The iPod Juggernaut

Friday, 24 March 2006

One nice side effect of the continuing growth and success of Apple’s iPod / iTunes / iTMS platform is that we’re no longer subjected to moronic business and tech pundits proclaiming that Apple, despite its initial success, is “making the same mistake with the iPod that they made with the Macintosh in the 1980s.”

In “Why 2004 Won’t Be Like 1984”, before refuting it, I summarized this misbegotten meme thusly:

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.

At that time, you couldn’t swing your arms without knocking into someone making this argument. Today, thankfully, it’s dissipated. Oh, sure, it pops back up once in a while from someone exceptionally clueless, but it’s no longer part of the accepted conventional wisdom.

What happened at first is that many people had a preconceived notion of Apple as a company that throughout its history produced innovative, elegant products to great acclaim, only to see others slip in behind them, copy their designs, lower the price, and take the majority of the market — leaving Apple as a struggling niche player. That’s how it always was, such pundits thought, and so that’s how it would wind up with the iPod, too. (Never mind the fact that this notion, in the historical sense, is just plain wrong.)

Why don’t we see people spouting such nonsense today? It’d be nice to think my aforementioned refutation had something to do with it, but, alas, there’s a much simpler and obvious explanation: the iPod has become so successful that it’s impossible for anyone with even a shred of sense to compare it to the Macintosh of the mid-to-late ’80s.

The iPod turned 4 years old last October, and no matter what happens from this point onward — even if iPod sales start to decline — its success to date has been so great that it’s destined to be remembered as one of the great pop cultural phenomena of this decade, and perhaps even the greatest. The Macintosh of the ’80s was a tech-industry phenomenon, not a pop-cultural one. Apple never achieved sales growth or brand awareness with the Mac like they’ve had with the iPod — not even close. Do you know anyone — anyone — who today doesn’t know what an iPod is?

And while Apple now is a darling of the business and tech press, lavished with attention and praise for nearly every move they make, that same historical bias against Apple — that which prompted the “they’re screwing this up just like they did with the Mac and Microsoft is going to steal this market away just like they did with Windows” postulation — is blinding them from the conclusion they ought to be reaching.

To wit: that the iPod is looking more and more like an unstoppable juggernaut.

Penny Wise, Pound Foolish

To commemorate the 20th anniversary of the Macintosh two years ago, Newsweek’s Steven Levy interviewed Steve Jobs. The subject eventually turned to the Mac’s relatively meager market share:

If that’s so, then why is the Mac market share, even after Apple’s recent revival, sputtering at a measly 5 percent? Jobs has a theory about that, too. Once a company devises a great product, he says, it has a monopoly in that realm, and concentrates less on innovation than protecting its turf. “The Mac-user interface was a 10-year monopoly,” says Jobs. “Who ended up running the company? Sales guys. At the critical juncture in the late ’80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens.”

First, this is an extraordinarily insightful summary of what went wrong at Apple in the late ’80s. Sure, Jobs is far from an unbiased observer of Apple’s post-1985 executive decisions, but it’s very hard to argue with his conclusion. At one point in the ’80s Apple was earning staggering 50 percent profit margins on Mac hardware sales. They certainly profited richly in the short run with that strategy, but in the long run, that sort of pricing clearly limited unit sales growth. There were simply too many people unwilling or unable to pay $5,000 for a computer. Profit and market share certainly aren’t diametrically opposed; the choice is which one you wish to maximize.

But second, look at that quote in the context of Apple’s iPod strategy. “At the critical juncture […] when they should have gone for market share, they went for profits.” Of all the myriad ways that Apple’s iPod position today differs from their Macintosh position 20 years ago, perhaps none is greater than this: With the iPod, Apple is going for market share.

iPods are certainly premium products, at least in the greater context of “portable audio players” — handheld audio tape and CD players typically cost around $20 or $30. Go back in time to early 2001, and I wager you’d have a hard time getting most people to believe that they’ll soon be purchasing $300 and $400 handheld music players.

