Analyst Darren Aftahi of Think Equity put out an interesting report today calculating the value of Napster's assets in a M&A scenario since Napster has retained investment bank UBS to "look at strategic options" (meaning sell itself). I agree with Darren that Napster is the most attractive M&A target out there today in digital music, and that there is a decent sized group of potential buyers, although I think a hardware maker will end up buying them vs a service provider. Given Napster's $100M in cash, decent brand, $100M in revenue and 500K subscribers, $5 a share seems like a reasonable value, even if the economics of the digital music business are pretty rough.
However, where Darren's analysis breaks down is on the replacement cost of what he calls Napster's "subscription architecture", meaning the content library, the label deals, the customer/subscription management system, database, etc. He places the replacement value on that piece at an astonishing $120-$145M, giving the stock another $3 in value, which is why he indicates there only 3 significant subscription providers, vs many music download providers.
That number just isn't right. In the last few years, it has gotten substantially easier to build a digital music service, subscription or otherwise. On the label side, the major deals are now pretty standard, and most of the indie deals can now be done through aggregators - that process has matured enough that it's almost become a rote process now if you know what you're doing. On the content library side, there are a few people who have built one from scratch who could do it again, or you can use Musicnet to do so, which accelerates the process. As to the "subscription architecture" part of it, that's just a fancy name for a consumer-facing media delivery system - it takes work, but there is nothing unique or impossible to understand about subscription music versus other media. Finally, hardware, storage and bandwidth prices have plunged in recent years, and off-shore development is now a lower priced option in many cases. And this time around, one could hire a team who has already built a music system, accelerating the entire process by skipping the known issues.
The end result is that a good team could now build a competitive Subscription Architecture for the US market in less than 12 months for less than $20M. Now a new market entrant may not want to wait that long, or may want other aspects of Napster's assets, which is why I believe Napster has significant value, but let's not go crazy over-estimating what it takes to build one. Plus in today's competitive market, I would build in other characteristics such as enhanced community, avatars (Meez), karaoke (SingShot) or other user-generated content options in order to differentiate the experience, but it's simply not that hard. What's hard is actually making money in the digital music business, which is why I believe there aren't that many providers anymore - they can get a better ROI in other parts of the digital media sector.
Comments