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MacBytes
Aug 8, 2005, 12:01 PM
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Category: Opinion/Interviews
Link: Why the market is wrong on Apple (http://www.macbytes.com/link.php?sid=20050808120119)

Posted on MacBytes.com (http://www.macbytes.com)
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JohnHummel
Aug 8, 2005, 12:47 PM
The analyst makes a series of very good points regarding Apple's growth and costs in the future. I will quibble on him about the growth of "alternative music players" - as I see it, Apple with their iTunes store and iPod sales at #1 are achieving a kind of a lockout (my father got a free shuffle, upgraded to an iPod 60 GB, installed iTunes for my sister, and then she wound up buying an iPod since only it could play the music from the store - and she ditched Napter ;) ).

My theory is that iPod sales will remain constant, since every 2-3 years people will "upgrade" their iPods since they are locked into the iTunes store (not technically, since they can rip to CD and back to MP3, or just use jHymn or some such - but most people will only know "does it work with iTunes? If not, then go away).

Of course, this is all just my opinion. I could be wrong.

cwtnospam
Aug 8, 2005, 02:04 PM
I agree. The iPod/iTunes combination is better than the competition and it's priced right. There's just no good reason to use anything else. This is especially true when you consider that all the alternatives require a Windoze PC, with all its virus and spyware problems. Not exactly the safest place to store your music collection.

winmacguy
Aug 8, 2005, 02:04 PM
The analyst makes a series of very good points regarding Apple's growth and costs in the future. I will quibble on him about the growth of "alternative music players" - as I see it, Apple with their iTunes store and iPod sales at #1 are achieving a kind of a lockout (my father got a free shuffle, upgraded to an iPod 60 GB, installed iTunes for my sister, and then she wound up buying an iPod since only it could play the music from the store - and she ditched Napter ;) ).

My theory is that iPod sales will remain constant, since every 2-3 years people will "upgrade" their iPods since they are locked into the iTunes store (not technically, since they can rip to CD and back to MP3, or just use jHymn or some such - but most people will only know "does it work with iTunes? If not, then go away).

Of course, this is all just my opinion. I could be wrong.
You sound MUCH closer than those anal-ysts.

BenRoethig
Aug 8, 2005, 02:08 PM
I don't know how exclusive the iTMS will remain to the iPod. It's only a matter of time before creative or someone pulls the anti-trust card out of their deck. With Apple being the clear leader, they can't be as closed as they are with the Mac.

OhEsTen
Aug 8, 2005, 02:43 PM
I don't know how exclusive the iTMS will remain to the iPod. It's only a matter of time before creative or someone pulls the anti-trust card out of their deck. With Apple being the clear leader, they can't be as closed as they are with the Mac.

I agree with you.

The only gripe I have with this concept (and it's already come up with the DOJ) is that how can you punish Apple for keeping their system - theirs. While Apple currently has a commanding lead over the competition - they are not a monopoly in that they are not resorting to microsoft-esque tactics. They created the #1 music player, and then created the #1 music store to supply their player. They have not "strong-armed" the other guys out of business - they haven't bought-out the competition. Apple has shown that they don't fear competition (like microsoft/wallmart etc.), when the competition heats up they refine their product further.

If creative and others want to be the next big dog - they need to get a clue that it happens by creating a better product. They still don't get that - thats why every music player they've come out with has been dubiously dubbed "iPod killer" - they compare every music player out there to the iPod (giving Apple free advertising in the process - he he).

To force Apple to make their music store (or iPod) work with other companies crappy products could result in a huge mess with the whole user experience turning into the convoluted mass that has become windows - driver updates and compatibility problems.

Gizmotoy
Aug 8, 2005, 02:48 PM
The only gripe I have with this concept (and it's already come up with the DOJ) is that how can you punish Apple for keeping their system - theirs. While Apple currently has a commanding lead over the competition - they are not a monopoly in that they are not resorting to microsoft-esque tactics.

Most would argue that they are a monopoly, and I'd tend to agree. Have you seen the market share percentages of the iPods? They've got the vast majority of the market. Not all monopolies are illegal, or even detrimental to the market, and currently Apple is not being abusive to its competitors. That's a key difference, and one that has to be successfully proven in an anti-trust trial such as the one that tried Microsoft for its anti-competitive behavior.

