Apple + Universal?

A month after news of Apple Computer's start-up subscription music service, reports began circulating that the company was negotiating to buy Universal Music Group, the dominant player in the global music market. The rumored buyout, first reported April 10, was variously quoted at $5–6 billion. The discussions between Apple and UMG may have been blown out of proportion; by April 12 the New York Times was suggesting that Apple might invest in UMG, but was in no position to make an outright acquisition.

Apple has already licensed UMG's catalog of recordings for sale to users of its soon-to-debut subscription music service, tailored for users of Apple computers. The company reportedly has also made similar deals with all of the other major music labels—BMG, Warner Music, EMI, and Sony Music. Apple CEO Steve Jobs is reportedly convinced that the era of free downloading is waning due to unrelenting legal pressure from the music industry. Apple's "rip, mix, burn" ad campaign last year alienated many music executives. In a bit of turnaround, the packaging on Apple's popular iPod portable music player tells buyers "Don't Steal Music" in four languages—in part because they may soon be buying it from Apple.

Apple Computer posted an $8 million loss on sales of $1.47 billion for its fiscal first quarter ended December 28. The company also posted a loss for the previous quarter, the first consecutive quarterly losses since Jobs returned as CEO in 1997. Last year, Apple had sales of about $5.74 billion, and reportedly has cash resources of about $4.4 billion. The buyout rumors hammered Apple stock as investors failed to see the connection between a software-and-computer company and an entertainment firm. On Friday, April 11, Apple was down $1.17, or 8.1%, to $13.20/share.

UMG, which controls 25% of the global market in recorded music, was the only one of the industry's "Big Five" to post a profit in 2002. Even so, its operating profit declined 23% to $510 million. UMG appears a certain buyout target for someone, but no one in the music industry has made an offer, with the global music market slipping 7% overall last year, according to figures released in April by the International Federation of Phonograph Industries. UMG's parent company, Vivendi Universal SA, needs to shed many of its assets to pay down its $20 billion debt. UMG will likely be split off from Universal Studios and the Universal theme parks; Vivendi's other North American assets, including the USA Network, may also be sold separately. Commenting on the Apple rumor, one UMG marketing executive told us, "Someone's going to buy us. I just hope it's someone who knows the music business."

Apple isn't the only member of the computer industry to see the value in owning a chunk of the music biz. Reports dated April 9, from Los Angeles and Sydney, Australia, mentioned a possible acquisition of Warner/Chappell Music, the music publishing business of AOL Time Warner, by chipmaker Intel. The potential deal, valued at $2 billion, would put the world's largest chipmaker in the music copyright business and make a small dent in AOL Time Warner's massive $45 billion debt. Warner/Chappell is the second biggest music publishing company in the world, the largest being EMI Music Publishing. Warner/Chappell controls the rights to more than 2.4 million songs, including many Motown classics, and the works of songwriters Dianne Warren, Bob Dylan, and George and Ira Gershwin.