Microsoft on iTunes in 2003: 'We were smoked'

Groklaw uncovers a couple of e-mails from Bill Gates and then-Windows leader Jim Allchin revealing that Microsoft was worried about iTunes when it first launched.

Matt Rosoff
Matt Rosoff is an analyst with Directions on Microsoft, where he covers Microsoft's consumer products and corporate news. He's written about the technology industry since 1995, and reviewed the first Rio MP3 player for CNET.com in 1998. He is a member of the CNET Blog Network. Disclosure. You can follow Matt on Twitter @mattrosoff.
Matt Rosoff
3 min read

There has been a lot of commentary following last week's New York Times op-ed by Dick Brass, a former Microsoft executive who claims that the company is bogged down by process and infighting, and has hence lost its ability to innovate.

Apple CEO Steve Jobs announces iTunes for Windows in 2003. CNET

One of the most interesting follow-ups comes from Groklaw, which dug up some e-mails placed into the public record a few years ago during an antitrust case against Microsoft. (These materials have been a treasure trove of interesting and sometimes-embarrassing internal communications, including then-Windows chief Jim Allchin's 2004 admission that he would have bought a Mac over a Windows PC at that time.)

Almost immediately after Apple launched the iTunes Music Store in April 2003, Microsoft Chairman Bill Gates sent an e-mail to a bunch of folks in the Windows Media and MSN groups praising Steve Jobs' ability to get "a better licensing deal than anybody else has gotten for music." He continued, "We need some plan to prove that even though Jobs has us a bit flat-footed again, we move quick, and both match and do stuff better."

Allchin added his opinion in a follow-up e-mail: "We were smoked."

A bit of history
At the time, the major record labels had built a couple of music stores, as well as online-delivery platforms Pressplay and MusicNet, which were almost universally panned for their lack of usability. Initially, songs purchased through the services couldn't be burned to CD or transferred to any portable device. Other online music stores were similarly hampered.

By the time Jobs struck his iTunes Music Store deal, the labels had loosened these restrictions only slightly, and they still required users to pay a subscription fee for a limited number of downloads or streams. Jobs was able to get consistent (99 cent) single-song download pricing, unlimited CD burning, and--critically--unlimited transfers to the iPod.

As Allchin asks, "How did they [Apple] get the music companies to go along?" Jobs' personal magnetism, as well as status as a Hollywood insider through his founding of Pixar Animation Studios, probably had some effect. But more importantly, the iTunes Music Store was originally Mac-only.

The Mac had less than 5 percent market share at the time, so content owners probably figured that allowing single-song downloads into such a small market would provide a good test bed for Apple's FairPlay DRM system and pricing model.

By the time Apple was ready to launch the Windows version of iTunes in October 2003, Apple had sold 13 million songs through the service, outpacing all other music stores, despite the Mac's small market share. In other words, FairPlay and the consistently priced single-song downloads worked.

Almost seven years later, the iTunes Store is the largest music retailer in the United States, online or offline, and most of the stores based on the Windows Media Platform (including MSN Music) are out of business or have moved to selling unrestricted MP3 files.

Getting back to Dick Brass's criticism of Microsoft, I find it fascinating that top Microsoft executives were aware almost immediately of the threat the iTunes Music Store posed to the whole Windows Media ecosystem, but Microsoft was still unable to stop it. This matches what I've seen time and time again in my last 10 years following the company.

Microsoft has some smart executives who can quickly and correctly assess market changes and opportunities. Often, they come up with a good strategy to capitalize on those changes. But somewhere between strategy and execution, the thread is lost. Windows Media and Zune are most relevant to this blog, but you can see it elsewhere: online advertising, search, and mobile phones, to name three obvious examples.