BenRoethig
Aug 8, 2005, 03:45 PM
Not all monopolies are illegal, or even detrimental to the market, and currently Apple is not being abusive to its competitors.

I don't know about that. Napster has grounds to complain about Apple not allowing the iPod to be used with it and other music services. Creative likewise has grounds on Apple not licensing the protected ACC format and allowing users to bring their songs with them to another player thus locking them into the iPod.

Whether Apple has the best overall package is immaterial. Obviously they do. No matter how good a product is, but consumers must be given the opportunity to make a choice. MS could weasel its way out of anti-trust but differences in platforms, operating systems, and the fact they they did release Mac versions of mac software. With the iPod and iTunes, there is no reason they can't work with competing products except Apple doesn't want them to.

OhEsTen
Aug 8, 2005, 04:09 PM
Why should Apple support other companies "lesser" products? And if I'm not mistaken - isn't the AAC format Dolby's? If creative and napster want to compete couldn't they just license AAC from Dolby too?

It is the responsibility of these competing companies to "create" a better product - not to leech off of the #1 product until they run it into the ground.

I realize that I am no legal expert at all - but to force a company to open up their system to competitors is completely anti-competitive. What kind of message does that send to the rest of the business world. Big companies out there that choose not to use their huge budgets on r&d just have to gripe to the DOJ so that they can get a big peice of the pie that they did nothing to make.

Apple's iPod prices have gone down. Apple is currently fighting the greedy record labels right now so they can keep their downloads to a reasonable 99. They may be #1 (for now) - but they are by no means a monopoly.

narco
Aug 8, 2005, 04:17 PM
I really hate that "we should be given a choice" argument, because there are plenty of choices. You can use iTunes/iPod, or you can use Napster/Whatever with a billion other mp3 players. People forget that downloading music isn't the only way to obtain music, it isn't even the most popular method of obtaining music.

In my opinion, just because something is popular, doesn't always mean a monopoly -- and Apple/iTunes is not a monopoly.

Fishes,
narco.

macidiot
Aug 8, 2005, 04:34 PM
Why should Apple support other companies "lesser" products? And if I'm not mistaken - isn't the AAC format Dolby's? If creative and napster want to compete couldn't they just license AAC from Dolby too?



AAC is from Dolby. Its the Fairplay DRM that Apple is restricting. There are plenty of players (and cell phones too) that support AAC. But currently only iTunes and the iPod support Apple's DRM.

macidiot
Aug 8, 2005, 04:48 PM
I don't know if this is a monopoly case... yet. There are plenty of other alternatives in the market. The consumer is free to choose. At this point, Apple is no different from Napster, Real, Creative, or any other digital music company in the sense that they put a product out there and let the market decide. They just happen to be far more successful than any of the other companies.

However, if, in the future, Apple locks up the market completely and starts doing things like crippling competitors with tactics like pressuring the music labels to not support a competitor or refusing to license its dock connector tech to a company that supports a competing product, then there might be a case.

I'm no expert, but my impression is that the DOJ doesn't have a problem with the natural creation of a monopoly. It has a problem with using that monopoly position to stifle competition and innovation to maintain unnatural pricing, all to the detriment of consumers.

SPUY767
Aug 8, 2005, 04:54 PM
AAC is from Dolby. Its the Fairplay DRM that Apple is restricting. There are plenty of players (and cell phones too) that support AAC. But currently only iTunes and the iPod support Apple's DRM.

Apple should not be forced to open up their DRM unless they choose to. Second, I'll be that Apple's got a way of updating all of a user's downloaded music so that it would suddenly work with all the other Mp3 Players. I mean, patching the DRM path of a song shouldn't take long at all. I'll bet it would be akin to the time it takes to calculate the volume of a song, and to do that to all 6000 songs in my library took about 5 minutes. Third, what is this guys talkin about "Early Adopters" for. The sombitch has been out for four years. I think it's past the "Early Adopter" Stage. This guy really needs to get a clue in some areas.

mrgreen4242
Aug 8, 2005, 05:03 PM
It's kind of funny to see everyone defend Apple... people who would normally complain about MS locking up DirectX for example somehow see it as ok that Apple has the Fairplay system locked down...

