[opendtv] It's Just about MUSIC...for now
- From: Craig Birkmaier <craig@xxxxxxxxx>
- To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
- Date: Mon, 15 Nov 2004 09:38:15 -0500
http://www.nytimes.com/2004/11/14/business/yourmoney/14music.html?oref=login&th
November 14, 2004
Gates vs. Jobs: The Rematch
By SAUL HANSELL
San Jose, Calif.
THE history of Apple Computer can be told through its advertisements
as well as its products. There was, of course, the commercial that
introduced the Macintosh. It was broadcast exactly once, during the
1984 Super Bowl, and signaled the company's bid to reclaim leadership
in personal computers from I.B.M. and its tiny, little-known software
partner, Microsoft.
Late last month, Steven P. Jobs, Apple's chairman, rented an ornate
theater here to promote Apple's latest advertisement for its iPod
music player - a crisp psychedelic montage of the Irish pop band U2
playing "Vertigo," a song from its next album. Unlike the 1984
commercial, this one is intended to help Apple preserve a big, and
growing, lead in the marketplace.
Speaking just after the event, Bono, U2's lead singer, said the band
was not charging Apple a penny to be in the ad. (The band says it had
turned down as much as $23 million to use its music in other
commercials.) In its three-year life, the iPod has achieved such
"iconic value," Bono said, that U2 gets as much value as Apple does
from the commercial, by promoting its music and the new Red and Black
U2 edition of the iPod, for which the band gets royalties.
The iPod, Mr. Jobs boasted at the event, has become the "Walkman of
the 21st century." It dominates its market in a way that no Apple
product has done in a generation, raising the possibility that the
company is becoming more than just a purveyor of computers with high
design and low market share. If Apple continues to ride the wave of
digital consumer electronics products, it may become the Sony of the
21st century.
For that to happen, however, Mr. Jobs must do what he failed to do
last time: prevail over his old nemesis, Bill Gates, who sees
entertainment as Microsoft's next great frontier. Microsoft is
working hard to make sure that the iPod is less like the Walkman and
more like the Betamax, Sony's videocassette format that was defeated
in the marketplace by VHS.
A few days after Apple's U2 extravaganza, Mr. Gates, Microsoft's
chairman, paced around his office overlooking the rolling hills of
suburban Seattle and recalled another advertisement that Apple made
25 years ago. "When I.B.M. came out with their PC, Apple ran an ad
saying, "Welcome,' " said Mr. Gates. "They haven't yet run the ad
welcoming us into the music business.
"Apple should," he added.
But he isn't holding his breath. Instead, Microsoft is turning up the
volume in the portable music business. And Mr. Gates makes no secret
that he expects to beat Mr. Jobs in that market as convincingly as he
did in personal computers.
In many ways, the story sounds eerily familiar. As was the case in
computers, Apple has sprinted ahead in the music market with an
innovative product, elegant design and tight links between its
hardware and software. Plodding along after it is a vast army,
organized by Microsoft, of rivals that may be less skillful than
Apple but offer a broader array of options and cheaper prices.
IN music, Microsoft has rallied nearly every other manufacturer -
like Dell, Samsung and Rio - to support a new version of Windows
Media. That audio standard allows their gadgets to play songs bought
from most music service companies, including America Online, Napster
and RealNetworks, as well as its own new MSN Music store. Microsoft's
campaign slogan for the services and players is "plays for sure."
The iPod cannot play songs from most other stores, and Apple's iTunes
store won't sell songs for other players. Mr. Gates argues that
consumers ultimately will want more choices. "There's nothing unique
about music in terms of, do people want variety of fashion, do people
want low price, do they want many distribution channels?" he said.
"This story has played out on the PC and worked very well for the
choice approach there."
Mr. Jobs rejects the comparison between the music players and
computers. The Macintosh had an uphill battle, Apple says, because so
many corporate customers already had applications based on
Microsoft's operating system that they didn't want to abandon. By
contrast, Apple's iTunes Music Store sells pretty much the same songs
that the others do, but they cannot be moved onto non-Apple portable
devices.
Most important, he points out, Apple's market share has actually
increased over the last year, despite increasing competition. "We
offer customers choice," he said during a news conference after the
U2 event, answering a question about Microsoft's strategy. "They
don't like the choices our customers are making."
Indeed, in the third quarter, some two million iPods were sold - more
than all of its competitors combined, and more than double the pace
of the second quarter. Market analysts and even rivals expect that
Apple will sell more of them this Christmas season and continue to
dominate the market into next year.
