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Could Apple really buy Universal Music?
It's a gamble, but the music industry needs some radical reshaping -- and that's an Apple specialty.
April 17, 2003: 11:01 AM EDT
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - The digital music world is in a tizzy. I'm talking about the flurry of speculation regarding Apple CEO Steve Jobs's rumored interest in purchasing Vivendi Universal's music division.

First reported by the Los Angeles Times last week, the tale took on a life of its own and was still the discussion du jour on many a digital music mailing list a few days later. Rumors even began circulating that Microsoft (MSFT: Research, Estimates) was interested in Universal Music (V: Research, Estimates).

As we wait to see if Jobs will pull the trigger, let's assess what the deal could mean for Apple (AAPL: Research, Estimates), its investors, and the digital music space at large.

First, the company. Apple has long prided itself on its cutting-edge ideas and designs. When it first introduced the iMac in 1998, the company broke with common computing wisdom and shipped the units without floppy drives. Aside from positioning the company as forward-thinking, the move opened up a nifty revenue stream from after-market sales of external floppy drives.

Clearly, Apple knows how to make money pushing its vision of the future. Other innovations include its Newton PDA device and its groundbreaking iPod MP3 player. Of course some of these innovations were successes (iPod) and others were failures (Newton). But none was as revolutionary as the rumored Universal Music deal.

According to the Times article (representatives from Apple and Universal declined to comment), the deal would cost Apple between $5 billion and $6 billion -- far more than the roughly $4 billion the company has in cash reserves. Investors reacted negatively when the rumor first broke, driving Apple's stock down 8 percent on Friday.

Gartner analyst P.J. MacNealy summed up investor attitude, saying, "I see there being cheaper ways to start a music service without buying a music company."

This may be true, and Apple is planning to launch an online music service soon with tunes licensed from all five major labels. Some critics have expressed concern that with the music industry in a funk (global sales fell 7 percent in 2002 to about $32 billion) and with no turnaround in sight, buying Universal now is too much of a gamble for Apple.

A gamblin' man

But Apple is a gambler, and the recording industry needs some radical new leadership.

"If the music industry is going to pull out of its nosedive and create a new model that makes sense, it's going to need some kind of ownership that has the capacity to take risks," says Aram Sinnreich, a former music analyst with Jupiter and now a doctoral fellow at the University of Southern California.

The industry's current approach to digital media -- a hodgepodge of unimpressive services for the consumer and legal roadblocks that have barely slowed post-Napster file-swapping -- has not done the industry a whole lot of good.

So, if you believe that the music business is in sore need of a shake-up, Apple's potential purchase of Universal Music could make sense.

"Apple's history of innovative management, customer-friendly focus, and great industrial design would bring new life to the music industry at a time when it really needs it," says Susan Kevorkian, an analyst with IDC.

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But things get a little tricky when you dig into the details. Even if Apple does make the purchase, it will own only one of the five major labels -- albeit the biggest one. If Apple were to open the floodgates and make its newly acquired music inexpensive and easy to obtain -- as none of the other major labels have done -- would consumers rush to get their hands on only one label's offerings?

That, dear readers, is at the heart of the gamble Apple faces. Could it persuade enough customers to sign up for its digital music service in a short enough time that the sheer number of users would force the other labels to play ball and adopt Apple's tactics?

It's a tantalizing scenario for sure. Even if the purchase doesn't come to pass in this round, the possibilities it portends have people thinking about a radical reshaping of the music world.

"In a few years," Sinnreich predicts, "I wouldn't be surprised to see all the major labels owned by other parent companies -- companies like Apple, Yahoo! (YHOO: Research, Estimates), or Microsoft." The music industry seems incapable of capitalizing on digital music. Could Apple do it better?

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