Napster’s acquisition by MelodyVR promises to lift a financial weight for Seattle’s RealNetworks

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MelodyVR Group’s deal to acquire music service Napster, announced early this morning, could be a financial boon for RealNetworks, and not just because of the $70 million purchase price.

RealNetworks, the Seattle-based digital media company, currently owns 84% of Napster. The announced $70 million purchase price actually includes just $15 million in cash, and $11 million in Melody VR stock. The deal consists largely of MelodyVR’s assumption of $44 million in payment obligations, “primarily to various music industry entities,” according to a RealNetworks statement.

The company’s precise share of the cash hasn’t yet been disclosed, and RealNetworks cautions that the amount is subject to a variety of contingencies and obligations.

But it could still be meaningful, given its current cash position. RealNetworks reported $19.7 million in cash and equivalents as of June 30, according to the company’s latest earnings report. That was after its cash balance was boosted by a $2.87 million Payment Protection Program loan in April, and a $10 million investment from RealNetworks CEO Rob Glaser in February.

Longer term, the sale of Napster could remove a weight from RealNetworks’ bottom line, and give the company more breathing room to focus on areas where it sees potential growth, including games and facial recognition technology. Napster was the largest RealNetworks segment by revenue, $23.3 million in the quarter ended June 30. However, its financials also reflected the challenges of the music business, with Napster posting an operating loss of more than $2 million in the same time period.

The company overall posted an operating loss of $4.9 million for the quarter. Its consumer media and games divisions posted operating profits of $436,000 and $531,000, respectively, while its mobile services division posted an operating loss of $1 million. (Another $2.8 million of the quarterly operating loss was attributed to corporate operating expenses.)

RealNetworks shares closed up 6% today, at $1.35/share, following the Napster acquisition announcement.

MelodyVR, which specializes in live virtual reality music experiences, is making a bigger strategic bet with Napster, saying in a news release that the acquisition “will enable the creation of a unique music platform that will offer both immersive live performances and music streaming – for the first time ever.”

The acquisition is scheduled to close in the fourth quarter. RealNetworks says it will give more details on the financial implications of the transaction during its next quarterly earnings call in November, or sooner, depending on when the acquisition closes.

RealNetworks CEO Rob Glaser in 2017. (GeekWire Photo / Nat Levy)

RealNetworks has undergone many shifts and pivots over the years as it looks to regain the prominence it had in the late 1990s as a pioneer in streaming music buoyed by its flagship RealPlayer product. It was flush with cash following a $761 million antitrust settlement with Microsoft, Glaser’s former employer, in 2005.

Looking ahead, Glaser said in a statement that RealNetworks will focus on its “primary growth initiatives,” including its SAFR computer vision and facial recognition platform, and its GameHouse casual games business.

The Napster brand rose to fame and controversy as a peer-to-peer file sharing site that was ultimately shut down by court order for its role in the spread of pirated music. It was later reincarnated as traditional music streaming site, and acquired by Seattle-based Rhapsody International in 2011. At that point, RealNetworks had spun out Rhapsody as a standalone company, maintaining a minority stake. Napster later replaced the Rhapsody brand, and RealNetworks retook majority ownership of the company last year.

“Rhapsody and Napster have travelled a long and winding road,” Glaser said in the statement, noting that RealNetworks first got involved in the business when it acquired Listen.com in 2003.

“We are proud of our stewardship of this pioneering business and iconic brand, and grateful for the hard work by the entire Napster team to keep the torch alive all of these years,” Glaser said. “We’re delighted to pass the baton to (MelodyVR CEO) Anthony Matchett and the innovative team at MelodyVR. We’ll continue to root for Napster and are pleased that we’ll be ongoing stakeholders in MelodyVR’s success.”

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