Apple should not let any other online music services work with iPod

“As rivals multiply, Jobs & Co. will make more money from its music site and iPods if all the industry’s rival players can share its software standards. With 50 million songs sold as of mid-March, 2004, Apple’s iTunes Music Store (iTMS) owns more than half of the music-download business. Apple execs note proudly that the iPod now rakes in more than 50% of the total revenues in the digital-music-player sector. Macheads offer these numbers as proof that the music battle is over — and that Steve Jobs has won,” Alex Salkever writes for BusinessWeek.

Salkever writes, “If Apple really wants to boost AAC, it would allow other device and software makers to license Apple’s own FairPlay digital-rights-management (DRM) system. DRM is computer code bound to each downloaded track or album that carries instructions on how the music may be used. For example, FairPlay allows unlimited CD burns of single tracks but doesn’t allow songs bought through iTMS to be played on other devices or to be traded on file-swapping networks. While anyone can use AAC — it’s an open standard, after all, and widely available for licensing — FairPlay puts a barrier between Apple and the rest of the online music community because iTMS downloads can play only on iPods.”

“That may sound like a good way to lock customers in. For a while, I thought so. But the announcements of new online music stores keep coming. And Napster’s parent company has raised revenue guidance for its online music sales to $5.5 million, from the $3 million range, for the quarter concluding at the end of March. That translates into a run rate of 5 million or so songs per quarter, which is an improvement — but still a far cry from Apple’s music sales, which are in the tens of millions of dollars worth of songs each quarter,” Salkever writes.

“Jobs himself recently acknowledged that Apple could miss its target of 100 million iTMS songs sold by April. Add up these discordant factors, and the competition for iTMS could start to stiffen in 2005. Apple may wind up isolated with a standard nobody else is using,” Salkever writes. “Apple’s AAC/FairPlay combo already owns the largest share of the music-download market. If music players from other outfits could use iTMS, then customers could move back and forth from one brand to another. True, that would mean less of a lock for Apple’s iPod. But it would be a big boost to iTMS revenues… By most accounts, iTMS is the smoothest, best online music store around. While Jobs & Co. doesn’t make any profit from the store yet — it’s a loss leader for the iPod — Apple could end up making boatloads of money if iTMS becomes one of the handful of default players and stores for what will clearly be a multibillion dollar market.”

Full article here.

MacDailyNews Take: Salkever wants Apple to play nice-nice with the Napsters and BuyMusics of the world to boost AAC. It is really important not to make the mistake of equating Apple’s Mac history with the iPod/iTunes. There is no reason to include others at this point in time and there may never be a reason to do so. There are no third-party developers to woo. Music is music and it can be encoded in any format you wish. It’s not like operating system-specific software. Why does Apple need to boost AAC/Fairplay, when AAC/Fairplay is already used by the legit online music download service that rules 80% of the market (Apple’s iTunes Music Store) and also works perfectly with the market-dominating players – iPod and iPod mini? It it Apple’s mission to help Napster, MusicMatch, etc. survive? No.

Apple has shown the willingness to learn from the past. The deal with HP to rebrand Apple’s iPod as their own and preload iTunes into their PCs proves it. Apple should pursue as many other companies as possible in much the same way. Apple makes the money from the iPod, not the iTMS. Even if Apple grossed US$1 billion per year from iTMS sales, they’d only keep (at best guess) 10 percent of that as their cut – US$100 million per year. Then they have to pay for bandwidth, equipment, marketing, etc. There’d be little profit of note. So, Salkever wants other players to be able to work with Apple’s iTMS, so Apple can make nothing from the player sales and also make nothing from the iTMS song sales? Bad business. You’d think a writer for BusinessWeek would understand that fact.

No, Alex, what Apple should do is exactly what they are doing. Keep AAC/Fairplay iTunes/iPod-only as long as they are ruling the market so handily. The more iPods they get into the market, the less the Napsters of the world will profit; they will suffocate. Nobody with an iPod uses anything but the best online store for their music, iTMS for Mac and Windows. The more HP-like deals for iPod rebranding, the better. If some online music outfit somehow makes significant inroads into the online music service market, then Apple can consider options like licensing or buying companies. But, for now, that’s not happening and Apple is correctly playing the game they created by their rules.

Related MacDailyNews articles:
Real CEO Glaser begs Apple to make iPod play nice with other music services – March 24, 2004
Napster CEO: ‘it would be great’ if Apple iPod supported WMA – March 09, 2004

58 Comments

  1. Letting iTunes play fair with other music devices is not necessary, Apple is doing the right thing for now. What I wouldn’t mind seeing is a variety of iPod models. iPod Mini, iPod and Super iPod (with color screen for photo enthusiasts) wold be a great way to go.

  2. If others are so interested in selling their music players, they would obviously license AAC/Fairplay and make a player that costs much less…

    I am sure you can transfer the protected AAC songs into them just using file copy at least..

    I don’t think anyone wants to compete with iPods, they want to define their own music format.

  3. For Apple to maintain its lead in downloads using iTMS and iPods it needs to go after the missing two thirds of the market. iPods command more than half of the dollars for mp3 players but two thirds of the users are using small cheap devices that work with mp3 and WMA. If Apple produces an iPod micro, a flash device with plugin storage, and sell it for about $120- $170, they will take in the remaining low price users. They get the money with the bigger devices and they get the users with the cheaper devices. The need for WMA will disapear. They then licence FairPlay to whoever wants it and the game is over.

