~EAlWORlD

f~~

Chapter 3 / Computer Hardware

91

Apple Computer: The iPod, the iMac, and the Business Lessons of Closed Systems
manufacturers like Dell, HP and IBM. When the technology dust settled, Apple ended up with barely 3.2 percent of the U.S. desktop market. ;And that's the way it was when Apple introduced the first iPod in October 200l. The iPod was another closed system, but this time Steve Jobs created a closed system with mass appeal. Fulcrum Global Partners estimates that iPods now account for 73 percent of the 30 million MP3 players currently in use in the United States. That's partially because Apple released versions of the iPod and iTunes for Windows. But it's also because Jobs cut a deal with the Big Five record companies in 2003 that locked up his device. The music companies wanted to sell songs on iTunes, but they were afraid of Internet piracy. So Jobs promised to wrap their songs in Apple's FairPlay-the only copy-protection software that is iPod-compatible. Other digital music services such as Yahoo Music Unlimited and Napster reached similar deals with the big record labels. But Apple refused to license FairPlay to them. So those companies turned to Microsoft for copy protection. That satisfied fearful music companies, but it means none of the songs sold by those services can be played on the wildly popular iPod. Instead, users of the services had to rely on inferior devices made by companies like Samsung and San Disk that supported Microsoft's Windows Media format. The situation has been a disaster for Apple's competitors. i'Tunes holds a commanding lead over its rivals, selling more than 75 percent of all digital songs, according to 1\TPD Group, a company that provides tracking of consumer music purchases. The second-place digital music store, eMusic, can't seJl any major-label hits because it refuses to copy-protect them. Instead, it relies on independent labels for content. But eMusic has a 9 percent share of the market, largely because you can play its unprotected MP3s on an iPod. Meanwhile, Rhapsody, Napster, Sony, Wal-Mart, AOL, and Yahoonearly all of which have deals with the major labels but are stuck with Microsoft's technology-are fighting over the remaining 16 percent of the digital music-store market. Most of these music services argue that they have something to offer music lovers that Apple doesn't: digital music subscriptions providing customers the chance to listen to more than a million songs for a monthly fee of roughly $10. You can't burn these songs onto CDs, and they become unplayable if you don't pay your bill. But Napster argues that it is cheaper to listen to music this way than to buy thousands of iTunes. True enough. But the software that Microsoft developed to allow this heavily protected music to be moved to portable devices has been so buggy that a lot of subscribers have given up and just listen to songs on their computers. Poor Microsoft. Nearly every music service and MP3 player maker other than Apple supports Windows Media and its copy-protection software. But not enough music

teveJobs has had much to celebrate lately. But the Apple CEO was particularly happy in February 2006 when he announced that the iTunes Music Store had soldits billionth song, to a teenager in Michigan who had houghta copy of Coldplay's "Speed of Sound." That milestoneis all the more impressive when you remember that \pplehas numerous competitors in the digital music world. Yahoo Music Unlimited and the legal incarnation of Napster aregunning for iTunes customers. Sony and Samsung are tf)ingto create iPod slayers. Andthe field is only getting more crowded. By the summer0[2006, Amazon may launch a digital music service with a brandedMP3 player, possibly made by Samsung. It is already being referred to in the industry as the aPod. Amazon won'tdiscussits plans, but sources tell Fortune that Amazon istargeting people over 40 years old-it refers to them as "the ;-..n>R crowd" who aren't as likely to own iPods as 'lySpaceusers. YetApple's challengers all face the same problem: Jobs's company will no doubt dominate the digital music market foryearsto come. That's because Apple has learned its hard lesson about closed systems. In the microcomputer desktop market, Apple shrank from an industry leader to a niche player because it designed closed systemswith proprietary hardware and software that were often incompatible with thousands of application software products that proliferated in the PC universe. \licrosoftset out to replicate the basic features of the Macintoshoperating system in each succeeding version of its \\indowsas, encouraged software developers to write apps for it, and then licensed Windows to mass-market PC

~n
re, ~e

pu lly on

lovers want to use them. It's a far cry from what happened in the desktop wars. ow it's Bill Gates's turn to learn that it's no full when you're outside a wildly successful closed system looking in. But what about that poor market share of the iMac and other Apple desktop and portable PC products, you may ask? Well, a funny thing called the "halo effect" of the iPod, which Steve Jobs predicted, has happened, and this time Steve is laughing all the way to the bank. Since the arrival of the iPod, Apple's share of the desktop and portable computer market in the United States has almost doubled, reaching just under 6 percent by early 2006. Many analysts expect that trend will continue to inch upward as more iPods are sold and more iPod users turn to Apple's Mac computer lineup for their computing experience. Even more growth is expected in the worldwide microcomputer market as iPod international sales continue to grow, driving more sales of iMac and other flavors of Macintosh desktop and portable computers. Apple's worldwide hare of that market was estimated at 2.5 percent in 2005, with predictions of a jump in growth to 3.5 percent by the end of 2006 and another jump to 5.0 percent by the end of 2007 by one computer industry forecaster.

Part of the reason for such lofty market share growth estimates was Apple's introduction of its Boot Camp software early in 2006. Boot Camp enables the newer iMac and other Mac models based on Intel's dual microprocessor chip to easily run applications software for both its own Mac as x and the Windows operating system. Boot Camp will be folded into the upcoming Leopard version of Apple's as x, further accelerating pple's drive to lure corporate and business Windows users, as well as the iPod crowd, to its lac lineup. As Microsoft continues to struggle with its five years and counting development of the new Vista version of Windows, Steve Jobs is seen as moving to seize the moment to regain the market share Apple lost to Windows PCs. By his continuing innovations of the iPod and the opening up of the Macs to run Windows applications, Jobs is proving that he has mastered the business lessons of how to successfully wield the two-edged sword of closed systems.
Source: Adapted from Devin Leonard, "The Player: Rivals \ Von't Find It Easy Competing with the iPod's Closed System," Fortune, March 20, 2006, and Garry Barker, "Apple Makes Computer History-Windows on a Mac," The Age, April 7, 2006, and iHncDnily eu's, April 8, 2006.

CASE STUDY QUESTIONS

1. Do you agree with the sources in this case that Apple will dominate the digital music market for years to come? Why or why not? 2. Can the key technology and business strategies Steve Jobs implemented with the closed system of the iPod be applied successfully to the iMac and other Apple closed-system computer products? Defend your answer with several examples of what could or could not be accomplished for Apple's computer product line. 3. Will the cachet of the iPod and the capabilities of Boot Camp and the Leopard version of Apple's OS X lure many more Windows PC users to the Mac lineup of desktops and portables? Why or why not? 1. Use the Internet to check out the claims of the iPod's dominance by the sources in this case. Research how the iPod's competitors are doing now, including new entrants like Amazon, and what strategies they are employing to gain market share. Has the market changed since this case was written? Defend your view of the status of the battle for the digital music market. 2. What is your view of the copy-protection tactics of pple and its competitors? Is this capability a proper protection of the music companies' and artists' intellectual property rights? Is it an infringement on a purchaser's right to reproduce content? Is it an anticompetitive restraint of trade, especially for the closed system of the iPod? Break into small groups with your classmates to discuss these issues.