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Universal Music: The right purchase for Apple?
$6bn gambles have to pay off...

By Ian Fried writes for News.com

Published: Monday 14 April 2003

Mac maker Apple has been linked with a bid for major record label Universal - marking a dramatic departure away from its core desktop business. But what will Apple be getting for its $6bn?

So far neither company has commented on the proposed deal, with talks believed to be in a "very preliminary" stage. But a deal of this magnitude has certainly got industry tongues wagging.

One analyst questioned whether it makes sense for Apple to purchase a record label at a time when media and the net are transforming key label functions such as talent searches, promotions and distribution.

Steve Harmon, a media analyst with Marketsnap Research Group, said: "Apple's rumoured bid for Universal Music group would be a big mistake in an era when artist discovery is being transformed by TV [such as Pop Idol]."

Harmon added: "Owning a stable of artists, no matter how well known, cannot compete with fan-based networks that find and nurture talent. In addition, distribution is becoming fully digital which, again, [presents] reasons not to acquire an old-fashioned company."

Although the combination sounds unusual, it might not be as surprising as it first appears, said analyst Phil Leigh of Raymond James & Associates.

He said: "We believe that Apple Computer has been slowly evolving into a digital media company anyway. Their computers are focused on digital media applications."

Apple is also developing its own digital music service, according to sources. The service is rumoured to be launching later this month, Leigh said.

The deal, if it were to go through, would allow Apple to evolve beyond its PC heritage. "The company is clearly attempting to evolve away from being merely a personal computer company," Leigh said. "It does not want to be controlled by the same economic dynamics that govern the conventional business PC market."

At the same time, the music unit that resulted would likely be the most aggressive in terms of moving its content online. Leigh said that online sales are the key to a recovery for the music industry, which has seen flat or declining CD music sales for the past five years.

"Ultimately the transition is as certain as fleas on a yard dog," Leigh said. "The only way to offset the declining revenues from CD sales is to adopt internet distribution."

Universal's vast stable of artists includes the likes of Bjork, The Corrs, Elton John, Fatboy Slim, Shania Twain and U2.

Talk of a marriage between Apple and Universal Music Group comes amid an industry-wide slump in music sales and as debt-ridden media conglomerates are seeking to unload underperforming assets.

Worldwide sales of music CDs, records and cassettes fell for the third year in a row last year, with a seven per cent drop in global music sales and a 10 per cent fall in units sold in the US, according to figures for 2002 released Wednesday by the International Federation of the Phonographic Industry (IFPI).

The root cause of the decline is hotly debated. The record labels have consistently singled out Internet piracy as the biggest factor behind the trend, while others have pointed to missteps such as high CD prices and promotional tactics that aim to produce megastars at the expense of consumer choice.

Either way, the industry's top task is solving the use of digital technologies and Internet distribution. Online subscription services now offer consumers a wide selection of music for a monthly fee, including the ability to burn songs onto homemade CDs. But paid services, such as Pressplay, with which Universal is heavily involved, face an uphill struggle against free file-swapping alternatives such as KaZaA, where millions of songs continue to change hands despite legal efforts to stop it.

The short-term prospects for the music business have turned record labels into hot potatoes at the media companies that in some cases only recently paid billions of pounds to acquire them.

In addition to Vivendi Universal, media leaders AOL Time Warner, Bertelsmann and EMI Group are all considering sales of their music divisions.

A potential Apple acquisition of Universal Music Group raises a tantalising question: Can technology - widely seen as the root of the music industry's problems - emerge as its ultimate saviour?

Apple has benefited from the boom in digital music, pitching its iTunes software as a way for consumers to "rip, mix and burn" their own CDs, an ad campaign that drew the ire of the music industry. The company has also had a smash hit with its iPod digital music player. However, in both cases, Apple profited without necessarily generating business for the record industry.

With the proposed music service, though, Apple is clearly looking for a way that it, as a hardware maker, along with the content owners, can profit from the popularity of digital music.

However, Sony's experience offers a somewhat-cautionary tale. The consumer electronics giant purchased CBS Records in 1988 for $2bn, but has built little cooperation between its music and its gadget operations.

Piracy remains a key point of disagreement between the company's media and electronics executives, with the record side of the company endorsing antipiracy schemes that make it more difficult for consumers to play songs back on digital devices. When Sony label artist Celine Dion released her single "A New Day Has Come" last year, for example, the track included encryption technology that rendered it unplayable on most PCs, including Sony products.

Sony's internal conflicts are mirrored in the larger industry, where the digital piracy issue has pitted the entertainment and electronics companies against each other in a lobbying battle in Washington. Legislation has been proposed that would allow the government to mandate copy protection technology for consumer electronics devices, if the industry cannot work out voluntary standards, sparking bitter complaints from PC makers.

In a sign of Sony's disarray, Sony Music in January appointed an executive with no music experience to lead the division upon chief executive Tommy Mottola's resignation after 15 years at the helm.

Andrew Lack, former president of NBC and longtime head of the network's news operations, faces a tough task turning around Sony Music, which lost $142m last year. He recently announced a restructuring plan that will combine some operations and could see as many as 1,000 employees cut from the payroll.