion and Time Warner had a market cap of $97 billion for a total of $261 billion. Nowadays, together, their market cap is $48 billion. AOL Time Warner shareholders have lost over $200 billion.
5. Credibility. AOL's image as just another corporate suit changes to a fun-loving rebel that attracts the world's youth and young-at-heart to the Napster community. It's a loyal, grassroots community whose members share a common bond - love of music.
6. Broadband, broadband. Downloading or streaming music begs the user for a broadband connection. AOL's been running near last in the race for broadband market share. Many of those Napster subscribers would quickly upgrade to a broadband connection and AOL would leapfrog into the lead.
Why the AOL Napster Would Work Financially Bertelsmann's Digital World Services (DWS) added its digital rights management and its DRM expertise to the rehabilitated Napster. (See story in this issue "How Bertelsmann Made the New Napster Pirate- Proof") It claims that the implementation of its DRM that it did with Napster is "tamper-resistant." Restrictions like CD-burning and fidelity can be added during file transfer. (See http://www.dwsco.com/faq/index.html.) Bertelsmann's claim is that piracy will be prevented and only songs that Napster has permission to sell can be transferred.
Watch the Dominos Fall AOL Time Warner will want to sell its own music through the new AOL Napster. Certainly Bertelsmann will trust its music to its own DRM service that it has boasted so much about. It would be difficult for them to explain why they didn't trust the new Napster's DRM. That gives you two big music labels selling through AOL Napster from day one.
The anti-piracy assurances should make the other record labels feel secure that their files won't be pilfered. EMI needs all the marketing help it can get so it would follow suit. That makes three of the big five.
And, Bertelsmann's DWS last week announced DRM for any cell phone or PDA that can run a Java program (TOR No 309). So, Vivendi Universal's dream of a wireless music world will become a reality. And, Vivendi, in the midst of a fire sale of its assets to pay off the heavy debt that Mr. Messier added, will want to maximize revenue from its Universal Music Group.
That leaves only Sony holding out as probably the last to join up. And, in time they'd have to follow along. All the record labels want their CDs sold in the big retail music outlets like Virgin to the point they fight over shelf space. They'd soon be doing the same at Napster and Sony would be in there fighting too.
Can you imagine the hits on the web page the first day that www.napster.com goes live? Or, will it be www.aolnapster.com ?
A Bargain Price When AOL made its initial offer to buy Time Warner, it offered stock worth $160 billion. It could buy Napster for a small fraction of that. (For the record, AOL and Time Warner did not merge. AOL acquired Time Warner for stock.)
AOL TW can probably get Napster, its 60 million users, a brand name that's on a par with Coca-Cola, a unique and proven peer-to-peer file-sharing technology that once supported 1.6 million simultaneous users and a new pay service business model that Bertelsmann spent over a year and tens of millions of dollars making secure from pirates for about $100 million, maybe $200 million. But it wouldn't be close to the $200 billion the acquisition cost both companies.
OK, Steve and Ted. You made it big by being mavericks. Do it one more time for the world's music lovers and all those disappointed AOL TW shareholders. Think of the headlines. But hurry. Remember you have only a few days to get your bid in!
The deadline is 4PM EDT on August 21.
TYPE: Newsletter; Fulltext
JOURNAL-CODE: ONLIREPO
LOAD-DATE: September 3, 2002