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JANUARY 14, 2004
By Alex Salkever Apple + HP = iPod Forever Despite critics who decry Apple's insistence that no other formats play on its device, this deal shows that Steve Jobs's digital-music strategy is a winner As expected, Apple's (AAPL ) iPod music player dominated the spotlight at the MacWorld San Francisco Expo last week. CEO Steve Jobs unveiled a smaller, lighter, and slightly less expensive version of the wildly popular digital-music playback and storage device (see BW Online, 7/7/04, "A maxiPrice for Apple's miniPod"). He also trotted out impressive stats showing that iPods are getting about 55% of the gross revenues from sales of all digital-music players. Few anticipated, though, that the iPod would also steal the limelight at the much larger and broader Consumer Electronics Show (CES) in Las Vegas. Jobs managed to accomplish this with an announcement that Apple would start shipping Hewlett-Packard-branded iPods at some point in the summer of 2004. Equally important, HP CEO Carly Fiorina said the No. 2 PC maker would install Apple's iTunes Music Store software and put the shop's icon on the home screen of HP's (HPQ ) consumer machines. A SLAP AT MICROSOFT. This surprise was the talk of CES, the biggest consumer-electronics expo in the U.S. "What this announcement says is for the first time one of the biggest manufacturers of Windows-based PCs is adopting as a standard an Apple platform. If I were an Apple shareholder, I'd be as happy as a kid let out early from school," says digital-media analyst Phil Leigh. The deal stipulates that Apple won't co-brand iPods for any other PC company. But Apple will gain powerful distribution through HP's extensive retail network, a development that likely will fuel a new wave of iPod purchases and a steady stream of people buying music through iTunes Music Store. It's also a rebuke to Microsoft (MSFT ) from a particularly important customer. Redmond is eagerly promoting its own Windows-based audio-file standard (Windows Media Audio, or WMA) and digital-rights-management schemes for music downloads. A host of other groups are pushing their own formats, including an upcoming offering from music and consumer-electronics giant Sony (SNE ). Apple chose a format known as Advanced Audio Coding, and it's teamed with an antipiracy scheme dubbed FairPlay. But Apple has set the DRM so that AAC-encoded tunes downloaded from iTunes Music Store won't play on any other devices. "PRETTY MUCH GOLDEN." At the moment, Apple has over 70% of the market for the digital-music downloads, so the only real competition is between Jobs and Bill Gates. And Jobs is winning: The HP deal underscores that he's the go-to guy for the music industry. "He was smart enough to go do something that was beneficial to the music industry in creating a paid environment that protects their interests. He's pretty much golden in terms of getting deals with the labels," says Tim Bajarin, CEO of consultancy Creative Strategies. That Jobs could become the most powerful guy in digital music from a platform with a mere 5% or less of total market share is like Houdini pulling a Hummer out of his hat. Step back, though, and the strength of Jobs's position becomes a bit less clear. Apple has decided to keep a close hold on the hardware by making the iTunes store compatible only with iPod players and Apple's audio-coding format. You can't import iTunes-formatted songs to a Dell (DELL ) Digital Jukebox or any other player not made by Apple. DEJA VU? Apple's tactic differs from the longstanding Microsoft strategy of licensing its software to work on any hardware, which started in operating systems and continues in the world of digital music. Microsoft has licensed its WMA digital-audio format to dozens of companies, and it's compatible with over 500 different types of digital players. And WMA files work on desktop software jukeboxes by MusicMatch, Roxio (ROXI ), Yahoo! (YHOO ), and Real (REAL ). It all sounds a lot like the circumstances under which Apple lost its market dominance in the personal-computer industry to a host of hardware makers sporting code by Bill's boys. This leads to a few questions: Apple is the force majeure of music right now, but has it chosen to reboot an already discredited strategy by refusing to let other music standards play on iPods, and not letting iTunes songs be uploaded to digital-music players made by other companies? Has Steve lost his marbles? And will Gates slowly and steadily reel Apple in to take over digital music and force the iPod into the unwelcome role of fetish item for Macheads?
BW MALL
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