Dell, Creative, and the iPod: Sour grapes?

by Alan Graham

Whenever someone is losing or feeling threatened, a common response is to talk trash about the opponent, often referred to as "saving face." It is a desperate tactic meant to deflect attention from your failures, by pointing out any flaw you can find in the competition. Enter Dell and Creative. They are losing the digital music battle and find themselves having to explain their failures in the space by doing one simple act of desperation, attacking the iPod.

Let's first take a look at a current statement by the CEO of Dell, Kevin Rollins (c|net interview):

"It’s interesting the iPod has been out for three years and it’s only this past year it’s become a raging success. Well those things that become fads rage and then they drop off. When I was growing up there was a product made by Sony called the Sony Walkman – a rage, everyone had to have one. Well you don’t hear about the Walkman anymore. I believe that one product wonders come and go. You have to have sustainable business models, sustainable strategy…[The Mac mini] might take some here and there, but Apple’s market share in the global computer business has really shrunk pretty far. Where they’ve been making success recently is not in the computer business, but in the iPod music business. So this might be an interesting new product but I’m not really believing this is going to turn the industry upside down."

It was in 1979 that Sony proclaimed, "Remember the Walkman," and that fad, Mr. Rollins, had a shelf life of well over 15 years. It ushered in a new age of portable music and only dissipated due to the demand for portable CD players, and now the new age of file based players. The world Walkman entered the global lexicon and was often as common a phrase as that fad, the portable facial nose waste receptacle...the kleenex.

Dell, a company that apparently doesn't do anything based on fads, was full of bravado when they released their online music store and media player. Expecting to rule the marketplace as they did with their PC mentality that "price is everything," they just couldn't seem to capture any decent market share, and in a sad show of desperation, even offered iPod users the option to trade their device in towards the purchase of a new Dell DJ unit. It seems odd to me that a company so unimpressed by the success of Apple and the iPod, would go to such trouble to actually "lose" money on the deal. Consider the fact that Dell's unit at the time sold for $100 less ($199) than the iPod ($299), and they were offering $100 rebate with your iPod trade in. So, Mr. Rollins, if you are so convinced that this is all a fad, then I suggest you explain to your shareholders why you would dedicate so many resources towards a product that you know won't help your bottom line. Shareholders aren't big on fads.

Mr, Rollins, it seems, is saving face. How else do you explain to the media, and your shareholders that the mighty computing behemoth is losing to a computer company whose market share is just a fraction of their global dominance?

Let's look at another interesting statement from Kevin (same interview):

"Apple's created a niche. If you look at the grand scheme of things, this quarter we are supposed to achieve something like $13.5 billion in revenue. Apple's in the $2.4 billion (region), so the size and scale is not even in the same league."

Apple, whose market share in the computing world almost doesn't even register, returns a better margin on their products with a smaller share of the market. This proves that Dell's strategy of "giving it away" might just be a fad and not a long term sustainable strategy. Apple users have always known they pay an upfront premium, and this mystified other computer manufacturers.

My belief has always been that when you've brought the PCs value down to a disposable level, that the only way to continue to sell new machines and survive such narrow margins, is through innovation. It seems that people are no longer just looking for the best deal, they are also looking for something which captures the imagination. The iPod has continued to show the world why Mac users continue to come back again and again. Dell on the other hand is going to face some serious problems once they've finally reached the corner they painted the computing industry into. And with China entering the computing business (through the purchase of IBM's PC division), I think we'll be seeing an end to Dell's dominance in a short time.

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And then we have Mr. Sim Wong Hoo, CEO of Creative who said of the iPod Shuffle:

“Actually, to me it’s a big let-down: we’re expecting a good fight but they’re coming out with something that’s five generations older. It’s our first generation MuVo One product feature, without display, just have a (shuffle feature). We had that — that’s a four-year-old product.

“So I think the whole industry will just laugh at it, because the flash people — it’s worse than the cheapest Chinese player. Even the cheap, cheap Chinese brand today has display and has FM. They don’t have this kind of thing, and they expect to come out with a fight; I think it’s a non-starter to begin with.”

