Will the iPod Become the Next Pet Rock?

Lately, I've written extensively about Apple Computer's moves in the connected home, and certainly some of the company's well-designed products—especially its best-selling iPod—are hits with users. But as much as Apple's fans would love to believe that one company can go it alone against a consortium of consumer electronics and PC industry titans, both history and current events tell us otherwise. In other words, I've got bad news for Apple: Unless you make some changes, and quickly, you've already lost the game.

If you have no idea what I'm talking about, let's backtrack a bit. We live in an age of confluence and change. Traditional markets for media—the audio CD, paper-based books and newspapers, DVD movies, film-based photographs, and so on—are on the wane. Whether you realize it or not, we're headed for a fully digital future, and no outcries about the perceived benefits of your favorite legacy media type are going to change that. There's just one problem with the notion of digitally delivering media: Because every digital copy of a song, book, or movie is a perfect, exact replica, users are more likely to pirate content—knowingly or not—simply because it's so easy. Why buy a CD when your friend can give you a perfect digital copy for free?

To protect against this lawless (and penniless) future, media creators and distributors—these days, primarily record companies and movie companies—are turning to Digital Rights Management (DRM) schemes, which offer electronic protection for digitally delivered media. The most famous (some would say infamous) example of DRM is Microsoft's Windows Media DRM scheme, but other companies have worked up their own solutions, including RealNetworks and even Apple, although the latter's DRM implementation is limited solely to a single media type (music) purchased from a single source (Apple's iTunes Music Store).

Contrary to many opinions, DRM isn't bad per se. It's not unworkable. I'd argue that effective DRM solutions are absolutely necessary to implement the digital future. Otherwise, content creators wouldn't get paid for their work, and many sources of media—music, movies, books, and other content—either wouldn't get created or wouldn't be released digitally. However, once we have effective DRM schemes, valid purchasers of content will be able to move that content from device to device, and access it legally wherever they'd like.

That's the plan. Sadly, many DRM schemes today are limiting to consumers because content distributors are afraid of piracy and electronic workarounds. Consider Apple's DRM scheme, which is among the least restrictive—but also among the least inclusive. (It applies only to music purchased from Apple, and not to other media types or other suppliers.) Customers who purchase songs from the iTunes Music Store can download purchased songs only once, and all sales are final. Once purchased, a song can be played back on "up to five Apple-authorized devices at any time" (currently, this means Macs or PCs with Apple's iTunes installed), can be burned as part of a playlist up to seven times, and can be stored on up to five Apple iPods at a time (but on no other devices). And like all DRM schemes, Apple reserves the right to change its terms at any time, a decision that will affect prior purchases as well as new ones. In fact, Apple has changed its DRM policy at least once already. And this, folks, is arguably the least onerous DRM scheme I've encountered so far.

As we move forward, I expect the least restrictive DRM schemes to catch on with consumers, because that's typically the way the open market works. However, Apple's initial success with the iTunes Music Store (more than 125 million songs sold and a catalog of more than 1 million titles to choose from) won't necessarily translate into continued success in the future. Indeed, the company is making the same mistakes that doomed its otherwise excellent Mac product line to less than 2 percent of worldwide market share in the PC industry. Instead of licensing its technology and opening the iTunes DRM scheme (called FairPlay), Apple is circling the wagons and refusing to allow others to access its crown jewels. Aside from a couple partners—HP and Motorola, neither of which has direct access to Apple's DRM technology—Apple is replaying its Mac single-source experiment, except that this time the stakes are much, much higher. The consumer electronics market dwarfs the PC market and will likely continue growing in the future as the PC business slows down.

Let's take a look at some of the problems Apple faces.

Innovative Services Apple Doesn't Offer
Apple didn't invent the online music store, the MP3 player, or even the hard-disk-based MP3 player, but the company is somehow credited with "innovating" in all three markets. Arguably, Apple deserves credit for getting record companies to agree on standardized pricing for online music sales, and its iTunes Music Store is a stark, elegant contraption that makes purchasing online music easy. However, Apple appears to be stumbling in its pursuit of newer, equally innovative markets.

The company's biggest mistake, in my mind, is ignoring the portable-video market. The problem seems to emanate directly from Apple CEO Steve Jobs, who has repeatedly and publicly downplayed the value of a "video iPod" and restated his opinion that music players make much more sense. However, recent video players, such as the multifaceted Portable Media Centers, underscore how dangerous Jobs' opinion can be. Sure, the first Portable Media Centers are a bit expensive, but so were the first iPods. However, in recent cross-country flights, the Creative Portable Media Center I tested (see my review at the SuperSite for Windows) proved its mettle more than once by letting me enjoy excellent-quality full-length movies in a cramped coach seat that wouldn't let me open a full-sized laptop.

As Microsoft CEO Bill Gates said recently, "Ask kids in the back of a car on a 2-hour trip, 'Hey, would you like to have your videos there?' My kids would. I guess Steve [Jobs]'s kids just listen to Bach and Mozart. But mine, they want to watch Finding Nemo. I don't know who made that, but it's really a neat movie. So, yeah, we're early on the video thing. A video device costs somewhat more than just a pure music device—up in the $500 range. But there's no problem with the screen. The experience for the kids sitting there watching that color LCD screen is fantastic. Getting the content providers to open up their broad libraries and making those things really easy to get at—we've put a lot into that."