But when compared to other digital music players, iPods are not only competitively priced, they’re often cheaper. Today’s Apple is very different than the old Apple, but many people still haven’t caught on. Take, for example, this recent essay by Joel Spolsky on “great design”:

And finally, the iPod. Ah, the iPod. It’s way more expensive than any competitive MP3 player. It has fewer features than the competition. The iPod nano, the tiny one that everybody’s raving about, is the only product I’ve ever seen that can be scratched beyond all recognition just by touching it lightly with your finger, and the shiny mirror back will be permanently covered in greasy fingerprint smudges from the moment you take it out of the elegant package until the battery wears out and you have to throw away the whole thing and buy another. But who cares?

The blue chip product in every category can usually be thought of as being popular despite obvious design flaws. Weird.

[…]

But that only gets you so far, as Creative, makers of the unloved Zen MP3 players, are learning the hard way. Despite having products that are better than the iPod by just about every reasonable metric, they are unable to even come close to Apple iPod’s dominant market share. They’re cheaper. They have more memory. They support more file formats. Etc. Doesn’t matter: they still have single-digit market share while iPod is probably in the 80s somewhere.

It’s a fine essay on the whole, but as regards the iPod, Spolsky is flat-out wrong. iPods are not more expensive than Creative’s Zens. A mere glance at the Zen Vision:M¹ shows that it’s a direct rival to the regular iPod: same height and width (4.1 × 2.4 inches) and the same screen size (2.5 inches diagonally).

The prices, however, are also the same. A 30 GB Zen Vision:M is $299.99; a 30 GB iPod is $299. (Even Apple’s price is more elegant.) So much for Spolsky’s claim that the Zen is cheaper and has more memory. My guess is that Spolsky wrote this without even looking into it, on that assumption he didn’t even need to check the prices because, well, everyone knows Apple hardware is more expensive, right?

Now, it is true that the Vision:M offers more features than the iPod, including things like an FM tuner and voice recorder that are only available on the iPod as peripherals that cost more money. But the truth is that most people don’t care about these features, because if they did care, either iPod sales would have tanked a couple years ago, or Apple would have added them. iPod competitors have been trying to out-feature-count the iPod from the get-go, and it hasn’t worked yet.

The simplicity of the iPod is one of the prime reasons for its appeal. That it lacks many non-essential features is itself a feature.

Hence the dilemma faced by Creative, Sony, and all other would-be usurpers of the iPod’s throne:

• They’ve tried adding more features and it hasn’t worked.

• They seem to be incapable of out-designing Apple — both in terms of industrial and user interface design, the iPod is almost universally hailed as superior. (Go back to the Zen Vision:M, for example: sure, it matches the iPod in height and width, but the iPod is about 40 percent thinner, 0.43 vs. 0.7 inches. Plus, the iPod weighs less and has much better controls.)

• Even if they could design hardware as good or better than an iPod, they’re still in a deep hole marketing-wise. You can’t beat a brand like iPod simply by throwing money at the problem.

And but so how else can they compete if they can’t win with more features, better design, or better branding? Price, right?

Wrong.

Apple isn’t giving iPods away, but they do seem to be charging less for them than what the market would bear. During the holiday season last year, for example, Apple was apparently selling iPod Nanos as fast as they could make them; I think it’s a fair bet that they could have sold just as many for, say, $50 more apiece. Instead, they priced them lower, putting additional pressure on their competitors and making iPods appealing to a broader segment of the market.

Apple can do this and still make a hefty profit because their overwhelming market share means they’re getting volume discounts on expensive components such as flash memory, tiny hard drives, and LCD screens. This means Apple can sell comparably-equipped iPods for less money, yet still make more profit. (According to Apple’s quarterly financial statements, they typically make about 20-25 percent profit per iPod.²)

In short, and I mean this in the nicest way possible, Apple’s iPod competitors are totally fucked.

