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Apple Computer: the Ipod, CASE the Imac, and the Business 2 Lessons of Closed Systems

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obr11544_ch03_072-116 09/05/2006 17:32PM Page 91 Chapter 3 / Computer Hardware ● 91 REAL WORLD Apple Computer: The iPod, CASE the iMac, and the Business 2 Lessons of Closed Systems teve Jobs has had much to celebrate lately. But the manufacturers like Dell, HP and IBM. When the technology Apple CEO was particularly happy in February 2006 dust settled, Apple ended up with barely 3.2 percent of the when he announced that the iTunes Music Store had U.S. desktop market. Ssold its billionth song, to a teenager in Michigan who had And that’s the way it was when Apple introduced the first bought a copy of Coldplay’s “Speed of Sound.” That mile- iPod in October 2001. The iPod was another closed system, stone is all the more impressive when you remember that but this time Steve Jobs created a closed system with mass Apple has numerous competitors in the digital music world. appeal. Fulcrum Global Partners estimates that iPods now Yahoo Music Unlimited and the legal incarnation of Napster account for 73 percent of the 30 million MP3 players cur- are gunning for iTunes customers. Sony and Samsung are rently in use in the United States. That’s partially because trying to create iPod slayers. Apple released versions of the iPod and iTunes for Windows. And the field is only getting more crowded. By the sum- But it’s also because Jobs cut a deal with the Big Five record mer of 2006, Amazon may launch a digital music service with companies in 2003 that locked up his device. The music a branded MP3 player, possibly made by Samsung. It is al- companies wanted to sell songs on iTunes, but they were ready being referred to in the industry as the aPod. Amazon afraid of Internet piracy. So Jobs promised to wrap their won’t discuss its plans, but sources tell Fortune that Amazon songs in Apple’s FairPlay—the only copy-protection soft- is targeting people over 40 years old—it refers to them as ware that is iPod-compatible. “the NPR crowd” who aren’t as likely to own iPods as Other digital music services such as Yahoo Music Un- MySpace users. limited and Napster reached similar deals with the big Yet Apple’s challengers all face the same problem: Jobs’s record labels. But Apple refused to license FairPlay to them. company will no doubt dominate the digital music market So those companies turned to Microsoft for copy protection. for years to come. That’s because Apple has learned its hard That satisfied fearful music companies, but it means none of lesson about closed systems. the songs sold by those services can be played on the wildly In the microcomputer desktop market, Apple shrank popular iPod. Instead, users of the services had to rely on in- from an industry leader to a niche player because it designed ferior devices made by companies like Samsung and San closed systems with proprietary hardware and software that Disk that supported Microsoft’s Windows Media format. were often incompatible with thousands of application soft- The situation has been a disaster for Apple’s competitors. ware products that proliferated in the PC universe. iTunes holds a commanding lead over its rivals, selling more Microsoft set out to replicate the basic features of the Mac- than 75 percent of all digital songs, according to NPD intosh operating system in each succeeding version of its Group, a company that provides tracking of consumer music Windows OS, encouraged software developers to write apps purchases. The second-place digital music store, eMusic, can’t for it, and then licensed Windows to mass-market PC sell any major-label hits because it refuses to copy-protect them. Instead, it relies on independent labels for content. But FIGURE 3.13 eMusic has a 9 percent share of the market, largely because you can play its unprotected MP3s on an iPod. Meanwhile, Rhapsody, Napster, Sony, Wal-Mart, AOL, and Yahoo— nearly all of which have deals with the major labels but are stuck with Microsoft’s technology—are fighting over the re- maining 16 percent of the digital music-store market. Most of these music services argue that they have some- thing to offer music lovers that Apple doesn’t: digital music subscriptions providing customers the chance to listen to more than a million songs for a monthly fee of roughly $10. You can’t burn these songs onto CDs, and they become un- playable if you don’t pay your bill. But Napster argues that it is cheaper to listen to music this way than to buy thousands of iTunes. True enough. But the software