Why 2004 Won’t Be Like 1984

Monday, 16 August 2004

My reason for writing “The Art of the Parlay” — revisiting the conventional wisdom surrounding Apple’s mid-’80s decision not to license the Macintosh — is that current events have made the topic relevant.

Those current events, of course, are related to the Apple music platform: the iPod, iTunes, and iTMS.

The relevance to Apple’s 20-year-old licensing decisions is that nearly every mainstream media pundit who opens his mouth about the iPod — especially in the wake of RealNetworks’ Harmony announcement — has decided that Apple is, all together now, making the same mistake with the iPod that they made with the Macintosh.

I.e., that Apple didn’t license the Macintosh, Microsoft did license their operating systems, and that’s why Microsoft won and Apple lost. And now Apple is doing the same thing with the iPod and the iTMS.

I’m here to tell you this is utter bunk. Apple’s position with the iPod is significantly different — and much stronger — than their position with Macintosh 20 years ago. There are admittedly a few similarities, first and foremost of which is that both products are much better designed than any competing product. Second, uh, they both use 12-point Chicago as the system font. (Except for the Mini, which uses Espy Sans, the Newton’s system font.)

The gist of my parlay argument is that the biggest difference between Apple and Microsoft — and the biggest reason for Microsoft’s lucrative monopolies in operating systems and office software — is that Microsoft built upon their previous successes, and Apple did not. Windows parlayed off MS-DOS, and Office parlayed off Windows. The Macintosh didn’t parlay off anything.

One potentially unsettling consequence of looking at the old Mac-vs.-Windows debate in light of this parlay theory — at least for those whose Mac enthusiasm borders on religious fervor — is that it leads one to revisit additional nuggets of conventional wisdom. E.g. the idea that the Mac-vs.-Windows competition is an example proving that the better product doesn’t always win (often mentioned alongside Betamax-vs.-VHS as a canonical example).

But was the Mac “better” than Windows? Better designed, yes. No question. But there are other metrics than design. One being compatibility. And in terms of compatibility, DOS/Windows was better than the Mac.

Microsoft looked at the PC market and asked, “How can we make the most money?” Their answer was to sell software to the business market, because that’s where the money is. Pure pragmatism: corporations are conservative, change slowly, and hold compatibility (and low prices) in high regard.

Apple looked at the PC market and asked, “How can we make something better than everything out there?” Their answer was the Macintosh. Pure idealism.

The Mac competed solely on the basis of the quality of its design. DOS/Windows competed on the basis of being compatible with what was already out there (and being cheaper (a factor that’s probably too important to be stuffed into a parenthetical)). Compatible with existing x86 PC hardware. Compatible with existing PC peripherals. And most importantly, compatible with existing software and software development techniques.

The result is that the Mac ended up appealing only to the segment of the market that values design over compatibility. Five to ten percent of the overall PC market is probably about right. Especially since in the Mac’s case, it was design at the expense of compatibility — there was no way both to remain compatible with the DOS/Apple-II state-of-the-art and produce something insanely great.

The Apple Music Platform, and the Parlay

So the gist of the current punditry’s iPod-as-Mac analogy boils down to this: Apple makes something cool, but then they keep it to themselves, and then they lose the market to a knock-off from Microsoft that gets licensed to other manufacturers.

But if you’re with me in my parlay argument, you can see just how much stronger Apple’s position with the iPod is. Apple’s entire music platform is a pure parlay:

• The iPod, iTunes, and iTMS work with any modern personal computer, Windows or Mac. Yes, the original iPod debuted as a Mac-only peripheral, and iTunes for Windows appeared even later — but Apple offered complete support for Windows relatively quickly.

• The iPod and iTunes are fully compatible with your existing CD and MP3 music collections.

The first point — Apple’s full support for Windows — has led some to speculate, foolishly, that it’s a sign that Apple is moving away from the Mac. They’re going to dump the Mac to make consumer electronics! Possible, of course, but highly unlikely given that the Mac is still the main source of Apple’s revenue and profits. The more obvious, but boring explanation is that Apple’s support for Windows is purely pragmatic: most people use Windows, and Apple wants Windows users to buy iPods.

Ideally, yes, Apple would also like them to replace their Wintel PCs with Macs. If Apple were still purely idealistic, they’d treat the iPod as a Mac peripheral. You want an iPod? Buy a Mac. (This was, in fact, the stated reason behind the original iPod’s Mac-only compatibility. But in hindsight, it seems plausible that it was simply part of a staged plan: ship it for the Mac first and see how it goes; if there’s demand, release a version for Windows.)

