Can Apple Make Sweet Music?

Apple, along with Gateway and other personal computer companies, has
been marketing its products on their ability to download digital music.
The company even coined the phrase "rip, mix and burn," earning itself
the scorn of the music industry because of allegations that it was
encouraging digital piracy of copyrighted music.

Now, according to a report in Friday's Los Angeles Times, Apple may wind up becoming a major part of that industry.

Apple is reportedly in talks with Vivendi Universal to buy the world's
largest record company, Universal Music. The Times says that the deal
could be worth as much as $6 billion.

If the acquisition does goes through -- and it's far from a done deal --
it means that Apple CEO Steve Jobs will be a
major entertainment mogul. Jobs is already chairman of Pixar Animation
Studios which is responsible for such animated movie hits as Toy Story,
a Bug's Life and Monster's Inc.

It also means that Apple will be well positioned to help jump start the
as yet elusive and so far unprofitable online music business.

Apple certainly has a vested interest in that business. In fact, Apple
has long positioned its Macintosh computer as a solution for creating
and even listening to digital music.

The Mac has long been viewed by many as the premier digital tool for
both audio and video production and is favored by many artists including Todd Rundgren, who associated himself with Apple long before other personal computers were mentioned in the same breath with digital music.

Indeed, while Macs can certainly be used for office applications, games
and just about any other PC application, the Mac has enjoyed an almost
cult-like following among the creative community where the Mac has far
greater market share than it does with the general population.

The company's iPod, MP3 player is regarded by many as the Rolls Royce of its genre and Apple has reportedly been testing its own music download service that would allow people to purchase music online with the blessings of the copyright holders.

In a sense, the acquisition of Universal -- if it happens -- would be a
giant step in what has long been Apple's gradual transition from a
computer company to a digital media company.

If Apple were to own Universal it would an almost cradle-to-grave stake
in the music it creates from the use of its technology to create the
music to distribution to the actual playing of digital recording. It
would also give it a possible leg-up over Microsoft -- which is
investing heavily positioning Windows as the center of the home
entrainment universe. Finally, an Apple Universal combine could be an
interesting challenge to AOL Time Warner which not only owns recording
labels, television networks and print publications but -- through AOL -- is potentially the world's largest online music distribution system.

While there is synergy between the two companies, there remain a great many differences. Apple, despite its consistent theme of being "user friendly" is a technology company rather than a consumer products company. Sure, personal computers are now a mass-market item, but there's a big difference between selling computers and computer software and selling record albums. Jobs, with his experience at Pixar, knows something about the entertainment industry but -- again - he's on the technology side of that industry. To date, Pixar's five computer-animated feature films have been marketed by Disney, not Pixar.

A technology company buying a music company is not without precedent. Sony purchased Capitol and other record labels, which have been consolidated into Sony Music. The giant consumer electronics company also owns Sony Pictures, which encompasses the old Columbia Pictures. Sony Music, like other music companies, has also had its share of problems lately. And, unlike Apple, Sony has a long history of selling low-cost consumer products through the retail channel.

AOL's acquisition of Time Warner is yet another example of "synergy" gone bad. At the time it was announced, it was widely assumed that AOL's dominance in the online world would be a perfect match for Time Warner's old media empire. If anything, people worried about anti-trust issues and the possibility that the merger could crush competitors. That's far from what happened.

I have no doubt that, ultimately, the Internet will replace the CD and DVD as the medium of choice for distributing both music and video but, again, that doesn't mean that combining a computer company with an entertainment company is necessarily the right formula. An argument can be made that Apple would be better off staying out of the music publishing business and simply set up distribution deals with all of the labels.

By owning one label, it could actually hurt Apple's chances of getting favorable distribution deals with the other labels. Consumer want choice and, unlike computers, consumers are not loyal to record labels. What consumers want is the ability to find music from their favorite artists or new artists, regardless of the label.

Having said this, I've long since stopped short-selling Steve Jobs. He's been a comeback kid on many occasions and has been very successful in his efforts to revitalize Apple Computer. His personal charisma and marketing skills are as legendary as his sometimes abrasive personality. Apple has had its problems but Jobs did rescue it from the brink of disaster by replacing its me-too hardware with some exciting new products and launching some incredibly well-received marketing campaigns. Jobs is a guy who knows how to "think different" and buying Universal is certainly a different way of thinking.

Wall Street, by the way, didn't cheer the rumor. Apple stock closed 8.14 percent lower on Friday while the Dow, NASDAQ and S&P experienced only fractional declines.

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By Larry Magid