What happens next Christmas and beyond, however, is a matter of
considerable debate. Microsoft fans say that other music players will
begin to match Apple's features and styling, and with lower prices.
They suggest that consumers, meanwhile, will want to buy music from
stores other than iTunes.
"Over time, proprietary standards always lose because industry
standards always win because you get more for less," said Michael A.
George, the general manager of Dell's consumer business. Dell has
just introduced a 5-gigabyte music player, using the Windows
standard, for $199, some $50 less than Apple's iPod Mini, which has 4
gigabytes.
Microsoft is also betting that a new crop of subscription services,
like Napster to Go, which let users fill up a music player with
thousands of songs for a flat fee of $10 to $20 a month, will prove
attractive to consumers. Mr. Jobs, by contrast, spent months
convincing the record labels to allow Apple to sell songs one at a
time for 99 cents each, and he argues that consumers prefer owning
music to renting it.
"If you sit down next to me and say you have 1,000 songs and you pay
$10 a month, how cool will I feel to say I paid $1,000 for 1,000
songs," asked Jonathan Sasse, the president of iRiver America, a
subsidiary of ReignCom, a Korean maker of portable players that has
endorsed Microsoft's format for subscription services.
Still, dethroning the iPod won't be easy. One reason is that none of
the rival electronics companies have made a player that is nearly as
attractive and easy to use. "It is not an MP3 player; it is just an
iPod, and it's only made by Apple," said Frank Sadowski, the head of
Amazon.com's consumer electronics department. The proportion of
Amazon.com customers who buy iPods continues to increase, he added.
Again, Apple is bucking the trend. The classic Silicon Valley
playbook calls for the company to try to turn its hit product into a
broader "platform." And many people argue that Apple should open up
both the iPod and iTunes to rivals, so as to establish itself in the
center of the digital music world.
BUT Geoff Moore, who articulated the platform strategy in his 1999
book "Crossing the Chasm," argues that Apple is the rare company that
should not follow his advice. Mr. Jobs, he said, has built the
company around idiosyncratic, premium-priced products that gain
appeal in part from their splendid isolation.
It's a risky strategy, Mr. Moore contends. "You are only as good as
your latest hit," he said. "You know at some point you will miss a
step."
But he says Apple is better off rolling the dice than trying to try
to emulate Microsoft. "It is hard to change the DNA of a company,
even if you have a great hand," he said. "There are some times that
you say, 'there is a great opportunity here, but it is not for us.' "
There is no question that Apple has played the music business like a
virtuoso, after ignoring the first several years of the online music
boom. When Apple became interested in music players in 2001, it
rejected the most common technology in the market, flash memory
chips, which can make inexpensive players that can hold a few dozen
songs. Rather, it latched onto an emerging design based on a hard
drive that could hold thousands of songs.
A few hard-drive players already existed, but they were bulky. For
the iPod's introduction, Apple bought the entire inventory of a new
generation of smaller drives from Toshiba, making the iPod the
sleekest hard-drive player in the market. This prevented rivals from
offering the smaller players for months.
Since then, Apple has been quick to add new features. In the spring,
it introduced the iPod Mini, based on 1-inch drives, and last month
it introduced iPod Photo, with the ability to bore your friends with
thousands of snapshots of your latest vacation on its small color
screen. Each innovation was matched quickly by rivals, but Apple was
able to cement its position in the minds of its consumers as the
leader in online music.
It was helped even more by competitors' missteps. Sony, in theory,
would have been the strongest rival, but it tripped over its own
conflicting agendas. Sony's biggest bet in digital music was the
MiniDisc, a popular format in Japan that never took off in the United
States. And because it owned a major record label, Sony manufactured
players that made it difficult to play MP3 files, the sort that were
traded freely on file-sharing services.
The pioneers in the market were Rio (born as Diamond Multimedia) and
Creative Technology, both makers of add-on sound cards for PC's.
Neither had Apple's marketing savvy or budget. Samsung, for its part,
chose to focus on the more lucrative cellphone and flat-panel
television businesses, letting its MP3 business flounder.
Indeed, Apple has been able to keep its leading share even though its
products are priced above similar models from rivals. Judging by its
latest crop of products, Apple seems to believe that its profit
margins can grow. The U2 iPod, for example, is priced at $349, or $50
more than an identical model with a white case. Adding the photo
features to an iPod costs less than $20, competitors say, but Apple
has been able to charge $100 extra for iPod Photo, over the $399
price of the comparable, music-only player.
