It has been 2 1/2 years since Apple Computer Inc. (AAPL ) introduced its iPod digital music player, and consumers' love affair with the sleek little gizmo just keeps gaining steam. Despite the iPod's hefty price tag -- $249 to $499 -- Apple has sold 3 million of them, making it far and away the most popular music player on the market. Demand is so fierce for the new iPod Minis that there's a six-week waiting list on Apple's Web site. And the player is only half of Apple's dominance in digital music. Its iTunes online music store accounts for 70% of all legal downloads.
But as CEO Steven P. Jobs knows all too well, Apple can't rest on its laurels. In tech circles, soaring success often masks future troubles. Look no further than Apple's own history: In 1980, it dominated PCs with a 16% share -- but it badly misplayed its hand and now has less than 2%. Just as when Apple ruled the PC market, these are early days for digital music. "We haven't even seen the big players make their mark in this market yet -- like Microsoft (MSFT ) and Wal-Mart Stores (WMT )," says David Munns, CEO of music company EMI Recorded Music North America.
What should Apple do to stay on top? Plenty. For starters, it needs to embrace the new ways consumers want to buy music. While the iTunes store offers 99 cents downloads, Apple has yet to provide a subscription service for folks who want to listen to whatever they want for a monthly fee. To stare down a raft of new music players, Apple needs to broaden its product line. It should consider forming partnerships to add iPod technology to cell phones and other futuristic devices. And it needs to address nagging quality problems, such as scratchy-sounding headphones and disappointing battery life. While most buyers love their iPods, Apple has to hit a higher standard to keep its market share, premium prices, and good buzz it has with buyers.
A swarm of competition is on the way. Rivals have unveiled more than 60 music players to compete with the iPod, and these devices can play music from a variety of services. The iPod, in contrast, works only with iTunes. "When you buy an iPod, you have one choice," says Chris Gorog, CEO of Roxio Inc., which runs the rival Napster service. "That may work fine for early adopters, but mass-market consumers are going to want to shop wherever they want to shop."
Jobs needs to remember the prime lesson of the Mac: Make friends -- lots of friends. While the Mac was an early hit, Apple couldn't keep up against the investments of Microsoft, Intel, and a gang of rivals. Apple has cut a deal with Hewlett-Packard Co. (HPQ ) to have the PC giant resell iPods under its brand name. Jobs should find more partners so Apple's technology can become the de facto digital- music standard. More allies -- say, Amazon.com (AMZN ), Cisco (DELL ), or Nokia (NOK ) -- could help Apple develop innovative new offerings and expand its distribution.
Jobs also should rethink his views on subscriptions. He has refused to offer them, saying music fans want to own rather than "rent" their favorite songs. But more than 1 million people now have online music subscriptions. Market leader RealNetworks Inc. (RNWK ) boasts 450,000 subscribers paying as much as $9.95 a month, up from 250,000 in the past year. Clearly, many consumers believe subscriptions are an easy, affordable way to discover new music.
The subscription model may get even more appealing if Microsoft Corp. succeeds with its new "portable subscriptions." Later this summer, the software giant is debuting new software, code-named Janus, that lets subscribers listen to rented music on portable players that use its Windows Media software. While Jobs and many others have doubted that the record labels would ever support this approach, Gorog says Roxio has signed deals with the five big labels. Janus "has the potential of cannibalizing download sales," says a top record exec. Jobs needs to swallow his pride and get in the subscription game so his old nemesis doesn't gain any advantage -- again.
To be sure, Apple still holds more cards than any single company in digital music. Besides elegant products, it has the best brand name in the business, the most momentum, and swank stores that are the perfect showcase for its wares. And Jobs is well aware that he can't stand pat: He recently created a separate iPod division within Apple to emphasize the importance of the business. Still, hordes of rivals are massing at the gate. The iPod may yet become what Kleenex is to tissues or Jell-O is to gelatin desserts, but Jobs has much more work to do to make that happen.
By Peter BurrowsWith Tom Lowry in New York