The iPod End Game

I have to admit, the iPod has been one of those devices that has fooled me from the start. I never thought anyone would buy a $400 portable music player, and before you laugh at me, remember how you felt the day it came out. If you bought an iPod within the first few weeks of it being released (or at least would have if it was PC-compatible), you’re off the hook. If not, you were skeptical like the rest of the world.

Oh how times have changed since then. iPod sales have far surpassed everyone’s expectations — including probably some people at Apple — and by the end of 2005, the device could see a market share of over 80%. Possibly well over 80%. An entire book could be written on the rise of the iPod, and in some senses, an entire book already has.

But I don’t want to get into any of that. It’s a huge hit. Bravo Apple. You are shaking up the world again… in a great, great way.

What I want to talk about is how this game will play out. How the rules will change when Microsoft puts both feet in the water. How sales will be affected when consumer tastes change. How new devices and new technologies will help, hurt, or kill the iPod. And most importantly, how Apple may attempt to defend its newfound position of power with a diversification strategy.

Let’s start with a few things learned from Apple’s last SEC filing.

Just the facts

The most shocking thing about Apple’s latest quarterly financial report is the raw amount of revenue brought in by the iPod as a percentage of the company’s total revenue. iPod revenue came at $1.2 billion while total revenue was $3.49 billion… if you subtract the iPod’s share, revenue comes out to $2.29 billion, meaning the addition of the iPod to Apple’s lineup essential grew the company’s top-line by 52%! That is huge. What’s even huger is what happened to the bottom-line. Due to off-the-charts iPod sales, Apple’s profit went from $63 million in the same quarter last year to $295 million in this quarter. This was particularly shocking to analysts (and myself) because it is generally thought that the iPod is one of Apple’s lower margin products. After running the numbers in my previous post, however, it appears that that has dramatically changed. A reliable inside source has also confirmed that suspicion and informed me that iPod margins are quite healthy and have risen by at least 30% since the introduction of the original iPod. This, of course, is huge for Apple as they appear to have ramped up production enough to get much better deals on parts, labor, and everything else associated with the production of iPods. Additionally, since a lot of the R&D for the iPod occurred during the initial introduction of it, those costs are no longer part of part of the equation. Yes, there’s still R&D going on, but Apple has clearly hit the “margin sweet-spot” in this last quarter of sales.

Another interesting thing about this dramatic change in product mix is that given how poorly PowerMacs will be selling in the future (as compared to iMacs and Mac Minis), we should see the average margin of Apple’s CPUs diminishing below that of the iPod. I am a professional designer and I’d never buy a PowerMac again. It’s not a bad computer at all, but Apple has created such a powerful machine in the 20″ iMac that I really have no reason for more than that. If you edit video for a living, fine, buy a PowerMac, but for the majority of even Apple’s professional user base, I reckon the consumer machines are just fine. So what Apple now has is a situation where their high-margin product (the iPod) is supposed to convert you over to their low-margin product (the Mac). Who would have thunk it.

It’s a strange situation for sure, but it will not last. The fact is that the margins (and sales) Apple is enjoying on iPods right now are due to lack of competition in the space. Yes we know all there are a handful of other MP3 player manufacturers out there, but none have created the total experience that Apple has created. Apple also has not yet even begun to feel the Microsoft effect in this segment. That should change as well.

So let’s examine some threats facing the iPod over the next couple of years.

The Microsoft factor

Love them or hate them, you have to respect Microsoft’s power to radically affect any sector of the tech industry. They are the most powerful company in the world today and more powerful, on a world scale, than most governments. They are also fiendishly good at spotting innovation and bending it in their own favor.

So what has Microsoft done to head off the iPod power surge? To no one’s surprise, it’s a software-based attack. Although Microsoft profits from hardware such as mice and keyboards, they’ve chosen (so far) to let hundreds of other companies build the players while they build the platform. Microsoft could easily build their own player, so let it be understood that if they don’t, they are betting that it is not a good idea for the long-term. They could even afford to build a player knowing it wasn’t a good idea for the long-term, merely to head off Apple’s momentum right now. But they’re not… which means they don’t think they need to.

Instead, Microsoft’s plan revolves around the Windows Media Player, Janus DRM, and what’s known as the “Plays for Sure” initiative.

Many Mac users (and even Windows users) remember the Windows Media Player as a clunky, crash-prone, bloated piece of software which rarely acts as it is supposed to. Times, however, have changed, and the Windows Media Player has undergone more improvements than Quicktime and Real combined over the last few years. It’s nice looking now. It doesn’t crash as much. Its API is much more robust than either Real’s or Quicktime’s. And most importantly, the WMV 9 video codec, at web bitrates, now looks better than Quicktime’s or Real’s. So after years of playing catch-up, Microsoft’s media player is now on par or better than the competition’s in many significant ways.

One of the ways the Windows Media Player is ahead is in comprehensive DRM. Apple uses the AAC format wrapped in its own FairPlay DRM and that’s great for music… but what about video? I can distribute a DRM’d audio or video file with all sorts of customized rights management on it if I encode with WMA/WMV. Before you shake your head and start screaming about how DRM is evil, realize that it is a fact of life and it likely always will be. It’s the only reason you can even buy music or rent video online, and Microsoft is thinking big-picture with it. Any major movie studio can distribute a full-screen, full-length, high-quality DRM’d movie right now in WMV format and it’s small enough to fit on an SD card. Apple is nowhere to be found in this market right now, and unless they’ve got another iTunes-like coup in their pocket with the major movie studios, Microsoft will likely own this space within a year or two.

But Janus goes beyond just the Windows Media Player. It is a set of requirements that device manufacturers must adhere to in order to maintain in their role in the Microsoft ecosystem. For instance, every Janus-compatible device must have a secure clock. A secure clock ensures that the date on the device can’t be tampered with in order to circumvent DRM time schedules. Furthermore, Janus-compatible devices must follow the Windows Media API exactly how Microsoft prescribes it. This means, essentially, that the device is heavily biased towards using the Windows Media Player as the sole conduit to the computer. The end result? All commerce goes through Microsoft.

The third prong in the Microsoft attack is the “Plays for Sure” initiative. “Plays for Sure” is not really any different than the concept of Windows. If you buy software which is Windows-compatible, it will work on any computer which runs Windows. If you buy music labeled “Plays for Sure”, it will work on any “Plays for Sure” endorsed device. So you can already see the value in device manufacturers getting that endorsement.

With regard to the current state of the music market, the “Plays for Sure” initiative really doesn’t mean anything yet. Most consumers will say “If it doesn’t play on my iPod, it doesn’t play for sure”. What happens when Dell starts giving away improved music players with their computers though? What happens when non-Apple music players start doing more things like playing video and making phone calls? Once enough of these Microsoft-endorsed devices make their way into the market, “Plays for Sure” will start to matter a lot.

So, enough about Microsoft.

The changing role of the device

I was delighted at the release of the iPod Shuffle because it is the first iPod that I feel should not be integrated with a phone. I listen to all my music on a Treo 600 phone and the regular iPods give me little advantage over this besides a slightly nicer interface and better syncing. I tend to listen to music without touching the interface much so that part doesn’t bother me, and the syncing just takes a little longer with the lack of iTunes but I’m okay with that too. Besides that, the Treo kills the iPod in almost every other category. I can make calls. I can check e-mail. I can use Bloglines. I have unlimited capacity via SD cards. I can take pictures and movies. I have much better battery life. The list goes on and on.

While the cellphone is the going to be the primary music player of most people within a few years, the iPod Shuffle fills a slot the cellphone never will: the ultra-tiny, wearable device. I need my cellphone to have a certain amount of bulk in order to carry out all of the complex interactions I have with it, but I just need a wearable iPod to be as small as possible, whatever the sacrifice in interface.

The key here is that no one wants to carry two cellphone-sized devices around. Given that people will always have a cellphone, there are only two things that Apple can do: build their own cellphone and keep making the iPod Shuffle smaller. The cellphone will be the primary music-playing device with either a hard drive or a high capacity SD card, and the Shuffle will be the device you take with you only on the rare occasions when you don’t have your phone (usually during exercise or when traveling out of the country).

Some people question whether or not Apple wants to be in the cellphone business, but I think the question is not if they want to make a cellphone but rather how they can negotiate the complicated landscape of cell carriers whilst turning a profit. Russell Beattie put the subject best when he said:

“Steve Jobs has a mobile phone. I’m not sure which mobile phone it is, but he’s definltely got one. And he hates it. He curses at it every day. He hates it like he hated the original IBM PC. He hates how hard it is to add contacts and make calls and he cringes at the web experience and the Java games, if he’s even bothered to try them. He holds it in his hand during long trips and admires some things about it, but knows he could do it better.”

