Friday, May 06, 2005

[Mac OS X] 10.4 gives us a peek at another evolution of iTunes, which is the inevitable expansion of the system to carry additional audio file formats. Looking at the unused iTunes icons that shipped with your new version of 10.4, you'll notice icons for currently-not-supported ogg vorbis and Windows Media Audio (wma), as well as several others including a variety of video formats, too.

With this new information we can make a pretty good guess about the evolution of both iTunes and iPod. When Apple feels that the success of iTunes is absolutely assured, which will be shortly, they'll address the user complaint that iPod only supports AAC and MP3 audio by adding these additional formats, leading to increased iPod sales. And at the same time, the video icons strongly suggest that Apple will also have a video iPod this year.

Apple's own downward price pressure on portable media players gives us another element of the probable iPod strategy that hearkens back to my question of a few weeks ago whether iPod is the razor or the blade. Ultimately, what Apple wants to do is make its money through iTunes, where the profit margins are better in the long term and the system is easily scalable. It was necessary to create the iPod platform to make this happen. But downward price pressures will eventually hurt iPod profit margins and affect Apple's stock price, so the trick is to know when to switch the business from being a mix of hardware and software to one that is software-only. That switch, which I believe to be inevitable, will happen shortly after Apple begins to license iPod clones.

But Steve Jobs HATES clones, doesn't he? He killed the Mac clones back in the late 90s.

What Steve hates is hardware competition, but iPod clones will only happen at a point when Apple has decided to get out of the business of making its own iPods. Think about it. If Apple licensed iPod technology, the company would receive from its OEMs a per-CPU license fee of anywhere from $5 to $25 depending on how smooth Steve is as a salesman and how desperate the would-be OEMs are for that license. As Apple's profit drops on each iPod it makes, eventually the per-CPU figure will approach what Apple might receive from licensees. At that moment it makes more sense for Apple to license clones than it does to make more iPods. Licensing clones AT THE RIGHT TIME would lead to huge clone sales, effectively killing any significant iTunes competitor. And in the long run, iTunes is where the money is.