At first glance, the conflict between Apple Computer and Apple Corps, the record company set up by The Beatles, looks like a straightforward trademark dispute.
Set to go before a judge in London this week, the quarrel centers on conflicting interpretations of agreements over use of the Apple trademark. A quarter century ago, Apple Computer (AAPL) agreed not to use the word Apple to sell music, cut The Beatles a check, and both parties happily went their separate ways.
ROUND TWO. That was then. Apple Computer has since become a force in music retailing, launching the iPod Music player in 2001 and the iTunes Music Store in 2003.
The current flap stems from an agreement reached in 1991 (late in the John Scully era), the second time Apple Computer tangled with the legacy of the Fab Four. That agreement gave the Cupertino (Calif.)-based outfit rights to the Apple trademark in connection with "electronic goods, computers, telecommunications equipment, data processing equipment." It also allows for trademark use related to "data transmission services" and "broadcasting services," as well as related promotional merchandising.
For those rights, Jobs & Co. paid the record company $26.5 million. Again, after cutting the deal, both parties went their separate ways.
"NOTHING TO LOSE." Fast forward to the iPod Era, when the record company is saying Apple Computer's foray into music sales violates the terms of the 1991 agreement. If it's money the record company wants, Apple Computer has plenty of it. It chalked up $14 billion in fiscal 2005 sales, and at the end of the most recent quarter it had $4.1 billion in cash and another $4.5 billion in short-term investments. The 1991 settlement amounts to less than a day's revenue.
As before, Apple will face pressure to settle, if only to protect the viability of its business, says Lee Bromberg, a trademark lawyer with the Boston firm of Bromberg & Sunstein. By contrast, "the only risk to the record company is the cost of the litigation," he says. "It has nothing to lose here, and they may feel that its time to roll the dice." But Apple might also be inclined to say enough is enough, and let the matter go to trial. It could argue, for instance, that downloads -- be they music, video, or spreadsheets -- are comprised of digital data, and it could point to clauses in the 1991 deal that cover "data transmission services" and the promotion of those services.
MICHAEL JACKSON'S BLUES. "Apple Computer can argue that its use of the trademark has nothing to do with music," Bromberg says. "They could say, 'This isn't our music. We're selling access to this service.' That's another argument for a low royalty."
For the record company, a big settlement could be a way of getting its hands back on one of the crown jewels of The Beatles' legacy: the publishing rights to some 250 songs that are controlled by Sony/ATV, a joint venture between the singer Michael Jackson and Sony (SNE), his record company.
Jackson, you may remember, is in debt up to his eyeballs, and his 50% stake in the song catalogs controlled by Sony/ATV could be worth as much as $200 million. The singer's $270 million debt used to be held by Bank of America (BAC) but is now owed to New York-based Fortress Investment Group. The debt is mentioned in a lawsuit before a Manhattan federal court against Jackson by Prescient Acquisition Group, which says it is owed $48 million for helping Jacko land the financing deal with Fortress. Meanwhile, Sony is said to be trying to buy the debt from Fortress with help from Citigroup (C).
THEORIES AND WHISPERS. In the event that Jackson's stake in Sony/ATV goes on the block -- because Jackson willingly sells or due to some other circumstance -- the proceeds from a settlement with Apple Computer might contribute to an Apple Corps bid.
Admittedly, there is a hole in this theory. Beatle Sir Paul McCartney has said that he isn't willing to spend a penny to reclaim the rights. In 1985, Jackson's $48 million bid for the rights to the songs bested McCartney's. This was only a year or two after the pair collaborated on the songs "Say Say Say" and "The Girl Is Mine," and the incident caused a permanent rift between them.
McCartney has been quoted as saying that there is a date in the not-to-distant future -- another 10 years or so, according to a few sources who claim to know -- when rights related to the songs will revert to him anyway. He is said to be calling it "a waiting game."
GOLDEN OLDIES. Still, 10 years is a long time in the music business, and the uncertainty of the future of Jackson's stake in the rights to the catalog will certainly attract attention -- and might spur other bidders.
And there is also the matter of online distribution of The Beatles songs. To this date, they can't be downloaded legally from any vendor. Rumors suggested last year that Microsoft (MSFT) had sought to negotiate rights with Apple Corps to carry The Beatles for download in time for the launch of its MSN Music service. The rumors died almost as soon as they surfaced, suggesting any negotiations had collapsed.
And that represents yet another piece on the chess board. With its control of the world's most popular music download service, Apple Computer could offer The Beatles a huge promotional bonanza -- one that would represent a huge money-making opportunity for both parties.
Such a deal could conceivably be worked out in the wake of a settlement between them, but here's the rub: Would Apple Corps go along with selling Beatles tracks for 99 cents, or would it demand richer terms that would lead to consumers paying higher prices?
UNSETTLED SCORE. That's the kind of variable pricing precedent that Apple would be loath to set. Record-label execs such as Warner Music's (WMG) Edgar Bronfman Jr. have suggested publicly "not all songs are created equal" and that some should be priced higher. Apple Computer CEO Steve Jobs is said to want to hold the line on 99-cent downloads.
There are a lot of ifs in the matter of Apple vs. Apple this go-round. But one thing is certain: The stakes are higher than they were a decade and a half ago.
Hesseldahl is a writer for BusinessWeek Online in New York
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