Apple vs. Apple: Perfect harmony?

Can Steve Jobs turn around a tough legal problem and get his beloved Beatles in an iTunes exclusive?

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
5 min read
As eager Macintosh developers waited for Steve Jobs to speak, the familiar strains of "Magical Mystery Tour" filled the darkened hall at an Apple Computer conference in June.

A buzz arose in the San Francisco hall. Did it mean Apple Computer had finally settled its trademark litigation with Apple Corps, the company founded by the Beatles? Was Apple's CEO about to announce a historic alliance between his iTunes music store and the surviving members of the Fab Four?

The answer was no, and music industry sources say recent rumors of an incipient settlement are equally unfounded. But Apple watchers eager to see such a pact remain hopeful.


What's new:
Speculation is once again rising that Apple Computer is in talks with Apple Corps to resolve a trademark dispute. One report quotes a legal source predicting the "biggest settlement anywhere in legal history."

Bottom line:
Steve Jobs is an avid Beatles fan, and some say that an alliance between the two companies would give iTunes needed differentiation in the online-music market. But others say rumors of an impending settlement are unfounded and question whether a big payout would make good business sense for Jobs' company.

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Music industry sources have said representatives of the surviving Beatles are at last discussing ideas for digital distribution with online companies but are asking for as much as $15 million for six months of exclusive rights to the music. That high price has some observers betting that Apple Computer might be the only company ready to pay, particularly if the payment comes attached to a legal settlement in which millions of dollars are already changing hands.

"In a market where differentiation is hard to come by, any means of differentiation is going to help," said Jupiter Research analyst Michael Gartenberg. "It would not surprise me if, as a part of a (legal) arrangement, they would come up with some kind of deal for the store."

Attorneys for both sides declined to comment on the status of the case. Apple Computer reiterated its previous statement on the issue, saying the two companies "have differing interpretations of this agreement and will need to ask a court to resolve this dispute."

The latest round of speculation stems from a report in Hollywood trade magazine Daily Variety last week that a deal between Apple Computer and Apple Corps might be near and that one legal source expected it to be the "biggest settlement anywhere in legal history."

However, music industry sources call that report baseless.

Legal experts separately question whether the settlement would really be among the largest non-class-action settlements, as Variety reported.

"I would take that proposition with a big grain of salt," said Lee Bromberg, an intellectual-property lawyer and founding partner at Boston-based law firm Bromberg & Sunstein. "I can't imagine it is going to be the biggest settlement we've ever heard of."

The trademark litigation between Apple Computer and Apple Corps could conceivably stretch on for many more months, or even years, legal experts said.

The Beatles' business operation sued Jobs' company a year ago, more than a decade after the computer company paid more than $26 million to settle the first trademark lawsuit with Beatles representatives. That settlement included an agreement that laid out the respective ways each company could use the Apple name. The release of iTunes had violated that agreement, Apple Corps contends.

According to a recent court decision quoting the 1991 settlement agreement, the Beatles were given the right to use the Apple name wherever their songs were involved and on "any current or future creative works whose principal content is music." However, Apple Computer was allowed to use its brand on "goods or services...used to reproduce, run, play or otherwise deliver such content," as long as it was not on physical media such as a CD.

The idea that Apple might pair any settlement with a deal to bring the Beatles to iTunes is seen as a natural for Jobs, who is an avowed Beatles fan. Jobs has been known to feature the band's music when demonstrating Apple products, and the company included songs from two Beatles CDs on the iPod devices it gave to reporters when the music player debuted in 2001.

But money could be a sticking point no matter what the size of a settlement in the trademark lawsuit.

According to sources in the online music business, representatives of the Beatles have talked to a handful of digital music companies about exclusive rights to the Fab Four's music, for a limited time period. One idea floated has been to create an online ministore for the band, where song downloads might share digital shelf space with DVDs, videos and interviews.

Apple does not create separate Web-based stores, but it has created a separate category for Disney works inside the iTunes store. Some industry insiders have speculated that if the Beatles want "premium" treatment, Apple could similarly create a separate, high-profile category for the band. And although the computer company doesn't yet sell videos or DVDs, it does offer spoken word content, such as interviews, through a partnership with Audible.

Preliminary discussions across the online music industry have not gone far, however. Companies from Microsoft down have decided that the price on such a Beatles deal--which some have said has ranged as high as $25 million--was too steep.

Even a $15 million payment to Apple Corps would be difficult for a digital music company to recoup quickly. Songs that sell for 99 cents online typically require about 75 cents in payments to the associated music labels and music publishers. Nearly 15 cents typically goes for overhead, leaving online song stores with a margin of about 10 cents per song at best.

That would require a store to sell 150 million songs to break even on a $15 million payment to Apple Corps--a steep goal, even if the deal was ultimately responsible for a blitz of publicity.

But of course, it may all depend on how big a Beatles fan Jobs really is.

"That may, in fact, be a big driver to a settlement in this case," Bromberg said, but he cautioned that Jobs may want to curb his enthusiasm. "If he looks too eager on that score, it's going to cost him."