Palm has already proven that you can make a high-end device like the Treo 600/650, sign deals with all carriers to support it, and turn a healthy profit in the process, so there is no reason to think Apple can’t do the same. In fact, the Apple brand has so much cachet right now that I would bet at least one carrier would bend over backwards to do a comprehensive deal with Apple.

And then there’s the ultimate end-around: Wi-Max. Robert Cringley wrote in an article several weeks ago that Walmart or McDonald’s could cover almost as much of the country with Wi-Max as any cellphone carrier covers with GSM/CDMA in a pretty short amount of time. An antenna on the roof of every store, a management system to gate access, and you’ve just created a next generation data and voice network. Is Apple watching this space for an entry point? Maybe.

Accounting for taste

The last major threat facing the iPod’s dominance is the simple fickleness of the modern consumer. Who’s to say the trademark white headphones and colorful commercials will still be hip in a year or two? Granted, Apple is the king of hip, but what if the iPod is less fashionable moving forward. It almost has to be less fashionable considering how fashionable it is right now. What if the iPod becomes the “big brother” brand and young people turn to alternative brands? Apple has more power to maintain their brand’s status than any other company, but the task is no slam dunk. And besides, as Apple proved in the 80s and 90s, the best technology and brand doesn’t even win out all the time.

A good example of a great brand falling out of favor in this way is Levi’s jeans. Levi’s had been the #1 brand of jeans for decades and they made a great product which was heavily associated with the entire “jeans” genre of clothing. Then, in the 1990s, young people started buying alternative brands. It wasn’t that Levi’s was any different than they had ever been… it was that they were no different than they had ever been. Young people knew they still needed jeans, but they sought to extend their own personalities with alternative brands like Seven. Once these alternative brands as a whole start to tip, it’s big trouble for the market leader… Levi’s in this case. Apple in our case.

Preparing for the End Game

Now that legitimate threats to iPod world domination are on the horizon, what can Apple do to fend them off?

Keep on keepin’ on

When you sell 4.5 million units of anything in one quarter, you’re doing something very very right. Apple has created a huge demand for the iPod through brilliant advertising and great product design, and they are now turning a healthy profit thanks to incredible economies of scale on the production side. When consumers are throwing money at you like this, keep taking it. With market share comes power, and even if Apple didn’t make a penny off each sale, they’d be strengthening their outlook in the emerging digital music market.

Build a cell or Wi-Max phone

I have no doubt about Apple’s desire to make a phone. If there was nothing standing in the way, it would already be done. It won’t be long before the cell phone is your camera, your music player, your organizer, your portable web client, your remote control, and your digital wallet. It will not only be your digital hub, but your single most pervasive conduit to the world. Before you say something like “The iPod is only successful because it does one thing extremely well”, think about what people have been doing with their iPods. People are installing hacks to store their contacts, read their RSS feeds, and all sorts of other things. And that’s to say nothing of podcasting! The point is that this device is begging to be so much more than what it was originally designed for. People love it for what it is but clearly want to make it so much more. The device doesn’t need to stay simple… it just needs to still feel simple, and that’s what Apple is great at.

The concept of the uber personal communicator is so powerful and its manifestation so certain, that it makes sense for Apple to provide it as soon as possible and by any means necessary. This is the sort of sentiment that Microsoft is famous for. When Redmond sees an opportunity, they throw their best resources at it even if they aren’t sure when it will turn a profit. Apple made $295 million this quarter. As an investor, would you have rather seen $295 million in the bank or $100 million in the bank and a $195 million investment into the personal communicator sector? The point is, when you are highly profitable and you have over $6 billion in cash it is your responsibility to invest in dramatically growing the business. If you’re not going to do that, issue a dividend. That’s what Microsoft did when they decided they had too much cash.

Now, that being said, Apple did invest in growing their business when they created the iPod and it’s now led directly to an over 50% increase in top-line revenue and an over 100% increase in bottom-line take-home. All I’m saying is let’s see more of the same here. Show no mercy on emerging markets and get them under your control as soon as possible.

Obviously, the Wi-Max route is further out and more speculative, but if that’s your end-around plan, then start throwing brainpower at it. Set your alliances early to ensure grabbing the best partner. Apple and Walmart may seem like strange bedfellows, but each has something the other wants. Walmart has wide distribution of inexpensive goods and services, and Apple has newly inexpensive goods and services to distribute. And you can bet they’d both love to get a piece of the monthly voice/data bill.

Partner with XM

Just a year ago, people were saying that satellite radio circuitry was too big to fit in a handheld device. Now, you can get a satellite radio player which is even smaller than an iPod. What’s the moral of this story? MP3 player. Music. Satellite radio. Music. Someone’s going to put it together, so it might as well be Apple. Apple has more juice in the industry right now than its ever had. Now is the time to use that juice on a deal with a favorable revenue split. Microsoft has already partnered with Sirius, so that road might be closed right now, but XM might be another avenue to look at.

There are so many possibilities, from a feature standpoint, that an Apple/satellite radio deal would create that it’s really the subject for another blog post. Boiled down to one sentence: Satellite radio pushes new music your way which you eventually purchase through the iTunes Music Store if you enjoy it. How about being able to click “Save This Song” while you’re listening to satellite radio? Now that’s “m-commerce”.

Develop the iTunes Music Store into an IP radio network

If Apple’s not hip with the satellite radio industry, they should immediately label them a serious threat and fight them with IP-based distribution. The iTMS is probably the most pristinely kept, thoroughly stocked, and comprehensively indexed body of digital music in the world today. Why not offer it as a subscriber-only personalized radio station as well? That’s something you can’t do over satellite… only over IP. The idea would be a DJ-less system which automatically assembled shows based on your tastes in music.

Microsoft already has technology which finds similar songs all the way down at the soundwave level. By analyzing sound patterns in multiple music files, they claim they can introduce you to more music that you’d probably like. I’m a bit skeptical of this approach, but I do think you could accomplish the same goal using smart folksonomies instead. It’s possible Apple is already developing these concepts. If they are not, they should be.

License and expand FairPlay

This is a tough one right now because Apple’s control over FairPlay helps lock people into iPods while at the same time ensuring a mostly hassle-free DRM experience. The minute DRM starts to get in consumers’ way is the minute they begin to reject it, and Apple has done a fabulous job at keeping it behind the curtain for the most part. FairPlay, however, could be a tremendous source of revenue once iPod profits shrink down as they inevitably will. There will always be other device manufacturers, so you might as well be getting a few bucks in licensing fees (as Microsoft is doing) for every music player sold, even if it’s not your own.

As for the “expansion” part of the equation, that would involve getting into the video DRM space. Could the iTunes Music Store become an iTunes Video Store? I think so. Not many companies would have the bandwidth capability to pull off such a feat, but don’t forget what company Apple has a very significant financial stake in: Akamai. They’ve been Akamai investors almost since day one, in fact. Akamai has more edge servers around the world than any other company, and you can bet they’d be willing to store and distribute a ton of movies if asked. Without a strategy to get into the living room (like Microsoft’s Media Center), the video distribution angle is of limited utility in my opinion, but that’s all the more reason to parlay this whole digital media renaissance into a compelling living room strategy. If Apple wants to be the digital hub, it can’t afford to ignore any battleground.

Other strategies?

Who knows.

Surviving is about reacting

It’s often all too easy to criticize Apple. Not because they’ve messed up in the past or because Microsoft is viewed as a more successful company, but rather because we know so little about their plans. They are intensely secretive, and just because there is no evidence they aren’t already doing some of the things mentioned above, doesn’t mean that they really aren’t. It is for this reason that this article should not be viewed as a criticism of Apple but rather just a look at how the landscape might be changing in the next few years. The true test of how smart the new Apple really is will be how they react to these changes. If we see three years of cockiness and isolationism, we’ll see this game play out just as the Mac OS/Windows duel played out in the 80s and 90s. If, however, we see Apple convert their hardware dominance in this market to software dominance (iTunes), licensing dominance (FairPlay), and commerce dominance (iTMS) — perhaps even at the expense of hardware dominance — then that’s when we can say for sure that the tables have turned and Apple is the new leader of the digital era.

I’m curious to hear if anyone has any other ideas as to how this battle might turn out or what else Apple could be doing right now. The only part of this article that I’m absolutely positive about is the emerging dominance of the SD-based music player/phone. The rest is educated speculation. So if you have some of your own educated speculation, please by all means share it.

66 comments on “The iPod End Game”. Leave your own?
  1. Josh says:

    Wonderfully insightful, thank you for putting all of the thoughts about Apple floating around together!

    Any thoughts on the much-discussed idea of an Apple foray into the media center domain?

  2. Aaron Jones says:

    Great article Mike. I have to say that you never cease to amaze me with your unique viewpoints and ideas. Good writing, fantastic thoughts, and even more intuitive than I expected when I started reading.