  4. Just try surfing over to Rhapsody or the New Napster (or Buymusic or Wal-mart for that matter) and see what you get. You get pushed over to a page proudly proclaiming that neither service has support for the Mac. So much for openning things up. Hey Steve, YOUR customers could give a flip if the iPod was open to other services. We can’t use them anyway.

  5. At this point, I don’t think we know the percentage of downloads that will be used on a portable mp3 player. My guess is that it’s low. But this is important information for these discussions. All of the “arguments” I’ve seen are based on the hypothesis that the people buying on line are exactly the ones that own portable mp3 players and this is not true, or at least I haven’t seen the slightest bit of evidence for it.

  6. And maybe Napster, et al should start allowing their users to rip cd’s in AAC. That would be a big support for AAC. Unfortunately, these JohnnyComeLately’s have been too busy kissing Gates’ feet and are suddenly looking around and finding out that m$ isn’t king of this domain.

    I think the ownership of Fairplay is pretty unknown. I know there is the Veridisc site that claims ownership, but it’s too out of date to be a reliable source. Fact is, though, why should Apple license it to others? Some of the others are even coming out with their own drm. If anything, Apple should work to let iPods use the other drm’s that are not owned by m$. That would be more of an assault on wma than anything else.

  7. Two points I was considering

    1) Apple should license fairplay to another store. Not to another player just the store. More music, more suscribers watch napster die again. Also it is competitive so you don’t get any monopolistic worry’s.

    2) Apple should add an import feature into Itunes, that converts wma’s with DRM to AAC with Fairplay.

  8. b has a good point. We were downloading music since iTMS opened, but didn’t get an iPod until February. I’ve seen very few other mp3 players in the circles I run in. Our iPod is the first that many of our friends have even seen.

  9. Peragrin has a doog point

    REAL already uses AAC… Apple should license fairplay to them and any other music store. We all know Apple does not make money off of the Apple Store but instead uses it to boost sales of the iPod (the real money maker).

    ANYONE who says “There is no reason to include others at this point in time and there may never be a reason to do so.” is JUST PLAIN STUPID. We are in Year ONE of online usic stores. The game is far from over, and yes, Apple can still screw up.

    Imagine this slogan… “The new Apple iPod, the best Audio player just got better, now compatable with Rhaposdy, Wal-Mart, and the industry leading iTunes… over 1.5 million songs available and counting.”

    Let AAC Fairplay become the standard and the iPod the only player that works with them all.

  10. Okay, so let’s use Salkever’s own argument. Back in the early 90s M$ (or further back IBM) should have been friendlier to Apple and other companies. But they weren’t. Now, you have the EU fining and mandating M$ do a better job of “playing well with others.”

    Apple’s got a long way to go with their monopoly before they need to be “friendlier” with others. Besides from that monopoly on music (just like M$’s on OS) Apple is hoping to drive sales of other products and innovations. The big difference is, that Apple embraces standards that are already available and open! So, if you don’t like what Apple is doing or think you can do it better, you have every opportunity to do so and best Apple at their own game and the consumers still “win.”

    Cry me a river… Whenever I hear “Windoze” people saying Apple (or Mac) should do xxx so that xxx will work on their PCs, I immediately close my ears. That’s exactly how it’s been for us Apple loyalists for years in a M$ world. Turn about is ‘Fairplay!’ (pun intended)

  11. I agree with Peragrin and Turgon but ear me out for just a sec as I am thinking as I write:

    Facts:
    1. Apple makes its money for iPod sales (not for iTMS sales) right?
    2. iTMS is only compatible with the iPod as is it the only player compatible with ACC/Fairplay. right?
    3. Every online music stores besides iTMS is not compatible with the iPod
    4. No player besides the iPod is compatible with the iTMS
    5. The iPod holds the bigger piece of the MP3 market pie because of its functionality, beauty, lightness, ease of use, etc. and not only because of its compatibilty with the iTMS

    So:
    Apple should:
    1. Keep or increase their marketing efforts to continue and increase iPod sales.
    2. License Fairplay/AAC so other MP3 players can play music from the iTMS. This way sales from the iTMS will increase therefore it shall become a bit more profitable.

    I seriously doubt that licensing Fairplay/AAC for other players would cannibalize iPod sales. After all, the iPod is one of a kind, literally and there is still one chunk of the market that is still selling tunes (Napster, SonyConnect*, Rapshody, or whatever) apart from the iTMS. So, Why can’t the iTMS steal their customers? For I have seen, it is the best Online Music Store out there.

    In conclusion, Apple should try and sell more iPods and try and sell more tunes from the iTMS (even if they will not be played on a iPod).

    What do you think? Please discuss.

  12. Assuming Apple permits other stores such as Real to have AAC/FairPlay so that Real can sell to iPod owners as well as the iTMS. So someone has iTunes and Real’s jukeboxes loaded on their computer – wouldn’t Apple have to change the iPod’s software to sync with two different jukeboxes? Would you be able to import files purchased from Real into iTunes and vice versa? I could see this complicating the process and Apple being blamed for the resulting mess.

  13. The goal for Apple isn’t to increase iTMS sales (a breakeven proposition at best), it’s to increase iPod sales (the real money maker). If it turns out that there are a whole bunch of songs available from other music stores that you can’t get at iTMS or the pricing of songs becomes an issue, then they might have to think about supporting these other sources.

    Personally, I always thought these devices were in a category called MP3 players. I would like to see Apple make it real easy for people to turn their AAC files into MP3’s to play on those other players if they want. Then they should lay down the gauntlet for MS to do the same thing with WMP. Then it wouldn’t matter what player you use to listen to your music. People would then buy based on the best overall product – which just happens to be the iPod/iTMS combo.

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