Real Kato Blog: Apple Watch: On the iPod Economy

Apple has proven the pundits wrong so far.

In October of 2001, Apple introduced the iPod. Most pundits said "so what", figuring that it was just another overpriced niche offering from Apple, a late entry in the already-growing world of portable digital music players. Proprietary music format? No licensing? It's doomed, they said.

Four years later, Apple has a strangehold on the digital music market, selling something like 75% of music players, and 85% of legally downloaded music. As Steve Jobs has said, see what happens when Apple puts its considerable product expertise into a market where Microsoft does not have an established monopoly?

The way Apple achieved this success was by building an experience. You'll see that term get used a lot when talking about Apple products. It starts with opening the pretty and cleverly-designed box that the package comes in, it continues with the seamless integration between the iTunes Music Store and the iPod, and goes all the way to the satisfying touch of the click wheel on the iPod itself. Apple puts thought into every aspect of the experience, and it shows.

And you have to give some credit to Apple's much-maligned "closed" strategy, ensuring that music from the iTMS would only work on the iPod, and that the iPod wouldn't play music bought from other music sources. That kind of exclusiveness seems like suicide when you're a tiny player in a market... but it starts to look brilliant when you're the market leader. If you've got an iPod, you'll only want to buy songs from the iTMS. If you've got a library of songs from the iTMS, you'll need to get an iPod to play them. And that cycle will last forever.

Now of course, we have to start looking at Apple with the "m"-word... monopoly. Is Apple illegally using a monopoly position in the music player market to maintain a monopoly position in the digital music download business? I don't think what Apple is doing qualifies as illegal yet. The iPod and iTMS are arguably part of the same user experience, and that fact alone will stave off monopoly lawsuits. That is, Apple can argue that it's really a single market, and that it's battling the Windows Media "Plays for Sure" alliance, or the Sony ATRAC system. Plus, Apple hasn't punished record companies for establishing deals with other digital download services; it hasn't practiced predatory pricing; and, it hasn't attempted to extend its monopoly into an unrelated market. And most importantly, Apple's products are clearly better than everything else in the market.

We really should be paying attention to the true monopolists... the recording industry itself. Record labels are now trying to pressure Apple into raising prices of certain songs. I can just imagine Steve Jobs saying, "If any of you are unhappy with the arrangement, you can leave. You can take your songs off the iTMS once the original contract expires. But if you try to say you're all going to leave, as a way of putting pressure on me to cave in on this, then I'll slap an antitrust suit on you for illegal collaboration and price-fixing." See, despite everyone's attempts to paint Steve Jobs as the bad guy for putting proprietary Digital Rights Management on iTunes, he's the one who's giving us (the consumers) leverage against the record companies. If not for the iTMS, record companies would feel justified charging us $2.99 for a song just because they can... just because they want to line their pockets with more of our money. (And don't be so naive as to think any of that price increase would go to the artist.)

And if not for the iTMS, we'd all be playing Microsoft Windows Media files right now. Ugh.

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