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Steve Jobs in a Box

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Not everyone was so wowed. In the wake of the collapse of the tech bubble and 9/11, the economy was reeling. Every prior digital-music player—and there had been a bunch—had been pathetic. Apple’s previous dabblings with diminutive devices had all been flops. Expressing a view held by many industry pontificators, an analyst at Technology Business Research declared, “What kind of money is to be made in these products? ... [R]ight now it’s a tricky time to be introducing new hardware.”

Even inside Apple, the initial hopes for the iPod were modest. It was conceived as simply another part of the company’s “digital hub” initiative: an assortment of features (iMovie, iDVD, iPhoto, etc.) intended to make the Mac as mediacentric as possible. At the launch, Jobs touted the iPod’s functionality as a spare disk drive. The notion that it would transform Apple from an also-ran computer outfit into a consumer-electronics powerhouse never occurred to anyone.

That “anyone” included Jobs was clear from one decision: his refusal, at first, to make the iPod compatible with Windows-based PCs. By doing so, Jobs was limiting its potential market to 15 million Mac owners—and blowing off the 500 million–strong PC universe. According to Steven Levy, author of the iPod history The Perfect Thing, some members of the iPod team disagreed. But when they argued the point, Jobs exploded. “I remember that day,” an Apple executive told Levy. “He said, ‘I’m never taking this to the PC!’”

But as the iPod attained escape velocity, Jobs relented; by mid-2002, it could be coupled with Windows. The about-face signaled not only that Jobs grokked its implications for Apple’s business. It hinted that his ambitions were in flower—that he saw an opportunity to reshape the entire music business.

Since the advent of the pioneering start-up Napster, the record industry had been waging a fierce rearguard action against the burgeoning file-sharing insurrection. But Jobs, with his cred in Hollywood, thanks to Pixar, believed he could bring the record labels around to online music sales. He approached them one by one, shucking, jiving, promising that Apple would implement technology—digital-rights management (DRM) software—restricting the ability to copy tracks willy-nilly. But the resistance of the labels was intense. “They were concerned about letting tracks out into the wild based on their experience with peer-to-peer [file-sharing],” explains Alan McGlade, CEO of the online software firm MusicNet. “It took them a while to get over it.”

But get over it they did—in no small part, ironically, because of Apple’s piddling computer-market share. “We only convinced them to let us do it on the Mac at first,” Jobs told Levy. “We said, ‘Well, if, you know, if the virus gets out, it’s only going to pollute 5 percent of the garden.’”

The iTunes music store went live in April 2003, hawking 200,000 tracks for 99 cents apiece. Six months later, Jobs persuaded the labels to let him sell songs to Windows-connected iPods. The labels were jubilant that people were actually paying for music on the Web. Sweeter still, they were getting two thirds of the revenues from every iTunes download.

The iTunes store has now sold over 2.5 billion songs—and directly contributed next to nothing to Apple’s bottom line. But Jobs never intended to make a bundle by retailing music. The purpose of the iTunes store was strictly to sell more iPods. To that end, the DRM on iTunes songs keeps them from being played on any rival music devices, such as Microsoft’s Zune or Sony’s digital Walkman. And tracks downloaded from rival services such as Rhapsody or Sony Connect cannot be played on iPods.

Jobs is unrepentant. “If you look at the total number of iPods we’ve sold and you look at the total number of songs we’ve sold on iTunes, it’s less than 25 per iPod,” Jobs argued at the D conference. “And the average iPod user has hundreds of songs on their iPod. So they’re clearly not getting the majority of their songs from iTunes; it turns out they’re not even getting a medium-sized minority from iTunes. And so this whole notion that somehow … iTunes is locking people into buying iPods is ridiculous.”

Is it ridiculous? Certainly, Jobs is correct when he says that the reason people buy the iPod is that it’s the best portable music player out there. But the link between the iPod and iTunes is also a barrier to entry for competitors. It’s designed to limit consumer choice, to foster reluctance among consumers who own iTunes tracks to switch to other devices. It has prompted complaints by European governments to the European Commission—which so far have come to naught.

More broadly, though, the resentment over the DRM on iTunes is only growing. In certain quarters of the music industry, Apple is coming to be seen less as an enabler than a gatekeeper. And among some consumers, including this one, the fact that iTunes tracks can be copied to only a limited number of computers, and are of sub-CD quality, is a deal killer. Together with myriad other factors, some economic and some technological, these cavils are stirring up a second online music revolution—one portending nothing good for iTunes or the iPod.


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