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Digital Entertainment

Apple Makes Nice with Music Labels

Apple appears poised to plug at least two holes in its product lineup. Not only is the consumer-electronics maker working on a media-friendly tablet computer that would make it easier for users to listen to music, view photos, and watch video, it's also in talks with music labels to include more content with sales of digital music at the iTunes online music store.

The four largest record companies, EMI, Sony (SNE), Warner Music (WMG), and Universal Music Group, are in talks with Apple to include an interactive package of photographs, video clips, lyric sheets, and other items, the Financial Times reported July 27. The newspaper also provided fresh detail about the tablet, a device previously reported by, saying it would have a display size as large as 10 inches.

Extra music content would be aimed at boosting sales of albums, currently sold via iTunes without many of the extras that typically accompany a CD or, in an earlier era, would have been found inside a record sleeve. That would be welcome news to the music industry, which has been buffeted by flagging album sales.

One Song at a Time Sales of albums in digital format have risen 19%, to 39 million, so far this year through July 5, from 33 million a year earlier, according to Nielsen SoundScan. Yet sales of albums in the CD format have tumbled to 141 million units this year, from almost 179 million a year earlier. "Selling more albums is certainly a bigger deal for the content providers," says Shaw Wu, an analyst with Kaufman Bros. Equity Research. "One of the long-term trends they've been facing has been the shift to single tracks. [It] has been really tough on their average selling prices."

Consumers have tended to prefer buying digital music one song at a time, and have bought 636.2 million of them so far this year, up from 563 million a year earlier.

The prospect of another Apple mobile device, one sitting somewhere between an iPod touch or iPhone and a MacBook notebook computer, has been the subject of speculation for some time. PC makers like Hewlett-Packard (HPQ) and Acer have embraced the concept of the netbook—essentially small and light notebooks that sell at reduced prices. But Apple executives, including Chief Operating Officer Tim Cook, have said they're not interested in the category.

An Army of Software Developers A tablet device that encompasses the media functions of an iPod, preserves the robust Web experience in a browser, and handles e-mail and text messaging could be a compelling media offering. TV shows bought from iTunes would be both mobile and appear on a screen that doesn't seem absurdly small when compared to a TV set. With a Wi-Fi connection, YouTube (GOOG) and Hulu videos might also seem more appealing for longer viewing.

Such a device would seek to boost the popularity and market penetration of Apple's mobile version of OS X, says Michael Gartenberg, an analyst at consultancy Interpret. "People have been thinking about this as a product strategy, but what it really is is a platform strategy," he says. "If you don't want an iPhone, then there's a device running OS X that will appeal to you. It may be the iPod touch, or it may be this tablet, or it may be something else."

And all those devices, he says, will have an army of software developers behind them, which will give Apple a leg up on mobile rivals like Research In Motion (RIMM), Google's Android, Microsoft (MSFT) Windows Mobile, and Nokia's (NOK) Symbian OS. "Apple wisely understands that one of the determining factors will be the availability of applications," Gartenberg says. And until now, Apple has had a long, long lead on mobile applications: The iTunes App Store carries 65,000 apps and has clocked 1.5 billion downloads in its first year of operation.

And if it wasn't already abundantly clear how important the mobile platform is becoming to Apple, during a July 21 conference call COO Cook said the combined number of iPhones and iPod touches amounts to an installed base of 45 million. That's almost twice the number of Macs that Apple has sold since 2007.

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