Apple and Real - A Few Thoughts

By Richard Menta 4/22/04

Back in the Windows 3.1 days, I sold computers while I attended college. I sold both Windows and Macs at a time when Apple possessed just under 20% of the market. A decade later that number is down to 3% puntuated by an announcement that Apple sold more iPods the last quarter than computers.

I always felt that part of the reason for that drop - and there is a whole laundry list of reasons- had to do with the fact that only one company was marketing Macs where there were 150 marketing Wintel based PCs (and another 1000 or so marketing PC only add-on products). Wintel won and Apple became a nich for the artistic and laptop set.

I think of this when I look at Apple's iTunes dominance.

The Archos AV320 digital audio/video recorder is available on Amazon

iTunes success, paired with the ever popular iPod started a gold rush among major corporations as disparate as Napster, Coca-Cola, and Walmart looking to repeat the iTunes model and profit online. As Apple will not license the digital rights management application (FairPlay) that wraps every toon sold on iTunes, these competitors all turned to other file formats.

Actually they all turned to one format - Micrsoft's WMA codec.

They turned to WMA because it was the only codec outside of the non-drm protectd MP3 format that was ubiquitous on MP3 portables. This left other choices like Ogg Vorbis and Real out in the cold.

That's why Real contacted Apple. Real needs Apple.

Their best shot is to turn to the big leader and work out a deal. Both use the Dolby Advanced Audio Codec (AAC) as their format, but only AAC tunes with Apple's DRM will play on iPods. Real wants to sell tunes to the market dominant iPod that last quarter sold nearly 900,000 players. This would give them a music store that can compete, but first they have to license FairPlay and it looks like Apple won't let them.

Maybe they should as Real has something to offer Apple. As Apple continually tells us, iTunes is only there to break even. The real goal is to sell more iPods. If that logic is true, then letting Real sell tunes for the iPod should be a good idea.

But Apple feels they don't need Real and in the short run that is an accurate statement.

I'm just not sure of the long run.

Sony was the first to introduce the VCR and their beta format was the dominant format for that device's first several years, when JVC's rival VHS format took the lead. Several more years later VHS took it all and the beta format disappeared from home electronics. It survives as a professional video format.

Apple's own computer line similarly shows a proprietary technology relegated to niche status.

In the long run Apple may need Real and other partners to retain their strong presence in digital music distribution. If all the iTunes competitors continue to embrace WMA, in a short time dozens of companies will all spending significant ad revenues to chip away as a group at Apple's market share. Companies with large bankrolls like Coca-Cola and Walmart.

There are already dozens of MP3 portable manufacturers trying to do the same to the iPod.

iTunes and the iPod retain their market appeal because they are so much better than the competition. The competition continues to dissect both of them the way Microsoft copied Apple's operating system to produce Windows 95.

Their goal is to make their products and services truly a clone, eliminating at least the major differences that hold them back against Apple. The only semi-surprising thing to date is that they have not done it already. They will.

Then it is Apple's ad budget against the combined ad budget of many of other companies. Companies who can also afford to buy TV airtime onShows as popular as Friends.

Apple the company can still be the number one company in digital music distribution, albeit with a lower 10% share of the market instead of 65% (or 75% or 50%, everyone has a different number). The problem comes in the guise of the AAC codec that iTunes has propelled. Today it makes up a very high percentage of DRM-laden tracks on the Net. If iTunes drops to 10% of the market it will be 10% AAC, 90% Microsoft.

Then we have MacOS-Windows 95 again. Get the picture? People several years from now could pass on the iPod as a purchase because it DOESN'T play WMA files. A codec is finding its way into auto stereos and home entertainment systems.

What propels iPod sales today could have the reverse effect if FairPlay loses play.

All this is speculation. It is also speculation that I'm sure Steve Jobs himself has considered. I am sure he is aware that the key here is not the online store or the player itself, but the codec underneath.

It may just be that Apple needs to think of the short run as a priority as the iPod presently means so much to the health of the company.

For all the talk of Job's ego, his biggest concern is Apple. Big successes today may be needed for the company as a whole, even at the expense of extended success several years down the road. Both profits and the stock is way up thanks to the iPod.

As James Dow pointed out in his iPod article for The Scotsman, the iMac was a huge hit when it was first released and then the enthusiasm waned. My viewpoint is not as harsh as his, but his reasoning is quite valid.

That's why Apple should reconsider Real's offer. It still may not be the right move, but it does offer long term strategic promise.


The iPod Mini can be purchased on Amazon


Other MP3 stories:
Ares/Warez P2P Blasts Past 300,000 Users
iPod Mini Released

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