Can the iPod Keep Leading the Band?

By the time guests arrived at a well-hyped product unveiling by Apple Computer Inc. on Oct. 26, the big news had leaked: U2's Bono would be on hand to introduce a special black version of the iPod music player. But Apple Chief Executive Steven P. Jobs had other news: a new, slightly thicker, pricier iPod that not only plays music but also stores and displays digital photos. "We're not standing still," Jobs said.

That bodes well for a big iPod Christmas -- and for Apple's chances of maintaining its dominance for some time to come. Although they haven't much dented the iPod's appeal so far, a horde of rivals, including Dell, Sony, Virgin Electronics, and Samsung Group, will offer north of 100 iPod wannabes this holiday season. Moreover, Microsoft Corp. recently announced new technologies that allow most of these products to work with dozens of online music services that compete with Apple's iTunes Music Store.

For now, Apple's continued innovation -- with its red-hot brand, expanding chain of retail stores, and a burgeoning market for add-ons -- looks likely to lead to a long, prosperous run. Eventually, though, Jobs faces a tough choice: Should he keep the iPod's proprietary system closed, or would Apple be better able to maintain its lead by licensing its technology to all comers?

Whatever Apple's current technological lead, history is not on its side. Although it increased its share of the digital music player market to 66% in August, according to NPD Group Inc., up from 28% the year before, many a tech pioneer has seen its early dominance wither. Just look at Palm in PDAs, Nintendo in game consoles, and Apple itself in PCs. Already, rival music players offer more features at lower prices. "It's a nascent market, and [Apple's lead] is not sustainable," says Dave Fester, general manager of Microsoft's Windows digital media division.

But Apple has significant advantages this time. For one, millions of consumers have invested in some of the 200-plus iPod accessories, from $19 pink plastic cases to $300 portable stereos from Bose Corp. Add-on makers such as speaker-maker Altec Lansing say well over 10% of iPod buyers also buy their products at many stores. BMW has sold 12,000 adapters to integrate the iPod into its sound system, and there's a long waiting list. "We can't keep them in stock," says James L. McDowell, vice-president of marketing for BMW North America. These add-ons not only draw customers to the iPod instead of rivals, they could also lock them in for the long haul -- just as the availability of thousands of Windows programs helped bury Apple in PCs.

Of course, all that will help only if the iPod continues to offer innovative features that keep it ahead of rivals. So far, Apple has successfully created six versions of the iPod since it was launched in 2001, including the more affordable Mini.

While the new iPod Photo, at $600, is likely to appeal mostly to well-heeled shutterbugs, it may hint at a much broader digital media play. Since this iPod can be hooked up to a TV or stereo, says NPD analyst Stephen Baker, why not devise one that stores music videos that can be played on big living room screens as well? And however whimsical the U2 iPod may seem, if it's a hit, Apple could quickly do similar deals with other artists. Another possibility: Analysts expect Apple eventually to field an iPod that uses cheaper flash memory instead of a hard drive. While flash devices hold only a few dozen songs, at less than $200 they represent nearly a third of the market for digital music players.

Still, as rivals' technology catches up, Jobs may eventually have to open up the iPod's closed world to maintain his lead. He would face a tough choice, either one of which could undercut Apple's own hardware sales: Should he license the guts of the iPod, allowing lower cost clones to flourish? Or should he license the antipiracy software in Apple's iTunes Music Store so that other players work with it?

Those are the kinds of open approaches Apple refused to take with the Mac back in the 1980s -- a decision that relegated the Mac to a tiny niche. With the iPod, Jobs has proved himself capable of thinking different; already, he is letting Hewlett-Packard resell and accessorize the music player. Apple won't be able to call the shots forever, but if Jobs plays his cards right, the iPod may dominate longer than its rivals imagine.

The McGraw-Hill Companies, Copyright 2004

PHOTO (COLOR): BACK IN BLACK Bono and Jobs with the new special edition

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By Peter Burrows