Creative who? Are they still around?

This statement reminds me of the Iraqi propaganda minister proclaiming there there were no American troops in Iraq. It's downright amusing. Mr. Hoo, Apple doesn't have to come out with a fight, they are winning. You have to come out with the fight, and so far you've failed to make any inroads into Apple's market share since you proclaimed war on them back in November of 2004.

"I'm planning to spend some serious money -- I intend to out-market everyone,"
-Sim
.

That plan includes spending a whopping $100 million targeted squarely at Apple. Here's where this falls short. Since Apple is winning the battle, they don't have to spend a single penny to distinguish themselves against any other music player. In fact, I'm not sure I've ever seen an Apple ad for the iPod that was anything but a cultural reference as to how cool this thing is. They are selling mountains of these units based on pure lust and word of mouth. And why this isn't a fad is simple. People who buy iPods quickly realize that they work and they work really well. There's no buyers remorse, as there is with many other products that are cultural fads. In this world of constant noise and crowded sidewalks, the iPod gives us the illusion of personal space. Their advertising captures that spirit. Creative's problem is that they have to convince the world they are better than Apple, and so far they don't really have the product or identity to do it yet.

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Apple's Problem

Don't get me wrong, Apple doesn't have this all sewn up. Apple has issues they are going to have to address at some point. I'd like to see them do this before their market share starts to decline. The simple fact that the Shuffle doesn't work with all AAC formats, and that you actually have to re-encode your music to their format, is absurd. While Sony recently proclaimed that they made a mistake in locking consumers into their own proprietary music formats, and thus allowing the market to get away from them, Apple seems content to ignore this lesson and plod forward. And why not, their proprietary format hasn't driven consumers away from their platform...but this is only because consumers don't yet know how it will affect them down the road.

For example, the new Sonos digital music system is the product I would expect from Apple. Truly brilliant in execution and engineering, yet it can't play my iTunes music store files, but I'm getting one anyway. Thus the ever present dilemma occurs...do I break Apple's DRM simply so I can play my own music, thus potentially turning a law abiding citizen into a criminal? (For gods sake will the Supreme Court rule on this stuff (again) so we can stop these people before we get innovated out of all of our fair use rights?)

As new products and services arise, more and more people will realize that they don't want to be locked to just one specific player or platform. I personally don't think that the cost of music is going to be the major deciding factor over where people get their files (you can only go so low), but it will in fact be new and diverse hardware and software products that will direct this. People are going to want devices like the Sonos and will quickly decide that Apple's hold on the music you buy from them is detrimental to your enjoyment of it. They will start looking to buy elsewhere in a very short time.

Apple needs to do two things to remain the leader in this space. First, we need to see iTunes updates and new features more often. They are few and far between. Second, Apple needs to realize that their margins on players is much better than their margin on music, so simply open up their DRM format to other companies. iTunes and the iTunes Music Store can remain the de facto source for media of all types if they simply continue to do what they do best...innovate. People bought the iPod with no thought about any proprietary format, they simply wanted one.

Take a lesson from your own play book: if you build the best experience, people will come, regardless of price. I know from my own experience that I keep coming back to Apple's store, not because they lock me in, but because it's design and execution are unmatched.

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Well regardless of who eventually comes out on top in this fight for dominance, the one thing that is true in this situation is that sour grapes do make the best whine.



8 Comments

deskpro
2005-01-21 15:15:43
Open up itunes? Unlikely.
Second, Apple needs to realize that their margins on players is much better than their margin on music, so simply open up their DRM format to other companies.


This is exactly why they won't open up itunes. Itunes, in the short term at least, is a promotional tool and an added feature designed to drive the sale of ipods - which are high margin.


Until itunes starts making serious profit on its own, I doubt you will see it opening up to other formats until it is forced to. This can happen a number of ways:


a) It is legally forced to
b) Decryption tools become so ubiqutos that there is no point encrypting
c) Other music stores become popular - selling mp3 files and consumers realise they can use those files better then apples.


