Digital competitors ready to take bite out of Apple

Apple's iPod music players holds 80% market share but not for long, if competitors have their way.

SAN FRANCISCO - Enjoy it while it lasts.

That is the message to Apple Computer CEO Steve Jobs from almost every other company in the digital music space vying for consumer attention after several years of domination by the iPod and iTunes.

Apple's successful combination of sexy design and elegant usability has propelled the iPod to the top of the digital music market as the undisputed king.

Every move Apple makes these days results in victory. As the rest of the flash-player market floundered, Apple took over the category in a day with the release of the iPod Shuffle. It turned podcasting from a cool-sounding technology that nobody used to a legitimate format by adding it to the new version of iTunes -- and generating 2 million subscriptions in less than a week.

Today, Apple commands 80 per cent of the MP3 player market and 75 per cent of online music sales. But even as analysts predict another massive holiday sales season for the company this year, many believe Apple's reign will last only another 12-18 months before the playing field levels out.

"It's inevitable that over time their market share declines," Piper Jaffray senior research analyst Gene Munster says. "It's safe to say that nobody can sustain an 80 per cent market share in a consumer electronics business for more than two or three years. It's pretty much impossible."

THE MORE THE MERRIER

Privately, record company executives say they can't wait. Not because they want to see Apple stumble, but because a less dominant Apple means a more robust market for digital music. The company by itself cannot bring digital music to account for 25 per cent of all music sales, as labels hope it will by 2009.

Apple points to the 500 million tracks downloaded on iTunes to date as a milestone. But dividing that figure by the more than 20 million iPods sold indicates that each iPod owner has bought an average of fewer than 30 songs from iTunes. Piper Jaffray estimates that only nine tracks are bought per month per iPod user.

"The mass market still is entrenched in a non-MP3 world," Munster says. "Until that changes, there's just too few iPods out there to move the needle for the overall music industry."

"There's a whole lot of green field out there," Gartner G2 analyst Mike McGuire adds. "Some people at labels are acting like all this is over because Apple has it. Guys, 98 per cent of music purchases (are) still coming from somewhere other than online."

Label sources say Apple stubbornly disregards their suggestions for drawing in new digital music customers. They say they would like more flexibility on track pricing and promotions. But more than anything, labels want to see the iPod become interoperable with music services other than iTunes.

"It's a monologue with them," one label executive who asked not to be identified says. "They pretty much say, 'This is what we want to do,' and if you disagree with them you're an idiot. It's like dealing with a cult."

LEVELING THE FIELD

The first step to chipping away at Apple's dominance is for a competitor to introduce a device that can capture the public's imagination as the iPod has. The story of the digital music revolution so far has been monopolized by the MP3 player, and the iPod outsells all others by a ratio of 3-to-1.

The leading competitor to date is Creative Labs. The South Korean manufacturer has brought to market a full range of critically acclaimed digital music players, capped most recently by the Zen Vision, which includes support for digital video files. But its market share remains about 9 per cent, according to research firm In-Stat.

Industry observers instead look to the much larger consumer electronics powerhouses Sony and Samsung to lead the next round of battle against the iPod juggernaut. Unlike Creative, these two companies are supported by revenue from their other consumer electronics products and have strong global brand identity.

Although late to the market, both are taking aggressive steps to challenge Apple and target the many consumers who do not yet own a digital music device.

"Only 11 per cent of the US population owns an MP3 player," says Peter Weedfald, senior VP of consumer electronics sales and marketing for Samsung. "There is plenty of opportunity to capture market share."

Samsung has stated its intention to take 10 per cent of the MP3 market this year, and aims to become the global leader by 2007. That is a tall order. Even a company representative, speaking on condition of anonymity, calls such success unlikely.

TRACK RECORD

But Samsung has a history of successfully challenging seemingly invincible market leaders and succeeding. Ten years ago, the company brashly took on Sony in the broad field of consumer electronics, and has since surpassed Sony on InterBrand's top 100 recognizable global brands list at No. 20 -- a 19 per cent gain. Sony is No. 28.

Samsung made an equally aggressive push into the mobile phone market in 2002 with the advent of a camera phone, catapulting past industry stalwarts Ericsson and Motorola to briefly capture the No. 2 market position behind Nokia. Samsung today is No. 3 in market share at 13 per cent, behind Nokia and Motorola, according to Strategy Analytics.

Sony is also making moves. Having shamefully ceded its dominant portable-music market share to Apple by dropping the digital ball, the company had exactly one MP3 device on the market last year. Today it has more than 10 and already is No. 1 in MP3 player sales in Japan, ahead of Apple.

The real battle is expected once Sony relaunches its failed Connect digital music store. Sony is one of the few companies in the position to offer an integrated device and retail service with the same brand, similar to Apple's iPod/iTunes combo.

HOLIDAY CRUSH

If Apple indeed has only 12-18 months of market dominance left, the next two months will show exactly how its competitors plan to mount their attack. Sony, Samsung, MSN and others are expected to unveil new products and services in time to market them for the upcoming holiday season.

Anticipated developments include a music subscription service and subsequent advertising blitz from MSN Music, the long-anticipated relaunch of the Sony Connect store, several new MP3 devices and the introduction of mobile music services from several wireless carriers.

No one assumes Apple will go without a fight. It is expected to introduce a video-capable iPod in September and finally unveil its iTunes-compatible mobile phone with Motorola. It is also rumored to be working on a subscription service with the help of a former Xbox Live executive.

"They have shown, based on prior performance, that they have the capability to remake themselves," McGuire says. "They have the flexibility to seize opportunities as they're presented."

- REUTERS