By Peter Burrows On Oct. 26, Apple Computer (AAPL) held one of its rock-concert-like product unveilings -- this time with a real rock star on hand. But before Bono, the lead singer of Irish band U2, took the stage at a renovated movie palace in San Jose, Calif., to mark the introduction of a new, black "U2 iPod", Chief Executive Steven P. Jobs had another surprise. "We're here to announce a revolutionary new product: socks," Jobs said. Yes, Apple introduced its own brand of iPod-carrying pouches, sold in a multicolored six-pack, just like socks.
Apple could never sell enough of its new iPod outerware -- the price is $29 for the six-pack, by the way -- to make much of a dent in the $8.3 billion company's bottom line. But dozens of other outfits are racking up hefty margins selling some of the 200-plus peripherals made to work with the iPod, from $19 colored cases to $300 speakers.
THINKING DIFFERENT.. Analysts say margins for such products often exceed 50% and sometimes are as high as 80%. "Sometimes we wonder if the guys making the cases made more money than we did," Jobs joked. Or half-joked, anyway. Fact is, the existence of this rich ecosystem is one of Apple's less obvious advantages in its quest to remain the dominant player in the growing digital music market.
At the moment, Apple has a 66% share of the market for digital music players, according to market researchers NPD Group, and Jobs wants to keep it that way. Consumers who buy all of these add-ons are more likely to stick with the iPod over rival offerings from Dell (DELL), Sony (SNE) and others -- just as most PC owners won't consider moving to the Mac because of all the Windows software they already have.
Also, some of these add-ons have expanded the way consumers think about the iPod. Rather than just playing tunes, add-ons turn it a voice recorder or a portable hard drive.
LIGHT TOUCH. Apple has expended relatively little effort to create this secret weapon. Small add-on makers have for the most part taken it upon themselves to jump on the iPod's coattails. Most of these outfits work primarily with Apple's retail group -- which is looking for products to sell in Apple's stores -- not with its developers.
Famously secretive about sharing its future product plans, Apple rarely gives these businesses a heads-up on new opportunities. But Apple will advise add-on makers whether it thinks their new product will be a hit, or whether they should stay out of the way of a rival that's already on the same course.
At the moment, Apple's light-touch approach is working just fine. Analysts expect Apple to sell more than three million iPods in the fourth quarter, and the demand for partners' products is soaring. "We've had a spectacular run with iPod," says Andrew Green, marketing vice-president at Griffin Technology. The 30-person company has sold hundreds of thousands of its iTrip, a gizmo that lets the iPod play music through a car stereo.
BIMMER BOOM. Now, Griffin is rolling out three new stocking stuffers. There's the $20 iBeam, which can turn the iPod into a flashlight or laser pointer, the $15 EarJams that attach to Apple's ear buds for a better fit, and a $9.99 PodPod, a plastic cradle that fits into a car's drink-holder. And the day after the U2 iPod was introduced, Griffin had matching black versions of many of its products.
Altec Lansing, long a top provider of speakers for PCs, is also jumping on the iPod bandwagon. Bob Garthwaite, vice-president for sales and marketing, says iPod accessories are the fastest-growing business for the company. And pre-Christmas orders from retailers for its three iPod-compatible products are "through the roof. It's going to be an iPod holiday season," he says.
The same goes for carmaker BMW, which started selling an iPod connector for four of its most popular models this summer. With the connector, BMW drivers can control their iPods using buttons on their radio or steering wheel. James L. McDowell, vice-president of marketing for BMW North America, says the carmaker has sold about 12,000 of the connectors so far. That's far more than expected, causing a long waiting list for BMW owners who want to spend the $250 or so to have it installed.
MONEY SPINNERS. While McDowell expects Apple to cut deals with other carmakers, he says he hopes Apple and BMW continue to improve its offering. For example, he'd like drivers to be able to listen to all of their iPod music, rather than be limited to playing one of a handful of playlists. Also, "we would very much like to have this available in as many BMWs as possible."
Retailers also want to see a rising tide of iPod accessories. That's because stores -- other than Apple's -- earn thin margins of around 11% selling the music player, say analysts. That's far less than the cut offered by many other manufacturers on other kinds of products. So why sell iPods? For starters, they're a great way to drive traffic into stores. Second, retailers can load up on profits from iPod accessories.
Take 34-year-old David Glickman, a management consultant from San Francisco. Since buying his iPod in 2003, he has purchased noise-canceling headphones, mini-speakers from Sony, an FM radio transmitter, adapters for charging in cars, a cable to connect the player to his stereo, and an adapter so he and a family member can listen simultaneously.
NO LOYALTY OATH. Still, while iPod owners who load up on accessories are less likely to jump to a rival digital music player, Apple shouldn't get too confident about holding on to the allegiance of the Glickmans of the world. "I want to be a lifelong Apple customer, but I do worry that they're going to lose their lead," says Glickman. And Apple's closed business approach -- the iPod only works with Apple's iTunes music store, and vice versa -- is worrisome. "I don't have a reason to change now, but chances are someone will come out with something cooler at some point," he says.
At that juncture, Apple had better come up with an answer, because no amount of accessory purchases will keep users in the iPod Nation for good. Burrows is computer editor in BusinessWeek's Silicon Valley bureau