"The iPod is an affordable luxury," said Michael Gartenberg, the
research director of Jupiter Research. "It's not the cheapest player
on the market, but you don't spend thousands of dollars extra to own
one."
While Apple has not opened the iPod to other music stores, it did
make an important decision to go after the broader market by building
a version for Windows computers. And it reached an agreement with
Hewlett-Packard for H-P to resell iPods and install iTunes software
on its computers.
Microsoft has been developing the Windows Audio formats for nearly a
decade as part of the media player built into Windows. It has long
licensed these formats for use in portable players, and it recently
added features for so-called digital rights management, which allow
music labels to control who plays a song and under what
circumstances. (Apple developed its own digital rights plan, called
FairPlay, that also is intended to thwart digital piracy.)
As the underdog in audio technology, Microsoft has marshaled its
formidable resources to get others behind its standard. For example,
the fee that electronics companies pay to license the Windows Media
format is about half of what the owners of MP3 charge. And Microsoft
has offered all sorts of engineering help and marketing muscle to
electronics companies and music service purveyors in return for their
adopting the Windows formats.
"Microsoft made it worth our while to get them into our box," said
Hugh Cooney, the president of Rio, a unit of D&M Holdings of Japan.
Rio had been using software from RealNetworks. "They bring a whole
suite of service to us, marketing, help with testing and engineering
support," he said.
Not surprisingly, RealNetworks was not thrilled. Last year, it filed
a $1 billion antitrust suit against Microsoft, accusing it of
anticompetitive practices in the player software market. In the
meantime, RealNetworks has largely abandoned that business to focus
on selling subscription music and video services.
Microsoft also raised hackles recently when it started its MSN Music
Store to compete with companies like Napster that it had been
courting for years. That isn't so unusual for Microsoft, its
executives say. The company often finds itself both competing and
cooperating, they say, with companies in the software business.
For the most part, though, the music world, from the electronics
companies to the music labels, has embraced Microsoft. "I never would
have believed I would say this, but Microsoft has been easy to work
with," said Ted Cohen, a senior vice president at EMI Recorded Music.
One reason that Microsoft can be so accommodating is that it does not
need to make money on media software, as RealNetworks does. It does
sell operating systems for telephones, personal digital assistants
and television set-top boxes. But all of these are meant first and
foremost to encourage people to buy more and more powerful PC's, each
with Windows.
"The key to all this is that in the end, the consumer gets a great
experience with digital entertainment that the PC makes better," said
Will Poole, the senior vice president of Microsoft's Windows client
division.
Many other PC makers, like H-P, Dell and Gateway, see their futures
in consumer electronics and have started making devices like cameras,
flat-screen televisions and music players. They also hope to sell
more computers, based on Microsoft's Media Center software, to power
home entertainment systems.
Apple's leading position with the iPod, marketing experts say, could
give it a leg up in these other markets. That is why some analysts
are puzzled that Apple's sleek new iMac, a computer built into a
flat-panel display, does not record and play television shows the way
a Media Center PC does.
Mr. Jobs declines to discuss his product plans. He has been openly
contemptuous of attempts to add video playback to hard-drive music
players, as Microsoft has with its new design called Portable Media
Center. And other Apple executives pointed out that the Media Center
PC had not been a success in the market until recently, and that
Apple tried to sell computers with TV tuners in them a few years ago,
with disappointing results.
Longtime Apple watchers say they recognize a pattern. In the past,
they say, Mr. Jobs has often dismissed a market as irrelevant before
introducing just such a product, with a great flourish. He then
explains that he has solved the problems his lesser competitors
couldn't. It worked stunningly well with music. And many expect that
he will try again, with some products related to television.
MICROSOFT, however, cares far less about music than it does about
television, a much bigger market. It has attacked it from many sides
- not only with the Media Center PC and Portable Media Center, but
with software for cable boxes, WebTV and the Xbox video game system.
None of these have left Microsoft with a position in television that
is even slightly similar to its chokehold on computers. (And it's not
clear that Hollywood and the cable companies would like that to
happen.) But the company has patience that is almost as deep as its
pocketbooks.
So it is easy to imagine, a few years from now, that an elegant, hip
Apple digital television product will be battling for the home
entertainment market against a much larger army of rivals using
various forms of Microsoft software. "It's a classic one," Mr. Gates
said. "Apple has always been a hardware company. I think Apple will
do things the Apple way, and Microsoft will do things the Microsoft
way. I'd say the long-term factors all favor our approach."
Copyright 2004 The New York Times Company
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