Apple’s sound strategy for the iPod

More than three years after the music companies handed Steve Jobs the keys to the kingdom by releasing their catalogues to him in digital form, Apple’s dominant position in the digital music business looks secure.

Bad strategy and execution on the part of rivals have made its position seem more impregnable than it is. But even with better planning, there is probably little they could have done to change this picture. That is worth remembering this week after news of yet another apparently radical attack on Apple’s stronghold, in the shape of an advertising-supported music download business.

First, consider the source of Apple’s strength. Its execution of its digital music strategy has been a textbook example of how to consolidate an early market advantage. It has extended its product range and segmented the market, moving into lower-priced devices and up into video. It has poured money into advertising, turning the iPod into one of the fetishistic objects of the age.

It has also been able to rely on two things that often characterise technology leaders: network effects and technology lock-in. Buy an iPod, and there is a good chance a friend will let you download all his or her iTunes music to your machine – not a bad network effect, even if of dubious legality. The lock-in comes from the digital rights management (DRM) software that lets the iTunes music store and iPod feed off each other.

History shows that technology leaders, once established, are seldom dethroned by direct competition. It usually takes a shift in business model, or in a technology paradigm, before that happens.

When changes like that do occur, the news for the challengers is surprisingly good. Very few companies that dominate one era of technology go on to dominate the next. Just think of Sony’s Walkman. A company that thrived on its engineering prowess – based on its skill in miniaturising analogue technologies – was left high and dry when the digital era arrived.

Not surprisingly, attempts to change the business model and the technology paradigm in portable digital media are now coming thick and fast. This week brought news of one of the most drastic: Universal Music plans to make its entire music catalogue available for download free of charge through an advertising-supported service called SpiralFrog.

An advertising-supported music market, though, seems a stretch. As Mike McGuire, an analyst at Gartner, points out, other music companies may well feel that giving away their songs would risk devaluing their product, even if the advertising revenues are big enough. Users who want free music still turn illegally to peer-to-peer networks.

Also, apparently radical attempts like this to beat Apple by changing the rules of the game are likely to fail because they are only a partial answer. Universal’s plan would be hobbled by restrictive DRM – users would have to return once a month to refresh their music and it would not play on iPods.

This gets to the heart of the problem. Taking aim at parts of the iTunes-plus-iPod system, now that it has become a de facto standard, is unlikely to work. At one end of the spectrum are the internet services that want to outflank iTunes by finding different ways to introduce people to new music. Changing this process of discovery – usually by adopting the sort of social networking tools employed by MySpace – is at the heart of services such as MTV’s Urge.

At the other end of the spectrum are devices that try to outclass the iPod. Sony’s PSP may have been invented for games but it has a screen that is far better suited for watching videos than the iPod. In between are new distribution mechanisms that change the way music is downloaded to portable devices. In Asia, where the mobile phone rules, accessing music over a cellular network is already a big business.

Innovations such as these will find a market and Apple’s position will undoubtedly be eroded somewhat, to the relief of an entertainment industry that does not want to see it become the gatekeeper to all digital media. Its 85 per cent market share of digital music in the US is twice Wal-Mart’s share of the DVD retail business, and even that is far too large for Hollywood’s comfort.

Yet Apple is still the only company that can tie it all together. Others have set out to copy it but are far behind. Microsoft, after a false start, wants to build a rival ecosystem of its own, called Zunes, while Sony has been cleaning up its Connect service after a weak beginning. Watching these companies chase Apple, though, is like watching rival search engines take on Google.

For now, Apple looks well placed to absorb all these innovations into its digital media ecosystem, either through its own inventions or becoming a copyist in its own right. Recent hints by a senior executive seemed to point to an iPod phone as the next product to hit the market and no doubt social networking through iTunes will be coming soon. As long as those white headphone cords maintain their allure and
Mr Jobs does not put a foot wrong, Apple should be able to stay at the head of the pack.

The writer covers technology for the FT from San Francisco