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Apple Takes Digital Music to New Heights

Last week, I wrote a lengthy piece about Google's sudden emergence as a tech powerhouse, with new tools and services that go well beyond the company's original push into Web services with its Google Web search. But Google isn't the only company causing industry leviathan Microsoft fits these days. In the digital media space, which Microsoft expected to have wrapped up by now, tiny upstart Apple Computer—best known for its elegant but expensive Macintosh computers—is delivering Microsoft the kind of market thrashing that the software giant routinely provides for its usually hapless competitors.

How did it come to this? Microsoft's Windows Media technology is technically excellent, free to end users, cheaply licensed, and broadly available through a variety of products and services from a huge number of partners. This strategy, which Microsoft thinks of as ecosystem creation, has served the company well in the past. But Apple, with its monoculture digital media strategy—in which all products and services come directly from Apple itself or, in some rare exceptions, from a small number of heavily restricted partners—has proven to be more effective. Today, Apple's iPods dominate the MP3 player market. And the company's iTunes Music Store so thoroughly dominates the online music market that it might as well be the only player.

Part of the appeal is style and design. Apple's products are elegant, beautiful, and worthy of lust, whereas Microsoft is known for its more pedestrian and less passionate products. Apple's approach to product development might be holding it back in the PC industry, where its Macs often cost in excess of $2000 or $3000. But consumer electronics is a completely different ball game. In that space, consumers are comfortable paying a bit more for style, because the devices typically cost much less than $1000. A $500 portable device with cachet is worth more to people than a comparably equipped but pedestrian $300 device.

By the Numbers
Don't believe me? Let's look at the stats. Apple has sold more than 500 million songs—that's half a billion songs, folks—in the two and a half years since it opened the iTunes Music Store. And it's now selling songs at a rate of 1.8 million per day. The service commands 82 percent market share in the United States and is doing just fine elsewhere, as well. (For example, iTunes already owns 80 percent of the UK market despite its fairly recent availability.) And iTunes is available in the 20 countries that represent 85 percent of the global market for music. Services based on Microsoft's technology make up most of the rest, presumably, but the company isn't releasing figures. No surprise there.

In the portable digital audio player market, Apple posts similar stats. The iPod controls over 74 percent of the market for MP3 players of any kind in the United States, and Apple has sold more than 22 million iPods to date, and more than 6.2 million in the most recent quarter alone. More than 1000 accessories are available for the iPod, and in 2006, over 30 percent of all automobiles sold in the United States will offer some form of iPod connectivity as a factory option. Car brands such as Acura, Audi, BMW, Honda, Mercedes, Mini, Nissan Scion, and Volkswagen are all on board.

Keeping Up the Momentum
So, what do you do to further this success? If you're Apple, you keep pumping out products, some of them risky and innovative, some of them simply evolutions of previous designs. And sure enough, last week, Apple revealed how it would bolster iPod and iTunes sales through the holiday 2005 season.

To truly understand what I call the iPod culture, you have to first wade through hip-deep superlatives. Apple CEO Steve Jobs treats each product launch as if it were a traveling religious revival, and it's so easy to get caught up in the hype that you sometimes forget that he's talking about products and not life-changing events. Such is the aura that Jobs projects, I guess. But let's look at this sensibly.

I Browse, I Buy, iTunes
First, Apple continues to extend the worth of its iTunes brand. The iTunes Music Store is the largest online music store in the world, now offering more than 2 million songs for sale. But the biggest reason to keep coming back to iTunes is the exclusive content (and, ahem, its exclusive connectivity with the iPod). To date, many artists have made individual songs available for sale only on iTunes. Last week, Jobs announced two such exclusive blockbusters. The company has signed up best-selling author J. K. Rowling, who is making all six of her Harry Potter books available on iTunes in audio-book form. And Apple finally managed to corral pop siren Madonna—who had previously resisted individual-song sales online—into providing her entire catalog for sale for the first time, including per-song purchases.

Additionally, the company released a new version of its desktop software, iTunes 5.0, for Windows and the Mac. Apple iTunes was already my favorite media player, and iTunes 5.0 adds a number of great new features, including a refined new look, the ability to place playlists into folders, a new search bar that provides simple filtering capabilities, Microsoft Outlook contacts and calendar synchronization with iPods, Smart Shuffle (to fix the broken shuffle feature that dogs all MP3 players), and parental controls. It's a winner, and iTunes has never been in better shape.

More Mellow than ROKR
Jobs' second big announcement concerned the Motorola ROKR cell phone, or the so-called "iTunes phone." Note that it's not called the iPod phone (or iPhone). In development since last year, and one of the worst kept secrets in consumer electronics history, the ROKR is a quad-band GSM cell phone with a built-in camera, built-in stereo speakers, a stereo headphones/headset, and an iTunes client built-in, with a dedicated iTunes button on the handset. However, the ROKR isn't the gigantic success story it could have been, thanks to a conscious decision by Apple to hobble the device. My guess is that the company made this move to protect its iPod market, which now generates one-third of the company's revenues.

How has Apple hobbled the ROKR? First, you can store only 100 songs (and audio books and podcasts) on the device, regardless of the capacity of the memory card you use. That's right, it's artificially limited. And you can acquire music only by plugging the phone into an iTunes-equipped Mac or PC using a lowly, 1998-era USB 1.1 cable, with pathetically slow transfer speeds. That's right, there's no USB 2.0 or over-the-air synching, as you might expect from a 2005 wireless product. As a music player, the ROKR works just like the iPod shuffle: You can use the Auto Fill function in iTunes to fill the phone with content, and shuffle the songs on the device. On the other hand, the ROKR does feature a nice color screen, so you can select artists, albums, songs, and playlists, unlike an iPod shuffle.

It's ... Beautiful
Apple's final announcement is the most exciting, although it's also the one most drenched in Jobs' calculated religious imagery. Apple has taken the bold step of replacing its best-selling iPod—the iPod mini—with a new device, the iPod nano. And the iPod nano, which is just 62 percent of the size of the iPod mini it replaces, is something to behold. A full-featured iPod that utilizes flash memory rather than a hard disk for storage, the iPod nano is tiny—really tiny—and weighs just 1.5 ounces (42 grams), or less than the weight of eight US quarters. It's thinner than a number-two pencil, if you can believe that. And it's less than a third of the size of any of the devices that allegedly compete with it.

Now, you might wonder about Apple's bizarre fetish with small things. The company's devices and PCs are routinely marketed for their small sizes (as with the Mac mini, and the iMac's "Where did they hide the computer?" tagline). I'm not sure that mainstream America is as fixated on smallness as Apple is. But the iPod nano is unquestionably cool, and unquestionably beautiful. Available in classic iPod white or a new black color, the iPod nano boasts 2GB (500 songs) or 4GB (1000 songs) capacities for $199 and $249, respectively. And color-obsessed fans of the iPod mini can get a carton of five colored nano tubes if they'd like to make more of a fashion statement.

Why is the iPod nano so important? If you look beyond the silly name (why didn't Apple just keep the iPod mini branding?), it's clear that the iPod nano won't just protect Apple's market share but will likely improve it. That's an incredible proposition for a company that already dominates this particular market. But like Google, Apple is at its best when it takes bold steps. And even though the Microsoft-based MP3 player and music service competition is barely treading water, I have to admit I like to see Apple just taking it to them and not holding back. The iPod nano sends a message, and that message is that Apple isn't complacent. From a consumer's perspective, there's a lot to like there.

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