  3. neil says:

    Interesting read! While I agree with some of the points you’ve made, I think you’re missing one major point: people by iPods partially because they’re hip, but also because they’re simple. They are not “deep” devices, in that the functionality is not so extensive that it makes using the device seem like quicksand. (cf. your average cell phone).

    I surmise that iPods are popular in part because they’re very basic, simple things, which in general what most people want. Your article is interesting, but it’s written from the perspective of someone familiar with technology. You crave integration, because that’s what technology-savvy people tend to crave.

    In my opinion, features are like fashions. One year, features are the big thing, and the next, it’s all about simple and straight-forward. This is represented like a bell-curve: as a new technology is assimilated and adopted into the mainstream, the level of desire for features goes up. We’re not very far into the whole “age of the portable music player”, but I think the fact that using computers in general has become so difficult is starting to bleed over into other technologies.

    We’re sick of our computers crashing, and spam, and virII, and malware… and we just want stuff that works. The iPod represents this.

    I’m not sure where Apple will take all of this next, and I think many of your ideas have a lot of merit… but I think things are going to get more and more straight-forward, rather than complex. Integration of other technologies (your “camera / mp3 player in one”) is inherently more complex, and while the technology leaders might use ’em, I wonder if the average person will.

  4. Brad says:

    Superb article. Perfect recipe of facts, speculation, and flat out opinion. Really got me thinking, which is what any well-written article should do.

  5. neil says:

    (of course, I’m exhausted right now, so most of the above probably makes absolutely no sense. Ah well.)

  6. Mike D. says:

    Oh god, if this post wasn’t so long already, I would have spent half of it talking about Media Centers. The optimist in me thinks we might see some Apple/Sony collaboration on the TV side of things, but that’s pure conspiracy theory stuff at this point.

  7. Mike D. says:

    neil: I definitely agree about the simple angle. I feel though, that that’s what the Shuffle is for. There will always be a dead-simple, ultra-tiny (eventually hearing-aid size) music-playing device with less capacity and functions than the mothership device. I’m just saying that there will be a mothership device and once it gets cheap enough and easy enough to use, that will be the main device people will usually interact with. My Treo is this device today… it’s just not as polished as an Apple.

  8. Jordan says:

    Josh: Read a few articles back (the “Macworld 2005” one) and scroll down to the “And finally, the ugly” section.

    Mike: This is a great article. You always manage to pull everything together in a lengthy, intelligent post. You’re staying in my RSS for a while.

  9. Lee Dale says:

    Off the top of my head (apologies if this is a mess), I can agree that the “mothership device” is the panacea of personal media management. I just can’t help but wonder if it’s too good to be true. We can see the inroads being made into this with concepts such as the Treo. But when we look at all the integration required (not features, but technologies and, more importantly, distinct media with distinct purposes (music, video, phone, email, etc.) I think it’s a longshot.

    We have corporate users and personal users with fundamentally different needs and desires. Furthermore, each group has its own vast subsets of users with different needs and desires. What will these devices do? The possibilities are almost unlimited and, as such, I doubt you’ll find a device that will have everything you want and deliver it as well as you want.

    When I look at IT today, I still see massive integration issues within single corporations. Disparate content management systems. Silos of business groups that have need to be talking to one another but can’t or, at least, have difficulty. If bottom-line driven corporations can’t get their shit together, I can’t imagine what will be required for the mothership device to serve our needs.

    You’re talking about a device as simple and intuitive to use as an iPod, but as flexible as a Treo to the Nth degree, with extreme battery life, unlimited (fast) connectivity, and no theoretical storage limitation, as well as the ability to offer (software and functionality wise) what you, I, and 1000s of other people with completely disparate concepts of the ideal device want it to do.

    If you’re not talking about such a device, then surely you’re back to carrying multiple devices, for the same reason that I have a Blackberry and an iPod. Maybe in a few years the Blackberry will be the iPod, but I would hazzard to guess that there will always be something missing. Right now, even, the battery life on the Blackberry is garbage and the OS is not as responsive as it needs to be. How is one developer/manufacturer going to build the ultimate device? I don’t think they can.

    So you get a group of companies working together. It’s still not enough. Does Apple control the interface design for everyone to ensure consistency and ease of use? What is the OS based on to ensure security and stability? Who isn’t part of the consortium and, as a result, what’s missing?

    There will be attempts at mothership devices. And I hope they succeed. But I’m skeptical that we’ll see mothership + trinkets like the iPod shuffle. I think in all likelihood you’ll have the advanced iPod or easier to use Treo that still doesn’t quite cut it for whatever specific reason you have, so you’re either making do or you’re also buying Brand Xs latest large device to complement it.

    The bottom line is, if you’re just making do, there will always be an in for the competition. So Apple may fall out of favour in 2 years, and come roaring back 3 years later. I think it’s inevitable anyway, because there’s still a ton of room in the industry to innovate. Apple doesn’t hold a monopoly in that area, nor would they have the resources to maintain it if they did.

    It is, however, a positive sign that the iPod shuffle was released. This is at least evidence that Steve is willing to reevaluate strategy at Apple, assuming that when he says we’ll never make a Flash device it wasn’t just marketing rhetoric designed to give the Flash based competition a false sense of hope. Either way, I personally think the minds at Apple found a way to turn a limitation into an innovation; you have limited storage and a price point to hit in a saturated market — is there something new to be offered here that maintains the Apple ethos, simplifying complex technologies.

    Anyway, I’ll stop now.
    Peace.

  10. Jeff Croft says:

    Michael, you’ve outdone yourself. Brilliant job.

    While I generally agree with all of your points, the one potential pitfall that I see for Apple that is bigger than any other is the FairPlay licensing deal. I truly believe that Apple’s ability to own the digital media market for years to come lies in their ability to put out a killer version of QuickTime with FairPlay built in for all formats and license it.

    If they’ll do that, they stand a very good chance. Otherwise, each piutfall you’ve pointed out has the potential to bite them in the ass one by one.

  11. Tee says:

    I have to agree with Neil’s comments. Take a look at the latest low price Nokia N-Gage (granted, not a very well designed product, but serves as a good example). From the tech perspective, all kids *should’ve* loved it.

    • they need a phone
    • they want to play games on the go
    • they want something hip & cool they can boast about
    • they need their parents to buy one for them so it has to be affordable

    Ok – so, did it fail? Yes. Partly because the way it was marketed and because it didn’t have enough original & good games. But, also, the primary marker ie. the kids *never* wanted to have it all in one. “If I want to play games I use my PS II”.

    It’s all about the experience in the end. I consider myself a techie, but I have loads of devices for different purposes. All of which I’ve chosen because they are best for the given purpose.

    I myself would never want to have all of their features integrated all in one – I want my employer to provide me with tools that help me to work better but I don’t want to use the same tool in my spare time for leisure activities.

    If you’re working freelance, then it’s of course a different ballgame, but most of the consumers are not – this is an important point, imo.

    Regarding big brother brands – Levi’s failed because they didn’t evolve., they didn’t study the changing youth culture enough and it was too late when they realised that. Look at Sony, same thing. But Apple, imo, is very clever when it comes to marketing – if they can keep that up, they will evolve and stay up there. A good read about branding is “The Hero and the Outlaw: Building Extraordinary Brands Through the Power of Archetypes”

    Good article, though – enjoyed it a lot.

  12. Very exceptional article. I had it converted to speech by my PowerBook, and I played it on my iPod while traveling to work. As for Apple and cellphones, they are installing the iTMS service on at least two carriers’ phone services right now. They may not want to make the Apple iPhone just yet because they want to have a significant portion of all of their competitors’ services before they release their own phone, giving them a portion of their competitors revenue and then later their own iPod-iPhone with some additional features to convert customers over wether they are Applephiles, musicphiles, or just technophiles. My own utopia will be when Apple and Google come together to do something, as I know it would be amazing coming from my two most beloved companies.

    Please continue the ace essays! I’ll be sure to read (or listen to) all future ones.

  13. Mike D. says:

    Lee: Agreed that no device will ever satisfy everyone. However, as phones continue to turn into full-fledged connected computers, the range of things you can do on them will only be limited by what software you have installed… or better yet, what web services you will be hitting. Microsoft’s Windows Mobile initiative is getting them onto a lot of phones right now. The experience isn’t astouding yet, but it just keeps getting progressively better.

    Tee: What if you turned that around though and took a gaming device kids already used like a GameBoy and added phone capabilities to that? I think the Nokia thing happened because kids simply won’t stand for second-rate game platforms. If it’s not hip, they won’t use it.