If they can’t win on features, and they can’t win on design, and they can’t win on price, what’s left? Their best remaining chance would be for Apple to somehow screw things up on its own, but considering recent history, that seems highly unlikely.

Again, I return to Steven Levy’s 2004 interview with Jobs. Levy wrote:

Once a company devises a great product, [Jobs] says, it has a monopoly in that realm, and concentrates less on innovation than protecting its turf.

Apple has done nothing of the sort with the iPod. They took their best-selling iPod model, the Mini, and discontinued it at the height of its popularity, replacing it with the radically superior and totally new iPod Nano.

My 40 GB fourth generation iPod isn’t even two years old, but compared to the current iPods, it looks like a relic. Apple’s only serious competition to date has been itself.

The iPod Ecosystem

If someone, anyone, intended to come out with a serious iPod competitor, wouldn’t it be here already? What could they possibly be waiting for? Clearly, the longer Apple maintains its lead, the harder it’s going to be for anyone to take it away.

No one’s admitting defeat, but it seems to me that some of Apple’s most-heralded competitors are giving up. If Creative’s executives felt they had any chance of winning in the market, they wouldn’t be publicly threatening to wage a patent dispute, a strategy vaguely reminiscent of Apple’s disastrous look-and-feel lawsuit against Microsoft in the ’90s.

In October 2003, Dell introduced their DJ line of digital music players, a move heralded by many morons as the beginning of the end of the iPod. E.g. Paul Thurrott, who, with co-author Keith Furman, wrote this gem:

Apple Computer’s tenuous hold on the portable audio-player market might soon fall thanks to a predictable foe, Dell, whose Dell Digital Jukebox (Dell DJ) is off to a strong start. The Dell unit is a bit bigger than Apple’s elegant iPod, but it features a more intuitive scrolling navigation wheel and support for Microsoft’s ubiquitous Windows Media Audio (WMA) format, which all online music services except Apple use (even staunch Microsoft competitor RealNetworks, which has its own audio and video formats, uses WMA — a telling decision). The Dell DJ, which I previewed at COMDEX last week and will review soon for Connected Home EXPRESS, also features dramatically better battery life than the iPod, lower prices, a built-in audio recorder, and — gasp — a simpler interface than the iPod. As the owner of two iPods, I’ve long expected the PC world to catch up with — and surpass — Apple’s entry. My only surprise is that it’s taken this long.

“Tenuous hold” — I love that part.

Now, here we are a little over two years later, and where is Dell? Quitting, that’s where:

Dell will discontinue the 5GB Pocket DJ, 20 GB Dell DJ20 and 30 GB Dell DJ30 music players, said Liem Nguyen, a Dell spokesman. The company has decided to focus on the flash memory DJ Ditty player as a way of streamlining its MP3 products, he said.

Like other hardware makers, Dell has been unable to compete with Apple Computer’s success in the MP3 player market. Several have tried — notably Sony, Samsung and Creative Labs — but none have hit on a combination of hardware and software as winning as Apple’s wildly popular iPod and iTunes, said Richard Doherty, principal analyst at The Envisioneering Group.

One remaining argument against the iPod juggernaut might be that Apple can’t go it alone. But they’re not alone. They have partners: iPod peripheral makers. Auto manufacturers aren’t adding “MP3 player adaptors”, they’re adding iPod adapters. The New York Times reported last month that iPod peripherals are a billion-dollar-per-year industry — and growing. Assuming that’s true, my hunch is that more money is spent on iPod peripherals than is spent on competing (non-iPod) MP3 players.

The iTMS continues to grow; BBC News reported in November that iTMS sold more music last year than traditional retailers like Tower Records, Borders, and Sam Goody.

In short, not only does Apple’s iPod/iTunes business not show any apparent weaknesses, they’re flat-out kicking ass in almost every way that matters.

So the interesting question is this: What happens if the next four years are like the last four years? How much bigger can Apple’s iPod business get?