FT.com / Technology –

Apple is working with the four largest record labels to stimulate digital sales of albums by bundling a new interactive booklet, sleeve notes and other interactive features with music downloads, in a move it hopes will change buying trends on its online iTunes store.

The talks come as Apple is separately racing to offer a portable, full-featured, tablet-sized computer in time for the Christmas shopping season, in what the entertainment industry hopes will be a new revolution. The device could be launched alongside the new content deals, including those aimed at stimulating sales of CD-length music, according to people briefed on the project.

Physical album sales have fallen sharply as music retailing has evolved from CD album purchases in retail outlets to digital downloads of songs from online stores.

Although consumers continue to purchase large amounts of digital music, they are buying individual tracks rather than higher-margin albums.

Apple is working with EMI, Sony Music, Warner Music and Universal Music Group, on a project the company has codenamed “Cocktail”, according to four people familiar with the situation.

The labels and Apple are working towards a September launch date for the project, which aims to boost interest in albums by bundling liner notes and video clips with the music.

“It’s all about re-creating the heyday of the album when you would sit around with your friends looking at the artwork, while you listened to the music,” said one executive familiar with the plans.

Apple wants to make bigger purchases more compelling by creating a new type of interactive album material, including photos, lyric sheets and liner notes that allow users to click through to items that they find most interesting. Consumers would be able to play songs directly from the interactive book without clicking back into Apple’s iTunes software, executives said.

“It’s not just a bunch of PDFs,” said one executive. “There’s real engagement with the ancillary stuff.”

The music companies declined to comment.

Album sales in the US fell 14 per cent in 2008 to 428.4m units, according to Nielsen SoundScan, which tracks retail sales data.

The new touch-sensitive device Apple is working on will have a screen that may be up to 10 inches diagonally.

It will connect to the internet like the iPod Touch – probably without phone capability but with access to Apple’s online stores .

Apple is gambling that it can succeed where everyone else has flopped, including Microsoft, which tirelessly pushed a tablet-ready version of its Windows operating system as a personal favourite of founder Bill Gates.

The entertainment industry is hoping that Apple, which revolutionised the markets for music players and phones, can do it again with the new device.

“It’s going to be fabulous for watching movies,” said one entertainment executive.

Book publishers have been in talks with Apple and are optimistic about their services being offered with the new computer, which could provide an alternative to Amazon’s Kindle.