Apple is also wrong about its approach to subscription content. Specifically, Apple has chosen to ignore subscription content, pointing to its success with a la carte music sales. Jobs has said that people want to own—not rent—content, and music fans have rallied around this opinion as if it makes sense. Sadly, it doesn't. Today, consumers are very much used to paying subscription fees to access content, a fact borne out by the success of cable TV service, premium TV stations such as HBO and Cinemax, movie rental outlets such as NetFlix, and even satellite radio. Music is no different, and although hardcore music fans will always want to purchase music (just as movie fans will suck it up and purchase the umpteenth version of The Lord of the Rings on DVD), most people just don't care that much.

In short, the future of digital entertainment is not just music, and only Microsoft and its hardware partners seem to have a handle on that. Furthermore, the future of music sales is with subscription—not a la carte—offerings. Apple is losing out in both cases by ignoring these crucial markets.

Integration Trounces Go-It-Alone
When Microsoft beat Apple in the OS wars, it did so not by facing off against Apple one-on-one but by licensing its OS (DOS first, then Windows) to a growing cabal of compatible PC companies and letting that group create an entire industry. Today, consumers benefit more from the competition in the PC industry than they ever would have by purchasing all their computer equipment from one supplier (Apple), and the result—called PC economics—is now a business-school case study.

Today, Apple is repeating its Mac mistake by going it alone with iTunes and the iPod, and Microsoft's somewhat obvious response is to license its digital media technologies cheaply or freely, depending on the situation, to anyone who asks. The predictable result is a growing list of PC-compatible online music stores, most of which are based on Microsoft's more open formats, and an amazing group of more than 100 devices, all of which are compatible with the songs sold (or, in some cases, subscribed) by those services. None of the stores are compatible with the iPod. And none of the devices are compatible with iTunes.

Even Microsoft's latest media player, Windows Media Player (WMP) 10, is open to competitors and partners alike, so companies can offer a front end to their music and video sources right alongside Microsoft's new MSN Music offering. Today, when you install the free WMP 10 player, you get access to a wide range of services, including MSN Music, CinemaNow, MusicNow, MusicMatch, Wal-Mart Music, and Napster, and others are arriving in the coming weeks. Each offers similar but unique services. For example, at 88 cents apiece, Wal-Mart's songs are cheaper than songs offered by the others, and Napster offers a subscription service that lets you copy oodles of subscribed content to compatible devices (such as the aforementioned Portable Media Centers). Those who go the Apple route get Apple services. Those who go the Microsoft route gets lots of choice, along with the inherent benefits of those choices, including better prices, better-quality downloads, more services, and so on. It's PC economics all over again.

Portable Devices Finally Catching Up
One of last arguments Apple supporters always dredge up is that, well, choice is nice, but Apple makes the best products. That was true when Apple had no competition, but it's certainly not true with online music services today, and the argument is beginning to fall apart with portable devices as well. The Microsoft-oriented side has always offered more choice, but now some of these devices are starting to outpace the iPod in key areas.

Dell's utilitarian Digital Jukebox (DJ) might be a bit heftier than the iPod, for example, but it offers three times the battery life and much more reliable mechanical buttons than the flaky controls on recent iPods. The DJ's buttons won't typically get pressed accidentally when you drop the device into your pocket. (Woe to the iPod user who forgets to slide the Lock switch before pocketing the device.) The DJ is also much more scratch-resistant than the curiously fragile iPod, which scratches if you look at it funny. Finally, the DJ is much cheaper than the iPod and of course far more compatible with online music stores. A new version of the player, due this fall, will further close the gap.

But let's turn our attention to the unobtainable iPod Mini, a $250 lust item that Apple announced in January 2004 and said would be widely available in April. Today, iPod Minis are finally shipping in volume, but Apple's inability to deliver the devices all year has opened the door to some competition. The primary benefactor here is Rio, whose excellent new Carbon device offers 5GB of storage (compared to 4GB on the Mini) in a package that's smaller, easier to hold, and arguably more attractive than the Mini—all for the same $250 price tag. Best of all, the Rio Carbon gets three times the battery life of the Mini, meaning you can keep the music playing all day long.

But the Microsoft camp benefits from other advantages as well. The music content from today's Windows Media-oriented music services will soon play on Pocket PCs and Smartphones, thanks to a new version of WMP 10 that's designed for Windows Mobile devices. And thanks to new types of compatible mobile devices, such as Tablet PCs and Portable Media Centers, customers have an even wider array of choices for taking content on the go. It's not just about portable audio players.

The Future Is Integrated, Not Isolated
Apple's short-term success is very real and quite admirable, but the company's inability to see coming trends in video, subscription content, and interoperability suggests that Apple is repeating the mistakes of the past. In the 1980s, the Mac held an early lead over the PC but was quickly buried after the industry standardized on a common Microsoft technology. Today, that series of events is repeating itself, and online music services—and to a greater degree, the digital delivery of all media types—is very much at a nascent stage. If Apple doesn't change its ways, the company simply won't survive.

But that apocalyptic scenario doesn't mean things have to end badly for Apple. The company could surprise me by licensing its FairPlay scheme to other companies and melding FairPlay into a protection mechanism that works with non-music media types on non-Apple services. It could open its iPod and allow non-Apple stores to sell music to iPod owners. And it could fill the huge and obvious gaps in its product lines by embracing portable video, TV recording, and other related markets, as Microsoft has done. It's not too late, but the gap is closing all the time. If you care about Apple, like I do, it's time to take a stand and ask the company—no, beg the company—to reevaluate its posture and open its products. Otherwise, we'll simply look back on the iPod and smile sadly, as we do when we think about other once-hot fads—like Pet Rocks, Rubik's Cubes, and Ouija Boards.