COLUMN

NOWHERE TO GO BUT DOWN

Wall Street is betting that music phones will knock iPod off its pedestal

STEVE MAICH May 9 2005
COLUMN

NOWHERE TO GO BUT DOWN

Wall Street is betting that music phones will knock iPod off its pedestal

STEVE MAICH May 9 2005

NOWHERE TO GO BUT DOWN

All Business

STEVE MAICH

Wall Street is betting that music phones will knock iPod off its pedestal

TO SAY APPLE COMPUTER is hot just doesn’t do the company justice. Apple is smoking, searing, blisteringly hot, not to mention hip, with a side order of funky. Last month, the company reported record quarterly profits—a US$244-million, six-fold rise in the bottom line—driven primarily by a five-fold increase in sales of its ultra-trendy iPod portable music players. Gadget geeks around the world have crowned Apple the keeper of all things cool. When they think about heaven, they imagine Apple CEO Steve Jobs waiting at the Pearly Gates, handing out their own customized iPod programmed with the billion coolest

songs ever conceived by the mind of man. So how come the company’s stock dropped 14 per cent in the two weeks after it released those phenomenal results? The answer is equal parts technology and history, and it boils down to this: being top dog is always tougher than being the dynamic upstart, and Apple observers have learned from painful experience that just when it seems there isn’t a cloud in the company’s sky, it’s time to start getting out your umbrella.

But before we get into the weather forecast, it only seems fair to recap the company’s remarkable success and give credit where it’s due. About four years ago, Jobs saw the coming wave of digital music before any of his major industry competitors, and rode it flawlessly. Near the end of 2001, he introduced iPod, and it quickly became the thingy of choice for millions of consumers to join the online music revolution.

The principal breakthrough features of the iPod are its ease of use and huge memory capacity, allowing consumers to create a personal jukebox with thousands of songs, all in one cute-as-a-button little package. Slick ads and word-of-mouth helped push it across the all-important dividing line separating the merely cool from the fabulously hip—a transition that’s worth billions to any company that can figure out how to make it. The iPod and the related iTunes online music store now account for 38 per cent of Apple’s business. Not bad for a product that didn’t even exist four years ago.

Now, about those storm clouds.

In some ways, Apple’s foray into the music business offers an apt metaphor to under-

stand its troubled history: the company is like a band that has come up with some of the catchiest tunes of the past 25 years, but has never been able to produce a truly great album. And even the best songs lose their appeal after a while, especially when they spawn an entire category of copycats. That is where Apple finds itself today, having just performed what might be its greatest hit ever, with the rest of the world looking to get in on the action and the crowd wondering what comes next.

Ask anybody who owns an iPod, and they will tell you with religious zeal that this little music box is the greatest thing in the history of things. But the world’s cellphone giants are already taking aim at Apple’s lucrative new niche. Nokia last week introduced its N91

APPLE observers have learned from painful experience that just when it seems there isn’t a cloud in the company’s sky, it’s time to start getting out your umbrella

multimedia phone, capable of storing up to 3,000 digital songs. The Finnish phone maker and Microsoft are planning their own online music site to compete with iTunes. And similar music phones from companies like Sony Ericsson and Motorola are on the way, all promising to mimic the iPod’s large memory and stereo-quality sound. And while Apple is expected to roll out an iPod phone within months, most of the major U.S. cellular companies are not planning to carry it, preferring to support models which will encourage users to download songs over their wireless networks.

A new front is about to open up in the battle for digital music supremacy, and the fight will come down to a question of which gadget has a stronger claim on your precious pocket space. In order to believe the iPod will hold off the advance of the music phone, you have to believe that consumers are so enamoured with slick styling and so-cool marketing that they will be willing to carry two gadgets instead of one. But styling is a tenuous advantage in the world of electronics, where fashion and taste are a constantly shifting terrain, and cool becomes quaint faster than a pre-teen can say “I’m bored.”

Even Apple seems to be quietly foreshadowing tougher times ahead. When the company reported its record second-quarter results, it didn’t raise its targets for the third, and company executives were quick to warn that the recent pace of growth can’t go on much longer. The implicit message in their conservative forecast seemed to confirm the worst suspicions of the Apple doubters: that the best performances of the iPod show are over, and there will be no encore.

For those who love Apple’s products, this is all just so typical. This company has made an art of innovation— from the personal computer itself to the point-and-click operating system—only to invariably surrender the high sales ground to the boring knock-off artists who copy Apple’s best ideas into a new and slightly cheaper model. So it’s not surprising Wall Street is already bracing for another disappointment.

The thing most people don’t understand is that business phenomena and pop culture unfold on differing time lines. When a cultural trend reaches its peak, its best days as a money-maker are often past. That’s why, while the buzz on the street is still all about iPod, the talk in the business community is that Apple’s cute little music boxes are yesterday’s mania. lifl

Read Steve Maich’s weblog, “All Business,” at www.macleans.ca/allbusiness