Apple Computer (AAPL ) chief Steven P. Jobs is known in the music industry as Mr. "Rip. Mix. Burn." That was the title of an ad campaign that Apple ran in early 2001 for its iTunes software. Music executives fumed that it was a clarion call to Apple customers to steal music by downloading it from the Internet. Then, in 2002, Apple's portable MP3 player, the iPod, went on sale and quickly became the hippest way to listen to such "hot" tunes on the move.
Now, Jobs is angling to sell online music. But how Jobs intends to build a thriving online music business where so many others have stumbled isn't clear. Sources confirm that Apple is in talks to buy all or some of Universal Music. Whether or not that happens, Apple is expected by the end of this month to announce its own service, expected to be called the Music Store.
What's Jobs really up to? Mostly, he wants to maintain Apple's hold on its loyal fans. Despite a return to profitability in the quarter ended Mar. 29, after two straight quarterly losses, Apple sales to its core customers, including schools and ad agencies, are weak. The company announced earnings of $14 million on sales of $1.48 billion, down from $40 million in profits a year ago and sales of $1.5 billion.
Jobs hopes an in-house music site might drive more traffic Apple's way. Right now, Macolytes can't use the leading for-pay online music sites, which are largely Windows-only. Still, the big question is whether Jobs can build an online music store that is more compelling than free. If anyone can do it, it should be Jobs, who time and again has turned technology duds into winners, from the laser printer to wireless networking.
Apple, as always, is betting on simplicity -- a concept not usually associated with the current crop of music sites. The likes of MusicNet, pressplay, and Listen.com offer monthly subscriptions. These allow subscribers to listen to, download or burn limited numbers of songs. Some sites also charge subscribers 99 cents to burn a song onto a CD or load it onto an MP3 player. But there are also restrictions on some services, including downloads that disappear when a subscription lapses.
Apple's Music Store is expected to have simpler rules. Each song will cost 99 cents, no strings attached and no subscription required. What's more, people who have seen the service say it exudes Apple's trademark elegance and simplicity.
To pull it off, Jobs would have to get enough labels and artists to agree to a simple 99 cents-a-song approach: a stiff challenge. That's where Universal Music might come in. According to a source close to the talks, Apple could buy a 10% or 20% stake of the company. That would give Jobs access to Universal's roster of artists, including U2, Eminem, and Sheryl Crow.
Even if a Universal deal doesn't happen, Jobs may be able to get the labels to play ball. For starters, the Mac's small market share of 3% makes record execs less worried about piracy. Still, Apple products don't yet feature piracy protection, something it will have to address to earn the labels' trust.
The Music Store probably wouldn't make money at first -- and that might not matter. Analysts say licensing royalties are running at about 65 cents a song. Apple would have to cover another dime or so to pay for bandwidth, servers, and the staff to run them. While high marketing costs might lead to red ink in the short term, it would be well worth it so long as it helps stem further erosion of Apple's market share. It could also boosts sales of the fast-selling iPod, which already has 50% of the portable jukebox market, says market researcher IDC.
But Apple won't be able to keep an innovation edge for long. If Jobs figures out how to sell music on the Net, rivals will be quick to follow. AOL plans to offer 99 cents downloads by yearend. Wal-Mart Stores (WMT ) and Amazon.com (AMZN ) also plan to launch services. "Apple entering the space is another step forward," says Jeff Somers, Amazon's music group merchandising manager. A necessary step for Apple, and maybe a positive one for everyone else.
By Peter Burrows and Ronald Grover
With Tom Lowry in New York