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The past week has been one of action and reaction for Apple Computer (Nasdaq: AAPL). The company maneuvered to address iPod supply-chain issues ["IPod Mini Demand Powers Microdrive Production Increase," MacNewsWorld, May 17, 2004], restructured its hardware resources to establish an independent iPod division [Blane Warrene, "Apple Carves Out New iPod Division," MacNewsWorld, May 20, 2004] and shifted its strategy to maintain leadership in the emerging global digital entertainment industry ["ITunes: China's Latest Import," MacNewsWorld, May 18, 2004].
Why would Apple go to such lengths to maintain the iPod's dominance? In an interview with MacNewsWorld, Creative Strategies president Tim Bajarin offered one possible explanation, arguing that digital entertainment is the next holy grail in technology.
More Than a Music Player
MacNewsWorld previously has reported the global recorded music market is worth US$35 billion -- and with the distribution system for music shifting to the Internet, maintaining and growing market share in that space could lead to substantial future revenue.
According to Bajarin, Apple came to this realization and moved quickly to become a market leader, with the iPod and iTunes Music Store (iTMS) combining to form a portable entertainment platform that could evolve along with the industry.
"The iPod already has calendaring, address book, storage," he said, "and they've never ruled out using it for other media [than music] in the future."
For example, Apple showed audio could be more than music when it added support for Audible.com, offering audio books and publications through the iTMS. This move has fueled speculation that video support is in the iPod's future.
Strengthening the Supply Chain
For his part, Yankee Group senior analyst Mike Goodman said the message industry observers should take away from this week's developments is that Apple's challenges "are good problems to have, addressing difficulty in meeting demand ... in contrast to being faced with software bugs or hardware failures."
Goodman added that while the new iPod division may simplify the supply chain for those devices, the bottom line still comes down to hardware availability. For example, the microdrives used in the new iPod Mini have been in short supply in the recent past.
"It's a matter of physical availability," Goodman noted, saying he believes increased production of microdrives by Hitachi will help Apple as it tackles new overseas markets and addresses North American demand.
"It does take time, though, to expand plant capacity," he added.
Growing in China
Meanwhile, Apple's partnership with Chinese PC maker Founder Technology introduces iTunes to a rapidly growing international market whose 80 million Internet users represent just 6 percent market penetration in that country, according to statistics provided by Internet World Stats.
"Globally establishing a broader base of product awareness will lead to a growing installed base," Bajarin said.
"They see a growing market, and they are defining how to address those growth opportunities," added Goodman.
The Next Move
Apple also will be going head to head against Napster internationally as it aims to make inroads in Europe with its iPod-iTMS platform.
Goodman said he believes the Napster music service itself is not a threat to Apple.
"They both (Apple and Napster) provide a legal music download service that requires a secure music player," he told MacNewsWorld. "More important is the installed base of the player. If there is a broad base of WMA players, Apple has to convert those users to the iPod."
WMA, or Windows Media Audio, is the format Napster uses and is a standard on many Windows-based digital music players. Apple partially addressed this issue of incompatibility in recent enhancements to iTunes, which allow users to convert unprotected WMA-formatted songs to the AAC format that is used to compress iTunes Music Store songs and that is compatible mainly with the iPod. That new compatibility, however, does not include songs purchased through the Napster service and protected with digital rights management (DRM) technology.
Global Opportunity
If Apple can spur iPod adoption in global markets, from which it traditionally has reaped 40 percent of its overall revenues, Bajarin said he believes the company will gain market share in the overall digital entertainment market.
Third-party developers already have shown their ingenuity with iPod add-ons, and Apple recently moved to build on that momentum by delivering an iTunes software development kit for both Macintosh and Windows platforms. The company hopes this will encourage creative innovation, drawing more attention to its digital platform.
Goodman summed it up in a previous interview with MacNewsWorld when he commented on Apple's foray into the Chinese marketplace.
"Think how many iPods Apple could sell there," he said.
