Monday, October 18, 2004

Apple sold as many iPods during the last quarter as it did during the product line's first 26 months of production. By my count, Apple has moved some 7.3 million iPods in the three years since its introduction.

It's clear how important the device has become to Apple's bottom line. In the fourth quarter of 2002, the first quarter during which Apple broke out iPod sales from the rest of its product lines, sales of the player accounted for only 3.67% of sales. Two years later, it accounts for nearly 23% of sales.

Apple now makes more from its top line from iPod sales than from any single line of its computers. By revenue, the PowerBook notebook line is Apple's second most important product, accounting for $419 million, or just less than 18%, of sales for the quarter.

Now don't get me wrong. I love the iPod. Two of those 7.3 million units are mine. But as much of a success as it has been for Apple, the iPod could also turn out to be an Achilles heel.

Take the iPod business away from Apple, and what's left? A company that sold 3.3 million computers in its fiscal 2004. That's less than 2% of the 176.5 million computers that market research firm IDC forecasts will be sold this calendar year. Apple's unit sales have improved a paltry 7% since 2002.

How could such a strong offering as the combination of the iPod and iTunes Music Store turn out to be a weakness? First, Apple is the big fish in a small but growing pond. IDC reckons 12.5 million MP3 players were sold in 2003.

Compare that to the Consumer Electronics Association's estimate that consumers bought more than 23 million devices it classifies as "portable headset audio" in 2003--that's portable tape players, personal CD players and radios combined. Sales for these older personal audio devices peaked in 2001 at 38 million, more than three times the unit sales of MP3 players last year, according to CEA data. That gives you a fair idea of how far the iPod and similar devices have to go before they become the consumer force that many already assume they are.

What might spoil Apple's party? A digital music standard format that isn't of Apple's choosing. The record labels are starting to make noise about wanting a single digital audio format and a unified digital rights management (DRM) scheme for all vendors.

Apple's continued insistence at sticking with proprietary formats--and locking others out from its technology--in time may start to look misguided. It likes the Advanced Audio Codec for audio and has its own DRM technology, called FairPlay, which it refuses to share with other companies.

Microsoft, for its part, has a popular audio format in Windows Media, and it has proved willing to license its DRM technology, known as Janus. Janus technology is central to the "plays for sure" promise Microsoft unveiled earlier this week. Buy a song from any service that supports Janus, and it will play on any hardware made by a Janus licensee.

I've heard this story before. I didn't like how it turned out the first time.