Sandisk's moment in the MP3 sun won't last long

Posted by: Aaron Pressman on August 21, 2006

Hmm, Apple shares (AAPL) down 2% today, Sandisk shares (SNDK) up 1% amidst some headlines about the battle over portable music players. It must be the latest “iPod killer” (and I use the phrase very loosely) is gaining some traction. While that’s the verdict of some, it’s totally off-base. If anything, the latest data shows just how vulnerable Sandisk and other Windows-centric players in the portable music space will be to Microsoft’s new Zune effort expected sometime before Christmas. Whatever great ideas Sandisk unveils in the next few months, the company is going to be obliterated when the Zune marketing tidal wave hits before the holidays.

So what’s behind the headlines? It seems that in the second quarter, Sandisk tripled its U.S. market share to 9.7% from 3.1% in the same period of 2005. Wow, Apple must be freaking out. What did its market share do? It dropped to75.6% from 75.9%. That’s more of a rounding error than a profound shift. It’s those lowly “other” players, also participants in the Microsoft music ecosystem, whose share plummeted to 7.9% from 14.6%, according to market researcher NPD.

One thing the report does show is just how fluid the market for NON-iPOD players is. Maybe that’s not surprising since vendors in that market can only compete on hardware – the music/software side is controlled by Microsoft. Little tweaks can have big impact since a consumer faces no cost to switching beyond buying a new player. All their software and purchased music will still work. On the other hand, a typical iPod user who switched would suffer from incompatibility with any music bought at Apple’s iTunes music store while losing all the play lists, info and ratings stored in the iTunes software.

By contrast, Apple can coordinate improvements or new features so they spill over across its hardware, software and online store. Take the example of podcasts, those endlessly varying audio programs you can download from the web. Last year, Apple added free podcasts to its iTunes music store, added features to subscribe and collect podcasts to its iTunes software and then added a special category on the iPod itself for organizing podcasts. Downloadable video is an even bigger example.

So, Sandisk and other non-iPod vendors are at war in their own little niche, one with low barriers to entry, low switching costs for consumers and little ability to innovate beyond the basics. Zune ought to eat their lunch. More interesting will be whether the softies themselves can make a dent in Apple’s market share. It’s a lot of the same folks who grabbed market share from Sony and Nintendo with the Xbox. But every new generation of video game console largely levels the playing field. Using your old games is a minor thrill compared to buying the latest and greatest new titles. I don’t see Zune making the same inroads on the iPod. Should be interesting, though.

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