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Circuit City and Napster: joint venture

Over the past few years, downloadable forms of content have been eroding the traditional domain of retailers (CD and DVD sales). Today, in an effort to embrace those changes, big-box retailer Circuit City announced it was joining with Los Angeles based Napster on a new co-branded music download service.

The new service which is called Circuit City+Napster will compete with iTunes, Rhapsody, and other download services. The offering will launch April 29th and use Napster’s established subscription based model. For $14.95 a month subscribers will gain unlimited access to songs provided through the service. The music will be playable on PC’s, compatible cell phones (via Napster 2 Go) and compatible MP3 players. (Because Napster uses Windows WMA Digital Rights Management protections its music is not compatible with iPods which run on Apple’s Fairplay DRM system). In addition to the subscription service, individual songs will be sold for 99cents.

Partnerships have been an important part of Napster’s subscription growth. Last October, Napster partnered with Tower Records Japan with a deal it hopes will add 1m subscribers over 3 years. In early March, via its partnership with AOL, Napster integrated 225,000 AOL Music Now subscribers onto the Napster service. (That accounts for nearly 1/3 of Napster’s global paid subscriptions.) In late March, AT&T/Cingular partnered with Napster to bring Napster to its mobile customers (offering a limited 1 year free trial as incentive).

This latest joint venture with Circuit City is not poised to contribute on the scale of these prior deals. With organic growth yielding only about 40,000 subscribers for Napster last quarter, it’s unlikely more than 3,000 Circuit City customers will sign up per quarter on the high-side. At $14.95 per head per month, that will amount to roughly, a meager $135k in gross subscription revenue per quarter prior to revenue sharing and expenses. Even with the revenue from an additional 100k individual songs downloaded for .99cents the income will still be small (less than $1m/year).

The real potential for Napster and Circuit City lies not in todays revenue potential but with the possibility of their service becoming available to iPod users (iPod’s dominate the MP3 Player market). So far DRM requirements have made that an impossibility but there is a very real chance of change. EMI’s recently announced plans to release DRM-Free music to iTunes and other download services (more info can be found here). If other labels follow EMI’s course, the absence of DRM could create an open market where consumers can use any service they like with any player they like.

Napster would still have to negotiate terms with the labels to be able to offer DRM Free music, but assuming it can do so without having to dramatically alter it’s subscription business, the subscription model might become more popular model with music loving consumers. it’s a matter of cost/benefit: $14.95 a month on iTunes would yield approximately 12 songs (at the DRM-Free price of $1.29 a song). Those songs would be owned free and clear. The same $14.95 on Napster, however, would yield unlimited access to 3million songs – provided customers keep an active monthly subscription. It’s a matter of buy vs lease. For a fan who consistently downloads 12 or more songs a month, the deal could make sense – and there are certainly at least a few iPod owners who’d participate. There’s also probably a good sized pool of iPod owning satellite radio customer’s who might trade in one monthly service for another.

It’s enough of a prospect to possibly consider going long on Napster – though any stock market benefit or market influencing news is probably at least a quarter if not two, or three, away.

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