Apple in talks to buy Universal Music Group — report

What will The Beatles have to say about that?

Apple CEO Steve Jobs may once have dated Joan Baez, but is he really itching to become a music industry player? If the LA Times is correct, that could well be what he achieves.

According to the paper, Apple is in talks to buy Universal Music, one of the world’s ‘big five’ record labels, from its troubled parent Vivendi. The Mac maker has yet to make a formal bid for the company, though negotiations have been continuing for the last couple of months. Apple is apparently looking to pay $5–6 billion. LA Times sources say Apple may make a bid on 29 April, when Vivendi’s board is next due to meet.

Certainly, Vivendi is willing to sell. The debt-laden French media giant, which bought Universal from drinks conglomerate Seagram a few years back, aims to rid itself of $7 billion debt this year. This week it sold its preference stake in AOL Europe to AOL, for $812.5 million, for example. Universal is a prime candidate for a sale, either in parts — music, movies, theme parks — or as a whole.

Universal is the world’s largest music label, accounting for around 25 per cent of world CD sales. But last year its profits shrank 23 per cent to $510 million — rather more than Apple’s $65 million — on the back of a worldwide downturn in music sales. That downturn has been largely blamed on Internet music piracy.

To date, the major labels have largely failed to capitalise on the Internet as a sales medium. It appears to have been Apple’s move to establish such a service that got it talking to Universal. This despite the fact that its early move to promote CD ripping and burning, and its successful launch of the iPod MP3 player, have both been criticised for encouraging piracy.

Apple may not have come up with a business model that sits between the tight control imposed by the music industry’s online efforts and the MP3 sharing free-for-all. The company is probably more keen simply to find ways to generate revenue from its established customer base, and to ensure that Mac users aren’t frozen out by the numerous online music services that only support Windows.

Apple’s music service, which the LA Times first revealed last month, is set to launch at the end of this month. Not coincidentally, it’s expected to unveil two new iPods at the same time. The music service appears to have the backing of all the major labels.

A demonstration of the service, held with music industry executives last December, appears to have been what attracted Vivendi to Apple — it approached Jobs, not the other way round. Since then, the two companies’ talks have broadened to include Apple’s potential acquisition of Universal, the Times claims.

Apple has even hired Morgan Stanley to do due diligence on the deal, a process that is currently underway.

Curiously enough, back in 2000, Jobs said he wanted Apple to be more like Sony. That was seen as a reference to the Japanese giant’s success as a consumer brand, but since Sony is also one of the world’s largest music labels — through its Sony Music Entertainment subsidiary — perhaps Jobs was taking a wider view.

If such a plan is in place, perhaps founded on the acquisition of Universal, Apple Computer must first deal with the restrictions placed upon it by the Beatles’ Apple Corp label, which sued the Mac maker in 1989 for trademark infringement. Both Apples settled out of court in 1990, and Apple Computer essentially agreed not to enter the music business. It also paid Apple Corp $26.4 million. Presumably Apple’s lawyers have been working on this one for some months now.

Apple currently has around $4.4 billion cash in the bank, so it would need extra funding to enable it to buy Universal for cash. And with Vivendi Universal’s cash needs, a pure stock-swap seems unlikely. Pixar, Jobs’ other company, made $90 million last year, so perhaps the deal will see the three come together. Pixar’s distribution deal with Disney will come to an end with the release of the upcoming Finding Nemo, so Vivendi may be interested in picking up the lucrative contract.

Apple must also face investor Marvin Davis who has offered $13 billion for 65 per cent of Universal’s assets, including its film and theme park businesses, and others, including Liberty Media, which want parts of the Universal group.

Ownership of Universal would certainly be a major departure for Apple, but it’s not beyond the bounds of reason. Apple sells to content creators, and it sells to content users. Its current strategy is founded upon the increased use of digital media by both constituencies. Owning Universal would give Apple the clout to offer the kind of online music service it wants to without having to endure limitations placed upon it by the big labels. Then again, it wouldn’t have a monopoly, and will still have to work with Sony, EMI, BMG, and Warner.

Equally, it’s unlikely to freeze out the Windows world, but Apple could certainly do a lot of damage to Microsoft’s media player and Digital Rights Management (DRM) strategy. It would also bring Apple much needed diversification, particularly important if the computer business continues to do as poorly as it has been of late.

A purchase is by no means certain, but it would be attractive. ®

Related Link

LA Times: Apple Reportedly in Talks to Buy Universal Music (registration required)

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