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Apple Reportedly in Talks to Buy Universal Music

In a pairing that would alter the architecture of the music business, Apple Computer Inc. is in talks with Vivendi Universal to buy Universal Music Group, the world’s largest record company, for as much as $6 billion, sources said.

Such a seemingly unlikely combination would instantly make technology guru Steve Jobs, Apple’s co-founder and chief executive, the most powerful player in the record industry.

Universal, which reaps about $6 billion in sales annually from artists such as 50 Cent, Shania Twain, U2 and Luciano Pavarotti, would be controlled by a maverick who revolutionized the computer market and coined the mantra “rip, mix, burn,” which many in the music business read as an invitation to electronic piracy.

The discussions, a closely held secret for several months, could founder over unresolved issues. Apple hasn’t made a formal bid but may offer $5 billion to $6 billion for the music company before Vivendi’s April 29 board meeting, according to the sources.

Jobs and other Apple representatives declined to comment, as did representatives of Universal Music Group and Vivendi Universal.

The Cupertino, Calif.-based computer maker’s surprise play for Universal Music could alter the dynamics of the bidding for Vivendi’s entertainment assets. The French giant, in a move to reduce debt, seeks to raise $7 billion this year by selling assets that probably would include some or all of its Universal film, television, theme park and music units.

Investor Marvin Davis has offered about $13 billion for 65% of the entertainment assets and has been the only known bidder to express serious interest in the music company. A separate sale of the music operation would appear to work in favor of Liberty Media Corp. and others that are focused on the company’s other entertainment properties.

Jobs’ pursuit of Universal comes at a time when Apple, with less than 3% of the desktop computing market, has been struggling to find its next wave of growth and the music industry has been buckling beneath the pressure of online piracy and falling sales.

Defying conventional wisdom, Jobs apparently is betting that music is finally on the verge of becoming a profitable presence on the Internet. Apple has been quietly testing a service that some music business insiders believe could pave the way for widespread online distribution of songs.

People who have tried the service, expected to debut by the end of April, say it makes downloading and purchasing music as simple and nontechnical as buying a book from Amazon.com. It allows users to buy and download songs to their computers with a single click and to transfer the music automatically to their portable MP3 players.

The computer maker, known for its iMac desktop computer and other high-profile products, posted an $8-million loss on sales of $1.47 billion for its fiscal first quarter ended Dec. 28 – marking the company’s first back-to-back quarterly losses since Jobs returned to the CEO post in 1997. Apple has annual sales of about $5.74 billion and had about $4.4 billion in cash, cash equivalents, and short-term investments as of Dec. 28.

Jobs, who also is chairman of Pixar Animation Studios, helped found Apple in 1976, then stepped down as its chief nine years later to launch Next Inc. He returned to Apple when it acquired Next.

Universal Music Group, which saw operating profit slide 23% to $510 million last year, dominates the industry in 63 territories around the world and accounts for about one-quarter of all CD sales. Headquartered in New York, the record company boasts a deep roster of executive talent and music stars on such top labels as Interscope and Def Jam.

Vivendi first approached Jobs in December, sources said, not long after its music executives visited Apple’s headquarters to view a demonstration of his new digital service. Impressed by the service and Jobs’ vision of music’s future, Vivendi initially proposed selling him a minority stake in its record operation, sources said.

Since December, the discussions have broadened considerably, with Jobs attending a series of meetings with Vivendi chief Jean-Rene Fourtou and other top executives in New York, Los Angeles and Cupertino, sources said.

By March, Jobs began weighing the possibility of buying the entire music division and hired investment bank Morgan Stanley to conduct due diligence, sources said. This week, accountants were poring over bookkeeping records at Universal offices in New York and Santa Monica, sources said.

Jobs’ interest in owning a music company comes at a time when the record companies believe that piracy has decimated CD sales around the world, shrinking revenue nearly 25% since 2000. Last year, Jobs infuriated the industry with Apple’s “rip, mix, burn” marketing campaign, which many executives believed promoted piracy of music on Apple’s computers, though Jobs insisted that the technology was meant only for legal copying.

People close to Jobs say he is convinced that the music industry is about to turn a corner in the copyright war. With the government shutting down pirate Web sites and the record industry now going after individuals for alleged piracy, the Apple chief believes digital theft will become increasingly more complicated, prompting fans to migrate to legitimate services, sources said.

Analysts believe that the 48-year-old Jobs will have to do more than make legal downloading easy. They say he also will have to slash prices, possibly to as little as 10 cents per song, to persuade consumers, many of whom have grown accustomed to free downloads, to buy music from Apple.

The launch version of Jobs’ new service was developed by Apple specifically for users of its computers and iPod MP3 device. Given its minuscule market share, Apple is likely to develop a version of the service to run on computers using Microsoft Corp.’s dominant Windows software.

Jobs already has secured deals with four of the world’s five largest music corporations to allow their catalogs to appear on the service, sources said.

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