If MS was required to open up the DirectX libraries so that they could be implemented on other platforms, such as OS X and Linux, everyone would cheer. But if Apple has to open up Fairplay so that other players could implement it then it is all of a sudden bad?

You can't have it both ways, and I personally think that industry standard methods, as defined by overall market usage, should be made available to all competitors.

Just my $.02.

OhEsTen
Aug 8, 2005, 05:03 PM
AAC is from Dolby. Its the Fairplay DRM that Apple is restricting.


Thanks for the info....

OhEsTen
Aug 8, 2005, 05:18 PM
If MS was required to open up the DirectX libraries so that they could be implemented on other platforms, such as OS X and Linux, everyone would cheer. But if Apple has to open up Fairplay so that other players could implement it then it is all of a sudden bad?

I don't think anyone is against Apple "opening" up Fairplay - they are just against the thought of being forced to do so - like what is being (and has been) hinted around by the DOJ. Why can't Napster and Creative create their own version of Fairplay? Why must they get big government to force Apple's hand to open up something they set up?

I agree with your analogy of MS and DirectX. But as narco brought out - people have plenty of choices of music store's - both brick & mortar and online. The same goes with DirectX - OS X (and Linux I believe) have an alternative to DirectX - OpenGL. That's what legitimate companies do when looking at a competing product - if no one will let them use the existing technology (or license it) then make your own. Don't whine to unlce sam.

macidiot
Aug 8, 2005, 05:21 PM
The analyst makes a series of very good points regarding Apple's growth and costs in the future. I will quibble on him about the growth of "alternative music players" - as I see it, Apple with their iTunes store and iPod sales at #1 are achieving a kind of a lockout (my father got a free shuffle, upgraded to an iPod 60 GB, installed iTunes for my sister, and then she wound up buying an iPod since only it could play the music from the store - and she ditched Napter ;) ).

My theory is that iPod sales will remain constant, since every 2-3 years people will "upgrade" their iPods since they are locked into the iTunes store (not technically, since they can rip to CD and back to MP3, or just use jHymn or some such - but most people will only know "does it work with iTunes? If not, then go away).

Of course, this is all just my opinion. I could be wrong.

Morningstar usually does pretty good analysis, usually conservative, which is a good thing to me.

I do think that the iPod still has plenty of growth in it. If/when direct car connector kits become commonplace, I think a lot lot more people will be jumping on the DAP player bandwagon. I suspect that the car is the #1 location for music listening. And this is what the analysts are missing when they make comparisons to the walkman. The walkman was pretty redundant when you got into a car. As a result, though huge, the market was somewhat limited to the young(restricted listening environments) and dense/urban markets (where walking/public transportion is common). Offer integrated iPod car solutions and the market expands dramatically. Right now, if your getting a BMW(for example), it'd be silly to not get an iPod over another product. And silly carry 100 cd's in the car instead of an iPod.

I think there is still plenty of room for growth before the market flattens out into replacement rate. Barring some other form of technology that completely displaces DAP players, I can see the market topping 150million units. Even if Apple drops to 50% share, thats well over the 40 million discussed in the article.

The halo effect is harder to predict, at least to me. Its really hard to say where Mac sales will be a couple years from now, especially with the switch to Intel and the (eventual) release of Longwait, er, Vista. Personally, I think they could do 4% easy.

Having said all that, I do think that Apple stock is at a relatively fair price currently. I think it should be at 50-55 6 to 12 months from now, but that depends a lot on what happens with the Intel switch. I don't know if I'd be buying right now, but I'm definitely holding.

AlmostThere
Aug 8, 2005, 06:56 PM
I really hate that "we should be given a choice" argument, because there are plenty of choices.
I would generally agree but the point is also that it needs to be an informed choice.

The first step would be for a clear notification that iTMS tracks cannot be played on any device apart from an iPod, something that even many ardent Apple users are unaware of. Yes, you can burn and rip but unless you maintain the same level of quality it is hard to argue this is in anyway equivalent and comes at significant overhead for the end-user.

A last resort, I expect, would be for Apple to provide tools to convert DRM-AAC to WMV or other protected format, thus liberating the downloaded library from the device.
This wouldn't force Apple to open up their system at all, nor support other players and they could easily maintain the same quality of service.

