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Apple has appetite for U music

Deal could transform digital music distribution

Could Apple, the maverick tech company with the “think different,” be the one to get the ailing music biz to do just that by acquiring the Universal Music Group?

Assuming talks between Apple and Vivendi Universal bear fruit, the combination of Steve Jobs’ technological vision and UMG’s vast catalog could kick-start the revolution in digital music distribution that everyone’s been waiting for since Napster razed the musical landscape three years ago.

One factor working in favor of a deal with Apple is that it appears to have arisen from a friendship between Jobs and UMG topper Doug Morris. Apparently Morris approached Jobs about a combination as early as October.

Investors soured

Still, Apple investors were none too thrilled by the buzz.

Apple shares tumbled more than 8% in Friday’s trading, indicating it could be politically difficult for Jobs to put together a stock-based offer. Vivendi shareholders were more circumspect, pushing the stock down just 0.3% by the end of the day.

Jobs’ reputation as an innovator — from the first Macintosh computers 20 years ago to the iPod music player — is undisputed, and his ability to put a user-friendly face on new technology may help him succeed where the industry has failed in efforts to sell songs in cyberspace.

The marriage would also have its advantages for Apple.

Jobs has managed to buck the commodification of the PC business by giving the company’s machines a personality and style, but he and rivals like Microsoft are making big bets on digitalization. “If you look at it from Jobs’ perspective, he realized early on that the future of personal computing is in digital media, and music is on the front lines of that,” said Phil Leigh, a VP at research firm Raymond James. “No application offers more promise right now than digital music does.”

So-so results

Unfortunately, deals between technology companies and the record biz have not exactly set the world on fire. The first major tie-up came between Sony and CBS Records. The resulting Sony Music division has had its ups and downs but has stuck to the standard record-company model throughout.

Another Japanese conglom, Matsushita, tried its hand at running MCA Records in the 1990s, withmiddling results.

And the merger of AOL and Time Warner — which includes the Warner Music Group — has yet to yield the synergies promised three years ago. In fact, that cash-strapped media giant has been entertaining offers to sell off its music assets, either as a whole or in parts.

Ironically, one rumor making the rounds is that Intel could bid for the Warner-Chappell publishing catalog, a deal that would give the chipmaker its first foothold in the media space.

Apple advantages

But Apple’s interest in UMG, the largest of the five music majors, makes sense in several ways.

For one thing, Jobs is no stranger to the entertainment world: He runs animation house Pixar, home to such mega-hits as “Monsters, Inc.,” the “Toy Story” franchise and “A Bug’s Life.”

Financially, Jobs is also in a strong position. Apple is virtually debt-free and is sitting on $4 billion in cash and equivalents. The company would have little trouble scaring up an extra $2 billion in financing to cover a $6 billion or so asking price for UMG.

In addition, the aforementioned tech-music tie-ups were consummated prior to online file-sharing revolution, which threw the potential of music on the Internet into stark relief. Jobs is planning a music-subscription service customized for Apple users; owning a music company could speed him on his way to bringing online distribution into the mainstream.

Cost-cutting likely

Any deal would almost certainly mean major structural changes at UMG.

The company, which controls almost a third of the recorded music market, is notorious for its high costs, which have dented profitability in recent quarters. Jobs would almost certainly take an axe to overhead to get the most of his investment.

“They have a cost structure over there that was not established on planet Earth,” said Leigh, who estimated that with tough cuts UMG would add to Apple’s per-share earnings within a year.

“Jobs doesn’t have the reputation of being a cost-cutter, but he’s not crazy, either,” Leigh added.

That Morris would likely remain on board could make a transition a lot smoother — though it remains to be seen whether the micro-managing Jobs would give Morris the latitude to run the company independently.

To be sure, Apple is by no means the only suitor for UMG. Microsoft has apparently been kicking the tires as topper Bill Gates may be eager to keep such a key content provider from falling into the hands of an arch-rival.

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