Apple's diplomatic core

iPod may define new era of open strategy By John Borland Staff Writer, CNET News.com January 23, 2004, 4:00AM PT For most of his life, Wayne Chang was one of the uninitiated. 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 simple as it may seem, this expectation reflects a major change for Apple's corporate culture and practice. The company has long held the philosophy that its software and hardware should be tied almost exclusively to the Macintosh computer for both quality and profit. But it is developing and marketing the iPod with uncharacteristic openness to and other technologies. 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." Easier said than done. Apple has carefully cultivated the Macintosh's image and related products with elegant design and operational simplicity. By ensuring that most critical hardware and software components are made by Apple, the company has largely avoided the incompatibilities and set-up problems that continue to plague Windows technologies. But the world of consumer electronics is far more chaotic than that of computing, with myriad brands, technologies and products that are given to . 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 . 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. As a result, the company finds itself at a critical crossroads: It must decide whether to follow the historically proprietary approach of the Macintosh computer or the more flexible business strategy of its successful digital music player. Apple declined to comment on these issues but has been open about its grand ambitions for the little music player. "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 . 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 , declaring that "hell froze over." Apple's musical iPod unveiledApple unveils its first consumer digital device, the stainless-steel iPod, capable of storing up to 1,000 songs on its hard drive. The new approach is illustrated most clearly in the iPod distribution deal with HP. The computing giant is a longtime Microsoft partner that sells PCs loaded with Windows operating systems and Media Center software, a digital command technology that competes directly with Apple's plans for the Macintosh. 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 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. Apple's new GarageBand and Logic music production packages are based on technology it with the purchase of Germany's Emagic several years ago. That company originally released versions of its products that would work with Windows, but Apple quickly stopped the practice. "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 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. On the wire Twenty years ago, Apple's first Mac press release announced a "desk-top" computer with a "mouse." Apple Introduces Macintosh Advanced Personal Computer CUPERTINO, Calif., Jan. 24, 1984--Apple Computer today unveiled its much-anticipated Macintosh computer, a sophisticated, affordably priced personal computer designed for business people, professionals and students in a broad range of fields... Like Apple's ground-breaking Lisa computer, Macintosh uses its built-in user-interface software and high-resolution display to simulate the actual desk-top working environment--complete with built-in notepads, file folders, a calculator and other office tools... Users tell Macintosh what to do simply by moving a "mouse"--a small pointing device... Read full text Source: Stanford University 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." In the end, simple economics may determine whether Apple extends its iPod approach to the company's other products. The music device has been hugely successful to date, with sales outpacing expectations and . More than 730,000 units were sold in the last quarter alone. 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 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. Editors: Mike Yamamoto, Desiree Everts Copy editor: Zoë Barton Design: Pam Dore Production: Meghan McDowell

Apple's diplomatic core

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