November 30, 2003

Ipod's Future Step

The New York Times writes about Apple's iPod in a fairly decent article explaining why it's the number one portable digital music player on the market today.

One bit really misses by a mile. The speculation in the article is that Apple can't stay on top because it's not supporting the file formats that other stores are putting their music out on.

This sounded like a sea change. But while you can run iTunes on Windows and hook it up to an iPod, that iPod does not play songs in the formats used by any other seller of digital music, like Napster or Rhapsody. Nor will music bought through Apple's store play on any rival device. (The iPod does, of course, work easily with the MP3 format that's common on free file-swapping services, like KaZaA, that the music industry wants to shut down but that are still much more popular than anything requiring money.) This means Apple is, again, competing against a huge number of players across multiple business segments, who by and large will support one another's products and services. In light of this, says one of those competitors, Rob Glaser, founder and C.E.O. of RealNetworks, ''It's absolutely clear now why five years from now, Apple will have 3 to 5 percent of the player market.''

What's missing is that Apple's already demonstrated that it can, at will, add formats. What nobody seems to remember is that AAC and the iTunes Music Store (iTMS) weren't original iPod features. They were subsequently added and the additions were fairly simple, download an updater and run for the iPod and download a new version of iTunes. Voila, you've got AAC (Apple's DRM system) & iTMS.

There is nothing holding back Apple from doing this with any other format out there. The real question is why should it?

If it's the market leader, if it's doing more business than anybody else, why should they open up their API and open up their application for use by a competitor? What is missing is the idea that the iTunes window of music sources is like retail shelf space. If you want in, you've likely got to pay. Customer demand will also get you in but if the integrated company store is selling the same goods, why would customer demand be generated?

Apple already provides a public SDK for iTunes on both Windows and Macintosh. Currently it exposes enough of the API to do far more than create custom visualizer plugins as Apple intended. No doubt that if the SDK doesn't already cover enough code to create new stores in iTunes, it would be simple to provide a few header files to alternative services to create the appropriate plug ins.

So with AAC being the leader in reasonable DRM (you can break it if you really want but the restrictions are so lax that most don't want) and MP3 already on board, Apple looks to maintain its lead unless something comes out that's better. If another format starts to become popular, Apple can add it at will, both validating it and nullifying it as a competitive threat. They don't have to worry about cannibalizing iTMS sales because those sales were never very profitable anyway. It's all about the hardware.

No, the complaints about not playing with others are very much sour grapes by industry players who are stuck dividing up the rest of the market. Hardware manufacturers are stuck outside the AAC world but Apple can maintain this differentiator while adopting any format that starts to become popular by simply releasing a codec firmware update and an iTunes plug in.

That ends up creating a two tier market with commodity players in one tier and Apple sitting pretty in the other. Will the Apple tier shrink to "3 to 5 percent"? I doubt it. The price difference isn't all that much. The number of people who can afford $300 for a portable digital music player but not $400 is not that large.

Posted by TMLutas at November 30, 2003 01:03 AM