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Apple Is Expected to Unveil Pact With Pepsi

Consumers would get free iTunes downloads with soda purchases, sources say.

October 16, 2003|Jeff Leeds and Terril Yue Jones | Times Staff Writers

Apple Computer Inc. thinks it's found a new tonic for success: Pepsi.

The Cupertino, Calif., company, which reported fiscal fourth-quarter earnings Wednesday that beat analysts' expectations, is expected to announce today a promotion deal that would give Pepsi buyers free songs from Apple's fledgling online music service.

Sources said the unveiling of the pact with PepsiCo Inc. was timed to coincide with today's release of a Windows-compatible version of Apple's iTunes Music Store, which has been available only to Macintosh users.

Representatives for Apple and Pepsi couldn't be reached for comment.

The sources said Pepsi was expected to craft a multimillion-dollar ad campaign around the music store, which charges 99 cents for each song.

One person familiar with the promotion said consumers who purchase Pepsi beverages would find codes in the packaging that they could redeem online for free downloads from iTunes.

Pepsi will pay Apple for each of the songs downloaded during the promotion, the sources said. They said Pepsi and Apple have discussed offering about 100 million free songs.

For Apple Chief Executive Steve Jobs, the hope is that the Pepsi promotion deal will draw millions of new customers to iTunes, which is battling to draw users away from free file-sharing networks such as Kazaa and Morpheus.

Apple also is competing with an increasing number of paid services, including Roxio Corp.'s new record label-authorized version of Napster.

For Pepsi, the aim is to help build a hip image among young consumers.

Pepsi has laid an enormous bet on the marketing power of music, sponsoring the WB television network concert series Pepsi Smash and tapping such music acts as Shakira and Beyonce Knowles for commercial campaigns.

On Wednesday, Apple credited record sales of iPod digital music players and strong revenue from Macintosh personal computer sales for fiscal fourth-quarter profit of $44 million, or 12 cents a share -- a stronger showing than analysts' consensus estimate of 7 cents.

The profit contrasted with a loss of $45 million, or 13 cents a share, a year earlier.

The company didn't break out iTunes Music Store revenue.

Taking away one-time investment gains and accounting adjustments, Apple earned $29 million, or 8 cents a share, Chief Financial Officer Fred Anderson said.

Revenue was $1.7 billion, up 19% from $1.4 billion a year ago, with quarterly sales the strongest in three years.

For the full fiscal year ended Sept. 27, profit was $69 million, or 19 cents a share, in line with analysts' estimates, compared with profit of $65 million last year.

In the quarter, Apple sold a record 336,000 iPod MP3 players -- 140% more than in the same period last year -- along with 787,000 Macintosh computers, whose sales were up 7%.

"If you look at the iPod, it's about 7% of revenues," said Martin Reynolds, an analyst with the technology market research firm Gartner Inc. "It's a small contribution, but for a product that's relatively new it's very impressive. Quite frankly, Apple doesn't really have a competitor in that category, and they keep moving ahead."

Apple's retail stores showed their first quarterly profit, about $1 million, on revenue of $193 million, Anderson said. Apple opened six new retail stores last quarter and now has 65 locations in the U.S.

In its first retail move overseas, Apple will open a store in Tokyo before the end of the year, as well as eight more domestic locations by Thanksgiving.

For the current quarter, the first of Apple's fiscal year, revenue is expected to increase to $1.9 billion.

The earnings report was released after the market closed. Apple shares rose 27 cents to $24.82 in trading on the Nasdaq stock exchange but fell $1.19 to $23.63 in after-hours trading.

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