  14. gb says:

    Mike, you make me want a Treo almost as much as Apple makes me want… well, basically everything they sell. But I’m not so crazy about the music-on-Treo concept that you seem to be in love with. Yes, you can swap out SD cards and the like, but I’m only seeing 1-2gb SD cards out there (there may be more, but not by much). I like my iPod in that I can carry 15GB (or, if finances would permit, 40-60GB) of my music, as well as having a portible mini hard drive to carry my 3D projects for school. Sure I can use multiple SD cards, but then I have to carry them all, organise them all, worry about losing a vital one, etc. Don’t get me wrong, i sincerely lust after a Treo… but I just don’t see everyone wanting a swiss army knife. I want to be able to leave my mobile phone at home when I go out, but I still want my music. Some people talk about how the iPod should, nay, must add wireless headphones and video screens and the like, but honestly, the iPod is simple, and that is the beauty of it. It doesn’t try to do everything, and I love it.

  15. Mike D. says:

    gb: Good points, but don’t underestimate how cheap SD memory is getting. Gartner Research, who follows this stuff, says that the price of SD memory should be down to about 1.6 cents per megabyte in three years. At that point, you’re talking about a 4 GB chip for $65. And that’s using a 1.6 cent per meg average… Apple gets crazy volume deals which would help lower the bill even further. It’s going to be quite awhile before Flash memory can deal with the needs of the 40-gig-music-toter, but the success of the iPod mini (and now the Shuffle) showed how many people don’t need more than 4 gigs.

  16. Zelnox says:

    Very nice article ^_^

    I’d like to see Apple follow the mobile phone route. It doesn’t have be something like the Treo, but certainly be a personal hub.

    I don’t know if you’ve read about NTT Docomo (a very popular cell carrier in Japan)’s vision to empower its subscribers with phones equipped with a contactless chip to pay for subway fares, movie tickets, or stuff in a vending machine. The phone will become a virtual wallet and can replace all those membership cards too. What can Apple’s role be in this? Apple can streamline the experience and make the mobile phone really a hub.

  17. Mark says:

    Ok, before I even read the whole article (first of all: great insides) two points:
    1. there will be an iPhone! it is the logical next step given all your points and the motorola-coop
    2. I am not too sure about all the convergence. convergence was a big thing in the last years with all the feature-laden treo thingies and pdas doing nearly everything a pc does. but the size-factor can kill all the fun. the treo – as all the other communicator/ericson p800 stuff/you name it – is just too big imo. a device is useful to me as long as I can stuff it into the pocket of my jeans (no levis, mind ;-)). so what can you put into such a device that can sensibly be controlled using a standard mobile keyboard layout and screen? phone, music, sms, mms, rss, photo, small videos, email (writing only sms-style length of course), a rudimentary browser, addresses, calendar (mind the screan-size!). that’s it. there is no way you can get a decent to use group-ware-editor on a phone.
    the idea of the ipod was NOT to make a feature-bloated do-it-all but a simple, elegant player that does just that: play.

  18. Erwin Heiser says:

    2 things mentioned in the article:

    some threats facing the iPod over the next couple of years

    It’s nice looking now. It doesn’t crash as much.

    Mike, you’re kidding right? Right?
    The only thing I agree on is that Microsoft can spot innovation. Too bad they innovate so little themselves.
    Sorry, just had to get that off my chest ;-)

  19. Ste Grainer says:

    You might find the latest I, Cringely column: “Mini Me” of interest. Robert Cringely always has some insightful commentary on tech industry players and where they might be headed. In this column, he seems to have some fairly good (if circumstantial at the moment) evidence to support his claims that the Mac mini will begin Apple’s foray into media centers and video distribution.

    Your thoughts on the emergence of all-in-one phones are interesting. I don’t own a cell phone and don’t see myself purchasing one anytime soon – I don’t make enough phone calls to justify the cost right now, and the quality of camera phones is nowhere near good enough to satisfy the photographer in me. I would definitely be more inclined to own one if it did things that I find more useful – like PDA functions and playing music. If it were designed by Apple, that would be the clincher.

    What I’d love to see is greater integration with Bluetooth on portable devices. Headphones have just started coming out that support it. My portable dream machine would have unobtrusive wireless headphones, and a modest display built into a decent pair of sunglasses (see what time it is, ask a question about local restaurants and have directions pop up right in front of your eyes, check what song is currently playing, even see what special deals a favorite store I’m near might have). Okay, so the sunglasses are still a little too sci-fi (think All Tomorrow’s Parties by William Gibson), but there’s definitely great potential for wireless peripherals on portable devices.

  20. Brian Ford says:

    A really well thought out article. Still, I disagree on a few points. I don’t think that convergence is a necessity with the iPod. I honestly WOULD rather have a cell phone -and- an iPod. (Similarly, I would prefer a really well designed, compact phone AND a digital camera over a camera phone.)

    I believe a top-tier iPod/Phone would be a good idea, but neglecting their current ease-of-usePods would be a mistake. And, I don’t think that the shuffle fills this need. (Though, I currently want a shuffle more than I want any other iPod.)

    “So, with this in mind I don’t think this statement:

    Besides that, the Treo kills the iPod in almost every other category. I can make calls. I can check e-mail. I can use Bloglines. I have unlimited capacity via SD cards. I can take pictures and movies. I have much better battery life. The list goes on and on.”

    can be considered a valid argument. You can’t beat someone in a category that they don’t compete in. The shittiest basketball player on earth will kick my ass every time simply because I do not ever play basketball. Nor does it bother me that I will never win a basketball game as a result of my non-interest.

    It’s certainly valid to be of the opinion that Apple’s lack of concern will sink the iPod ship, but I choose to believe that they have a strategy. With the iPod shuffle, Steve has proven that he is willing to go against statements made in the past. In this case, he was dead against the need for a flash based iPod… I think he realized that maybe he was wrong and they went ahead and made a really great and certainly left of center flash based music player.

    You’re dead on with you radio comments, but I’m not so sure that it’s time to license fairplay. There WILL be a time, and I think Apple just has to play it like the stock market. Sell at the perfect time.

    Mac Media Center aside, I really have to believe that Steve has movies on his mind. He’s never said “no” to this, just… “technology isn’t there yet.” The man runs Pixar, and he -has- to have an idea about just how important being first out of the gate will be. He’s got Pixar lined up, he’ll probably be able to strike a distribution deal with whoever Pixar hooks up with post-Disney, and the success of iTunes has got to make movies enticing to Steve. However, it needs to be done right. I’m not nearly as interested in buying a movie online as I am buying music online. I really need the packaging for my DVDs. Music CD packaging is a waste of space, IMO. (With the exception of a few bands who care about package design.) I want a movie that I can somehow download to my computer and then wirelessly beam to my TV for a limited time. I don’t know how they could do it, but if they can, i’ll be all over it. It will need to follow the model of the iTMS. Integrated ease-of-use is where it’s at.

  21. Great writing Mike.

    I have held off buying an iPod because I know it won’t be long at all before the music player, cell phone, and digital camera merge into one. I pray that Apple will take some large part in doing this because I can’t see any other company doing it the right way. Waiting will be a little easier now with an iPod shuffle.

    Part of me also hopes we are all completely wrong on this, and that merging into one device isn’t the best solution and that Apple will reveal and suprise us with something we weren’t expecting. That’s what they are good at.

  22. Jason says:

    By no means is this a completely pro-MSFT comment, but in many ways it is (funny how that works, eh?).

    Microsoft may not be completely brilliant in its innovation, but it makes up for that in engineering for business’ sake. Plays for Sure is only the shell of it, as the true underlying intitiatives surround how media will be encoded and distributed.

    A little known deal they’ve been working on is with ContentGuard, a company that owns patents and helped create the XML structure that allows multiple devices to share rights to the same piece of content. Microsoft is trying to buy them — not license the technology.

    At the bit level, Microsoft also owns the only secure audio path (“SAP”) from the decode of a media file to the playback at the driver level. That means the copyrighted content owners can rest easier with SAP than with other technologies, if only for now. You can’t break into the path digitially (analog, sure — it does playback on a speaker).

    You thought the browser was integrated into the OS? Wait till you see these technologies in MCE and/or XP and/or Longhorn.

  23. Absolutely right on the XM radio deal. Oddly enough, the XM radio market seems to be largely different than the iPod market (my dad owns an XM radio, but wouldn’t know how to rip a CD if his life depended on it).

    That said, a merge of the two would be killer, and would seem fairly easy to accomplish. iPod XM. Done.

  24. Mike D. says:

    Ste: Cringely’s Media Center theory is interesting, but the one thing people don’t seem to be understanding about the Mac Mini is that it is unfit to be a Media Center because it is so lacking in power. A Media Center actually needs a lot *more* power than a regular machine, especially if you want to play back Hi-Def. Even a dual G5 has trouble playing back Hi-Def right now. Apple needs to build the encoding and decoding onto the chipset. The Mac Mini, form factor wise though, is a perfect start to a Media Center concept.

    Brian: Agreed, and I think Apple will continue to sell standalone iPods to those who want them. I just think the majority of people will want this functionality baked into their phone, thus killing part of the market for standalones.

