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Apple: iPod domination - or just another fad?

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Analysis "I got drunk and ended up with a hooker," said Conan O'Brien, the sardonically witty talk-show host as he compered Bill Gates's CES speech last week. "Bill got drunk and ended up in bed with an Apple computer." Cue picture of horrified billg.

However it's not that prospect which should be giving Bill the nightmares. It's tendrils, white tendrils with little bud things attached, spouting randomness. Bill hates randomness - to him it's a swear word ("This is just random!" is his favourite term of abuse of bad work) - but the random-spouting tendrils of white iPod headphones are spreading irresistibly across his formerly pristine domain.

The big question: is the iPod a threat to Windows, and Windows Media? Is the Mac mini going to persuade lots of people to abandon their PCs? And will that number make any impact on Windows?

First, music. Creative Technologies is sending out champagne to journalists after selling two million flash-memory and hard-drive based music players in the past three months. Woo hoo! Well, Apple sold 4.58 million iPods in the same period, crossing the 10 million total sold threshold on December 16. It increased its share (by volume) of the overall market - which itself grew - from 31 per cent of all digital players in 2003 to 65 per cent in 2004. Flash-based players share halved, from 62 per cent to 28 per cent. And Apple's rival hard-drive makers actually saw their share fall by 1 per cent. Plays For Sure, but Sells Only Sometimes. Meanwhile, on Wednesday Apple announced its biggest-ever quarterly profits and revenues in its entire history - $295m on sales of $3.49bn.

And what does Steve Jobs do? Releases a flash player, priced within reach of pretty much anyone, with the iPod name, which comes with iTunes, which is a memory stick formatted in FAT32 so it'll work for file storage with Windows too, which can store about twice as much as the average flash player (which offers about 256MB) for the floor-breaking price of £69. It's not just clever. It's fiendishly clever. "We're really serious about this," said Jobs. "We'd like to go after the remaining mainstream flash market." One can imagine some panicky meetings in the boardrooms of flash memory makers, with designers being thrown bodily at memory sticks and told to come up with something good, quick.

These suckers sell

Any retailer or reseller will tell you that iPods just won't stay in the stores. Those suckers sell. And how. You thought Steve Jobs had given up his dream of world domination? You underestimate the Stev-ego. And it's not just a player thing. You get more people using iPods; they use iTunes, and the iTunes Music Store; they keep expanding Apple's share of the legal music download market. And while it dominates, Apple's iPod still won't Play, For Sure, billg's Windows Media Audio format. The tendrils! The tendrils!

And the iTunes Music Store keeps on growing, to 220 million songs sold; it's now doing 1.25 million per day worldwide. But put the brakes on. It's not clear how big the subscription sites such as Napster are; the songs that people listen to temporarily on their PCs (because Microsoft's Janus technology, to let them move DRM'd music onto their Plays For Sure players, still isn't quite here yet, despite being announced last spring) don't count to the download figures. Subscriptions are an obvious way forward for online music; it's like radio where you get to choose the tracks. If you like it enough, you buy it.

The Stevego is dismissive of subscriptions - principally, one suspects, because Apple doesn't yet have the software that can handle it; it's buy those DRM files, or nothing.

One thing's for sure: when the team at Apple gets that software written - Quicktime 7? 7.5? - there'll be another Stevenote in which he'll explain that he always thought subscriptions were a good idea, but just wanted to do it right. Just like with flash players, which a year ago he dismissed. In fact, Danika Cleary, worldwide head of iPod marketing, explained on Tuesday that the iPod shuffle took around nine months to develop; and the discussions on whether to develop it preceded that. So even as Steve wrinkled his nose at flash players and unveiled the iPod mini a year ago, he had probably decided already that he would do one too.

Moral: Apple is very determined to have all of this business to itself.

