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Note To Apple: Proprietary Is Good
NEW YORK – Is Apple COmputer shooting itself in the foot by sticking to its own closed digital music format? It's possible, but it's important to consider two multi-billion industries that have thrived despite their proprietary technologies.
One is printer cartridges, and the other is videogames.
Ink and toner cartridges, which can cost up to $60 each, are enormously profitable. In fact, some PC companies give away low-end printers because they know they can more than make up for it in cartridge sales. Hewlett-Packard, the market leader in printers, pulled down $2.2 billion in earnings, before taxes, through the first six months of fiscal 2004, ended in May; $1.9 billion of which came from its imaging and printing division which includes consumables.
Printer makers like HP and Lexmark International have no incentive to make their cartridges interoperable. If they did, competition would develop, and prices would fall. Plus, it would be extraordinarily expensive for them to do so anyway, considering the vast sums each spends to develop intellectual property in the market. HP Chairman Carly Fiorina is fond of telling reporters how much intellectual property is wrapped up in the act of shooting a single drop of ink from a cartridge onto a piece of paper.
If buyers want cheaper cartridge alternatives, the only options are to buy refurbished units either from the companies themselves–some stores sell these–or buy refilled cartridges from one of the many no-name companies that sell them. The purchase price of a printer is a fraction of what a buyer will spend to keep it running over its life. Still, the high prices haven't deterred growth. So attractive is the business that Dell got into the market last year. Chairman Michael Dell has said that he regrets not jumping in much sooner.
It's the same story in the videogame industry. Game developers must write games for each platform, the most popular being Microsoft's Xbox and Sony's PlayStation 2. Games typically retail for about $50. The game market continues to grow despite game prices and the fact that a hot new title may not be available for every videogame console. Smaller game developers have to choose wisely. Most can only afford to write games for the platform which gives them maximum exposure. Larger players like Electronic Arts and Take Two Interactive typically write for multiple platforms.
Contrast that with the PC industry. Standards, which created a way for a single software application to run on any vendor's system, are a primary reason why the PC industry succeeded. No such standards exist in the gaming world. "This is a prime example of the counterargument" to closed solutions, says David Card, an analyst at Jupiter Media.
In a prepared release, Apple today said that it was "stunned" by RealNetwork's move to allow people to buy and download songs from its competing music service, called Rhapsody, and upload them onto the iPod. Currently, iTunes is the only legal online music service that is compatible with the iPod. It is, however, possible to use the iPod to play songs from other illegal, or paid music services, but not without a tricky workaround. Apple said that Real's Harmony technology, which enables the transfer, will probably not work with the iPod when Apple updates its software.
Apple's closed platform–the iPod is the most popular player and iTunes the most popular paid service–isn't likely to stunt the growth of the digital music business, legal or illegal. Real's system, and Apple's hostile reaction to it, is probably just the beginning of what could turn out to be a long tussle.
Still, the whole point might be moot. According to Yankee Group analyst Michael Goodman, five billion songs will be downloaded this year, 4.7 billion of them illegally
* Post was edited: 2004-08-23 12:29:00
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