    Jason: Excellent points about the Secure Audio Path. That is huge for Microsoft, and you’re absolutely right… content providers feel safer knowing Microsoft has this locked down. There’s so much that goes into their DRM that people don’t even know about. It’s all important stuff.

  25. Jeff Croft says:

    My personal feeling on convergence of the phone, camera, music player, etc. is that I’m all for it — but only if the singular device can really do everything the individuals can and offer just as good a user experience.

    I don’t really like toting around multiple devices, but I’m willing to do it if that’s the only way I can get the best possible performance and experience. So far, I’ve not seen an all-in-one device that really offers a music experience nearly as good as the iPod (I know you love your Treo, but unless it works with iTunes, the exprience just isn’t as good).

  26. ~bc says:

    Must say Mike, you tend to be more “right on” with the web stuff, and less so with the electronics. Not that it wasn’t a well put together article, and it can’t be wrong since it’s your opinion. That said, I think you’re way off when it comes to QuickTime v. WiMP. First off, I think anything MPEG4 looks better than WiMP9. Maybe that’s subjective. What QuickTime is brewing in Tiger is really tight. h.264 is in another league vs WiMP9. You have a point w/ MS & DRM availability, but DRM availability isn’t what draws consumers. What Apple can make available with QT to average humans in both creations, and delivery (quality via available bandwidth) is more appealing. Remember, the iPod, everything that surrounds it, and many of the great points that everyone lauds about OS X — all exist thanks to Quicktime. It’s all around you. iTunes is simply a front for QT. Plus, I’m willing to bet when it comes to the draconian world of DRM, what creative types want to get into bed with MS, given their past history of tightening the leashes of their corporate customers? What happens when they change the user-agreements and start renting DRM? As great as a tech company MS can be, it’s their business tactics that their technical creativity will never be able to atone for. I’m not saying Apple is going to take over the globe (far from it, I hope, they’re better as an underdog) The golden era of MS is very possibly behind us.

  27. Craig M says:

    Great article, with just one caveat on my part. Apologies for sounding like a whining european, but XM radio is only a state-side phenomenon, and as Apple is a global company, any XM or Sirius functionality would give extra value to only one (granted their largest) of their markets. Not that superbowl or Howard Stern has a huge following here anyway!

    Europe and other parts of the world have had digital radio gaining popularity for a few years in the form of DAB (digital audio broadcasting), a terrestrial broadcast system (more applicable and cheaper as we don’t have the geographical size to sort out as the states), so Apple might consider doing different chipsets for different marketplaces, but it suddenly looks a less inviting prospect to having a single “world” product. Unless the’y’re smart about it in the same way they are with their universal powerbrick (that can snap in any country’s plug into the main body). Just thought it might be worth pointing out.

  28. Mike D. says:

    ~bc: I guess we can disagree about QuickTime without disagreeing about most of the rest of the article, but I’m not the only one who feels this way. There’s a reason why the majority of clips encoded for the web were Quicktime a few years and are Windows Media now. The WMP has just been improving at such a faster pace. You’re right in that a certain amount of it is subjective but I’ve encoded and deployed enough video at ESPN and Disney to tell you that, in my opinion at least, here are a few areas where the WMP is clearly a lot better right now:

    • Encoding speed. This is more of a producer-side problem than a consumer side problem, but it really takes a hell of a long time to encode Quicktime files on the fastest Mac as compared to encoding WMV files on the fastest PC. It’s not even close really.
    • The quality, to me, is also better with WMV bitrate to bitrate. Believe me, as a lifelong Microsoft basher, I was probably the last at my office to admit this, but it is just true with the current codecs each is using. Now, granted, a lot of your commentary was about QT 7’s H264 (MPEG4) codec, which I haven’t tried out yet because it’s not available, but I have tried QT’s current MPEG4 support and it’s just not as nice as WMV9 right now. It’s nice, sure, but WMV9 is just superb.
    • As mentioned before, you cannot offer a protected Quicktime movie on the web for download right now. You can do this today with WMV.
    • The embedded Quicktime player is not scriptable in the least bit. The embedded WMP has well over 100 scriptable commands that you can call from javascript. This is what I mean by a more developed API.
    • WMP has supported high-definition playback for quite some time now (and it’s GOOD) and Quicktime is just now adding support. Microsoft has had problems (and will continue to) getting major studios to adopt their high-def architecture, but my only point is that it’s there and it looks great. Plays back just fine on mid-range machines too.

    I don’t disagree with your larger point that Microsoft is currently not as loved by the “creation” industry as Apple is, and that very well may remain the same. I also agree that because of the way Microsoft is pushing proprietary formats like WMV9 over more open formats like MPEG4, their best days may be behind them, but they aren’t going to fall over on their own. If that is going to happen, Apple needs to make all the right moves and my only aim with this article is to discuss what those right moves might be.

  29. Mike D. says:

    Craig M: Great points about the geographical limitations of XM and Sirius. Who knows if and when they plan to expand into other countries. This may be one reason why an IP-based end-around might be a better play. Consider this scenario: What if, instead of listening to something like XM live on your iPod, you could just dock the iPod at night (when it has a full internet connection) and it would download a day’s worth of music for you, programmed like a radio station would program it. So, in other words, the iTMS would send you a collection of music that it thinks you might like based on your tastes. Then you could listen to what had been downloaded for you as if it were a radio show, but it would erase itself after a day or two. I like this idea, but it seems like it would require a tightening of the DRM capabilities in the iPod. If you could hack iTunes so the songs would get saved down as unprotected files, that would be a problem.

  30. dardar says:

    partner with xm? laff….. one step at a time please, they dont even have fm radio on the ipod when most all of their competitors do.

  31. michel says:

    but..

    bye the time someone made a better product (or a better succes) than ipod and rule out of the market, the REAL MONEY will be already in Apple’s hands

    and apple will do like everytime.. they still continue to sell the now “minor” product and doing research for a new one

    like with 1984 macintosh, or apple 2, it will be an eternal redoing.

    Drm is not “evil” (funny to use “evil” everywhere), it’s just a pain.

    DRM is not a “fact of life”. simply, it only concerns some retails products (as dvd or legally downloaded music) it is a pain for users (never you bought an american dvd in europa ? ho you lucky man with all the movies you want.. but how about the japanese, chinese or indians movies ? hmm ?)

    and it’s not life.

    about the ipod : too many people do not understand the public want SIMPLICITY !
    the ipod is SIMPLE, it’s not about “features”, it’s about simplicity. too many “technology – versed” persons do not understand that. they speak about IP, or xml, or new savy xm radio thing, or whatever, but the public do not care. and it is right to do not care. Apple knows that.
    people who is not understanding that couldn’t predict the success of the ipod, but it was not rocket science neither leap of faith, just cold logic and expericence.

    as a professionnal computer engineer (network, and administration) I dare to say that : “a GOOD technology is an invisible one”.

  32. Mike D. says:

    dardar: The reason iPods don’t have FM radio built in is that FM doesn’t lead to any iTMS purchases. The more FM that is available, the less songs the consumer will be compelled to purchase. I feel like there is a sell-through opportunity with XM though… we’ll see.

    michele: I disagree that the reason the iPod is successful is that it doesn’t do much. It is successful because it *feels* simple… and that is the key. Most people who own iPods own cellphones too, so introducing cellphone features is not going to confuse anyone.

  33. Robert Sharl says:

    Cellphone features not confusing? I work with technology and I was ready to throw my new SE K700i out of the window a few times this last week. I’ve /never/ felt like that with my iPod.

    I agree that the iPod’s strength is that it takes a fairly complex task (gathering music, converting it, organising it, moving it around, playing it) and makes it seem like the simplest thing in the world. If Apple could do this with the mobile phone I’d buy it in a heartbeat, but it would take turning the phone into a Mac/PC peripheral, like they did with the music player. I’m not sure how many people are ready for that yet: Goodbye to all of those arcane menus on the phone to configure every feature; instead the device configures itself based on your computer-based address books, internet settings, calendars etc. Much easier for Apple to do on the Mac side than Windows, and that’s likely too small a market. And that’s without getting into the problems of the operators..

    Robert

  34. John says:

    I can only hope that the Apple phone will use the click-wheel™ for rotary-style dialing.

  35. Leo says:

    One of the first blog-entry’s (on any blog in this world) that really gave me insight! You know what? I think you’re right!

  36. Kevin says:

    Excellent read. Comprehensive. A few other points to toss in:

    1. SJ said in 2000 upon introducing the digital hub concept and iTools that Apple intended to be one of the ten largest Internet companies. iTools became .Mac, and hasn’t really grown into much, but could SJ have been hinting at things way beyond iTools, like the iTunes Music Store, and even an iFlix Video Store? And isn’t Apple’s development of Xserve (RAID, Xsan) not only for content creators but for Apple itself – so it can cheaply and efficiently serve up multimedia content?

