Saturday, June 04, 2005

…With IPod Woes, Will Apple Rot?

Being an early adopter of the iPod, I can speak first-hand about Apple’s digital audio player. The iPod can be used to travel, in vehicles, and also as a backup to store pictures and other files. Apple got many things right, most notably the user interface. The UI is easy to learn, simple, and has fairly robust implementation. The Mini’s design is ideal for running and exercising. Apple has sold more than 15 million since late 2001. Although the iPod is a good product, it’s nowhere near perfect.

The most prominent issue is the batteries. The constant charging/discharging of an iPod eventually leads to poorer battery longevity and eventually failure. The batteries were not designed to be replaceable. Initially, Apple told consumers they would have to buy new iPods. In November 2003, Apple began offering a battery replacement service for $99. Class action lawsuits were filed in December, 2003. A proposed settlement, valued at $100 million, will apply to as many as 2 million iPods sold before May 2004. Apple had agreed to replace some iPods and give other consumers up to $50 in cash or credit on Apple purchases. The non-removable battery is a major flaw. If batteries fail, consumers weigh the hassle and cost of replacing the battery versus buying a new generation MP3 player.

Another issue is multiple computers and multiple iPods. What if you want to move music from one computer to another? Once CDs are recorded onto a hard drive it’s very cumbersome to transfer iTunes files to another computer. Third party products that facilitate the process have been blocked by updated versions of iTunes and iPod software. Users can’t copy from the iPod to a computer for Apple’s fear of copyright issues. Apple is not allowing customers to do things with the music that they have fair use rights to. This will eventually hurt Apple in the long-term.

The ultimate problem with iPods is that Apple appears to be executing an isolated strategy, which will erode market share when competitors release new generation products. They have not established any logical licensing agreements. If you want a hardware device to be standard, the software has to be in play. Apple probably realizes that the iPod isn’t unique beyond its design and thus can’t be protected as a standard. Apple has great innovations, but has no idea how to give them long-term legs. This weakness will become more apparent as firms begin releasing comparable products.

Apple is behaving just like they did with the Macintosh. Initial product and iterations are consumer friendly and enticing. Price hasn’t decreased, performance hasn’t increased, quality issues remain, users’ demands haven’t been met, the system has been kept closed and unlicensed and eventually Apple will be left with little market share and just a small, loyal following.

Competitors will soon be selling hard drive-based portable devices. Will any of them have the right combination of usability, style, and compact size to lure consumers away from the iPod? Apple has had a free ride because making a great music player is no secret. Vendors attempting to emulate the iPod say the best choices in 1.8-inch hard drives are from Toshiba (Apple’s orginal supplier) and Hitachi. To gain leverage in negotiating hard drive prices, some iPod competitors will size their cases to fit both. The difference is only a few tenths of an inch in each direction, but this could add up to a 20% increase in volume. Some manufacturers use 2.5-inch hard drives, making the players up to twice as big as the iPod. As hard drive MP3 player prices move down toward $200, the desirability of flash memory players may decrease, too. If you could get 350 hours of music for $200, would you pay $125 for 2 hours (128MB) of music?

Analysts have dismissed most of the issues related to the iPod. IPods now account for nearly one-third of Apple’s revenue, generating $1.01 billion in sales in the quarter ending Mar. 31. Piper Jaffray has maintained an “outperform” rating and $52 target price on Apple Computer, expecting the fiscal third quarter to outperform the second. The research firm raised the fiscal 2005 and 2006 EPS estimates on Apple to $1.32 and $1.48, respectively, from $1.27 and $1.38, citing indications of a strong launch for OS X Tiger.

Analysts believe in Apple’s stock performance in the long-run because Apple is a survivor. Even as its personal computer business lost market share, the company found a way to be relevant as a niche player. Even though its computer business is booming again thanks to iPod users migrating back to the Mac platform, that’s not the primary catalyst for faith in Apple. Apple is a company that personifies innovation. MP3 players and computers are commodities, for the most part, yet Apple has been able to make its products distinctive. While that also implies that Apple sometimes rests on its laurels when things are going well, it’s still an amazing company that will likely find future niches that are worth differentiating.

Jua Mitchell


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