Apple Computer's apparent cold shoulder to RealNetworks this week has once
again put the company's "go it alone" strategy in the spotlight.
With the Macintosh, Apple decided to keep its operating system proprietary,
licensing it out only on a few rare occasions and keeping control of both
hardware and software. The approach has arguably given Apple an edge, when it
comes to integrating new capabilities such as DVD burning, but the Macintosh
also has become a niche player in a Windows-dominated PC market.
Now, RealNetworks CEO Rob Glaser and some others see the
potential for history to repeat itself in the digital music world, if Apple
persists in keeping its software and hardware closed. Apple has taken some major
steps to avoid past mistakes, notably making the iPod compatible with Windows
PCs, dramatically expanding its potential market. iPod
sales last quarter helped Apple triple its earnings, compared with the
same period a year ago.
But that's a half measure, according to Glaser, who recently quipped that
Apple might go the way of the Soviet Union, unless it takes a more liberal
stance toward licensing its software, specifically the FairPlay digital rights
management (DRM) controls that prevent songs purchased through iTunes from being
"Apple's (market) share will go down, if they continue to do this," Glaser said at last month's PC Forum. He
predicted that customers will say, "I bought an iPod and can only shop at one
store. What is this? The Soviet Union?"
Real also uses proprietary DRM, but it's made little headway in the
marketplace compared with FairPlay and Microsoft's Windows Media Audio (WMA)
formats. Notably, only a handful of portable music players support Real's
format. And with Apple riding a crest of iPod portable music player sales,
analysts said RealNetworks faces the more immediate short-term threat.
Given Apple's history, few are surprised that Apple appears to be rebuffing an advance by RealNetworks
to team up in a battle against Microsoft. Regardless of what the right strategy
might be, analysts don't expect Apple to partner with Real or to license out its
core technology any time soon. Apple declined to comment on its plans.
"Once you do that, you basically lose control," said Creative
Strategies analyst Tim Bajarin. "That's one thing (Apple CEO) Steve (Jobs)
won't do. He won't lose control of being able to write Apple's destiny.
It's Jobs' belief that Apple can deliver superior music products by handling
both hardware and software better than anyone else, Bajarin said. "I believe he
will not deviate from that strategy," he said.
To be sure, Apple appears to have learned some
lessons from the 1980s and is not going it totally alone.
The biggest step Apple took was offering its iPod for both Windows and PCs,
forgoing an opportunity to use the device mainly as a way to sell Macs. The
company followed up by porting its iTunes jukebox software
and music store to Windows, again giving it a much larger market to address.
It also has lined up both America Online and Hewlett-Packard as
partners, albeit in somewhat limited roles. AOL has links to Apple's music
store, while HP will sell a custom blue-hued
version of the iPod and include iTunes on its PCs. Already, 300,000 HP PCs have
shipped with Apple's software, the Mac maker said Wednesday on a conference call
Undoubtedly, Apple could find more partners, if it were willing to loosen its
reins. But Jobs seems comfortable with whatever risks the company's proprietary
approach might carry, at least for now.
"It's an opportunity, but Apple won't take it, because they're happier with
deals like with (HP), where Apple is largely in control of the partnership,"
said Jon Erensen, an analyst at research firm Gartner.
There are some good reasons for Apple to stick to its guns. The company sold
800,000 iPods last quarter, setting a new record and actually selling more of
the digital music players in the quarter than it did Macs. Its music store,
designed to be a breakeven proposition, posted a narrow profit as well.
Adding software partners might not do anything to make its current products
better, analysts say.
"Integration is a huge reason why iPod has done so well, so I don't see the
incentive to open it up for anyone, including RealNetworks," said Tim Deal, an
analyst at Technology Business Research. "Ease of use is clearly an important
factor to the people buying iPods, so why would Apple want to put more hands in
the pot and potentially create glitches that aren't there today?"
RealNetworks, in particular, would appear to bring little to the party.
"The only way RealNetworks has a chance to become involved to a greater
extent is if users express dissatisfaction over their ability to use other
services with iPod, and we certainly haven't heard much about that yet," NPD
Techworld analyst Stephen Baker said.
Eye on Redmond
But there are also some powerful counterarguments to
Apple's approach. It is clear that Apple will be taking on Microsoft and its
billions of dollars, and it makes sense for Apple to line up all the allies it
"I would never assume Microsoft is out of the game, even with a good lead"
like Apple's in digital music, said Roger Kay, an IDC analyst.
Kay noted that the software industry tends to have relatively few barriers
that allow a competitor to enter a market, even one dominated by another player.
"Microsoft has a huge war chest," he said. "They are highly motivated."
Having recognized Apple's lead, Microsoft is eyeing several possible places
to try dethrone the iPod. The company plans later this year to offer technology,
code-named Janus, that will allow
subscription music to be transferred to portable players, a feature not
currently possible with the iPod. The company also has software for "portable media centers", devices that
combine video and music playing and photo display into devices that, though
bigger than the iPod, could fit in a large shirt pocket.
Also, it is not clear that Apple could gain much from licensing its software.
"I don't see a tremendous amount of advantage to licensing Fairplay," said
David Card, an analyst at Jupiter Research. "Apple is a hardware company, and
the only reason Fairplay--or even iTunes, for that matter--exists is to sell and
Microsoft has been pushing its own digital audio format, WMA, as part of a
larger consumer electronics and digital-content strategy. The company's efforts
have resulted in a broad acceptance from hardware players, something from which
analysts say Apple could benefit.
However, even if Apple loses its dominance, the company has shown that it can
support a business, even without commanding market share. For all the criticism
heaped on Apple for its small share of the PC market, the company has been
largely profitable in recent years, while most of its rivals have not.
Card added that Apple may not want to be the Dell of the digital audio player
world, referring to the computer maker's ability to ship devices in high volume
while having a reputation of being low on the innovation totem pole.
"Apple wants to be the BMW of the market," Card said.
Analysts say the more important question is how well Apple prepares itself
for future battles--including video. In that arena, though,
analysts say Jobs and his understanding of the
record and movie industries is probably the key. Many companies, including
Disney and Time Warner, have already begun to line up behind Microsoft, so Apple
will not have the same advantage it had with the music store.
"If Steve is able to create an iPod video store and do just as good a job (as
with music), he could easily be an alternative to Microsoft," Creative
Strategies' Bajarin said.