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Carry That Weight: Apple Versus Apple

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This week, Steve Jobs's Apple Computer and the Beatles' Apple Corps are scheduled to go to trial in England, marking a new phase in a trademark dispute which has clung to both companies for more than a quarter century. The outcome could define the nature of Apple Computer's now-burgeoning iPod and digital music businesses.

Yesterday -- The origins of Apple v. Apple are somewhat shrouded in modern myth and contradiction, but here are the basics.

In 1968 the Beatles formed a new business to handle their business and financial affairs, as well as to serve as a tax shelter and as a corporate base from which to launch their products and ideas. Named Apple Corps (get it?), allegedly by Paul McCartney, the company was originally to have five divisions (electronics, film, publishing, records, and retail) and the company supposedly threw open its doors - and its wallet - to anyone with "worthwhile" artistic projects. As the Beatles grew apart and eventually disbanded, Apple Corps degenerated and nearly collapsed in a morass of legal and financial chaos. After several years, the dust settled with the company mostly serving as the licensing agent for the never-ending menagerie of Beatles products, and with former Beatles road manager Neil Aspinall still in charge to this day. Apple Corps has a reputation for keeping a very tight hold on Beatles-related property and licensing.

Half a world away in Mountain View, California, Steve Jobs, Steve Wozniak, and Ronald Wayne founded Apple Computer on April 1, 1976. (Astute readers will note Apple's 30th anniversary is less than a week away.) Many sources claim the name is a direct homage to the Beatles' Apple Corps (and Steve Jobs is a long-avowed Beatles fan). Apple's official line is that the company founders were merely concerned with having a name which came before "Atari" in the telephone book: Apple's founders had all previously worked at Atari.

It might seem odd for two companies to have the same name, but in legal terms, there's no fundamental problem with companies using the same name or trademark so long as it doesn't confuse consumers. In practice, this usually means they can't be in the same business (or in related businesses) and/or operate in the same markets.

One story goes that in 1978, George Harrison saw an advertisement for Apple Computer and asked Neil Aspinall if Apple Corps should be concerned. In any case, in 1978 Apple Corps filed a trademark infringement suit against Apple Computer, which was settled in 1981 for an undisclosed amount (rumored to have been $80,000). The companies also agreed they would share the "Apple" trademark, with Apple Computer sticking to the computer business and Apple Corps sticking to entertainment.

You're Going to Lose That Girl -- In 1987, computers started infiltrating multimedia and music production, leading Apple Computer to try renegotiating its agreement with Apple Corps. However, nothing could be worked out, and in 1989 Apple Corps again sued Apple Computer, this time for violating the earlier 1981 agreement by including sound playback and MIDI capabilities in Macintosh computers. After a great deal of painful litigation, Apple Computer and Apple Corps settled again in 1991, for a reported $26.5 million.

This second round of litigation had some long-standing impacts on Macintosh software. For instance, the suit kept Apple's MIDI Manager from being an official component of System 7. Despite the Mac's long-standing use in music performance and production, lack of system-level capabilities made MIDI on a hazy thing for years, with musicians frequently cursing Apple's unsupported MIDI Manager, or third-party MIDI implementations like OpCode's (temperamental and long-unsupported) OMS. And if you've ever wondered about the sound "Sosumi" which shipped with System 7 (and is still in Mac OS X), well, it's not the name of some exotic Japanese xylophone. Say "sosumi" out loud and its intentions become clear; the sound's original name was "Let It Beep."

<http://en.wikipedia.org/wiki/Sosumi>

Can't Buy Me Love -- In July 2003, Apple Corps opened fire on Apple Computer again, this time alleging the iTunes Music Store is in violation of the 1991 settlement agreement. On the surface, it seems like an open and shut case: Apple Computer agreed to stay out of the music business, and there's no denying the iPod is a music device, and that the iTunes Music Store is in the business of selling music. So why is this case going to trial?

One of the interesting developments of Apple Corps' current lawsuit is that previously undisclosed details of the companies' 1991 settlement have become public. In 1991, Apple Corps agreed to let Apple Computer use its own marks on items which fell within Apple Corps field of use (e.g., entertainment), so long as Apple Computer didn't sell "physical media delivering pre-recorded content." An example in the agreement bars Apple Computer from selling a CD of Rolling Stones songs.

<http://www.hmcourts-service.gov.uk/ judgmentsfiles/j2468/apple-v-apple.htm>

As most people know, the iTunes Music Store doesn't sell physical media: it sells digital tracks which customers download and play on their computers, an iPod, or (with some determination) other music devices. The main question before the U.K. court is whether, in legal terms, those digital versions of recorded audio constitute "physical media." Some analysts say Apple's iTunes service falls safely within the bounds granted to Apple Computer outlined in the 1991 agreement; others say Apple Corps will walk away with a gargantuan ruling.

