Sean Parker

Yammer, which won the top prize at last year’s TechCrunch50, recently rolled out a bunch of updates to its web version, as well as its Adobe Air-based desktop client. We use the service on a daily basis for work, and those of us with iPhones are all eagerly awaiting the release of the new version of the iPhone app with Push Notifications.

As the core concepts behind Yammer are quickly becoming features that others in the enterprise space are realizing they will need to compete with, Parker’s guidance should help the company maintain an advantage, and push forward.

Parker is currently serving as the Chairman of Causes, one of the most popular social networking applications, and is a Managing Partner at the VC firm, Founder’s Fund. He is perhaps best known for serving as Facebook’s President during the time it was founded. That role is about to get the Hollywood treatment in David Fincher’s upcoming movie, The Social Network, based on Ben Mezrich’s book, The Accidental Billionaires, about the early days of Facebook.

Parker also served as an expert panelist at this year’s TechCrunch50 a few weeks ago.

Mr. Parker joins George Zachary, Keith Rabois, Adam Ross, Adam Pisoni, and David Sacks on Yammer’s board. The latter two serve as Yammer’s VP of Technology and CEO, respectively.

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Best Buy announced today that it has acquired Napster for $121 million in cash. The company said that it will keep Napster’s executive team and will leave the Napster service and its estimated 700,000 users in place without changing much in the near-term.

During the 2008 fiscal year ending March 31, Napster had revenue of $127.5 million, and a loss of $16.5 million. The loss was an improvement over its last fiscal year, though, when it lost $36.8 million.

Best Buy ostensibly believes that it can eventually make Napster turn a profit or, at the very least, provide a service that is valued by its customers (Best Buy inked a Napster distribution deal with the company’s then-parent company Roxio for $10 million in 2004).  But how does acquiring Napster help the company in any way?

Napster’s competition is simply too fierce and too far ahead for the once-popular service to stay relevant.

iTunes is the world’s largest music store and there’s no sign of that service losing the top spot any time soon. Worse, Amazon’s DRM-free MP3 store is coming on strong and now that MySpace is starting to get into the music game with free ad-supported streams, there’s little room left for Napster to cement itself in the market.

So where does Napster fit into that equation? Granted, it’s still servicing 700,000 customers and its revenue is quite high, but how much longer can it compete in an environment where at least three services are better and its user-base is minuscule compared to its competitors’?

Napster’s business model is simply too similar and too out-dated for it to compete in this market. The company uses a subscription-based model to let you download songs and also offers freenapster.com for those that want to stream music for free online. Of course, the only problem is the songs sound awful and paying $12.95 per month isn’t worth it to most users, given the success of iTunes and Amazon’s store.

And with new business models on the way from MySpace where it will try ad-supported streams, how can Napster regain its status as the most popular service in the industry by maintaining status quo?

Under the guise of “improving” itself, Best Buy has engaged in a mercy acquisition of Napster in the hope that somehow it will materialize into something worth using. Napster was always the haven for illegal downloads and ever since it went legit, it lost its allure and fewer people have found reason to use it.

Best Buy just wasted $121 million.

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The new software would load only meta data about songs, videos, and other media onto a handheld device. It would then allow users to stream this media from their desktop computers on demand and even let them organize their iTunes libraries remotely (by adding, deleting, and moving files around). The main benefits come from saving space on your handheld device, where disk storage is scarce, as well as saving the time it takes to synchronize.

There’s been no official word from Apple on when or whether it plans to release this technology (it files patents all the time that go nowhere). But such a development could be seen as one step towards a streaming music service like Rhapsody or Napster, which have operated in stark contrast to Apple’s download model. However, the patent does not suggest that Apple plans to stream data from its own servers – just consumers’ own desktop computers, where they keep the music they have downloaded.

Apple could also be understood to be taking on at least one facet of Microsoft Mesh, which promises to make consumers’ personal files available to them on whichever device they use. Of course, MobileMe already goes to show that Apple has data synchronization on its mind – but perhaps there’s a broader trend here as well.

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Streaming music service Rhapsody has joined the likes of Wal-Mart, Amazon, and Napster by launching an MP3 store.

Its move to offer unprotected music downloads has been anticipated since last Fall when Real Networks joined forces with MTV and Verizon. The Rhapsody MP3 Store offers music from all four major labels (Universal Music Group, Sony BMG, Warner Music Group, and EMI) at 99 cents per single and mostly $9.99 per single disc album.

