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How HP invented the market for iPod resellers

Buying its own IP

Apple's iPod is the killer device of online music, and HP very well should have owned it.

Back in 1999, researchers at Compaq designed a 30 Gbyte portable music player that weighed 9.5 ounces, could fit in your pocket and had 10 hours of battery life. The Personal Jukebox - aka PJB - went on sale for more than $500, and Compaq received a handy patent for its work.

But the PJB is not all that interesting in and of itself. Plenty of companies were busy working on their own music players at the time. The demand for such devices was pretty clear, as consumers rushed to organize their music on PCs and wanted a way to carry the tunes around.

The PJB is interesting because Compaq was working on the product so early and because the company became part of HP in 2002.

Much of the HP/Compaq deal centered around the two companies linking their PC, server and storage operations. Make no mistake, the acquisition of Compaq was meant to bring HP as close as possible to rivaling IBM for big business deals. Furthering some weird Compaq music player project probably did not fall real high on the list of post-merger "things that need to get done."

Maybe it should have.

With Compaq on its side, HP found itself in the leadership position for non-Palm handheld devices with the iPaq. In addition, HP owned the highly-touted Chai software for small devices, had ties to the StrongArm processor, and ran fanciful promotions for its CoolTown vision of the connected home. Hell, HP still touts the CoolTown idea, even though its seems to have ignored its own marketing hype.

How is it that a company with a filthy rich consumer device division, a long history pushing innovation and portable patents on hand failed to create the iPod?

"We're proud of the fact that our focused innovation strategy - investing in technologies where we can lead and partnering for the rest - is paying off," said Shane Robison, executive vice president and chief strategy and technology officer at HP in a recent press release.

This boxed quotation, as in boxed wine, was used to tout HP's newly formed IP (Intellectual Property) licensing division. It also happens to be the exact same quotation used by HP CEO Carly Fiorina the week before at her CES keynote to explain why HP decided to resell Apple's iPod device.

For some reason, HP sees no shame in humbling itself to adopt Apple's product. The company with "Invent" in its logo missed out on the online music revolution and will partner to catch up as quick as it can.

Few people know the exact details of HP and Apple's agreement around the iPod. Maybe Apple is paying a small fee to HP for every sale based on the old Compaq patent. Maybe not. Apple will clearly benefit from iPods pushed through HP's vast stores.

The bigger question is why HP rushed to Apple's side.

It's said that Apple owns 70 percent of the legal online music market with more than 30 million songs sold via iTunes. In addition, Apple is making millions selling the high-margin, high-priced iPod device. The music being the driver for the hardware sales, in theory.

In the grand scheme of things, however, 30 million songs are negligible, especially at 99 cents a pop. The music industry claims to have lost billions from illegal file-trading, and Apple's contribution to stemming the swapping tide is about equal to the San Francisco Police's contribution to thwarting the illegal drug trade in the US. By the by, online file-trading is still booming, as of last check.

Beyond the relatively meager online music market, HP's embrace of the iPod has also tweaked the nerves of good partner Microsoft. HP happens to be the biggest backer of Microsoft's Windows Media Center. And Microsoft and Apple happen to be at odds over the direction their DRM infections will take.

The only explanation for HP's iPod lust is that it was the easy way out - the road least invented.

The easy way out has become a tradition at HP since Carly Fiorina took over - one of the shining examples here being HP's decision to pick Intel's Itanium processor for high-end servers instead of its own PA-RISC and Alpha processors. This move opened the way for HP to kill off the Tru64 operating system, lay off tens of thousand of workers and effectively sign up as Microsoft's lapdog on the server.

To think that HP missed the online music market already is absurd. This baby is in its infancy and at current margins may never walk. HP, far more than Apple, has the might, the product and the size to broker favorable deals with the music industry, and supposedly has the inventive spirit to come up with its own devices.

HP's decision to pick up Apple product points to nothing less than a failure of the company to capitalize on its own invention. In addition, it shows HP's unmatched readiness to ignore in-house IP at the very moment a fledgling market looks promising.

But beyond all that, the iPod decision must be painful for both HP veterans and Compaq newbies. HP's first big deal came when it sold something different, something unmatched to Disney, which bought oscillators to make Fantasia. Compaq's history goes back to cracking the IBM PC and creating a new market for open clones.

But instead of having a crack at out-inventing and out-designing Apple - something not easily done - HP chose to rebadge competitor kit. On top of that, it's rebadging a relatively closed device chock full of DRM. Open clone the iPod is not.

Companies don't need to stay the same to remain relevant, but a wholesale loss of inventive ideals does not benefit a technology company.

Hopefully Fiorina will enjoy her PJB - you know, the one that says iPod on it. ®

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