Baby You're a Rich Man -- It's safe to assume the companies have attempted to settle this dispute out of court. Although Apple Computer made a bid to move the case to a potentially more-friendly venue in California (the rejection of which accounts for key terms of the 1991 agreement now being available), plainly the computer maker is comfortable with going to trial and stating its case before a judge. Why is Apple willing to put its market-dominating iTunes Music Store at risk, compared to the relative safety of a negotiated settlement?

One reason is that the door isn't closed on a settlement: the two Apples can work toward an out-of-court agreement up until the moment the judge issues a ruling, and keep working on a settlement while appeals processes are underway. Going to trial just means that both sides will be airing their arguments and evidence in public. Both companies have previously indicated they're willing to let these disputes drag on for years, so, even going to trial, a quick resolution seems unlikely.

Another reason is that, despite Apple Computer's newfound music business essentially redefining the company, the computer maker may not have much to lose in this case. In trademark disputes, damages are typically limited to profits derived from violations. Apple Corps' dispute with Apple Computer centers on the iTunes Music Store, not the company's now-iconic iPod music players. By most accounts, Apple Computer doesn't earn a tremendous amount of money from its iTunes Music Store: rather, the bulk of its music profits are driven by iPod sales, which Apple Corps is not alleging infringe on its trademarks.

A few back-of-an-envelope calculations here: let's say Apple sells songs on the iTunes service for $1 apiece. (Yes, $0.99 is the typical per-price track in the U.S., but collections and albums have a lower per-track price, while international versions of the iTunes Music Store often have higher per-track prices, so $1 a track seems fair). Of that dollar, between 65 and 75 cents go to the record label, and another 20 to 25 cents is consumed in management and distribution costs (servers, bandwidth, encoding; designing, running, and managing the store; customer support, etc.). So each track nets Apple Computer a few cents, at best. In round numbers, let's say iTunes has sold a billion tracks (that milestone went by last month), so in about three years of operation Apple Computer has earned perhaps $20 to $40 million on music sales. Let's double that to allow for fuzziness and video sales, which undoubtedly constitute "pre-recorded content."

<http://db.tidbits.com/article/08434>

How much of $80 million can Apple Computer afford to lose to Apple Corps? A lot. Apple's total assets at the end of 2005 totalled more than $14 billion, with over $8.5 billion being in cash, cash equivalents and short-term investments rather than buildings and inventory. Apple Computer may not be very afraid of Apple Corps right now.

<http://www.apple.com/pr/library/2006/jan/ 18results.html>

The Long and Winding Road -- Speculation regarding this case has been rampant, particularly when the lawsuit was first filed back in 2003. Rumors had Apple Computer negotiating a record-setting settlement with Apple Corps; others had Apple Computer spinning the iTunes Music Store out into a separate business, possibly selling Apple Corps a partial or even controlling stake. And nearly everybody has been wondering whether Steve Jobs will negotiate a deal to get Beatles recordings available for sale on the iTunes Music Store. To date, no legal digital music services carry any Beatles music.

I have no inside track on the case, but I don't expect it to be resolved in the near future. If history is any guide, the longer these things simmer, the more likely they are to become irrelevant or veer off in unexpected directions. Apple and Apple have been going at each other for nearly 25 years, with this flare-up already nearly 3 years old. Anything could happen.

Personally, I don't expect Apple Corps is in any hurry to get Beatles recordings into iTunes or other digital download services, which may preclude a settlement which involves Apple Computer getting access to the Beatles catalog. I'm sure Beatles tracks are a frequently swapped commodity on illegal file-sharing services, but time is on Apple Corps' side. The company waited five years to release Beatles albums on CD, and has found substantial success repackaging Beatles material (as the recent Anthology and One releases demonstrate) and releasing alternate versions (for instance, re-issuing the original American versions of Beatles albums released on Capital records, and stripping out Phil Spector's production on Let It Be). Scarcity only makes the Beatles material more valuable, and Apple Corps has long been focused on maximizing the value derived from its Beatles properties.

Persistent music industry scuttlebutt says Apple Corps has tentatively explored limited-time, exclusive arrangements with online music vendors (particularly Microsoft), but at premium prices: one figure I heard from several sources in 2004 was $15 million for exclusive rights to sell Beatles tracks online for six months. Given the low profit margins of all online music businesses, only those with deep pockets could even consider that sort of money-losing deal.

In the end, Apple Computer and Apple Corps share more than a name and a litigation history: they're both perceived as products of the enthusiasm and hopefulness of 1960s culture which held that it was possible for a good idea to change the world. The real surprise might be if someone other than Apple Computer brought the Beatles online.

 

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