Given the anti-trust ruling against MS was little more than a small slap on the wrist, I don't think Apple have much to fear, even in a worst case scenario. There are many shades of grey before inflicting anything vaguely punitive on Apple.

The bottom line though, must always be what is best for the consumer - I am sure Apple can make a good defence of most of its actions.


Back OT - it is very easy to get caught up in the current period of growth at Apple, especially with the ubiquitous iPod appearing in every newspaper and magazine but most analyst will look at Apple over slightly more than the last two years and it is not difficult to see that Apple has been a somewhat volatile company, to see the least. Great result if you invested at the end of 03 but it is not something I would look to as a long term investment.

shamino
Aug 8, 2005, 07:40 PM
This is nothing new. Morningstar has had an unusually low valuation of Apple for a few years now, and maybe they're right.

But as recent history has shown, those who relied on that judgement and sold at the start of Apple's upswing ended up missing out on a lot of profit.

IMO, Apple's stock is overinflated. This doesn't mean you should avoid it, but it does mean you should treat it as speculation and not as a long term investment. If you hold it, you really must track the price and be prepared to sell if it should start slipping.

I made that mistake a few years ago when I owned AMD. I bought them a few months before their "K7" (aka Athlon) processor was released. The stock grew rapidly, after the chip came out, because it was the first one to outperform Intel. My shares grew to 3x the price I paid for them. But I didn't watch them carefully. I went away on vacation for a week and when I got back, I found that the bubble had burst and most of that profit went away. I sold my shares for a 15% profit - nice but nothing close to what I could have made if I was paying attention.

shamino
Aug 8, 2005, 07:44 PM
... clear notification that iTMS tracks cannot be played on any device apart from an iPod, something that even many ardent Apple users are unaware of. Yes, you can burn and rip but unless you maintain the same level of quality it is hard to argue this is in anyway equivalent and comes at significant overhead for the end-user.
WRT quality during the re-ripping, that's (usually) a red-herring.

Yes, you lose quality in the process. But since most portable players (aside from a few Panasonic models) can't play AAC, you would have to transcode the files anyway, resulting in the exact same losses.

Of course, the inconvenience is still there. I did this with a bunch of my iTMS purchases (in order to make an MP3 CD for the car). The act of burning and ripping (and then erasing the CD-RWs I used as temporary storage) was quite time consuming.

OhEsTen
Aug 8, 2005, 08:07 PM
This is nothing new. Morningstar has had an unusually low valuation of Apple for a few years now

The whole market has always been bear-ish about Apple. The big difference I see is that there are companies who aim to please their customers, or companies who aim to please their stockholders. Most big businesses aim for the latter. It is very rare for a company to succesfully do both. Apple is a company that has a happy (usually) customer base. If I every bought stock in them it would be a purely sentimental buy as I would never expect to make a huge profit from it. Granted they have surprised us occasionally (in 1998 and then back in January 05) but the "street" seems to be exceptionally critical of Apple's outlook. Just look back at their last quarterly results there were several areas where they saw 100%+ increases and yet the analysts felt "it could have been better" not to mention the countless times they have projected "doom" for Apple.

Apple might have had some volitile times, but their position now looks pretty good - especially considering that they are bucking most tech trends right now.

macidiot
Aug 8, 2005, 08:17 PM
The whole market has always been bear-ish about Apple.


It could be because most people on Wall St.(and probably most people in America, whether they know it or not) have had long positions in companies that are diametrically opposed to Apple. Companies like Dell and Microsoft.

gerardrj
Aug 8, 2005, 10:37 PM
It's kind of funny to see everyone defend Apple... people who would normally complain about MS locking up DirectX for example somehow see it as ok that Apple has the Fairplay system locked down...

If MS was required to open up the DirectX libraries so that they could be implemented on other platforms, such as OS X and Linux, everyone would cheer. But if Apple has to open up Fairplay so that other players could implement it then it is all of a sudden bad?



Even if Apple has a monopoly on personal music players, they are not using that monopoly to force you to purchase songs from the iTMS. An iPod can also play any of a number of open audio formats (WAV, AIFF, MP3, AAC), as well as Apple's Loss-less encoder and you can acquire music from any source that supports those open standards.