B, won't happen - Apple can continually change the encrpytion. While decrypters might keep up they will not always work - and this is hardly mass market.
C, might happen but will require hugh spending by other music stores to get across their brand. Apple consumers might still not care if they can't see themselves using an other product


so perhaps A. Maybe.

agraham999
2005-01-21 15:27:20
Re: Open up itunes? Unlikely.
Well...here's the deal...people will leave the platform once they choose to expand what role their digital lives will take. So Apple has a choice...either open up the DRM so other companies can incorporate it...or don't. If they don't...people like me will either be forced to break the DRM so I can use it thoughout my home on non Apple gear...or I will simply stop buying music from Apple.


A point in Apples column is that their DRM is quite flexible and pretty good...but only within their platform. There is no reason they shouldn't license this to other companies...in the short term it makes sense in that it is good for their bottom line...that is until people start to explore other solutions and decide Apple doesn't fit.


I firmly believe Apple knows this and is simply using what they have to their advantage while they secure a firm grasp on the market...eventually they will have to bend...but I hope it is before they break.

benbangert
2005-01-21 19:07:40
Re: Open up itunes? Unlikely.
Ummm, so you think people want to expand their digital lives by getting Sonos? Did you look at that website? Who in their right mind spends $499 on a music box for every room of their house, then another $399 just to tell it what to play??? That's insane.


Gee, you could put a Mac mini in each room of the house for the same price....but back to the house. Those systems have been around for a long time, and they've never sold very well, and I think they never will.


You want to listen, to your music. You also likely don't have speakers all over the place, its a pain. So you put on the iPod, and you can drift from room to room with continuous music. Why would you want to destroy that by having to keep changing what speakers the music is coming from as you walk around? It just makes no sense.


People's digital lives seem to have gone to portability. Apple's iPod as you cited, owns that market. Why would they want to go backwards, to something like Sonos?


I think its way too early to tell what Apple will or won't need to do regarding their DRM. The A) scenario will occur if Apple completely destroys the competition, I can see a monopoly lawsuit against them going through forcing them to license the DRM Until then, who knows.

agraham999
2005-01-21 19:52:22
Re: Open up itunes? Unlikely.
If only you knew what you were talking about it would be much easier to respond. First of all you pay $1200 and you get two sonus boxes and a remote. The boxes will give you audio in two locations...like upstairs and downstairs.


Second, the Sonos doesn't require a computer...and can find music on a network of up to 16 different sources.


Third, the Sonus can play the exact synced track in every room at the same time or multiple tracks in multiple rooms. Can't do that with an express...in fact you can only send one track top one express from one computer...the Sonos can send multiple tracks to multiple units.


Go back...research the Sonos in detail before you remark on something you clearly aren't very informed on. The Sonos is far superior to iTunes...and yet also compliments it.

jbelkin800
2005-01-21 20:59:08
KEY DIFFERENCE
The key difference is that the Sony players automatically/insisted on converting any file you wanted to load into the player to ATRAC 3 which is NOT playable on any other non Sony player. And even though mp3 have probably a 97% marketshare (legal & illegal), Sony insisted on ignoring the consumer.


The ipod loads 7 other formats and unlike the ATRAC3 which was a one-way conversion only - any AAC file can be burned to a CD and then reloaded - even lossless if you prefer. The Sony was/is a diesel.


The ipod plays AAC you encoded legally just fine - however if you buy poorly cracked AAC tracks elsewhere -well, you get what you pay for, like buying a sweater at WalMart and trying to return it to Nieman Marcus - good luck with that.

davidwb
2005-01-22 07:09:55
the DRM fallacy
The situation with Sonos illustrates the fallacy of DRM. No, the Sonos doesn't interest me and neither does Apple's wireless music solution. But that isn't the point.


DRM encoded music is non-standard - the standard today is MP3 with unencrypted AAC gaining support. As long as Apple doesn't license Fairplay only solutions from Apple will work. This means my TiVo can't play the iTunes music I bought. Nor can the Sonos. And it doesn't end there. Soon Sony will be selling CDs in the US that aren't really CDs. Will we be able to play that music on our iPods?


