Parks Associates Blog

Monday, March 26, 2007

AT&T and Napster In Groundbreaking Music Service Deal

When the rumor mill becomes silent, you know something big is coming. AT&T revealed today its new music service pact with Napster, a well-known but struggling online music service provider. This deal arrives just a couple of weeks later after AT&T announced its intention to end the content promotion partnership with Yahoo!, and we can’t help but musing on the connection of the two events.

This new deal is groundbreaking for digital music industry in three ways:
1. Scope and feature: this is not the first time that an online music service provider partners with a walled-garden service operator. But the scope of collaboration is much broader than past precedents. Napster allows AT&T customers to access to not only its full music catalog, but also all its service tiers including PC-streaming and Napster-on-the-go, as well as mobile phone synchronization features. In contrast, Real Networks’ Rhapsody only gives Comcast subscribers (unhappy I am) free access to its premium online radio stations.
2. Pricing: AT&T subscribers can access Napster’s service for free for twelve months, a promotion that is also unprecedented. Napster’s premium “To-go” service costs $180 per year, and is perceived as much more valuable than the online music/radio streaming service. This arrangement might be the steepest discount Napster has ever given to a partner, and I am just wondering what kind of revenue sharing scheme the two parties have hammered down.
3. Exemplary effect on other service providers: No doubt this partnership will send ripples to the peers of the two companies in their respective industry. This bold move of bringing valuable content from the open Internet into its “garden” in order to drive subscriber growth clearly fits AT&T’s “three-screen” strategy (TV-PC-Mobile Convergence), and will be closely watched by other service providers. If successful, the partnership might lead to AT&T’s acquisition of Napster. After all, Napster’s share has been battered for too long and service providers need compelling content badly to fuel subscriber and ARPU growth. So it sounds like a logical deal to me, and all they want is a piece of evidence that digital music subscription market has room to grow.

For the struggling Napster, it apparently did not have the upper hand in negotiating the deal, but this is a much needed strategic move to help it survive as a standalone music service provider. Previous attempts, like free MP3 player or ad-supported music download, have largely failed to energize its subscriber growth. The new pact, though might be at the expense of Napster’s margin, is expected to give its subscriber base a lift, tame Wall Street’s frustration, and give the management more time to find the right course for the company.

For AT&T, the deal highlights its clear resolve to turn itself into an experience enabler for consumers. With service infrastructure for three entertainment screens, it is eager to introduce richer content so that consumers will stay on its network longer, spend more and think less about switching. The ability to transfer tracks to a mobile phone will be complementary to its future over-the-air mobile music service.

Finally, for the digital music industry, especially the nascent but besieged music subscription service, service providers’ deep involvement is clearly a positive sign. We at Parks have long argued that service provider’s participation can be one of the drivers to revive subscription growth, and AT&T has made the first step. Music has always been a loss leader for big retailers, and music subscription service can do the same for service providers.

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