Jobs Thinks ‘Different’ and Many Marvel

If Apple Computer Inc. winds up with a blockbuster deal to purchase Universal Music Group, it will be because Apple Chief Executive Steve Jobs believes he has discovered the secret to selling music online -- something that has eluded the sharpest minds in the music and technology industries for years and ruined many entrepreneurs before him.

Illicit song-swapping services such as Napster and Gnutella have lured tens of millions of users into downloading songs free; meanwhile, licensed distributors of music have managed only tens of thousands of customers, and several firms have gone under.

With piracy eroding compact disc sales for three straight years, it looks to some skeptical observers like a bad time for Apple to think about spending up to $6 billion to get into the music business.

But plenty of technology firms, including software powerhouse Microsoft Corp., have been negotiating deals on a number of fronts with record labels and movie studios, peaceably enhancing copyright protections while convincing more record executives that legitimate online distribution is their only way out of a downward spiral.

“There are going to be some new relationships,” said computer industry analyst Roger Kay of market research firm IDC. “Microsoft and even Dell [Computer Corp.] have been sniffing around Southern California trying to find the right combination to that lock.”

Other technology companies have considered buying a label in the last few years, according to executives in both camps. Those explorations foundered in part on concerns about merging very different corporate cultures and mastering the arcane financial structures of the record business.

“Unlike two years ago, when content looked like a black hole, we’re on the cusp of being able to build digital music businesses,” said Sean Ryan, CEO of Listen.com Inc., which offers a subscription service for digital songs. “Over a period of time,” he said, digital music “could be larger than traditional music businesses.”

Last month, Jupiter Research predicted that consumer spending on digital content -- including music -- would grow from $1.6 billion in 2002 to $2 billion in 2003.

With its share of the worldwide desktop computer market stuck below 3%, Jobs has been trying to transform Apple into something more than just a computer maker.

After a slow start, the company has moved more quickly than its rivals to help consumers use their computers to manage music, photos and video. Its iPod portable digital music player is one of the most popular products in its segment.

So it’s less improbable than at first blush that Apple would try something even further removed from its history, said independent computer analyst Amy Wohl, a onetime Apple consultant.

“They have to do something dramatic,” she said.

Presumably, one former Apple executive said, Jobs thinks buying a record label will move Apple away from the intense cost competition of the computer landscape into a new direction that makes the most of its software and connection to consumers.

“It put a smile on my face when I heard about this. It’s fascinating,” the executive said. “Apple always needs to pull a rabbit out of its hat. Universal is a pretty big rabbit.”

Apple and Universal have declined to comment on reports that such a deal is in the works, but Apple shares fell 8% on Friday on word of the discussions, which were first reported in The Times. Apple has yet to make a formal offer, and sources cautioned that the negotiations may not result in a deal.

The prospect of a takeover of Universal in particular was cause for wonder in business circles over the weekend. Many music industry executives said they doubted that the talks would result in an outright purchase of Universal.

“Most right-thinking technology companies come to understand this isn’t their core competency, and they move on,” said Jim Griffin, CEO of Cherry Lane Digital, a media and technology consulting firm. “This is a tough town to come to with a big wallet.”

Universal was one of the most virulent foes of Napster, the pioneering music file-sharing system. The world’s largest music distributor also was particularly slow to license its songs for electronic use, record executives said.

But despite their public squabbling -- a year ago, Silicon Valley and entertainment executives were trading accusations on Capitol Hill over whether profits were prompting computer firms to turn a blind eye to piracy -- the two sides lately have come to accept that they must find a way to work together.

“The music business and the technology industry have had a much better relationship than the public-policy rhetoric would lead you to believe,” said Hilary Rosen, head of the Recording Industry Assn. of America. “I’m a firm believer that we will have a new electronic delivery format.”

Much of the change has been against the will of the record companies, which have been battered by piracy and unable to turn the tide with lawsuits and lobbying. The fact that Universal would consider hitching itself to a niche player in the computer business further underscores the feeling among some music executives that they have lost control.

Taking on Universal would carry enormous financial risks for Apple, which already is struggling to reverse two straight quarters of losses. Like Pressplay, MusicNet Inc. and Listen.com, Apple may not be able to make digital music pay enough quickly enough.

A deal also could jeopardize Apple’s relationship with rival music companies. Apple needs their cooperation for its forthcoming digital music distribution service, whose goal is to make it as easy to buy songs online as it is to buy books from Amazon.com.

In late 2000, when German media conglomerate Bertelsmann invested in Napster Inc., it expected that other record companies would join its BMG label in licensing content for a legal version of the Napster service. Instead, the investment prompted the other labels to take a harder line in their negotiations with Napster because they had no interest in putting money in Bertelsmann’s pocket. No deals were ever struck.

But recording industry sources said Apple’s online music service has locked down deals with all five major music companies, and a transaction with Universal isn’t likely to scare the others away.

The cultural issues of combining a computer company and a record label may be less daunting if it is done with such a bold stroke, some industry executives and analysts said. They speculated that Jobs may have concluded that the only way to avoid the often-voiced frustrations of negotiating with the label bosses is to become the boss himself.

“Apple is doing it out of total frustration,” said stock analyst Brett Miller of A.G. Edwards & Sons, who owns no Apple shares.

Besides, if Apple seems like an unlikely owner for Universal, it still may be a better fit than the label’s current parent, Vivendi Universal.

“Now they’re owned by French utility company,” Rosen of the RIAA said. “What’s seamless about that?”

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Times staff writer Alex Pham contributed to this report.