While Rhapsody specializes in streaming music to paying subscribers ($13 per month gives you on-demand access to its entire music collection), this is not the first time Rhapsody has offered downloads. Most of its downloads have been protected by RAX-formatted DRM, although lately MP3 files have been mixed into its collection as well.

But with the launch of its MP3 store, Rhapsody fully endorses the idea that DRM is dead. And it goes toe-to-toe with the aforementioned DRM-free music stores, as well as iTunes Plus (whose files are actually in AAC format, not MP3), by providing over 5 million tracks that can play on virtually any music player without any restrictions. All songs will be provided with a 256 bit rate.

The Rhapsody MP3 Store sits to the side of the regular Rhapsody streaming music service on its own subdomain, but the two are also integrated with one another. Shoppers on the MP3 store site who are also paying subscribers can play full-length samples (non-subscribers can also play up to 25 full length samples per month). And subscribers have the option of buying and downloading the files they’ve enjoyed streaming but want to play when not at their computers (or connected to the internet).

The purchase experience is mostly browser-based; however, Rhapsody also provides a download manager that can automatically load songs into iTunes. Only Windows is supported at launch, with Mac support coming later.

Rhapsody is also working over the next couple of months to integrate its streaming and downloading functionality into Viacom’s network of music sites, including MTV, VH1, and CMT. It has teamed up with iLike as well to power music across all of that startup’s social networking apps and on its main website. Expect the same level of integration that we’ve already seen on MOG.

On related notes, Rhapsody is putting the finishing touches on its powering of Yahoo Music, which should go live soon so that Yahoo users aren’t simply redirected off-site. And it has just helped launch a new Verizon VCAST music service for getting its songs onto mobile handsets. With all of these partnerships, Rhapsody is working to become not only a destination but a platform for music distribution as well.

Streaming music may be the way of the future – especially when reliable and fast wireless technology becomes ubiquitous – but the launch of Rhapsody’s MP3 store goes to show that consumers still want to own their music – and control when and where they can use it.

Also see our round up of DRM-free music providers from last fall, which includes some of the more indie-focused services like Amie Street.

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The fact is that Napster is still unprofitable and still makes most of its revenue from all-you-can-eat subscription sales. Both AOL and Yahoo bailed out of this business, since consumers don’t seem to like it and the labels take all the revenues. Ian Rogers explained why that business sucks last year, right before he bailed out of Yahoo.

So Napster is making their big push into DRM-free sales, a market dominated by iTunes and increasingly Amazon. And…cough…BitTorrent. The days of paying for recorded music are nearly over. And there’s nothing Napster can do to change that.

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Starting mid-November, the service will allow AT&T customers to browse 5 million songs, preview samples of each song and purchase and download music from their mobile phones. Unlike a previous deal where some AT&T customers had free access to Napster, under this deal users will pay $7.49 a month for 5 songs or $1.99 per single, double the going rate on iTunes.

The deal is good news for the struggling Napster, who will gain exposure to AT&T’s 63 million customers at a time they are looking to sell the company.

AT&T also announced two new music applications: MobiVJ, a streaming video service, and VIP Access, a “mobile fan club and discovery service.” The MobiVJ music video channels cover eight genres and provide streamed video to AT&T customers for $6.99 a month. VIP Access allows customers to search artist biographies and discographies, sample new music, participate in polls and receive breaking alerts via text messaging services for only $2.99 a month.

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However, the desktop client is only part of what’s holding the company back. Napster is still a subscription-centered service, which keeps them incompatible with the leading digital music player, the iPod (not a good idea, say industry experts). Consequently Napster has lagged behind Apple’s end to end iTunes system which reportedly controls 70% of the digital music market.

But the company is holding out for a glimmer of hope. Amazon has already crossed the chasm into open digital downloads. Christopher Allen, chief operating officer at Napster, forecasts that by the end of next year these DRM free MP3s will become standard. So far, only Universal Music Group and EMI Group sell music DRM free. However, with labels loving the iPod but hating the revenue split, other labels are sure to follow.

In other music news, Ars Technica is expecting iTunes to lower the price of DRM-free songs to $0.99. That’s still $0.10 more per song than Amazon is charging. Note our recently article on the inevitable march of recorded music towards free.

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Napster sells music subscriptions and the odd DRM’d download. Pay $10 per month and listen to any of the music in their library. This is a tricky, low margin business. There’s lots of price competition (see our comparison of the space here), and the labels and credit card companies take the vast majority of the revenue. In the last fiscal quarter, Napster had nearly $26 million in revenue but just $7 million of that didn’t go the labels and other costs of goods sold. Caving into this margin pressure, Virgin Music bailed out of the U.S. market just a few days ago.