The second point — Apple’s full support for MP3 and other non-protected audio formats — is curiously and significantly underemphasized in the mainstream media, especially in coverage of the recent RealNetworks brouhaha. See, for example, Saul Hansell’s report for the The New York Times, breaking the RealNetworks/Harmony story (emphasis added):

Tomorrow, without Apple’s authorization, RealNetworks will start to give away software that will allow people to buy and download songs from its online music store and then play them on Apple’s popular iPod portable devices in addition to those that use the Windows Media Player format and RealNetworks’ Helix format.

This will be the first time any company other than Apple has sold songs for the iPod. While the Microsoft Corporation has freely licensed the Windows format to various music stores and makers of portable players, Apple has kept its business proprietary.

To their credit, the Times ran a correction two days later, and appended it to the bottom of the original article’s web page:

An article in Business Day on Monday about plans by RealNetworks to give away software that will let people download songs from its online music store and play them on Apple’s iPod referred imprecisely to other sources of songs for the player. While RealNetworks will be the first besides Apple to sell them in the protected iPod format, other companies sell them in the MP3 format, which the player can also use.

But even this correction ignores the fact the iPod is compatible with songs ripped from CDs — which means the iPod is compatible with the vast majority of the music people already own. As in legally own.

The only proprietary aspect of the iPod is with protected audio formats, a.k.a. DRM. The songs Apple sells through the iTunes Music Store are protected using Apple’s own FairPlay DRM system; and it’s the one and only DRM system Apple supports.

But for all the publicity and attention the iTMS has garnered, it’s essential to put it in perspective. Apple has now sold just over 100 millions songs through the iTMS. But how many billions of songs do iPod users already own, legally and legitimately ripped from CD?

This isn’t a hidden feature. There’s no trick to it. Apple exerted itself to make it as easy as possible to transfer your music from CDs to your iPod. You put an audio CD in your computer; you click one button in iTunes; you connect your iPod.

That’s compatibility. If you enjoy music enough to consider buying a $300 iPod, there’s a good chance you have a CD collection numbering in the hundreds. Thousands of songs, which cost thousands of dollars. The iPod and iTunes fully embrace your existing music collection.

Already have music in MP3 format, from sources unknown? The iPod and iTunes will play them, no questions asked. That’s compatibility.

(Compare and contrast to Sony, whose latest supposed “iPod-killer” stubbornly only plays songs in Sony’s proprietary ATRAC format.)

Point being, for all the attention it gets, the iTMS is a completely optional part of the iPod experience. You can buy an iPod and completely fill it with music without spending a single dollar at the iTMS.

In short, the issue of compatibility — and of parlaying a new platform off existing, successful platforms — is an enormous difference between the iPod and ’80s-era Macintosh.

The Macintosh was an incompatible hardware platform that required incompatible software.

The iPod is hardware compatible with existing PCs and Macs. iTunes is compatible with both Windows and Macs. And most importantly, they’re both compatible with the billions of CDs people already own.

Pro-Choice

RealNetworks’ battle cry in the Harmony debate is “Choice!” Consumers demand and deserve “choice”, and despotic Apple isn’t offering it to them. (Microsoft has also played the “choice” card — cf. last year’s “Closed Is Open”. Look for Microsoft to reiterate the “choice” angle when their own music store platform launches.)

But when RealNetworks whines about choice, they’re only talking about choice between rival DRM platforms. And it’s true that Apple denies iPod owners this choice.

But what Apple provides is a larger and more important choice: the choice not to use DRM protected audio at all.

Harmony is not going to help Apple sell more iPods. Harmony is simply an attempt by RealNetworks to sell songs to iPod users. There’s no shame in that — but no benefit to Apple, either.

One argument is that Harmony appeals to people who are concerned about DRM lock-in. I.e., if you spend your money on music at the iTMS, what happens if in a year or two you decide to buy a music player from another company? Holy shit, you’re locked-in!

This is so fallacious, it’s hard to see how anyone is falling for it. DRM lock-in is indeed a serious issue — but the people who are concerned about lock-in aren’t going to trust RealNetworks (or Microsoft) any more than they trust Apple. They’re going to buy non-DRM music, which the iPod already embraces.

Plus, Apple allows you to burn your iTMS songs to good old-fashioned unprotected CDs — which you can then import for use on non-Apple music players. A pain in the ass? A bit. But a far cry from fascist lock-in.

The other argument trotted out by RealNetworks and its supporters is that they’re selling higher-quality audio files than Apple — Real’s songs are encoded at 192 Kbps, Apple’s at 128. But this is not so simple an issue as higher quality being better — otherwise we’d all be using lossless encoding formats. There’s a space trade-off, which maybe isn’t so important to 40 GB iPod users, but is quite important indeed to 4 GB iPod Mini users.

And in the same way that those wary of DRM aren’t buying protected audio files from anyone, music connoisseurs who are bothered by Apple’s lossy compression aren’t going to be satisfied with Real’s compression, either, even if it is less lossy than Apple’s. They’re going to buy CDs.

