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Digital Music: Does Apple Hold the Best Hand?

By Staff Writer MacNewsWorld ECT News Network
Apr 30, 2004 4:32 AM PT

A recent Jupiter Research report entitled "Portable Media Devices -- Beyond Music" calls Apple's iPod the most successful portable media player today.

Digital Music: Does Apple Hold the Best Hand?

"More than two and a half years after its introduction, no vendor has come close to Apple in capturing the hearts and minds of the marketplace," the report states, adding that the iPod's sleek form factor, ease of synchronization and reasonably long battery life are its core attributes.

With regard to standards, the report says the online music market has become polarized between Apple's Advanced Audio Coding (AAC) and Microsoft's Windows Media Audio (WMA). "Microsoft may hold the larger hand of cards (particularly widespread use of WMA and WDRM), but Apple holds the aces with the iPod and iTunes," it notes.

Granted, the majority of digital music files are MP3s rather than AAC or WMA files, but as legal downloads increase in popularity, the battle between Apple and Microsoft for digital music supremacy increasingly may resemble the World Series of Poker. The Mac Observer publisher and poker aficionado Bryan Chaffin said he found Jupiter Research's poker metaphor to be a great analogy.

"In Texas Hold 'Em poker, having a pair of aces is a great hand when you are against one, or at most two, opponents. In such a case, the aces will win as much as 94 percent of the time," Chaffin told MacNewsWorld. "When you add in more players, however, those aces lose a lot of power, winning less than 50 percent of the time. While still favored, the aces are just not as powerful the more opponents you add."

So, who is holding the better hand? Should Apple hold with its aces? Or will Microsoft upend its rival with a full house of WMA-based partners?

A Winning Hand?

According to Chaffin, Apple's strategy to tie the iPod with the iTunes Music Store (iTMS) has been a hands-down victory so far. However, the company has had relatively few rivals with which to contend.

"While Apple has a staggering 30 percent of the market in music players, that also means the other 70 percent of the market will work everywhere but iTunes Music Store," Chaffin said. "That's a lot of other hands in this metaphorical poker game. It will only take one of those opponents to hit, as they say in poker, for customers to turn to a different product and service."

He noted that such an event is especially possible in the broad, Windows-based market, adding that Apple could easily lose its momentum if this were to occur. "In the grand scheme of things, it's most likely a matter of when, not if, that happens," he said.

Nascent Market

Jupiter Research vice president Michael Gartenberg, the author of the abovementioned report, said the portable media player market is still nascent, with just 2 percent of those surveyed reporting they own a hard drive-based digital jukebox.

"Apple is playing a very strong hand, with lots of folks looking on enviously," Gartenberg told MacNewsWorld.

GartnerG2 research director Mike McGuire concurred that, from a business standpoint, Apple is doing a great job with its iPod/iTMS combo. Apple's interface is a primary reason for the company's success in this arena.

"Being able to [purchase] songs and make playlists easily on a portable device is the heart of online music in the future," McGuire told MacNewsWorld. "The challenge is growing the overall market. A lot of people still are not hip to the idea of online or PC-based music."

More Opponents

For his part, Chaffin praised Apple for growing the online music market from nothing to a multibillion-dollar business. But he cautioned that when Microsoft enters the market more directly and "starts throwing serious money at it," Apple will have to compete against more opponents in both the music-player and download markets.

"The mistake that Apple has always made is in not adjusting its tactics once the rest of the industry [gets] anywhere even close to what [it is] doing," Chaffin said.

"So far, it seems as if Steve Jobs is intent on repeating that mistake, though I hope to be proven wrong on this," he continued. "Good poker players learn from their mistakes."

'Apple Is Fine'

Apple's announcement Wednesday that its latest version of iTunes for Windows will support WMA-to-AAC conversion may be a step in the right direction, given that the default version of Windows Media Player rips only to the WMA format.

"Apple has provided a straightforward means of getting [WMA files] into a format supported by iTunes," Jupiter analyst Joe Wilcox told MacNewsWorld. "Because Windows Media Player doesn't come with a high-quality MP3 encoder, some consumers may have unwittingly created vast WMA collections that won't play in iTunes."

Jupiter's Gartenberg said he does not see the WMA/AAC issue as similar to the Mac-vs.-Windows battle that took place more than a decade ago, partly because other players like Sony are entering the market with their own proprietary technologies.

"There is no center of gravity right now except for the MP3. Customers expect support on that," Gartenberg said. "The iPod is an open platform. It supports MP3s. Apple is fine."

Cold, Harsh Reality

GartnerG2's McGuire noted that if Apple continues to dominate the online music market, the company might license its Fairplay digital rights management (DRM) technology to make it compatible with RealNetworks and other services and players.

However, he said, making a business case to license Fairplay right now would be difficult. The cold, hard business reality is that Apple's primary loyalties lie with its customers, employees and shareholders, all of whom likely want the company to extract as much profit and value from the iPod/iTMS nexus as possible.

Meanwhile, Gartenberg noted that Apple's core digital media business is selling iPods, not songs.

"There are a number of players with very different business models," he said, "and there seems to be a lack of recognition that they're pursuing different business models than Apple might be doing right now."

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