Tea Leaves

Just over five years ago today, Apple Computer invited members of the press to an event in which Apple would introduce “a breakthrough digital device”. The all-knowing Mac rumor mill quickly swung into action, revealing that the device would be a music device, possibly a portable MP3 player, not a portable MP3 player, a wireless standalone cd-writer, a floor wax, and a dessert topping. Six days later — five years ago, today — Steve Jobs finally got on stage and introduced an overpriced MP3 player, and everyone yawned. Hindsight being 20/20, I’d like to put on my product manager hat and opine on why it’s something anybody cares about today.

1st generation: Oct 23, 2001
c/o: Rjcflyer@aol.com cc

Before I do that, I should clarify something: I do not work for Apple. I have never worked for Apple. I do have friends who work for Apple and they don’t tell me squat about what goes on there. I didn’t bother to talk to any of them about the contents of this article — they’d just refuse to comment. This article reflects my opinion only, and not the opinion of anyone else who writes on this site, nor the opinion of any of my past, present or future employers.

For those who have just returned from 6 years in Subrockistan, the iPod is a portable MP3 player with a few notable qualities:

1. You can update the contents of the iPod, and charge the battery, merely by plugging the iPod into your computer.
2. It has a staggeringly simple interface — some might say too simple.
3. You can find them for sale just about everywhere.
4. You can generally have someone else’s when you pry it from their cold, dead hand.

The iPod is a wild success today, but its introduction met with skepticism. It was derided as silly looking, too expensive, too feature-poor, and called a number of things that we can’t print here. Every revision was expected to fail, and every passing year brought claims that this was a fad like the Walkman (only 100 million Walkmans sold in the first 20 years). In the early years of the iPod, no article was complete without a quote from a competitor claiming they would best Apple with more featureful offerings. Meanwhile:

• Apple’s market share in digital music players continues to grow, recently topping 75%. Apple shipped 8.7 million iPods in the last quarter, bringing the total units sold to over 60 million.
• The market for iPod accessories is around $1 billion.
• iPods, with their characteristic white headphones, are an increasingly popular robbery target.
• 70% of 2007 model year cars in the us have direct ipod connectivity built in.
• 1.5 billion songs sold via the iTunes store.

That last item bears consideration:

• The iTunes store launched in 2003.
• Depending on whose numbers you believe, digital downloads accounted for somewhere between 5% and 6% of the total music sales market as of the end of last year, and has grown since. The iTunes store currently accounts for somewhere between 80% and 88% of the digital download market.
• In slightly less than 4 years, Apple has gone from nothing to somewhere between 4% and 5% of the worldwide music distribution market, making it a bigger music retailer than Sam Goody or Tower Records, and all without shipping a single CD.

Many people consider the success of the iTunes store as key to the iPod’s success, since music industry lobbied congress to make it illegal to use iTunes music on any non-iPod portable MP3 player. It may make it easier for Apple to retain iPod users in the future, but I know only one person who purchased an iPod and then went on to purchase a non-iPod player. He claims his next unit may be an iPod again. The iPod market is still in wild growth mode, and Apple isn’t worrying about retaining the early adopters — it’s worrying about getting units as possible out the door as fast as possible.

So what has made the iPod successful? I can think of a number of factors. Whether these were intentional or accidental, all of these contributed to the success of the product:

• Timing. The iPod came along at the exact point where pretty much everyone knew about mp3s, but no one had figured out the magic sauce for selling consumer electronics for them.
• It’s a consumer electronics device. Before the iPod, most portable MP3 players were made by computer accessory companies, and they thought like computer accessory companies: users want more features, and don’t care about a lot of configuration hassles. Apple produced a product that fit with music fans’ desire for something more like a home stereo: no more than slightly cryptic, and music, music, music. After the iPod started to take off, the competition introduced new and more confusing features, while Apple tried to make the product simpler still.
• It was white. Yes, it was goofy looking. And yet, it did not look like part of a computer. This matters when selling to a young adult audience that considers aesthetics an important differentiating point. If you’re a geek you want more features. But in the whole history of mankind nobody ever got a date due to enhanced skip protection.
• Carefully controlling features until their time had come. Apple was late with video, but when they delivered video everyone else was still an also ran. Journliasts often asked Apple about video support in the years before release, and Apple pointed out that most people use iPods while doing something that requires their visual attention. The tech industry took this to mean that Apple was not interested in video iPods. But a small part of the market rides public transportation for an hour every day, or flies for six hours every month or two, and that sub-market is big enough to support a video product. It made sense to build video in once the buyers were already going to be carrying such a device. Apple’s competitors had to convince a sizeable percentage of Metro and MTA riders that they wanted to buy a portable video player. Apple merely had to let its iPod-carrying commuters know that their next iPod would let them watch videos.
• Being Sony first. Sony has a simple model for developing products: make something cooler than what the commodity market has, then charge 50% more for it. Apple did that before Sony could, so when Sony came along, saw what Apple had, and tried to charge 50% more than Apple for a product that was not obviously better, it was ignored. The only Sony MP3 player I’ve seen in a couple years has been my phone, and I can only get it to actually play music by leaving it in my pocket while walking around the grocery store.
• Engraving. By letting people put their name in their iPod Apple instantly increased the value of the iPod to the buyer. It also decreased the value of the iPod to anyone else. Engraved iPods don’t get resold as much as un-engraved ones, and new iPod buyers are more likely to buy new.
• Good supplier management. Apple can place big orders with vendors to get big discounts. Meanwhile, it’s soaking up supply, increasing its competitors’ costs. Higher volumes with higher prices and lower costs can be taken to the bank.
• Better control of prices. Whether through judicious use of incentives or ruthless use of back-room chats with Vinnie Bag-o-donuts, Apple has managed to keep a lid on price wars between iPod retailers. The iPod’s final prices stayed consistent while other MP3 players got discounted. Freshman microeconomics would suggest that this would drive more sales to the competition, but that ignores the fact that most iPod buyers want an iPod, not an MP3 player. Indeed, Apple seems to find itself with product shortages before every winter holiday. These higher street prices have also given the iPod a perceived aura of relative quality.
• It was white (yes, again). Everyone knows what an iPod looks like. Nobody knows what a Creative Zen looks like. Suddenly a bunch of people are carrying this freaky white box. What is it? It’s an iPod. A different bunch of people are carrying little gray boxes. What are they? They’re MP3 players. They’re like iPods, only different. Parents, do not let your kid grow up to be the brand manager whose product gets described as “like” something.

Which brings us to today: the iPod is well entrenched, the iTunes store is starting to worry Target and Walmart (who sell iPods after famously failing to negotiate lower iPod prices with Steve Jobs), Apple just launched movie downloads, and it costs less to buy the two TV shows I ever watch from iTunes than it costs to get cable TV.

What’s on the horizon? Steve Jobs claims this year “is likely to be one of the most exciting new product years in Apple’s history”. Apple has already pre-announced the iTV iTunes/TV bridge-box. The rumor mill predicts an iPhone iPod-telephone combination. MacOSRumors predicts that they will be working on an article about exciting developments in writing new articles. And Microsoft is launching the Zune — a new portable media device dubbed by some as an “iPod killer” — by going after the capabilities the iPod doesn’t have. Some people think it’s already a flop. Others think it’s the only thing out there that can seize the iPod’s momentum. I’d offer a guess, but there’s a funny thing about predictions: if I could predict the future I’d have written this five years ago.