Control This

USA Today columnist Kevin Maney wrote about the RealNetworks/Apple dispute on August 3 (“Apple’s control-freak tendencies could crush iPod”). Not only did he get just about everything wrong, but along the way he hit every one of the clueless “Apple is repeating their Macintosh mistakes with the iPod” talking points. It’s worth examining point-by-point.

Maney starts:

The past couple of years, Apple Computer CEO Steve Jobs has gotten nothing but roses and kisses from the public and the media.

But a feud between Apple and RealNetworks over music downloads is exposing Jobs’ tragic flaw. Amazingly, he seems to be making the same devastating mistakes with the iPod that he made with the Mac 20 years ago.

Uh-oh. Not looking good.

Given the subject, it’s only fitting to put the situation to music, so here’s part of the story to the tune of the old hit American Pie:

This is so corny, I’m embarrassed even to republish it.

Long, long time ago
I can still remember how Steve Jobs made us smile

He knew the Mac was truly great;
it trumped that DOS made by Bill Gates

And dominated PCs for a while.

No, it didn’t. The Mac never dominated the PC industry. It peaked with a market share around 10 percent. (Apple arguably “dominated” the PC industry in the early years of the Apple II, but not with the Mac.)

But ’85 in retrospect
looks like a case of gross neglect

Bad news of a crisis;
the Mac, Jobs wouldn’t license

First, Jobs was on his way out of the company in 1985. Second, don’t get me started on the licensing thing again.

I can’t remember if I cried
as I watched Apple’s business slide

Too bad those lessons weren’t applied
The day the iPod died

The lessons of an incompatible hardware platform that never grew significant market share (Macintosh), applied to a highly-compatible hardware platform that’s maintained an overwhelming market share lead over all competitors for two years (iPod). Apply that how?

The iPod has half the digital music player market, and iTunes sells 70% of all legitimate music downloads. Jobs practically willed the digital music business into being. […]

But Jobs has blown it before — and, boy, does it look like he’s blowing it again.

When before has Steve Jobs been in charge of a platform with half the market? (Never.)

But around 1985, Jobs and his executives decided not to license Apple’s technology or operating system to any other company. Apple wanted total control. It wanted to sell all the products itself. It wanted no competitors.

That sounds sinister. Another way to put it is that Apple was selling Macintoshes for very high profit margins, and wanted to keep those profits for itself. Which is what corporations do.

This was a yawning opening for Microsoft, Intel and the PC. Since anyone could buy the licenses and components to make a Windows-based PC, that technology took wing.

So according to Maney’s timeframe here, Microsoft, Intel, and the PC didn’t take wing until 1985? Talk about revisionist history. Microsoft and Intel were in fact both on the path to industry domination years before the Macintosh, and the Mac had little to no effect upon their vectors.

This year, Apple is left with less than 4% of the market for personal computers — basically a cult following.

Ah, yes, Apple’s “cult following” — every hack pundit’s favorite means of dismissing Apple entirely. The Mac only has four percent market share, and even that doesn’t count because it’s just a cult following. “Cult” implies irrationality.

More recently, Jobs has done for digital music what he once did for personal computing: He’s made it appealing to non-techies. Once again, his design sets the pace. No device is as good as the iPod; no software solution works better than iTunes.

About the iPod and iTunes, he’s correct. About the credit, he’s wrong — Jobs is the CEO, not the company. Apple engineers designed and created the iPod and iTunes, not Jobs. I have no idea why hacks tend to conflate Apple (the company) and Jobs (the CEO). Would Maney write that Bill Gates released a new version of Windows?

But like the Mac of 1985, it’s a closed system. Other than open-source MP3 files, only music downloaded through iTunes will play on iPods, and iTunes music won’t play on any portable device except an iPod.

Here’s some not-so-clever misdirection: If you ignore MP3 files, the iPod only plays Apple’s own proprietary iTMS songs. But that’s a little like arguing that if it weren’t for cash, you’d have to use credit cards for every purchase. True, but there is cash. And there are MP3s — billions of them, all compatible with the iPod. And it’s not just MP3 files — the iPod also plays WAV and AAC files.

Recall that the iTMS didn’t even exist for the first two years of the iPod.

(It’s also worth pointing out that MP3 is not an “open source” format. The MP3 format is owned by Thomson, and companies like Apple must pay Thomson royalties to decode and encode MP3 files. But why bother getting the details right when you’re writing for USA Today?)

Apple refuses to license the technology to third parties. Instead of setting a standard for all, Apple wants to own it all.

It’s almost as though they’re a for-profit corporation, attempting to maximize their revenue from a wildly popular product and service. Absurd.

When Microsoft behaves that way, everybody screams antitrust.

Perhaps that’s because Microsoft is a monopolist, and has been convicted of illegally abusing their monopoly positions. With the iPod and iTunes, Apple is a market leader, but not a monopolist — thus anyone who described their licensing decisions as “antitrust” would be talking out of their ass. Or writing for USA Today, I suppose.