    2. I noted that you don’t think much of Quicktime or H.264 relative to WMV9/VC-1. But H.264 seems to have taken on great near-term importance to Apple, which makes me think that entry into video is imminent; it’s just waiting for H.264 and a few other things (faster broadband, faster wifi).

    3. SJ told Mossberg of WSJ last July at the intro of Airport Express that Apple was working on a remote control (the lack of which led Mossberg to give AE a really tough review). Which made it sound like it was coming real soon (like sooner than the iPod car solutions that he also talked about). But the iPod car solutions have already come and still no remote. Is the appearance of the remote now tied to the arrival of the full 10′ iLife UI, including H.264 video?

    4. The refusal to license Fairplay could be that it is part of a consumer “lock-in” strategy leading into a video-playback device. iPod drives iTMS sales which will drive the Mac/portable video device and so forth. Once H.264 video is secure as a standard, then Fairplay audio/video DRM gets licensed.

    5. Finally, I think the huge investment into Apple Retail Stores was not simply to present Macs in a better light, but to become a full-fledged consumer electronics store selling many Apple products. There is definitely more to come on this front regarding strategy.

  37. Stream says:

    I might be your regular “Jane Internet” who knows jack about anything but I can tell you right now that this whole “people will always have a cellphone” is utter nonsense.

  38. Darren says:

    Great article. I haven’t read all the comments so someone else may have said this already (there’s a lot of responses here). On a recent trip to the US I carried my cell phone (mobile as we Brits call it), my Palm Tungsten T3, my iPod (20 gb 4th generation model), and my Sony digital camera. Oh yeah, and my laptop but take that out of the equation. One of my colleagues commented that I could have taken just one device that did calendar / email / phone / music / photos. Probably true. However, one of the current drawbacks about these magical all-in-one devices is that they do a lot of things but aren’t in the top of their class at anything (except perhaps being a phone where the playing field is fairly level… you dial, you speak, you listen). Is there a phone with a 7 megapixel camera, and does it have red-eye reduction, low-light auto-focus? I think not. Is there a phone which allows as many games as I have on my Palm and is the screen as good? Probably not yet. As for music… I’m not sure because I’ve never used a phone for that. However, I have my whole CD collection on my iPod, it plugs into the car and it sits in a donut speaker system at home. Show me that with a phone. And then what happens when the phone rings? ;o)

    Summary – one day there may be a device to do everything and do it well, but until then there’ll be a lot of people who feel the combined device is a compromise on a number of key features.

    One other thing I think Apple have got right… iTunes. The selection of music is the broadest I’ve seen in the UK market and it’s easy to purchase, download and sync. They’re one of the cheapest in the UK (even though overseas iTunes stores are cheaper). Compare this with Sony’s download site… a poor selection, a mandate to use Internet Explorer (nasty) and expensive – £0.99 or £1.09 compared with iTunes’ £0.79.

  39. john says:

    Great article! It started the wheels spinning for many readers. The wheels spin at different speeds for everyone. We’ll get convergence and it’ll be ubiquitous. It’ll be very mobile and very compact.
    Already there is a virtual keyboard being developed as the text interface, you’ll be inputting on your arm for example. That solves the size problem.
    Convergence will happen because parents will adopt it because their kids want it or need it. Think expensive calculators, appr $100 each, phone $100, MP3 player $200, PDA $400, Camera $200, portable gaming $200 etc
    Little Johnny/Janey will receive a device and this device will do it all. They’ll get used to it, they’ll rely on it and it’ll do more with each generation. This is evolution and it will happen. This will possibly even be partly subsidized by the state as it will have many potential benefits to education.

  40. Chad Thompson says:

    This was the first article of yours I have read and I have to say it was extremely thought provoking. Having addressed the many facets of the iPod in such a thorough manner, I would like to hear your views on the Oakley Thump the sunglass mp3 player.

  41. Nice article. I generally agree with your analysis, but I think you’re overlooking something fundamental: Market-share comparisons between Macs and iPods don’t work.

    The Mac didn’t blow a commanding lead — it never had one
    Market-share has fluctuated over the years, but it’s never been anything remotely close to half the market.

    The iPod has a commanding lead
    If you think that this is an untenable situation, then you must also thing that Microsoft will soon lose their lead with Windows in the OS space. I don’t believe that, and I doubt you do, either.

    FairPlay is genius
    DRM we can live with. DRM the labels can live with. Controlled by a company that’s not a convicted monopolist.

    Fashion is an opportunity for Apple, not a threat
    Of course white iPods will go out of fashion. Do you see Apple trying to sell Blueberry iMacs any more?

    I have the same relationship with my cell phone that you imagine Jobs has with his; I hate it. It’s ugly, clunky, and all but unusable. I’d rather pass it through my small intestine than try to listen to music or surf the web with it. (I don’t doubt your Treo’s an improvement on it.)

    Before long, we will see that Jobs’ dismissal of video on iPods is just a weak attempt at throwing Microsoft and Sony off the scent while Apple takes a swipe at another entertainment-industry segment.

  42. Rahul says:

    But what of Playstation Portable?

  43. andy says:

    Where as I think your post is really insightful, and it is obvious that you have put a lof of thought into it, I feel you’ve missed several things completely.

    First off, there will always be a higher demand for specialty devices then there will be for integrated devices. There are tons of factors for this. Not the least of which is that it’s easier to market specialty devices, and they *are* easier for the consumer to “get.” It’s also easier to compare apples to apples with specialty devices. Creating interfaces for devices that fuse such different features as calling someone, emailing someone, playing music, and surfing the web just eats up R&D like nobody’s business.

    Take a look at kitchen gadgets, for instance. All of the “it slices, it dices, it juliannes and it’s a toaster” devices fail in the market pretty quickly, and none of the major brands make such things. It would be a simple matter to make a combination blender, food processor, and coffe grinder, for example. All three devices are even based on the same “core” of a highspeed rotory motor. But for whatever reason… no one would buy it. You know those pots that have the top that acts like a colandar? They don’t sell well at all.

    Also… there are many feature that you failed to mention with the ipod. It’s primary purpose is to be a music player, true, but it also has some nice little, “but wait there’s more” features. The ability to use it as a portable firewire or USB storage device is nothing to balk at. The little bells and whistles of being able to sync it with your calendar and your contacts list, and being able to read ebooks via third party software may not be nearly as powerful as what you can do with a PDA, but they are so nicely integrated with the interface, it almost feels as if there’s no modal change. They’re just nice little extras.

    FInally, the idea that you have an unlimted storage capacity through swappable SD cards is a little zany. The biggest obstacle to that argument is the price factor. A 1 Gig SD card, at best, is going to cost $100. And unless you have more than one SD Card port, you are limited to the maximum SD card size at a time. So to truly have the same 20gig capacity as the cheaper of the full size iPods, you would have to spend $2000 dollars, and spread you files out over 20 cards (making sure that they fit just perfectly in 1gig increments), and to my knowledge those files would have to be pulled from a device like the Treo through a software interface rather than being treated just as an external drive if you wanted to put them on to your computer.

    Someday in the future there will be no iPod. That is for sure. Just as there will come a day when there will be no desk-top computers, and no cell phones… but all of those days are quite a ways off. And really… it will never be because of competing companies. Compettion has a tendency to cause all parties involved to make beter products. It is highly doubtful that any of the players in this game even want to “kill” their opponent.

  44. Mike D. says:

    andy: Thanks for the post. My responses:

    1. Demand for specialty devices vs. integrated devices: I guess only time will tell but my feeling that is this issue is all about pockets. Ask anyone on the street how many pocket-sized devices they would feel most comfortable carrying around everyday and I guarantee the top answer would be one. Are people in some cases willing to carry two? Sure. But given a just-as-friendly UI in an all-in-one device, I think people will choose one almost every time. We’ll see what happens… pockets aren’t getting any bigger.

    2. On integrated interfaces eating up R&D money: Great. That’s what Apple does best. Creating interfaces isn’t about expensive material testing so much as it is about getting the right people in the room writing the right software. The Treo is a great example of an excellent integrated yet simple interface, and I think Apple could much better.

    3. On other iPod features that I failed to mention: The calendar, contact list, and eBooks hacks are what I was talking about when I said that people are already pining for much more in the iPod. Do these nice little additions add value to the iPod? Absolutely. But they could be a lot nicer if they (and other things) were baked into the OS from the start. People are pushing the limits of what they want in their device. All I’m saying is that Apple should observe what people are doing and act accordingly to expand functionality.

