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Memo to Apple (AAPL) - Get Apple Inc. Report and Intel (INTC) - Get Intel Corporation Report: You don't want to go there.


Los Angeles Times

reported Friday that Apple was considering a purchase of

Vivendi Universal's

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Universal Music Group, the same week that market rumors circulated that Intel was interested in buying Universal.

But though it sounds sensible for a company that makes music-listening gadgetry to own a music company itself, history teaches otherwise. For hardware companies, taking over entertainment software companies usually turns out not to be a celebration of synergies, but a recipe for hemorrhaging money instead.

If you're skeptical, just go back to the early 1990s and see what happened to Japanese consumer electronics companies that invested in Hollywood. The theory was that in-house entertainment would pave the way for new video technologies. The reality was the companies dumped billions of dollars into a somewhat older technology: the toilet.

Of course, the idea that any music industry outsider could make money by buying a record company looks like quite a stretch these days. Beset by piracy, superstar-geared economics and a shortage of superstars, the music industry has been suffering falling sales over the past three years; the value of 2002 music shipments for U.S. manufacturers is down 13.5% from 1999 levels. Universal -- which, thanks partly to Eminem, had a 29% share of the U.S. market last year -- saw its worldwide operating income decline 23% in 2002. Even in better times, the music business in general and Universal in particular have proved hazardous to outsiders, as any Edgar Bronfman can tell you.


But Apple, the marketer of the iPod MP3 music player, and Intel -- a chip manufacturer that has often sought to increase demand for its technology by encouraging software developers to push hardware to its limits -- may figure that controlling a music company will make money for them in the long run.

As the compressed-data MP3 music format, portable MP3 file players and online file trading have grown in popularity over the past few years, consumers and consumer electronics companies have found themselves in conflict, in various ways, with Universal and the other major music studios. While consumers have rushed to listen to music in new formats and consumer electronics companies have supplied the necessary gadgetry, record labels -- fearful of losing control of their copyrights -- have been more cautious about venturing into these uncharted waters.

In this context, Apple and Intel may believe that by owning a significant chunk of the record market, they'll be able to direct the course of new technology, perhaps speeding along the development of favored hardware formats by committing to the release of their own company's music on that format.

That was roughly the same strategy envisioned by video-equipment manufacturers in the early 1990s, when

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bought Columbia Pictures, Panasonic parent


bought Universal Pictures (now another property that Vivendi is trying to unload) and


teamed up with Hollywood producer Larry Gordon.


And it didn't work, recalls Bob Gerson, editor-at-large of the consumer electronics magazine


and a longtime chronicler of the consumer electronics business.

"Sony and Panasonic and JVC all found out that if you're going to buy an entertainment company, you buy it as an investment and forget about the synergy business," says Gerson. "Which is why two of the three are out."

The only reason Sony is successful now, says Gerson, is that the company effectively erected walls between the hardware and software businesses. Synergy in the movies, he says, "amounts to nothing more than using products for plugs."

The scheme is doomed to failure for two reasons, says Gerson. First, he says, entertainment is not fungible. "If somebody wants a recording of Britney Spears doing whatever Britney Spears does," he says, "a recording of Barbra Streisand is not going to substitute." Thus, he says, you can't create demand for a new format by using it for one's own artists if other record companies don't go along. Sony may have helped its MiniDisc audio music system by releasing MiniDiscs of Sony artists, he says. "But even they discovered, if other companies don't go along, it doesn't do you any good."

The second problem, he says, is that owners interfere in the music business at their peril. "It's a people business -- there's no product," he says. "If your top execs walk out of your movie studio, where's your investment?" Similarly, asks Gerson, "What good is a record company if nobody's there?