Macopinion

Why Zune is a Threat, Part 2

By Marc Zeedar - macopinion@designwrite.com

In part 1 of this series I wrote about how Apple needs to differentiate the iPod from the Zune and how Apple shouldn't underestimate Microsoft. Today we're going to look at Microsoft's allies: the recording industry.

Music Industry Support
By far the biggest threat of the Zune for Apple is Microsoft's association with media companies. Apple has a virtual monopoly on digital music and soon will be rivaling retailers like Wal-Mart for music sales. Apple also has a reputation for taking a hard-line approach to negotiating; the industry has tried for years to get Apple to introduce variable pricing for songs and the company still refuses to cooperate (album pricing can vary but songs must all be 99 cents). Apple also doesn't adjust DRM on a per song or per company basis -- all songs sold on iTunes have the same digital rights.

While this is good for consumers, the music industry hates it. Microsoft has shown a willingness to bend over backward for music companies -- even going so far as to give Universal a cut of sales of Zune hardware!

Is it any wonder then that the music industry (Universal in particular) desperately wants Zune to succeed?

If Zune even makes a dent in iTunes sales or shows signs of gaining consumer support, it gives the record companies a big bargaining chip with Apple. Also, with Microsoft's deep pockets, it can afford to give the record companies higher royalties than Apple (though my understanding is that Apple doesn't keep much of the 99-cent song price anyway).

With the recording industry behind Zune, it means partners in promotion for Microsoft, potential exclusives, and possibly better short-term licensing deals.

And we're not just talking music. Video is getting bigger and film studios are nervous about Apple being the only player in town. They want to hedge their bets and ensure they aren't stuck in a long-term contract with unfavorable terms. Many see supporting the Zune as a way to keep Apple on a leash.

Apple needs to be careful. While Apple is the big player and has huge amounts of clout in the industry right now, it does not serve the company well to be arrogant and antagonize the people it needs cooperation from for content. Granted, Apple should not cave in on basic principles -- like songs being variable priced or DRM being more restrictive -- but Apple should show humility and a willingness to negotiate on other terms.

If Apple does antagonize the media industry, they can join with Microsoft to create a forminable foe. Apple might dominate right now, but they do need content. Granted Apple sells millions of dollars of that content and the media companies would be foolish to turn their noses up at those millions, but if the industry feels that their hands are being tied by Apple and this situation could continue for the long-term, they just might be willing to sacrifice some sales today rather than continue to give Apple power.

It's a dicey situation. I can't imagine why anyone would want to get in bed with Microsoft, considering their history and back-stabbing reputation, but Microsoft has shown that they'll make decisions against their customers' best interest and that's what the media companies want.

Apple needs to convince the recording industry that the iTunes solution is the best one for everyone: for Apple, for consumers, and for the industry. Apple must show them that the Apple plan will be good for everyone in the long-term. This is not an easy sell as media executives are infamous for making poor decisions that antagonize their customers: fighting the cassette, the VCR, encrypting DVDs, and being anti-digital media.

The bottom line is Apple has demonstrated the way to success with digital media: transparent technology, unobtrusive DRM, and reasonable, consistent pricing. Within those terms, digital music has taken off. If the recording industry had their way, consumers would face a choice of such restrictive rights that we'd all be stealing music via P2P sites. That would doom the industry. Unfortunately it's not easy to convince stubborn (and stupid) record execs of that truth.

Apple as a Studio
Another aspect of Apple's digital media business that worries the recording industry is Apple becoming so powerful they can effectively become a studio. This is already happening in limited ways: if an unsigned band can get their songs listed on iTunes and have world-wide sales, why would they need a record company?

Being a record company isn't Apple's goal, but it could be a side benefit and raise their power in the industry. Imagine a world where bands are begging to be on iTunes.

Some people think that Apple's power could lead to the demise of DRM (Digital Rights Management). More and more music groups are releasing their songs as uprotected MP3s which work with any digital player. It's one way around the Apple monopoly. Of course the big record companies don't like either, but I doubt Apple would mind. People buy iPods because they are the best device, not just because of iTunes.

The Unknown Future: aka, iTV
Of course all this speculation of the future has one key unknown: iTV. Apple's upcoming mystery box has huge potential -- it could become anything from a multi-media set-top box, a DVR, a video game system, to online shopping. There are many directions the box could grow, depending on consumer interest and the popularity of the product.

For instance, if enough people had it, it could put Netflix out of business. Or Tivo. Or CNN.

It could be used to create a whole new market for content. What if, for example, Google -- with their newly purchased subsidiary YouTube -- were to link up with Apple and iTV and provide video clips for the device? That could be huge. Short clips of content are likely to be much more popular than taking hours to download entire films, and video on a large television screen is much more convenient than watching them on computer screens.

We haven't even talked about interactivity, games, or other features. Imagine Tiger's Widgets running on iTV: live weather, news, sports scores, stock tickers, and more.

All this means that iTV represents a potential new platform for Apple. With the rumored iPhone, that would be two new platforms in 2007. If those are successful, it could make Apple the most important player in digital content and communications.

Conclusions
This is a fantastic time for Apple. Everything's going right so far. The Zune is a flop, the iPhone's already a hit before it's even been announced, and people are talking about iTV.

But the competition is just starting. Apple's going to be attacked on multiple fronts. With new products coming out, will Apple's attention be too divided to fight back properly?

Apple hasn't been in a monopoly position in decades, and never with such a majority. If Apple's not careful, the iPod could become the product people love to hate simply because it's so successful. Can Apple handle success?

Most of us think success is easy -- just open the bank account and let the dough roll in -- but success can be fleeting. If Apple doesn't manage things perfectly, there's the risk that others will steal momentum away from Apple. So far no one's showing any signs of doing that, but 2007 could be another story.

Fortunately Apple seems to be taking the threats against it seriously. The company's decisions so far have been spot on, and I hope that continues. Here's to next year and more Apple innovation!

macopinion@designwrite.com