Apple steps up iPod 'tax' push

Manufacturers are told they must pay if they make accessories that connect electrically to the portable music players.

Tech Industry
Apple Computer is stepping up its push to get iPod accessory makers to pay for the right to connect to the popular music player.

For some months, the company has been seeking royalties from accessory makers that want to display a "Made for iPod" logo on their products. The program, which one analyst has likened to an "iPod tax," applies to devices that connect electrically to the player and not to cosmetic things like cases.

Now Apple has made the program a requirement for manufacturers who want their gadgets to plug into the "dock connector" at the bottom of the music player, Senior Vice President Phil Schiller confirmed to CNET News.com last week.

News.context

What's new:
Apple is telling iPod accessory providers they must pay it royalties if they intend to make devices that connect electrically to the music player.

Bottom line:
The move could generate millions of additional dollars for Apple, but it also may cause grumbling among those companies that have to play along.

More stories on the iPod

"Yes, the electrical connection has specifications around that and licensing around that, and the way you get that assistance and information and licensing is through the 'Made for iPod' program," Schiller said in an interview. He did not say when Apple made the program mandatory.

It's not clear what means Apple might employ if companies don't go along, as Apple declined to comment on that. Though many manufacturers have signed up for the program so far, some have complained in private that it's too high a price. But for Apple, the move is a chance to profit further from the empire it has built on the iPod, given that the market for such add-ons is estimated in the hundreds of millions of dollars per year.

According to a source familiar with the program, Apple is getting a royalty on the order of 10 percent of a device's wholesale price. Schiller declined to discuss the financial details, but that percentage is similar to what Apple has been seeking in recent months, according to sources familiar with the program.

"They're just expanding the 'iPod tax'," said Gene Munster, a financial analyst at Piper Jaffray. "Ultimately Apple is tired of watching these people profit off their success."

Munster said the move is unlikely to dramatically boost sales for the Cupertino, Calif.-based company, but said "from an earnings perspective, given it is pure profit, it could inch the needle."

Though accessory makers are loath to criticize Apple publicly, there have been grumblings over the price the company is charging. An Australian online report quoted unnamed executives from speaker makers Altec Lansing and Bose grousing over the double-digit cut.

An Altec Lansing representative in the United States said the company has been unable to verify who, if anyone, at Altec made those remarks and said it is glad to be part of the program.

"We have a great relationship with Apple, and we fully support the 'Made for iPod' program," said Pamela Roccabruna, the senior marketing manager at the Milford, Pa.-based speaker maker.

Bose representatives did not return calls seeking comment.

Future models
Though some device manufacturers may quibble with the royalty Apple has set, there will be some peace of mind for them in knowing that the accessories they make today will work with the iPod of tomorrow.

As part of the current "Made for iPod" program, Apple will ensure that devices will physically accommodate future models of the player, Schiller said. Accessory makers can build a standard well for an iPod and know that future iPods will fit into the slot. Apple has also pledged to include an adapter with its players that will let them fit into any products built around that universal well. (Apple included such an adapter with the recently introduced iPod Nano.)

"If they want to design one device that connects with many different size and shape iPods," Schiller said, "we'll take responsibility to make sure there is a standard dock connector that comes with the iPod."

Bottom's up for iPod

Since the third-generation iPod debuted in 2003, Apple has offered two ways to connect accessories to the music player: a small connector at the top of the device and the dock connector port at the bottom.

But a change in strategy has left those at the bottom on top. The latest crop of iPods has eliminated the top connector, meaning that a vast number of add-ons will no longer work with the Cupertino, Calif., company's latest creations.

In some cases, whole classes of products won't work, such as the voice recorders and remote controls that plugged into the iPod's headphone jack and accompanying port. With other add-ons, such as the transmitters that send the iPod's tunes to a car stereo, the accessory market is divided into winners and losers.

Devices like the original Griffin iTrip won't work, because they require the top port, while others, such as Monster Cable's iCarPlay, are in the clear.

Griffin and others are responding quickly though. Griffin on Monday announced a new version of its AirClick remote that connects to the bottom of the iPod, rather than the top.

Just knowing they won't be left out in the cold could be valuable to accessory makers, who typically have to build their products without any certain idea of what Apple plans to do next. Though Apple-related add-ons have long been a good market, accessory makers have also learned that they can be outflanked if Apple shifts course. Many companies first learned that lesson with the iMac, as Apple introduced models with new colors, rendering outmoded any accessories in the previous season's hues.

"We can ensure to the end user when they buy an iPod down the road that the compatibility is going to be there," said Randall Stowasser, a product manager for Compton, Calif.-based Belkin.

Avoiding obsolescence is also increasingly important to consumers, who, in some cases, are shelling out as much for iPod add-ons as for the pricey players themselves, which can cost as much as almost $400.

Both consumers and hardware makers have learned the hard way the cost of not having such guarantees. The most recent iPods--the Nano and the video-capable iPod--lack a small connector near the headphone port. That change means that a whole crop of accessories, including some popular remote controls and RF transmitters, have became outdated.

But by removing that port, Apple has made the connection to its dock connector all the more valuable.

"It's the key to the kingdom," said Andrew Green, a vice president at Digital Lifestyle Outfitters, which specializes in iPod add-ons and is part of the "Made for iPod" program. "Truly nothing can be done without it. It was one of two options yesterday; it is truly the only option today."

Green said his company has focused all of its recent development on products that connect to the bottom of the iPod.

"Now we'll see rewards from doing so," he said.

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