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Time for Apple to Spread the Beat

By Alex Salkever Back-to-school season used to be a wonderful time for Apple. Primary and secondary schools snapped up fleets of its computers. As teachers and youngsters booted up, Apple's startup gongs rang out across the land and promised that maybe, just maybe, all those impressionable little ones would turn into lifelong Mac buyers. These days, no chance. Dell (DELL) has pretty much eaten Apple's lunch in the schoolyard (see BW Online, 8/13/03, "Apple's School Days Are Numbered"). But that doesn't mean Apple still can't cash in on the return to class.

In fact, a number of factors have lined up to make this the perfect time for Apple (AAPL) to grab a huge chunk of the back-to-school market -- in digital music players and online music. If Apple made a big push to get a Windows-compatible version of the Apple Music Store up and running as soon as possible, the payoff in iPod sales could prove stupendous.

CLASS OF ITS OWN. Here's why: No one doubts that right now Apple is the biggest gun in the digital-music business. Visitors to the Apple Music Store have downloaded 7 million songs in single and album form for the low, low price of 99 cents per single and $9.97 per album since it opened on Apr. 28. That's just a drop in the revenue bucket for the music industry, which in 2002 boasted $12.6 billion in CD shipments. But Apple has done better with legit digital distribution than anyone else, including Sony (SNE), America Online (AOL), Yahoo! (YHOO), and a host of other Internet luminaries.

What's more, Steve Jobs has achieved that success selling to only a minuscule portion of the market -- Mac users running OS X, the latest and greatest Apple operating system. Sure, sales slowed after an explosive start, but that's to be expected of any hot new offering. And Jobs & Co.'s clever use of one-click purchasing technology licensed from Amazon (AMZN), the whistle-clean Apple interface, and liberal file-copying policies have made the Music Store a shopping paradise, vs. the confusing, restrictive offerings elsewhere.

This brings us to iPod. For the uninitiated, the iPod family of digital-music players has become Apple's crown jewel. It's by far the most popular player on the market today, with a 25% share. In the last quarter alone, Apple sold 304,000 iPods. And an increasing number are being sold to PC owners, since Jobs & Co. made them Windows-compatible in July, 2002.

THE PERFECT MOMENT. Trouble is, those PC owners can't use the Apple Music Store. Getting that offering up and running could push iPod sales up another notch, particularly if Apple offers enticing deals for online songs. For example, if new iPod buyers were offered 30 free songs at the Apple Music Store, that could prove both a tempting lure and a way to acclimate the novices to the Jobsian Way of scoring tunes.

No one will be more open to that sales pitch than college kids. The free-music gravy train is about to come to a screeching halt. Network administrators at institutions of higher learning have looked nervously at the file-swapping madness for the past two years. This year, they'll have to put the foot down. The Recording Industry Association of America (RIAA) is liberally doling out subpoenas to Internet service providers and universities, asking to see account records of suspected big-time file swappers, who offered and received illegally copied music over the Net.

While a handful of colleges may choose to fight these writs, most don't want the hassle. Nor do they feel terribly comfortable defending behavior that the courts have consistently ruled is a breach of the law.

BANDWIDTH HOGS. That means increased scrutiny of campus networks -- something that'll make it much harder for massive file-swapping networks to survive. Even encrypting the traffic won't help much. Network admins can spot file swappers just through the huge amounts of bandwidth they consume.

Equally important, after this summer of nasty worms and crashing networks, college IT departments are in no mood for tomfoolery on their systems -- their sympathy for "those crazy kids" is about used up. File-swappers are one more giant headache at a time when invaders like the SoBig virus are knocking their networks for a loop. Any unnecessary drags on bandwidth become serious problems.

The turned-up heat on file-swappers is an enormous opportunity for Jobs & Co. At the moment, Apple's online-music deals are the next best thing to free. You can copy the songs just about every which way imaginable and still not run afoul of Apple's digital-rights policy. (Crossing international borders is the glaring exception. Apple built rules into its iTunes music software that invalidate Music Store purchases when a user tries to press play outside the country where the song was purchased).

THE PLAYER'S THE THING. Most college kids I know blow at least $5 per day on coffee. Convincing millions of them to spend even $1 per day on music would be a huge coup for Apple and the recording industry. The key to getting them in the habit is to make it easy. That means coupling iPods with a new and enhanced Apple Music Store that can handle sales to both Mac and Windows users.

The big plus for Apple would come from pumped-up iPod sales. It enjoys hefty, double-digit margins on these sleek devices, while in music, it makes less than 10 cents per song, according to Charles Wolf, a longtime Apple watcher and analyst with investment bank Needham. The big bucks are in the player, not the tunes.

Apple already enjoys head starts in both name recognition and buzz. The iPod has achieved nearly iconic status among young music lovers. And even though Apple has only 5% of the total PC market worldwide, according to its own estimates, surveys have shown that 20% of the general public knows about the Apple Music Store.

SLOWER JUGGERNAUT. So conditions are ripe. To seal the deal, Apple should mount one of its trademark high-volume, buzz-grabbing marketing campaigns. However, it had better move quickly. Other player makers are sizing up the iPod and improving their own offerings. And America Online, Yahoo, and even Amazon are exploring the possibility of offering music stores of their own, under the same terms as Apple's.

Even more important, college kids are future consumers of technology. Sure, they'll buy computers -- and plenty of digital cameras, music players, and other lifestyle devices. Aren't those exactly what Apple is trying to sell these days?

That's why, if at all possible, Apple should roll out a Windows-friendly version of the online music store this fall. Inevitably, improvements in other music players will slow down the iPod juggernaut. And competition for sales of online music will increase.

Right now, though, Apple is basically the only game in town in both of those key areas. Jobs should turn up the volume on campus. Salkever, Technology editor for BusinessWeek Online, is alternating with Charles Haddad on Byte of the Apple

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