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Everybody wants slice of Apple's big iPod pie

On a long walk down the aisle of the airplane we were flying on vacation a few weeks ago, I could barely find a row without at least one passenger hooked up to some electronic gadget. And most by far were plugged into Apple iPods.

Even so, I didn't understand just how popular the little music players are until Apple announced its holiday quarter results this week - an astounding $5.7 billion in sales overall. That was about a billion more than the company originally estimated.

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The company sold 14 million iPods during the fourth quarter and more than 42 million overall.

Think about that - more than 10 percent of the people in this country have bought a gadget that nobody had heard of two years ago.

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The question is where that market is headed now and how sustainable it is for Apple and a dozen, well-heeled Apple wannabes.

One reason Apple has been successful is that its iTunes online store and iTunes software allow users to buy digital files online, manage them on a computer and download them to the iPod. Apple says it has sold about 850 million songs online, at about a buck a pop, and it continues to sell about 3 million a day.

That sounds like a lot of money - but a substantial chunk of it goes to the music producers and artists. So even if Apple sells $1 billion worth of album tracks a year - plus a few million more in popular TV-show video downloads - the music end of the business is relatively small potatoes.

Apple makes its real money from hardware - the iPod line is extremely profitable, especially with Apple's market share in digital players estimated at 75 percent.

That's why the booths at last week's Consumer Electronics Show in Las Vegas were jammed with digital music players of every shape and size. From independent manufacturers such as Creative Technologies (who helped create the digital music market that Apple devoured) to PC makers such as Dell and Hewlett-Packard who want to sell high-margin add-ons for their low-margin computers, everybody wants a piece of iPod's pie.

Until now, Apple has had a couple of advantages. One is that the original iPod was far more elegant and usable than the competition. Even though Apple was late into the market, digital music players hadn't caught the public imagination until the original iPod came along. Its successors also have been superbly designed, staying well ahead of the pack. But other manufacturers are starting to catch up, particularly in the high-capacity, compact players like Apple's Nano that use flash memory instead of hard disks to store data.

Although most iPod owners use their machines to play music they've converted from their own CD collections or swapped over the Internet (probably illegally), Apple has provided customers with its own, proprietary source of legitimate music - the iTunes store. It distributed album tracks in a format that was copy-protected but not overly restrictive. That satisfied the music industry that Apple was fighting illegal copying but was flexible enough keep consumers happy by allowing them to burn CDs and play their tunes on more than one machine.

Apple has refused to license that technology to other music vendors or manufacturers of music players. So iPod users are stuck with Apple's store for new music. (There's an awkward but effective workaround we'll discuss later.)

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This is the way Apple has always enforced loyalty. But its customers are notoriously loyal anyway (actually, they're more like cult members). And truth be told, they don't have much reason to bolt from their iPods. The iTunes store has an excellent selection and charges the same for downloads as everyone else. Now it's augmenting its music library with videos - episodes of TV shows at two bucks a pop.

No one else in the online music business has the same kind of vertical integration between hardware, software and online purchasing. Until recently, Napster, Rhapsody and other vendors of online sources used competing and incompatible copy protection schemes, which meant that you had to buy a music player compatible with your music store - and chances are that there weren't many. Some offered protected downloads that couldn't be played on any portable device.

Microsoft, which has launched a music service, is bringing some semblance of order to this hodgepodgewith a copy protection scheme called Plays For Sure that online music vendors and makers of players can adopt.

If an online music service has a Plays For Sure logo, its music will play on any portable device that displays the logo. An increasing number of digital music and video players are supporting that scheme, which will provide a uniform alternative to Apple.

With Microsoft, Yahoo, Google and big Internet service providers all getting into the music and video download business - and compatibility problems fading - your choices as a consumer are likely to increase. Apple will no longer seem like the only game in town.

Now a word about making digital music from different sources compatible. Apple's Fairplay and Microsoft's copy protection schemes were designed to keep purchasers of downloaded music from sharing them willy-nilly with friends who haven't paid for them.

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In practice, they make sure that music downloaded from iTunes can only be played on iPods, and tunes purchased from Napster and other vendors can only be used on players that conform with their particular copy protection scheme.

Given that neither Apple nor Microsoft is every going to agree to "interplayability," there's only one way to make music truly compatible - by converting downloads to MP3 files.

MP3 is the designation for the compression scheme that made digital music popular - it turned CD album tracks into relatively small digital files (three megabytes or so) that can be stored on hard disks or downloaded to music players.

MP3s are not copy protected, and almost all digital players accept them. At the moment, converting an iPod or WMA file to an MP3 file is a two-step process.

First, burn it to a regular music CD (a good way to back up music in any format). Then use the latest release of Windows Media Player (Version 10) or a third party program to "rip" the tracks back to MP3s on your hard drive. These unprotected files can be used anywhere.

The process takes a few minutes and you'll have to pony up for a CD (25 cents to 50 cents per disk, good for 70 to 80 minutes of music). There's also a small but noticeable loss of sound quality in the process. But if you're playing tunes in your car, on a plane, while you're jogging, or in any environment with even moderate ambient noise, you're not likely to notice.

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mike.himowitz@baltsun.com


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