Napster hired an investment bank in September to sell themselves. At the time they were losing $10 million in cash per fiscal quarter, and had $100 million in the bank. I called them unhealthy. Since that time, they’ve reported another fiscal quarter. They had stellar subscription growth, adding 48,000 subscribers. But they lost even more cash – another $11.6 million. This is a company with operating margins of -38%. And they were sued for patent infringement just a week and a half ago.

Now they’ve announced the acquisition of AOL Music’s subscription service. They’ll add 350,000 new subscribers, get promotion on AOL, and pay just $15 million in cash. It’s not a bad deal, except it adds more unprofitable customers to the struggling company, and the company’s war chest just got significantly lighter. That’s one less fiscal quarter Napster has in operating cash.

It’s unusual to see a company make acquisitions when it is itself on the market. Maybe this is Napster’s signal that the sales process isn’t going well. Or perhaps they just took this opportunity to further consolidate the market. Either way, I’m looking forward to next quarter’s financial results, which should be announced shortly.

One point of clarification. The New York Times reported that Napster paid just $43 per AOL subscriber, compared to their own valuation of $328 per subscriber. Their calculations were incorrect – they used the Napster stock price after the deal was announced, which had spiked sharply. And they failed to take into account that the majority of Napster’s market capitalization is from the $90 million or so they have in cash. Take those factors into account, and Napster’s per subscriber valuation is around just $90.

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BusinessWeek reported that Fanning, the founder of Napster and Snocap, is in the development stages for a new social networking site called Rupture. The site will have a WoW plugin so that players can network within Rupture directly from the game.

Early blogging on the subject speculated that Rupture might “run afoul of Warcraft’s terms of use.” Fanning’s representative insists that this isn’t the case and that Rupture is “absolutely consistent with World of Warcraft.”

Rupture will reportedly allow social networking from other games in addition to WoW.

We requested an interview with Fanning but he is not taking them until the site launches, which his rep could only say will be in the first half of next year. For now, visitors to the site can request additional information when it becomes available by providing their email, guild, and realm. Fanning told BusinessWeek he raised capital for the site from a group of investors including Ron Conway and Joi Ito.

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At first glance the company looks very healthy, with annual revenue of over $100 million and another $100 million in cash. The problem, however, is that their business has extremely low margins. This last fiscal quarter the company lost nearly $10 million from operations (or $40 million annualized). Getting Napster to profitability isn’t going to happen in this very crowded music market. For more on Napster’s competitors, see our recent analyses of the music download services and music subscription services. Napster does not offer the best, or cheapest, product in either category.

That doesn’t mean Napster won’t sell for a lot of money, though. A good investment bank sells based on fear and greed. And lots of players fear being left out of the music revolution occuring right now. Napster may be just what they are looking for. For a recent example, see Montgomery Securities recent sale of Grouper to Sony for $65 million in cash, something no one expected would happen.

While the pay per download market is dominated by Apple iTunes and the quasi-legal AllofMP3, the subscription music market is a more level playing field. There are strong product offerings from AOL, Napster, Rhapsody, Virgin and Yahoo.

All of these services offer a music library of at least a million songs to users for a set monthly fee. The product offerings are generally broken down into three main buckets: PC listening only, “to go” which allows moving music to a music device, and an optional download service to allow permanent ownership of the song (with DRM) and that can be burned to a CD.

Note that none of these services work with an iPod. They all utilize Microsoft’s PlayForSure DRM technology which is not compatible with the iPod. Also, none of these services work on a Mac. You must have a Windows machine to use them, although Rhapsody has some Mac functionality.

The Music Subscription Services

Overall, the best service based on pure stats is Virgin Digital, which boasts the largest catalog of music (2 million songs) and the best overall price at $8/month. Unlike all of the other services, Virgin charges one price for both the PC and to go versions. Virgin also has excellent additional features like user reviews of music create a social atmosphere.

All of the services require the download and use of a special player, except AOL, which uses a web based approach along with the Windows Media Player.

For the flat out cheapest price, Yahoo comes in at the lowest point with a basic plan of $5 per month (althought the to go plan is $10/month, higher than Virgin’s single price plan).

But based on pure joy of the user experience, Rhapsody has the slickest software and the most intuitive user interface. It’s the most expensive at $15/month, but worth the money if you want the best service available.

Both Google and Amazon are in the process of developing online music products, and will certainly have compelling product offerings of their own.