DRM makes unprotected music more valuable that the legitimate product. Protected music (so called) limits what I can do with my purchased music while those who get the music illegally have no such limits. As long as this situation exists the illegal product has greater value than the legal product. This has the potential to drive more of us to act illegally.


Ironic ain't it? Music companies take steps meant to force us to act in a legal fashion and those steps actually drive the illegal market.

knowitmost
2005-01-23 22:12:15
Dominent subversion
Apple knows exactly what they are doing.


You may not remember it, but the whole reason that Apple lost the PC war to WinTel was becuase they didn't realize that too much of the world liked the "old way" -- that was the CLI interface of the Apple II, not the UI that would eventually win, GUI.


They sorta made the same mistake with Newton, but Mr Jobs pulled the plug on it before it took down the company the same path again -- if you ask anyone why Palm is down it is NOT because of any flaw with Palm OS, or even pressure from WinCE devices, it that people like the "old ways" better. In Palm's case that means folks who need/want real applications much prefer a real laptop (especially now that Centrino powered laptops with 12" screens are far more versatile than any PDA and nearly as transportable; if you just need a contact list than a cell phone is now all the power you need. As for "media centric PDAs" just look to Sony for the right answer (which thet borrowed from the Newton).


It seems that the form that digital music is taking is pretty much "personal music". This is no doubt some what shaped by the record companies legal policies, but it also a function of the "old ways". The Walkman did create this kind of experience, first with prerecorded tapes, then with the "mix tape". iTunes effectively captures the essential spirit of "mix tapes". While many vocal critics of FairPlay believe that "file sharing" is the essence of digital music, the success of the iTunes Store suggest otherwise.


In terms of listening to music at home the "old way" has long been albums, whether vinyl or CDs. Certainly when having a party it is very convenient to have several albums play consectutively. Multi-disc changers (which also exist for vinyl) served this function.


knowitmost
2005-01-24 06:19:12
Dominent subversion cont'd
Devices such as the Roku, the Sonos, and others are too new to really classify. Some seem very "low end" barely replacing the "wires to speakers" of earlier failed wireless speakers, while other are much more ambitious with interfaces to integrate the web with multiple audio & video sources. While falling into the broad category of home entertainment, devices that try to be "everything to everyone" have not fared well in the marketplace. TVs with built-in VCRs or DVD, video cameras that also take stills, recipe calculators that also connect to the internet -- all great on paper, flops in the marketplace.


Look at what Apple has introduced in the iPod Shuffle: the MINIMAL music player -- no radio, no display, no memo recorder. Similarly the Mac mini is an offering so minimal it is argueably 'incomplete', you must "bring your own keyboard, display & mouse". Apple can get away with this becuase it is all about being "different", not so radically different that it outside the mainstream, but clearly not following the 'rules' set by others that you must give away POS monitors and input devices to lure the rubes or throw features at an MP3 player to be all things to all buyers.


Apple cannot maintain their industry leading margins by doing what their competitors do, so they play a different game.


Yes, FairPlay is "closed" to competitors, but through superior marketing and a reasonable acknowledgement of the common ground shared by the majority of consumers & content providers Apple has a DRM system that is "different enough".


Apple's "old way" in DRM is people DO PAY for content, they can use it in there cars, on their computer, with a reasonable number of portable devices. A "system" that mimics the functionality of the original Walkman -- and has Sony kicking itself for not realizing how they "could've been a contenda..."



Apple need not open up FairPlay to anyone. To do so would be akin to MSFT "opening up" Windows OS -- it would break the very thing that consumers & developers/content providers have come to expect from the "platfrom" -- a systme that ensures 'devices' (WinTel computers or iPod player) will seamless work with 'programming' (software or music).


Perhaps there will be a point in time when "opensource" solutions displace these dominent models. That is why MSFT's must explore & fight aginst alternatives like Linux. Apple has the luxury of claiming that the iPod was never really its "core" business and will continue to evolve the Mac computer & OS.


In the coming decades, when iTunes is no longer the sole leader of digital music, Apple will have another offering, and if its past is an indicaction, it will be even more successful...