Last week, Real publicly exposed Apple’s obduracy. Real announced that it has a way for people to legally download and play songs that work on both Apple’s products and Windows-based products.

Actually, Real’s Harmony only works for Windows-based products, because Harmony is only available for Windows. As John C. Welch points out on his weblog: “‘Choice’ is defined as ‘You have to use Windows’. In fact, from what I can tell, there is only one major music store that gives users on multiple platforms the access to the full range of its features… the iTMS.”

It’s the kind of flexibility consumers want. But Apple doesn’t seem to care.

What consumers? The ones buying iPods? The ones waiting to buy iPod Minis? Or just the ones who pull things out of their ass for USA Today?

A large part of the appeal of the iTMS is the “It Just Works” factor. Because it bypasses the browser and the concept of “downloading”, working instead entirely within iTunes itself, buying songs and getting them onto your iPod just works. Somehow I doubt the user experience of the Walmart.com music store can match it.

“Consumers are not in the end going to put up with being locked in,” says Josh Bernoff, consumer tech analyst at Forrester Research.

So perhaps they’ll buy their music on CD, rip it to unprotected non-DRM audio formats, and play it on their… iPods?

Music has a long history of competing standards in new technology, but the split never lasts. In 1950, it was RCA Victor’s 45 rpm record vs. Columbia’s 33, and eventually all record players accommodated both. In 1970, it was Philips’ audio cassette vs. the eight-track — invented by William Powell Lear, who also created the Learjet. The eight-track soon disappeared.

Apple can’t win by keeping its music technology to itself.

Why not? They’re selling 70 percent of DRM-protected music now. As Jobs has stated in interviews, if some other music store gains significant market share, Apple will consider supporting it. But for now, why share, other than to be charitable?

According to Maney and his ilk, Apple is doing everything wrong — but yet somehow they’ve got the number one music player and the number one online music store.

Choosing When to Take a Long Shot

Even if you remain convinced that Apple “must” license its music platform, isn’t that exactly what they’re doing with HP?

That HP is on the cusp of releasing its own licensed version of the iPod — now, while the iPod is still the undisputed leader in both design and market share — is alone reason enough not to compare Apple’s position with the iPod to their position with the Mac 20 years ago.

It’s baffling that those criticizing Apple’s decision to spurn RealNetworks describe Apple as being unwilling to license their technology, when in fact they’ve done exactly that — partnering with a company that is much larger than Apple itself.

To insist that Apple ought to be thankful to RealNetworks and to allow their Harmony technology to work is to say that Apple should allow other companies to freeload.

With the HP deal, Apple will be earning licensing fees and has gained a partner with the second-largest PC market share and extensive retail sales presence — i.e. Apple stands to benefit directly from the deal. Whereas with RealNetworks’ Harmony, the only company that stands to gain anything is RealNetworks.

Yes, Apple makes way more money selling iPods than they do songs at the iTMS. Yes, Apple probably only makes about 10 cents per song sold. And, yes, Steve Jobs has stated that the iTMS is a loss-leader (“break-even-leader” is perhaps more apt) intended to sell more iPods.

And so the argument goes, If the iTMS is just there to sell iPods, why not welcome another music store that supports the iPod?

It’s foolish to think that every public statement from Apple’s executives is the plain truth about their actual strategy.

The fact is, the market for DRM music is nascent. It remains to be seen whether any DRM-protected media format will be a long-term success. The entertainment industry certainly hopes so; consumer advocates certainly hope not.

If consumers revolt against DRM, and protected media slowly fades into oblivion, Apple has lost nothing. The iPod and iTunes have embraced unprotected audio files from the beginning.

But assuming that DRM-protected media takes hold, history indicates that one format will dominate the industry. The three major contenders now are Apple, Microsoft, and RealNetworks — and it’s generous to put RealNetworks in the list.

Is it any wonder or surprise that Apple would like to be the company that wins?

It’s difficult to speculate on the long-term prospects for the iPod. Certainly it isn’t hard to imagine that 10 years out, a music player equivalent to today’s iPod might sell for $20 or $30. iPods are either going to get a lot cheaper, or gain a lot more features. Or both. Either way, that’s uncertainty.

Establishing a de facto standard format for DRM audio, on the other hand, is the type of success that keeps on succeeding. Ten cents a song on 100 million songs is nice; sell a couple of billion songs, and you’re talking about a serious cash cow. Not to mention the potential to parlay success with DRM audio into success with DRM video.

That’s not to say I’m a fan of DRM-protected media. I’m not. But whether you like it or not, there’s a high-stakes competition going on to establish a de facto standard DRM format, and at the moment, Apple is winning. This game is far from over, and Apple’s going to be damned if they’re going to give RealNetworks or Microsoft a helping hand.