    4. Regarding storage capacity and SD cards: Jupiter Media Metrix did a study and found out that the optimal size for a music player is about 4 gigs. In other words, that amount of storage is comfortable for most people. Maybe not power users, but most people. Not coincidentally, 4 gigs is the size of an iPod Mini. The price of SD Flash memory is expected to go down to under a penny a megabyte by 2009 or earlier so that translates to a 10 gig chip for about $100. Not bad. Furthermore, the iPod Shuffle is showing that a large group of people doesn’t even need anything close to 4 gigs. I know I don’t. I don’t need my portable device to be my entire music server… I prefer my home computer to take on that role. Just let me shuffle 10 or 20 albums or use autofill to pick randomly from my library and I’m happy. If you use random mode a lot, a Shuffle isn’t really much different than a full-sized iPod. If you aren’t away from your mothership machine long enough to play through all the songs, they are effectively the same thing.

    Also, I’m not saying you can’t still have your separate music player. As long as there is still a market for high-end standalones, Apple should continue to sell them… alongside whatever other devices they might be offering.

  45. Mark says:

    Great read and interesting looking into the aspects of both powerhouses of the tech/computer industry. There are other points to explore such as will APPLE actually make it’s computers and software more mainstream to further push their brand in the desktop computer sector? We all know desktops may be getting smaller but noone sees them going away anytime soon. Unless you consider “complete media solutions” a lot of headliners are looking into. Once again great read. Now to link you on my very meager blog heh.

  46. oneafrikan says:

    Great article Mike.

  47. michel says:

    Microsoft is not so “powerful”

    they have only the power states accept to give to them.

    IBM has more powers in government, research and economy.

    it’s mostly totally irrelevant if you think of powers and influence of oil companies

    and some national computers entreprises as BULL (for France) has still huge legacy market and military influence.

    I know “microsoft windows” is on all yours pc desktops and it’s the major huge player on “desktop and workstation” of users, but it’s only that (it’s huge, very huge, but the world is a way much more huge)

    About the ipod. it has nothing so special and its sucess was not a surprise.
    in every market you can find Big Sucess even when it’s expensive. if the product is nice, right, and exactly in the range of the choosen public : it’s a big seller.

    I bought an ipod (for my macintosh, and no I’m not a weird person, I’m very common) because it was, even for the price, simply the best and easier tool for me. Of course some others was cheaper, but the quality was “cheaper”, the ease of use was “cheaper”. I pondered lenghtly : I could pay for it and for me the gain in quality was superior to the price in comparaison.

    about market , 8% for example seems to be a little number. but if 8% represent 8% of a VERY HUGE MARKET with Millions of people , in fact 8% is a LOT OF potential clients and BIG Money .

    in computers, even 2% is A LOT OF Money ! (so a 98% of computers market is insanely huge big money, yep! )
    In the same time, we should NEVER FORGET one company can sell to 98% of people a product and in the same time LOOSE money (for example, if the product is not expensive enought to sustain profitability or the one monopoly doesn’t cover for failures in others market) .

    An other company may sell to only a tiny market but its products are so profitable , the company can invest and sell others products and make money in many way.

    (it’s not an microsoft vs apple rant. I think about cars, plane, Audio and video market for example).

  48. Mike D. says:

    Chad: I recently tried the Oakley Thumps on for the first time. Music-wise, they actually sound pretty good. They are designed so that you really don’t even need the earbud in your ear to hear the music. This is good for when you’re walking around town and you don’t want to completely shut out the world. Stylewise though, they’re just not for me. They look a little too “Terminator” for me.

    I’m not sure that the “sunglasses-musicplayer” combo is as good of an idea as the “cellphone-musicplayer” combo. Reason being, there are plenty of times when I want to listen to music but don’t want to be wearing sunglasses. But there is really no time I’m without my cellphone.

  49. Jim says:

    Apple will beat Microsoft to the “on-demand-movie-download” party. No matter how superior WMV9 is to Apple’s current QT implementation.
    H.264 and Quicktime 7 are big folks. H.264 is the biggest technological advantage in QT 7 and OS X Tiger. the ramifications of it are huge. Until you see it in action you can’t really appreciate it.

  50. Shaun says:

    Just to add another European perspective. I imagine most Brits look on with some puzzlement when the US iPod bashers bash on about it not having FM radio and adding on XM Satellite. For us, we’ve had completely free DAB from the BBC for a number of years and our terrestrial analogue signals for radio and TV are being switched off as early as 2008. Commercial radio exists but not so many people listen to that and the stations would be mad to not use DAB also. Nobody here is going to pay for commercial digital radio. Sticking a satellite dish on your house is about as popular as herpes as a fashion statement. We’ve DVB-T terrestrial digital TV and DVB-H for mobile phone based video – guess what DVB-H uses – yep, H264 MPEG4, not WMV9.

    Although Nokia announced support for Windows Media Player 10 on it’s phones recently, guess what format it transcodes WMA to – AAC MPEG4.

    Apple have also been building a lot of backend infrastructure into Quicktime7 for mobile phone companies for H264 and 3GPP and there have been reports of them working hard with the telcos to get services set up. I wouldn’t bet on a WMP future yet.

    Also, whilst phones that do everything are becoming more popular, it’ll take someone like Apple to sort out the interfaces on them and make them cool enough for the general public. I’ve both a Sony Ericsson T610 and a p910i (and a couple of Nokias). I use the T610 if I’m going anywhere I need a normal, simple phone that fits in my pocket and that won’t make me look like a geek when I’m on it and I take the p910i if I need SSH and a browser with me and put up with the bulk and weird looks. I can’t imagine the general public would have that need and they would rather have the smaller phone. Smartphone usage is growing but it’s at the expense of PDAs, not phones and it will always be the tech fringe.

    I also play music on my p910i via OGGPlay and its 512MB card. It’s no iPod and without iTunes to sync files it’s a real pain to get music on there. I’d be much better served by an iPod Shuffle. The p910i is also smaller than the Treo and much smaller than the various Microsoft based XDA type phones popular over here. But IME, they all have really shockingly bad user interfaces. Symbian is ok, WindowsMobile is just wrong and Palm is creaky and nobody knows which OS the next Palm will be based on from week to week.

    So, I look forward to an all Apple phone (not a Motorola iTunes Phone Ugh!) just because the current phones available have terrible user interfaces, terrible syncing (except the T610), terrible ergonomics and creeping feature bloat.

    I’m not so convinced I’d like everything in one device. I like my T610 because it’s a good phone and not any bigger than it needs to be. If it had a black and white screen, no camera, a couple of UI changes and a battery that lasted a week it’d be near perfect. If it was the size of an iPod, I’d imagine I’d not like it at all even with the changes.

  51. Mike D. says:

    Shaun: Great information on the European market. Many thanks. Just a couple of things —

    1. The Treo and the P910i are actually almost identical in size. The Treo is a tad shorter and thinner and the P910i is a tad narrower. They share basically the same form factor except the Treo doesn’t have that flip down keyboard thing.

    2. I agree that satellite radio may not be a great addition to the iPod. I personally don’t use satellite radio and I’ll never pay for such a thing either. I do, however, see the need to get “non user-programmed” music onto iPods. I don’t think we’ll ever get to a point where friends are the only way we find out about new music. We need radio stations, albeit in a slightly different form, to introduce us to music we wouldn’t know about otherwise. My main point is that if Apple shuns the satellite route, they should make plans for an IP-based endaround. Turn the iTMS into an IP-based radio station which can either stream music to your iPod over WiMax or cell networks, or download it when you’re within Wifi range and cache it for later listening. Once we get to the point where we can be introduced to music directly from our devices and then push one button on said device to purchase and own it, that’s the golden moment.

    3. With regards to UIs on phones: I think the main reason people are so skeptical about ditching iPods for music-playing phones is that, as you say, most phones have really shitty interfaces! To that, I say “Don’t hate the game! Hate the player!” Just because most phones have shitty UIs doesn’t mean they have to or that they always will. The Treo, for instance, has an excellent UI. In fact, I didn’t even believe in convergence until I started using one. It’s bliss… it really is. Not perfect, but damn good. Throw Apple’s fingerprints onto that product and you’ve got yourself a phone, PDA, camera, and MP3 player that are as easy to use as a, well, Apple.

  52. Patrick says:

    Mike, I’d completely agree with your point on the movement that Microsoft is making into digital video: if they get their foot in the door of independent producers and providers as well as networks such as MTV before any H264-based Apple solution comes around then Steve Jobs et al will have major hurdles in getting them replaced by Apple solutions. I love the fact that Jobs shows such faith in this new codec and as Shaun writes, the movement into mobile phones will be telling – it’ll be availability on cellphones and other wireless devices which will be the telling of all the new video technologies. The Apple/Motorola alliance still has legs because, as the Treo has shown, there is mileage in good design even if it’s not coming from the leading provider. Microsoft’s phone software is so heavy and slow compared to that on the Treo that I believe a lot of new phone providers will be thinking again about providing a Windows OS based phone; they have not been a roaring success!

