Will iPod suffer fate of the Mac?

Apple critics again take aim at the company's "go it alone" strategy--but CEO Steve Jobs seems comfortable with risks.
Written by Ina Fried, Contributor; Richard Shim, Contributor and  Matt Hines, Contributor
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 illegally copied.

"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.

Lessons learned
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 with analysts.

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 can get.

"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 promote iPods."

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.

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