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February 8, 2006

Fighting Over A Fifth Of The Market

I've been super-heads-down at work this week (I'll get in to that in a different post), but I saw a couple of news items that I thought were pretty significant.

First, CNET reported on Monday that our good friends at Dell are exiting the market for hard-drive MP3 players:

Like other hardware makers, Dell has been unable to compete with Apple Computer's success in the MP3 player market. Several have tried--notably Sony, Samsung and Creative Labs--but none have hit on a combination of hardware and software as winning as Apple's wildly popular iPod and iTunes, said Richard Doherty, principal analyst at The Envisioneering Group.

Then today, the friendly folks at Napster posted their third-quarter numbers, losing $17M on $23.5M in revenue. (Oh, and they deny that they're for sale.)

These two stories are interrelated.

It's not exactly news that the iPod is the 800-lb. gorilla of the portable music player market. Depending on whose numbers you believe (I'm going with The Register from last month), the iPod has roughly 80% share:

Jobs claimed 42m iPods have been sold, with 32m players shipped during 2005 alone and 14m during the fourth quarter of 2005 - the magic holiday shopping season for retailers and technology companies. iTunes, meanwhile, has sold 850m songs at a rate of three million songs each day, giving Apple 83 per cent market share.

Interestingly, these numbers have held constant - or even gone up - in the last two years. Back in October of '04, Bloomberg was reporting that the iPod was over 80% as well:

The iPod had an 82 percent share of the market in U.S. retail stores in the 12 months ended in August, up from 64 percent in the same period a year earlier, and 33 percent two years ago, according to Port Washington, New York-based NPD Group Inc.

So why are these articles about Dell and Napster significant? Because Dell is only the beginning. I fully expect a few other firms to exit the MP3 market here in the next few months. Why? There's no money in it.

Look, Apple's got 80% of the market. For every $1.00 spent on MP3 players, Apple gets $0.80. That remaining $0.20 is split up between ... well, between everyone else. Creative? Dell? Sony? Brand X? They're all competing for that fifth of the market. And it's not exactly cheap to play in the space; they're all spending money for advertising, for shelf space, for sales commissions, for R&D, for inventory, for supply chain management, for technical support. And at the end of the day, $0.20 just isn't enough to keep the lights on. Dell, being a well-managed company, saw the handwriting on the wall and decided to get the hell out. Anyone else dabbling in the market is sure to join them.

(And poor Napster, bless their heart, is the canary in the coalmine - they're only able to sell their wares to that remaining 20%. Is it any wonder that they're having a hard time making a go of it?)

I have a bet (stakes: a nice dinner) with one of my coworkers that Apple's iPod share will actually be higher two years from now (or, more properly, two years from when we made the bet, which would put it at October 2007). And these news articles are telling me that I'm going to win.

We are watching a the birth of an industry standard. It's really kind of amazing, like being there when Windows 3.0 shipped. At some point, it's all over but the cryin'. Are we there? You be the judge.

This last Christmas, Apple posted blow-'em-out-of-the-water sales results. These are the kinds of share numbers that executives fantasize about - numbers where the Market Speaks, and Blesses Thy Product. Here, it's obvious that the market has selected the iPod/iTunes combination as the dominant design in the music space, much as Windows is in operating systems, or the internal combustion engine is with automobiles. With this kind of share (sustained over two years!) it's just not worth the economic risk to Dell or Samsung or Brand X to try to catch Apple. To win, Dell or whoever will have to dramatically change the game. And, frankly, when you're stuck scrapping for that leftover twenty cents on the dollar, you don't have a lot of funds left over for game-changing.

Of course, while Dell is getting out and Napster is trying to figure out how to lose less money, things are damn good in Cupertino. Apple is enjoying the kind of glow that the Blessed Company always enjoys - strong sales, lots of partners, money for everybody. The iTunes Music Store is about to sell its billionth song. What many people miss about the iTMS is that music is software. Music may not be terribly "sticky" in the way that, say, Office is, but when you add music videos, TV shows, and eventually movies -- well, the world starts to get more interesting. And that means for every dollar iTMS sells, it's just ... that ... much ... more ... resistance to switching to a different product when that customer goes to buy a new music player in two years.

Furthermore, the rest of the world has aligned around the iPod standard as well. The New York Times did an article on the size of the "iPod Ecosystem":

...making add-ons for the iPod is a $1 billion business. Does that sound like hyperbole? Consider this. Last year, Apple sold 32 million iPods, or one every second. But for every $3 spent on an iPod, at least $1 is spent on an accessory, estimates Steve Baker, an analyst for the NPD Group, a research firm. That works out to three or four additional purchases per iPod.

Most major car manufacturers now sell "iPod connection kits" that use Apple's (proprietary) iPod dock connector to talk to the music in your iPod. That dock connector, by the way, is something that's not duplicable by competitors without incurring the Holy Wrath Of Steve (and His attorneys).

Even people who have held off coming to the party are acknowledging that, in truth, it's not worth holding out:

Why did I jump to the Apple music ship? Simply put, I'm tired of waiting for Microsoft and its partners to get their act together. iTunes simply has features that the competition can't match, and it doesn't look like they're going to catch up anytime soon. It's got the best overall interface, the best-designed music store, and some easy-to-use features that I really care about.

IBM wasn't the first to make a PC, and their PC wasn't even terribly innovative - it was standard parts, but with two twists. First, IBM owned the intellectual property around its BIOS, which is how the parts of the computer talked to the PC's software. And second, it had a new operating system inside that it'd licensed from a small little firm in Redmond. The intellectual property in the BIOS prevented anyone from copying the IBM design and stealing its sales - at least for a while. And the licensed operating system, being blessed by IBM (and its high-volume sales) became a new industry standard. We all know how that turned out.

Well, today, Apple's got the dock connector as its BIOS and the FairPlay technology (think: DOS) to keep its music (read: software) compatible with its platform.

So yeah, it's 1981 all over again. The difference is that reverse-engineering the dock connector is much harder than it was in 1981 (thanks to the DMCA), and I'm pretty sure Apple managed to get an exclusive license for FairPlay (unlike IBM, who didn't bother to demand that with DOS).

Any bets on who's next to exit the non-iPod music market? My money's on Samsung: they do a lot of business with Apple (memory chips for the Nano), and they're diversified enough that they can get out without any fuss. Some Samsung exec is going to realize that the MP3-player money could be put to something more productive - like CDs or a money market account.

Creative, however, is probably stuck. Good luck, guys.

Amazing.

UPDATE, November 10, 2006: One or more of the original hyperlinks on this page expired, and has been dereferenced. The hyperlinked text is now underlined.

Posted by Gavin Shearer at February 8, 2006 10:17 PM. Posted to Apple.

Comments

Posted by: purple at February 16, 2006 11:32 AM

Posted by: bill at March 22, 2006 12:08 PM

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