    I think the idea of Apple getting into the phone design and the actual process, whether producing a phone themselves or not, is a great one. It captures the market of people, like you and me with Treos, who want to listen to music on the go but don’t want to carry around another device. You saw it in radios bundled with walkmans and then with portable CD players. Nokia’s most popular consumer phones are those with radios in them – because people like them! You don’t have to get home and plug in five different devices but can just do the one which quickly becomes a reflex – you get home, you plug in your phone! Personally the iPod Shuffle was a killer because it’s exactly what I want for the gym, for running, for losing in coat pockets, but others won’t agree and that’s why an Apple phone is so compelling. By using their skills in interface design, and in convergence an ‘iPhone’ could succeed where the likes of the N-Gage failed.

    Satellite on the iPod would be a major risk because it provides an element of the unknown in the realm of quality. What’s so great about the iPod is that the quality of the experience maintains so consistently high – taking an XM player onboard would then involve service dropouts, unreliablitity, battery drainage and so forth. People wouldn’t be able to tell whether it’s the iPod that’s playing up or the radio, and they wouldn’t distinguish between providers, they’d just say ‘My new iPod sucks!’ and drop it; the cool factor plummets. I think this is key in your idea about the fickel consumer – people abandon companies because they stop making good products. Levi didn’t go out of fashion because there were new alternatives but because Levi became boring, traditional and weren’t innovating in the field like Diesel and G-Star. If Apple maintains its reputation for quality in everything it does then it’ll succeed. If consumers demand access to their iTunes music on their Nokia, if they make Quicktime’s DRM and system-wide workflow so easy it’s second nature then they’ll gain these markets just as easily as Diesel stole Levis.

    … I think.

  53. kath says:

    i want to find the marketing and financial objectives for the ipod for research i am doing, do you have any suggestions as to where the best and most accurate place to find these would be?
    Thanks

  54. Rob says:

    When kids think of buying anything they think of what is the most popular investment to buy what is cool and trendy and shown on “MTV” . They don’t realy care about what it can do because they will understand those perks after they have made their purchase. This is basically what powers a nice part of the iPod’s wonderfull sales. So many of my peers at my high school barely knew what it was they were buying when they bought thier new “origonal” iPod they didnt know how to get the music on their iPod, they didn’t even have enough music to be concidered a music geek but they did know that those white head phones had to be more trendy than those yellow “Live Strong” bracelets. They knew that the pretty little chunk of mettle was the status symbol to carry around. Allot of my friends that have iPods dont even have a phone, they still go around asking to borrow. As long as iPod stays fashionable thier business will keep on booming, they don’t even have to produce a whonder device.

  55. Dave says:

    Your article gets me all carried away in the idea of a single piece of kit doing so many day to day things. No need to be laiden with lots of kit in various pockets, forgetting your cards, your keys, your phone, your music player, yadda … Less clutter please.

    Mobile music and radio (including ‘buy this song/album?’), phone, camera, internet, handheld games console, remote control for TV, but also potentially secured for your car locks, and home door lock, chip and pin Credit/Debit card idea could be integrated too, as well as sideline things like Shopping Loyalty cards and locally the London Transport Travel ‘Oyster’ card … simple technology which could be handily incorporated.

    Trying to think what else I use day to day that could be incorporated … a book I’d prefer to keep as a book, but thats my own personal preference.

    I realise the security implications, but these things could be made manageable and suitably secure I’m sure. With the way fingerprint scanners and retina or dna technology is moving, it’s not too far away from such a mass/personal scale.

    Ramblings … Just looking toward the future a little wide eye’d.

  56. Gordon Ashe says:

    Why don’t they make a device that includes cell phone, voice recorder, MP3 player, FM radio AND 1GB of USB flash memory. For a bonus, they could give it a fingerprint scanner that prevents others from using it. Does anything like this exist on the market. I know they can make it, it will be almost as light and compact as a regular cell phone. It seems the manufacturers are trying to milk as much money out of consumers by offering a little at a time, so that we end up buying 3 or 4 new upgraded models before they finally make something we want now and they can certainly make now. I for one and not going to spend another penny till I see something like that. (And no, to anticipate some responses, I’m not going to wait until a “wallet PC” comes out, that will require infrastructure changes to provide the necessary service support.)

  57. Francis Paredes says:

    very interesting. long but interesting :-)

  58. b ill says:

    Excellent article, and beautiful page design. The numbered comments are a particularly nice touch.

    This realtime comment preview is also most amazing.

    Oh, and my iPod rocks me faithfully since 2002.

  59. modcon says:

    I don’t believe that Apple Computer is in any present danger of becoming the “Big Brother” company in the eyes of consumers. Sure, consumers can be fickle when it comes to fads. But the loyalty of iPod consumers is not steeped so much in the superficiality of the iPod fashion trend as much as it is in the positive user experience that Apple has designed for them. Also, today’s consumer is also extremely savvy and has access to more product information than ever before in order to make a well-informed purchase decision. It used to be said that a good salesman could sell an icebox to an Eskimo, but that’s less true than ever in today’s market. Consumers aren’t likely to spend hundreds of dollars on something smaller than a deck of cards (or a stick of gum, or. . . what’s next, a grain of rice???) without first being absolutely sure that they NEED it. Apple has reached that golden niche of ubiquity, and shows no sign of loosening its stranglehold. Remember the cola wars in the 80s? Nowadays, “Coke” is synonymous with “cola,” as “iPod” is shorthand for “portable mp3 player.” Not to mention Apple has streamlined itself into a finely-tuned “system-experince-creating-machine,” capable of steering the hardware, software, and media industries on a whim (once those industries realize that Apple’s going where the money is). And the cellular/Wi-MAX industry is next. Don’t think for a minute that Apple hasn’t been brainstomring around the wireless iPod concept for years already. Sure, negotiating the wireless/telecom/cable TV/broadband legal landscape can be on par with finding one’s way through a mine field, but if anyone can wrangle the communication giants into submission, it’s Apple Computer. They single-handedly rescued the record industry from online file-sharing piracy concerns with the overwhelming success of the iTunes store, then qualmed the “who’s-gonna-want-to-buy-TV-shows-online” concerns of the TV networks, and are about to answer similar trepidation from the movie studios (with millions in profits, doubtless). In the age where content is king, content delivery is God. A wireless iPod/cellphone is right around the corner, courtesy of the Creator. As Apple has tried to market it’s desktop line as the digital hub for your home, the iPod will be the digital hub for the rest of the world. And I’ve got my money in hand!

  60. Ben says:

    What a great blog. I think you predicted the future. Will the capability exist to install rival os’es or indeed multiple os’s on the hearing aid size gadjets of tommorrow?

  61. naysayer says:

    None of this really holds up anymore. Plays For Sure has been submarined by Microsoft itself, they’re building their own player which does not work so well, and Apple is still running away with music/movies/TV shows.

    Then there’s the new phone Apple’s coming out with…

  62. How will it end for Apple?

    the ipod end game

  63. Amiri.Info says:

    Return of Apple

    Can Apple loose its lead again? Along time ago Apple was years ahead of it’s time in terms of technology, features and potential, but for reasons that I don’t want to rehash here they managed to loose it all.

    The iPod has proved to be a…

  64. This Guy Is Smart…

    I never thought anyone would buy a $400 portable music player, and before you laugh at me, remember how you felt the day it came out….  iPod sales have far surpassed everyone’s expectations — including probably some people at App…

  65. Apple Striking Back

    Anyone even remotely interested in computers and their future should read “The iPod End Game” on Mike Davidson’s blog. H…

  66. Alexandre says:

    While listening to the Critical Path podcast on with Asymco’s Horace Dediu on 5by5, I got stuck on Dediu’s comment that there weren’t iPhone rumours when Google acquired Android. After a quick search, I ended up on this piece (written eight months before the Google purchase), so I tweeted to @Asymco with a link to this post. Several people, including Dediu himself, tell me that this wouldn’t qualify as a rumour (though my own definition of rumour probably differs from theirs). Still, I’ve received some comments about how insightful this piece was.
    I later found a NYT piece from 2002 which contained an actual rumour about the “iPhone”, including the name:
    > industry analysts see evidence that Apple is contemplating what inside the company is being called an ”iPhone.”
    http://lar.me/2kg

    But back to this piece, here, which might have been more insightful than the NYT’s one or Beattie’s…
    In hindsight, this piece was both prescient of what would actually happen and telling in what didn’t happen. The radio, Plays for Sure, and WiMAX parts didn’t pan out as planned, and that’s interesting. Apple’s content play has been both more ambitious and less impactful. The move against DRM might have been surprising. And it’s funny to think about 1GB SD cards as expensive… ;-)
    But, in the abstract at least (and in Steve Jobs’s way to describing it), the iPhone has been this integrated communicating device about which people had been talking for years. So, good jobs in predicting it years in advance.

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