Apple does have a monopoly on FairPlay, but it is tenuous at best to say that monopoly is predatory. You don't HAVE to purchase an iPod to listen to iTMS tracks, you can just use your computer. The fact is that the most popular on-line music store's tracks play on the most popular operating system (Windows) and the most popular portable music player (iPod) using freely available software.

To say that Apple should be forced to make iTMS tracks playable on other brands of players is, in my mind, akin to saying that Ford Motor Company should be forced to produce replacement parts for General Motors vehicles.

winmacguy
Aug 8, 2005, 10:59 PM
AAC is from Dolby. Its the Fairplay DRM that Apple is restricting. There are plenty of players (and cell phones too) that support AAC. But currently only iTunes and the iPod support Apple's DRM.


AAC (Advanced Audio Coding) - An ISO/IEC standard compression scheme published in 1997 as part of the MPEG-2 family. Designed to improve on the older MP3 codec, it delivered better quality audio in the same size files. AAC has been enhanced several times since its inception, including an improved version that was created in the MPEG-4 family. This new version, also known as MP4, was adopted by Apple as the default choice when importing to CDs into its iTunes jukebox and iPod players. With the addition of Fairplay DRM, it is also used by the iTunes Music Store. Normal MPEG-4 AAC files use the extension .m4a, while DRM-protected files use the extension .m4p. Audiobooks use the extension .m4b. While some companies have been slow to offer support for AAC, open source AAC support can be found at audiocoding.com.

greatdevourer
Aug 9, 2005, 03:52 AM
I would generally agree but the point is also that it needs to be an informed choice.

The first step would be for a clear notification that iTMS tracks cannot be played on any device apart from an iPod, something that even many ardent Apple users are unaware of. Yes, you can burn and rip but unless you maintain the same level of quality it is hard to argue this is in anyway equivalent and comes at significant overhead for the end-user
The problem with that is that it would magnify an already serious problem. That problem being ignorance. You see, I come across many people who seem to think that all music you put on your iPod has to come from iTMS, regardless of how many times people say that they've got all their CDs on there, or that iTunes existed before the iPod and the iPod existed before the Music Store, people still won't listen. Trying to get that point across will just make this current problem a whole lot bigger

faintember
Aug 9, 2005, 04:07 AM
iTMS, iTunes and the iPod are not a Mac monopoly.

Every mp3 player i have seen uses some form of software to transfer files to the device, and often require a conversion from one audio format to another.

iTunes is the software for the iPod. More than a few standard (and some non-standard) formats are acceptable to the iPod. The iTMS is just a option, much like napster or rhapsody, but better.

SPUY767
Aug 9, 2005, 06:37 AM
I don't think anyone is against Apple "opening" up Fairplay - they are just against the thought of being forced to do so - like what is being (and has been) hinted around by the DOJ. Why can't Napster and Creative create their own version of Fairplay? Why must they get big government to force Apple's hand to open up something they set up?

I agree with your analogy of MS and DirectX. But as narco brought out - people have plenty of choices of music store's - both brick & mortar and online. The same goes with DirectX - OS X (and Linux I believe) have an alternative to DirectX - OpenGL. That's what legitimate companies do when looking at a competing product - if no one will let them use the existing technology (or license it) then make your own. Don't whine to unlce sam.

Just a note, Real did. It was called harmony. Apple changed the fairplay spec slightly and updated firmware and that was the end of harmony.

macidiot
Aug 9, 2005, 02:38 PM
It's kind of funny to see everyone defend Apple... people who would normally complain about MS locking up DirectX for example somehow see it as ok that Apple has the Fairplay system locked down...

If MS was required to open up the DirectX libraries so that they could be implemented on other platforms, such as OS X and Linux, everyone would cheer. But if Apple has to open up Fairplay so that other players could implement it then it is all of a sudden bad?

You can't have it both ways, and I personally think that industry standard methods, as defined by overall market usage, should be made available to all competitors.

Just my $.02.

A difference is that iTunes, Fairplay, AAC, etc. is available on both Mac and Windows. DirectX is not. Actually, WMA(in its drm'ed form) isn't either. Both are Windows only.

So Apple isn't locking the consumer out before he/she has even made a choice. The consumer is free to choose what store and what device to use. Apple might try to lock you in once you made your choice(and even then its only with songs from the store), but so does Gillette with their razors. Microsoft doesn't even give you a choice, if your on a Mac. There's a difference.