that Microsoft developed to allow this heavily protected music to be moved to portable The runaway success of Apple’s iPod has helped devices has been so buggy that a lot of subscribers have given boost the market share of the iMac and other up and just listen to songs on their computers. desktop and portable computers in Apple’s Mac Poor Microsoft. Nearly every music service and MP3 lineup. player maker other than Apple supports Windows Media and its copy-protection software. But not enough music Source: John Flournoy/MHHE DIL. obr11544_ch03_072-116 09/05/2006 17:32PM Page 92 92 ● Module II / Information Technologies lovers want to use them. It’s a far cry from what happened in Part of the reason for such lofty market share growth es- the desktop wars. Now it’s Bill Gates’s turn to learn that it’s timates was Apple’s introduction of its Boot Camp software no fun when you’re outside a wildly successful closed system early in 2006. Boot Camp enables the newer iMac and other looking in. Mac models based on Intel’s dual microprocessor chip to But what about that poor market share of the iMac and easily run applications software for both its own Mac OS X other Apple desktop and portable PC products, you may ask? and the Windows operating system. Boot Camp will be Well, a funny thing called the “halo effect” of the iPod, folded into the upcoming Leopard version of Apple’s OS X, which Steve Jobs predicted, has happened, and this time further accelerating Apple’s drive to lure corporate and busi- Steve is laughing all the way to the bank. Since the arrival of ness Windows users, as well as the iPod crowd, to its Mac the iPod, Apple’s share of the desktop and portable computer lineup. market in the United States has almost doubled, reaching As Microsoft continues to struggle with its five years just under 6 percent by early 2006. Many analysts expect that and counting development of the new Vista version of trend will continue to inch upward as more iPods are sold Windows, Steve Jobs is seen as moving to seize the mo- and more iPod users turn to Apple’s Mac computer lineup ment to regain the market share Apple lost to Windows for their computing experience. PCs. By his continuing innovations of the iPod and the Even more growth is expected in the worldwide micro- opening up of the Macs to run Windows applications, Jobs computer market as iPod international sales continue to is proving that he has mastered the business lessons of grow, driving more sales of iMac and other flavors of how to successfully wield the two-edged sword of closed Macintosh desktop and portable computers. Apple’s world- systems. wide share of that market was estimated at 2.5 percent in 2005, with predictions of a jump in growth to 3.5 percent by Source: Adapted from Devin Leonard, “The Player: Rivals Won’t Find It Easy Competing with the iPod’s Closed System,” Fortune, March 20, 2006, the end of 2006 and another jump to 5.0 percent by the end and Garry Barker, “Apple Makes Computer History—Windows on a Mac,” of 2007 by one computer industry forecaster. The Age, April 7, 2006, and MacDailyNews, April 8, 2006. CASE STUDY QUESTIONS REAL WORLD ACTIVITIES 1. Do you agree with the sources in this case that Apple 1. Use the Internet to check out the claims of the iPod’s will dominate the digital music market for years to dominance by the sources in this case. Research how come? Why or why not? the iPod’s competitors are doing now, including new 2. Can the key technology and business strategies Steve entrants like Amazon, and what strategies they are em- Jobs implemented with the closed system of the iPod be ploying to gain market share. Has the market changed applied successfully to the iMac and other Apple since this case was written? Defend your view of the closed-system computer products? Defend your answer status of the battle for the digital music market. with several examples of what could or could not be ac- 2. What is your view of the copy-protection tactics of complished for Apple’s computer product line. Apple and its competitors? Is this capability a proper 3. Will the cachet of the iPod and the capabilities of Boot protection of the music companies’ and artists’ intellec- Camp and the Leopard version of Apple’s OS X lure tual property rights? Is it an infringement on a pur- many more Windows PC users to the Mac lineup of chaser’s right to reproduce content? Is it an desktops and portables? Why or why not? anticompetitive restraint of trade, especially for the closed system of the iPod? Break into small groups with your classmates to discuss these issues..
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