Wednesday, April 23, 2003

Apple/Universal Music Group follow-up We reacted negatively a few days back to rumors that Apple might buy Universal Music Group (UMG) from Vivendi. So, did the stock market, which gave Apple a drubbing on the rumors. Among other reactions, the best we've read is in Businessweek Online where, in an article entitled "Steve, steer clear of Universal Music". The author, Alex Salkever, sums up all the reasons to avoid the deal. Most of his points are good, but standard, business arguments: cash issues, distraction from the real business of the company, and a possible legal mess from a former Vivendi acquiree, Barry Diller. Two other points stick out for our oligopoly discussion. In the first he states, " No company has successfully managed to be both a device maker and a content producer at the same time. The only one that has come close is Sony with its PlayStation game platform. Sony did well for a while making consumer electronics while producing movies and music. Now both units are lagging -- and moving in different strategic directions. The electronics unit wants to freely distribute content. But the entertainment units want to sell more premium content and restrict use. If Apple tries to do both, it may soon mirror Sony's plight." This illustrates well the perils of any vertical integration in an oligopoly, especially if you want to be an open platform.  How can you get other developers to work to make your platform better if they fear you will compete with them? ( A near-monopoly like Microsoft is a differnt matter.) How can you decide when a move will make money for one vertical level of your firm, but lose money for another? Salkever's second point is about timing. "Pssst, Steve. You could probably get a better deal in six months. Both Time Warner and Vivendi are also shopping their music businesses, while the sector's fundamentals are rapidly weakening. As the music biz continues to shift from CDs, a lucrative but tightly controlled distribution business, to the wild new frontier of online delivery, music sales could face further upheaval. Jobs could well be foolishly buying an asset at a price that'll look inflated in the very near future. " One of the great causes of the downfall of oligoplies is untimely buying. That's the reason both Vivendi and AOL Time Warner need to discard multiple units. They both bought too much at the wrong time. Many companies find it hard to digest big purchases. The danger is greatest when they wander from their real expertise and don't understand the essential value of what they buy, as with water companies buying music companies/movie studios or publishing/entertainment firms merging with computer services.. Finally, the music indutry is in the midst of a catstrophic change. While oligopolies can ride out most disruptions - and the music industry with its phalanx of lawyers beating up on college students is surely trying  - they can't hold back the tide. Some companies will survive, but all wll be battered by the sea-change of digital music. Apple should not dive in. 9:16:04 PM

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