Living Economics

Tuned out
The popularity of iPods locks in customer loyalty to the closed iPod-iTunes portable music playing system.

If you did not know there are 32 million seconds in a year, now you should know thanks to the number of iPods sold in 2005. The 32 million iPods sold last year amounts to 1 every second (Santilli) and represented 72% of the portable music players sold in 2005 (Associated Press).

Piggybacked on the iPods were one billion songs downloaded from the iTunes Music Store since the inception of the player in 2003 (Associated Press). And the accessories market is a 1 billion dollar a year business (Santilli).

The iPods craze is no mean feat for a computer company struggling to gain traction in a market dominated by the Windows platform. The sales of iPods accounted for more than one third of the Apple’s total revenue in 2005. The success of the iPods contrasts sharply with the failure of the Macintosh computers. Both the Mac computers and the iPods are built on closed proprietary systems. Apple made both the hardware and the operating system for its Mac computers trying to lock in all the revenues instead of licensing the hardware to third parties. But by keeping its hardware expensive using mostly proprietary components, it never sold enough computers to make its OS dominant. Apple ended up with 3.2% of the US desktop market (Fortune).

Apple closed the iPods system by designing them to play only iTunes downloaded songs using the proprietary FairPlay encryption plugin. This copy protection of iTunes downloaded songs persuaded the record labels to lower the prices of their songs. Such software-enforced iPod compatibility of iTunes songs thus uses low-priced songs to expand the sale of the expensive iPod players. By refusing to license FairPlay to other music stores, Apple essentially makes it difficult for rivals to gain a foothold in the lucrative portable MP3 music player market. First, current iPod owners would not be able to easily play their iTunes songs if they switch to rival players. Second, iTunes has bigger online music catalog by virtue of the iPod dominance. Third, there are more songs to be shared among the large base of iPod users. Because of these lock-in effects, the iPod market has become a virtuous circle once the sale of the players took off. The iPod’s closed system has brought about dual streams of revenue from the sale of players and songs.

But some dark clouds are on the horizon. The big record labels want to be able to charge more for new releases instead of uniform pricing for all songs and albums when their current contracts with Apple expire in April 2006 (Economist. 3/11/2006). And an antitrust bill to force Apple to license its FairPlay copy protection software to rivals has already been passed by the French lower house (BBC News).

And there is always the threat from new technology which might make the MP3 music standard obsolete.

  • Associated Press. 3/19/2006. "New French bill isn’t music to Apple’s ears."
  • BBC News. 3/21/2006. "French MPs vote to open up iTunes."
  • The Economist. 3/11/2006. "Your fix or mine?"
  • The Economist. 7/8/2006. "Apples are not the only fruit."
  • Fortune. 3/20/2006. "The player."
  • Santilli, N. "One iPod sold every second." [updated 2/3/2006; cited 3/21/2006].
  • Wikipedia. "Fair Play." [cited 3/21/2006].
  • WSJ. 7/5/2006. "Digital Music: A Primer."
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