Death Of iPod — My Two Cents
Reports of my death have been greatly exaggerated…Mark Twain
The hot news of the minute is whether Apple’s iPod will survive the next generation of music-playing mobile phones. Everyone seems to have picked up on Engadgets interpretation of a throw-away line in a BusinessWeek article that Sprint and Verizon have categorically refused to sell Motorola’s proposed iTunes mobile phone — something I think is inferring too much into what was actually written.
The first thing to remember is that when Apple and Motorola announced the proposed phone in July last year the plan was to launch in the first half of 2005, and there’s still a couple of months left to go before that time period passes. This was reiterated in December, although hints that we might see something earlier probably succeeded in maintaining attention on the phone, but not in the way Motorola hoped.
The fact that carriers are not fighting to subsidize the ‘iPhone’ is also unsurprising, considering they are currently in a battle with handset manufacturers over how handsets are branded, and the last thing they want is another brand on their handsets. Of course, they are also unhappy with the revenue plans of the iPhone. The only reason for a carrier to offer the iPhone is to use it as a gimmick to attract customers from its rivals, which would mean the handset would have to be exclusive to that carrier. Neither Motorola nor Apple will subsidize the handset because that’s how they make their money.
So, the question is, how do things look for Apple in the portable music business? In truth, there’s a lot ranged against it.
The most telling thing against Apple is that mobile operators don’t need it. The record labels need Apple because the company controls the iPod/iTunes market, which by many accounts is around 70% of the portable music market — which the record labels want to sell to. But the carriers already have a customer base, a customer base that probably includes all of Apple’s customers. Also, iTunes customers are seen by many in the industry to be excluded from potential customers of the mobile operators music service. The record labels are looking to get into bed with the carriers because the carriers are willing to allow different prices for different songs.
Operators also have the advantage with billing — it is much simpler (and cheaper) to charge the sale of a song to a phone bill than a credit card. Operators also have the advantage with digital rights management technology, which — despite a few hiccups — is likely to be open and interoperable. On the other hand Fairplay, Apples DRM software, is being held onto by Apple almost as tightly as the company held onto its computer software in recent decades, although it has been open to running Fairplay on Windows and licensing it to HP for a portable music player.
In Apples favor is first mover advantage. Basically, that’s it. Being first to market with an integrated portable device and music store allowed Apple to dominate the marketplace, a move helped by its pricing of songs at 99c. The low price is a strength, but also a drawback. Apple makes about 4c for every song it sells, making the bulk of its money on sales of hardware. In both the handset and computer markets hardware has become mostly commoditized — it’s possible to charge a premium for a brand but you won’t get much of the market.
Also in Apple’s favor is the inherent greed expressed in the business practices of mobile operators. Initial music download services are unlikely to be priced much cheaper than ringtones, putting the songs at a price at least double that of iTunes. Still, that’s more than offset by not having to buy another device to cart around.
Finally, Apple has what is known in business parlance as “a good brand”. iPods are just cool, and that counts for a lot in the marketplace. Not only is it an odds-on chance that portable MP3 players will all be known as “iPods”, but podcasting will continue to be called the same thing no matter on what device the file is listened to. That kind of community is a very strong base for Apple.
As the BusinessWeek article stated, mobile phones don’t pose an immediate threat to Apple — the memory is too small, the downloading practices still unwieldy and the price point likely to remain too high for the next few years. However, in a few years mobile operators will have sorted out the kinks in their distribution system and worked out the best price point, and handsets will be able to hold enough songs for all but the most psychotic of music collectors. Of course, if Apple sold its Fairplay system to individuals then owners of the next-gen of handsets could buy it, put it onto the mobile and use iTunes that way.
Apple’s iPod system will go the way of its computer business, as long as it stands still and does nothing. I think this is unlikely…in the next few years I expect to see a video iPod as well as some other innovations to the device. This will keep iPods dominant — or at least strong — for some time yet. In the end, though, Apple will have to find a way to make its revenues through licensing Fairplay or selling content.
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