By John Borland
Staff Writer, CNET News.com
January 23, 2004, 4:00AM PT
While deeply into computers, he never joined the legions of militant Macintosh loyalists who have helped Apple Computer stave off the Microsoft empire. Last year, the 20-year-old Massachusetts college student and programmer finally took the leap and ordered Apple's iPod music player--but by no means does he intend to become a Mac fanatic.
"I would expect Apple to make their new products work with Macs first," Chang said. "But in the end, I do expect them to be interoperable and not just tied to the Mac."
As the Macintosh celebrates its 20th anniversary Saturday, this diplomacy appears to be a defining element in Apple's strategy. Technology companies face a broad market shift away from traditional computing products and toward consumer electronics. In this emerging era, consumers will likely show little patience for any companies that attempt to lock them into a single brand.
Like archrival Microsoft and other technology leaders, Apple has identified the digitization of home entertainment as a primary engine for growth--and, in its particular case, as an opportunity to reclaim the glory of its early years. However, while it envisions the Mac at the center of a network that encompasses music, videos, photography and other media, Apple is entering foreign territory in expanding its product lines with the iPod and other devices.
"The rules of engagement for the iPod market are new. They don't necessarily have to follow the same rules as with their old PC policies," said Roger Kay, an analyst at research firm IDC. "They may relinquish some control in order to gain access or control of a market that could be orders of magnitude larger than their old one."
But the world of consumer electronics is far more chaotic than that of computing, with myriad brands, technologies and products that are given to wildly fluctuating prices. Different devices from separate manufacturers must work with each other to win wide consumer acceptance--and Apple seems to be moving in that direction.
A recent deal allows Hewlett-Packard to distribute co-branded iPods. Apple appears to be open to the idea of working even with those technology companies once considered bitter enemies. And so far, the approach seems to be paying off: The number of iPods that run Windows software has quickly caught up to those using Macintosh technology, now accounting for about half of the music player's overall sales.
Yet some dangers are inherent to this common-denominator strategy. A wholly unique iPod has been able to stand above the prosaic fray of consumer electronics, bearing a higher price for its advanced features and brand name. But as more companies release players with similar features, the iPod risks becoming a commodity, with profit margins driven down by competition.
"Apple's goal is to get iPods and iTunes into the hands of every music lover around the world," Apple CEO Steve Jobs said in a statement announcing the company's deal with HP.
An exclusive history
For most of its two decades, Apple has consistently led the desktop computer industry in introducing new technology, features and designs later adopted in a wider market. But its reluctance to license its operating system to other manufacturers enabled Microsoft to achieve near ubiquity by licensing its rival Windows software to hardware makers across the industry, such as Dell, HP and Sony--reducing the Mac's market share to a single digit by the mid-1990s.
By the time Apple tried licensing its own technology to allow other companies to make Mac "clones," it was too late. Former Apple CEO John Sculley, who opposed the concept during his tenure, later said his decision against licensing the Mac was one of his biggest regrets.
The iPod represents one of the most significant exceptions to the Apple-only mantra. Apple first released an iPod that could be used with Windows computers, then released the iTunes jukebox software and song store for Windows, declaring that "hell froze over."
Apple unveils its first consumer digital device, the stainless-steel iPod, capable of storing up to 1,000 songs on its hard drive.
As part of the iPod deal, Apple is creating tools that will allow HP programmers to tweak the iTunes music software and store so that they can work with features of Microsoft's Media Center, such as a remote control. While Microsoft has made no secret of its irritation over this deal, which will promote Apple's music store and media format, the arrangement will keep consumers on a computer using Windows.
Apple has shown other signs of opening technologies besides those related only to the iPod. This month, for example, it announced that it had certified the new version of its Xserve data storage system to work with the Windows and Linux operating systems.
At the same time, the company has drawn distinct limits to its technological detente.
"We have no interest in a Windows version," Rob Schoeben, Apple's vice president of applications product marketing, said in announcing the company's new Logic Pro audio products last week. "The market is not telling us that we need to think of anything but the Mac."
HP executives also have cited Apple's unwillingness to support Microsoft's Windows Media player format on the iPod. "We would like to see interoperability," said Tom Anderson, HP's vice president of marketing for consumer PCs, but "that is not in our current plans."
No easy answers
Apple's reluctance is understandable. Despite the iPod's success and high profit margins, analysts say it is the Macintosh computer that still accounts for the bulk of company revenue.
"In all my talks with Apple officials over the past three years, their basic goal has never been anything but to innovate on the Macintosh, to assert its role as a hub, and then make that the center of the next-generation consumer home," said Tim Bajarin, president of research firm Creative Strategies and a longtime Mac analyst who has done consulting for Apple.
However, as the digital entertainment business booms, more products will be made to support video, photography, games and other content. Companies such as Dell and Creative Labs are already entering these markets with prototype portable and home-networking devices.
That could make it increasingly difficult for Apple to maintain its proprietary strategies. Aside from iTunes, none of Apple's highly touted software products--such as iPhoto or iMovie--are available for computers running Windows.
Apple could try to expand these product lines with devices ranging from photographic or video-playing iPods to digital-recording TV set-top boxes, all of which have been the subject of much speculation. But analysts say any such products likely would be years away, citing Apple's tendency to enter a new hardware market only when it is growing close to mainstream acceptance.
Digital video--whether on a PC, a TV set or an iPod-like handheld device--remains a long way from the developmental stage that digital music was in when Apple conceived of and released the iPod. Few people are building digital video collections in the way Napster and CD-ripping software sparked MP3 libraries, and Hollywood has shown little willingness to support an iTunes-like video store.
"Apple has shown that it will not necessarily be the company to lead the market in trying to drive new trends but that it can be the company to capitalize on clear trends by doing better than its competitor," said Michael Gartenberg, a Jupiter Research analyst. "It's a question of when they think the market is mature enough for them to get involved."
That's given the company more than 30 percent of the MP3 player market and more than half of all portable digital music player revenue. Yet Apple's days of having a near monopoly on high-capacity players are over, and more companies are entering the market all the time. The likes of Dell and Samsung are offering similarly sized players with comparable storage capacity for considerably lower prices--following a traditional pattern in the consumer electronics markets, in which cutthroat competition typically drives profit margins to a bare minimum.
Apple has said the iPod will succeed by offering higher quality than its rivals, even if it costs more as a result. Many analysts say they expect Apple's consistently innovative design and aggressive marketing to perpetuate the iPod's appeal for at least the near term.
"We think iPod's leading position is defendable for perhaps two years and is important to Apple's 'cool' image," Merrill Lynch analyst Steven Milunovich wrote in a recent research report analyzing the company's finances.
But that approach is far from foolproof, especially in the volatile consumer electronics business. Sony has long used the power of a respected brand to charge higher prices. But the electronics giant suffered a severe market backlash and is in the midst of a corporate upheaval to regain financial health.
Apple may have a unique chance to avoid a similar fate, if it can figure out how to turn the allegiance of the iPod generation into abiding affection for a broader range of products. Many consumers increasingly associate the company's brand more with the digital music player than with the 20-year-old Macintosh brand.
"I've mainly grown up using PCs," Chang said. "But I guess I'm a closet Apple lover, and the iPod brought me out."
CNET News.com's Ina Fried contributed to this special report.