Yet there's still a huge market out there, and Microsoft is very determined to have as many music download sites going as it can. The only problem, as Michael Gartenberg of Jupiter Research points out, is that it's so confusing - you have an iRiver player, which you plug into MusicMatch, and buy stuff off Napster. So when it goes wrong, and the computer won't play your music, whose fault is it? Apple has a much simpler story, for now.

Now, the Mac faithful will tell you that the Mac mini is thus the perfect way to undermine Windows. Just add keyboard, screen, mouse and another stick of RAM to produce a perfectly serviceable home computer. It has the same "I'll wear it now" takeaway look as the iPod; the boxes even have little carrying handles, because this thing is small, and light. Starting at $499 a pop (£339 in the UK; €499 in most Continental countries) it's an easy buy. These things will walk out of stores too. Less quickly than the iPod, but they'll go.

The theory is that Joe or Mary iPod - who already has a Wintel PC - will buy a Mac mini, plug in the PC's keyboard, display and mouse (hereafter KDM) and start using it occasionally for things like photos and movies, and then a little bit more for web surfing and maybe email. Sure, but most of his or her online life is still on the PC, and s/he will still use that for the main work. But the next time a Windows virus comes along, Joe or Mary gets infected, swears to the skies and discovers that the Mac is still working fine. And then over time the PC gets used less and less. Sure, could work - as long as Joe remembered to put plenty of extra memory in. At the base configuration of 256MB, he'll get very bored waiting for OSX to swap the paged-out memory page back from the disk, and probably stick with the PC.

For small businesses (the theory goes) it's also a neat, cheap upgrade path, though the processor is old (introduced in August 2002 on the Power Mac line; that's probably how Apple can make any money on these). The businesses have already got the KDM; all they need is the CPU. Sure, could work - in fact I can think of two UK national newspaper offices that will probably jump at the chance to upgrade their hacks' machines far more cheaply than with the Power Macs they presently have. There must be plenty more.

Hopelessly divided to you

So let's be generous, and assume that Apple does really well with the Mac mini. Let's see, 10 million iPods sold, perhaps 13 million more iPods to sell this year, be generous and reckon 10 per cent will buy - no, be extra generous, say 20 per cent. How many Joe and Mary Switchers does that make? Um, 4.3 million. Woo hoo! (And the Mac market will buy enormous numbers of them, likely to use as media servers or cheap second machines. So add a few million there.)

Then you compare those numbers to the worldwide PC market in 2004: 172 million, by IDC's forecasts. Suddenly, the Mac mini looks like only a small weapon in the computer wars - which anyway are well over.

And meanwhile, the Windows Media Center, in its confusing complexity, is just beginning to get the start of an inkling of some sort of traction among the first of the early adopters. Well, 1.4 million have been sold after two years of very uphill struggle. However, that still puts Microsoft much closer to the home media experience than Apple.

Only in music does Apple have the air of dominance, because the rest of the opposition is hopelessly divided - to the extent that HP has thrown in its lot with both sides, selling Media Centers and iPods. What's needed is some real consolidation; when Woolworths, Oxfam and Napster are all selling music files which you can play on any of 50 machines, the reaction isn't "Great, loads of choice!" It's "Oh hell, how do I choose?" Billg doesn't quite appreciate this. But then, he doesn't get why people like random tracks either, I suspect. What the business needs isn't more sites selling WMA music and more players that can play them, but fewer. In a burgeoning market, people like strong brands.

The upshot: people will keep buying iPods until they see a reason not to, and Apple has discovered a knack for giving them just what they want - four new models (iPod mini, iPod Photo, "U2 iPod" and iPod shuffle) in 12 months. A former Apple staffer told me of being in a meeting with Steve Jobs's deputy: "He said that 'if you've lost the battle, one way to win is to move to a new battlefield'". Apple's certainly discovered the right battlefield. On the music side it's starting to look a lot like a rout. But this war too is far from over. The Mac mini may have been the shot heard around the computer world. But does anyone remember who fired the first shots across the trenches in the First World War? ®

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