Mac Musings

Why iTunes and the iPod Will Continue to Dominate the Market

Daniel Knight - 2004.12.22

Every comparison of the iPod's success to Apple's failure to dominate the personal computing market is flawed.

There, I said it. Now it's time for all those pundits to take note of the vast differences between the products and the markets. Put simply, Apple can't repeat the mistakes of the past because the iPod situation is nothing like the Mac situation.

Fact 1: Market Share

Whether in the heyday of the Apple II or the peak of the Mac's popularity, Apple has never dominated the personal computer market. Peak market share was 22% - one computer in six - in 1984, and that included both Macs and Apple II models (see Apple Has Always Been a Niche Player).

Radio Shack dominated early with the TRS-80, which held 2/3 of the market in 1977-78. Commodore hit 40% in 1983, but the IBM PC and its clones held a majority of the market in 1986, and they have dominated ever since.

Apple has always been a significant player in the PC industry, but it has never been the dominant player.

In the digital music market, Apple dominates. A recent article on Cnet indicates that the iPod accounts for 92% of all hard drive-based music player sales. In fact, Apple has driven that market so powerfully that a host of other companies are trying to ride their coattails with iPod wannabes. (HP was smart enough to just buy and market Apple's iPod.)

Also riding the iPod's coattails are flash-based players, which offer less capacity at a lower price. Thanks to the iPod, with 4 GB and higher capacity, hard drive music players dominate the market, but as flash memory becomes more affordable, digital music players with decent capacity are also seeing a surge in demand.

You can just bet that the rumored "iPod flash" will sell like hot cakes, probably eclipsing all other brands just as the hard drive iPod eclipsed all its competitors.

But whatever happens, the fact remains that for the first time in its history, Apple absolutely dominates a market - and at about the same level the Microsoft Windows dominates the PC market.

Fact 2: Standards

The early personal computing world was incredibly diverse. Each brand chose a chip and created something unique. It wasn't until CP/M and (later) MS-DOS that hardware started to standardize so it would work with an operating system.

Speaking of which, the IBM PC was built using off-the-shelf components whenever possible, making it easy for others to copy the design and create the clone market that made Michael Dell and Bill Gates rich. IBM created a de facto standard, and it remains with us to this day.

Some standards are created in the boardroom - FireWire, USB, etc. - while others happen in the real world when one solution dominates the market. Despite the fact that Windows PCs can run Windows Media Player (so can Macs, for that matter), they can also run iTunes and QuickTime, so there's no obstacle to Windows users adopting iTunes and the iPod for their digital music collections.

The iPod, with iTunes, has become the de facto standard.

Fact 3: iTunes Music Store

Here's where so many so-called experts really miss the boat. They think that Windows Media Player and Microsoft's digital rights management (DRM) will win the day because so many services support it. This is in comparison to the "monolithic" iTunes Music Store, which only works with iTunes, which is the only software that supports the iPod.

It's the same kind of closed system Microsoft created with Windows, Word, Excel, PowerPoint, Access, and Internet Explorer - among other products - to grow and maintain their market share. Mac OS X, Linux, Safari, Firefox, Keynote, and other products may chip away at the monolith, but it isn't getting much smaller.

The same thing is happening with digital music. The iPod dominates music player sales. The iTunes Music Store dominates music sales. Consumers are happy, and the only ones complaining are companies that can't figure out how to compete because Apple owns the whole iPod/iTunes/Music Store triad.

Fact 4: Selling Macs, Making Money

One of the original dreams was that the iPod would help sell Macs, and there are indications that it's beginning to happen. Macintosh sales have been relatively stagnant at about 3 million units per year since 1997 (with an exceptional 4.5 million unit year in 2001). Analysts expect Apple to see an increase in unit sales this year, possibly reaching the 4 million mark.

Cause and effect? It's hard to say. There are so many reasons to choose a Mac that it would be hard to say that it's the iPod that's behind all of it. But it would also be foolish to say that the iPod isn't helping people lean toward the Apple brand when buying a new computer.

The iPod is about Apple making money through iPod sales and music sales. It works.

It's also about growing Apple's mind share, and it's working there, too. Windows users are downloading and using Apple's iTunes, whether with an iPod or as a great free program for managing their digital music libraries. They're seeing the simplicity and integration of good Apple software.

iPod owners are seeing the simplicity and integration of good Apple hardware, and that might be enough to give a little more weight to the Macintosh when it comes time to buy a new computer.

Once they look at the Mac, they discover that it really is a simple, integrated computing solution. It's stable. It runs Office. It handles the Web and email with aplomb. Safari blocks popup ads. Mail learns what spam looks like. iTunes makes it easy to rip, buy, listen to, and burn your music. iPhoto and iMovie make it easy to work with digital photos and videos.

The list goes on - and then there are the things that Mac doesn't do. Macs don't run adware or spyware. Macs don't get viruses (so far). Macs don't get hijacked and turned into spambot mail servers.

Continued iPod Dominance

Whether the iPod sells one more Macintosh computer or not, the fact remains that Apple continues to make a profit selling 3 million computers a year. Those profits are boosted through iPod and iTunes sales, so Apple now has two very steady income streams.

The iPod dominates the digital music market like VHS dominated VCRs, like Windows dominates PCs, like gasoline-burning vehicles dominate our roads. Short of Microsoft giving away music and players, non-iPod music players are going to be the Beta recorders, non-Windows PCs, and alternative fuel vehicles of the consumer electronics world.

If the pundits want to compare the iPod to something in the PC world, they should be comparing it to the Windows monolith, not Apple's Macintosh division. Then they might understand the uphill battle Microsoft and others will have carving out an existence against the dominant standard.

Apple owns the market, and I don't see any way that's going to change in the years ahead.