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'Beware the March of iTunes,' warns Fester

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Microsoft would be negligent if it didn't see Apple's music ambitions as a competitive threat. On the eve of Apple's splashy launch last week, Microsoft offered a Q&A which warned users not to be seduced by iTunes, Apple's integrated MP3 player/ripper/burner/radio/music store, which is now available on Windows.

Microsoft's David Fester (and whether Fester is his birthname or an homage[*] to his CEO, we don't know; Intel employs a Mr. Jason 'Ziller', which isn't at all relevant here) warned that iTunes carried several disadvantages.

It's worth quoting in full:

"Unless Apple decides to make radical changes to their service model, a Windows-based version of iTunes will still remain a closed system, where iPod owners cannot access content from other services. Additionally, users of iTunes are limited to music from Apple's Music Store. As I mentioned earlier, this is a drawback for Windows users, who expect choice in music services, choice in devices, and choice in music from a wide-variety of music services to burn to a CD or put on a portable device," said Fester. David, that is.

"Lastly, if you use Apple's music store along with iTunes, you don't have the ability of using the over 40 different Windows Media-compatible portable music devices. When I'm paying for music, I want to know that I have choices today and in the future," he said.

There's plenty of irony in seeing one monopoly accuse another monopoly of restricting users' choices. But monopolies they both are.

Beware the March of iTunes

If Redmond was late in seeing the potential of the Internet (but not catastrophically so), it was even slower in seeing the potential of consumer Internet services. It took Microsoft two years to produce an MP3 player after WinAmp became a smash hit, and even longer to establish WMV as a viable alternative to Real's streaming format. But it takes more than inattentiveness to explain why Windows still lacks an integrated music application as coherent as Apple's iTunes.

While Microsoft was under investigation for anti-competitive[**] behavior against Netscape and Sun, it couldn't afford to be too blatant about squeezing utility companies out of the Windows 'ecosystem'. This is, at least, is one possible narrative to explain why Windows Media Player still lacks so many useful integrated features. Another is that Microsoft's notorious bureaucracy and slack coding might explain its failure to produce competive or coherent software, but we shall be charitable here, and if only for the sake of argument, discount this narrative altogether.

On the other hand, Apple has shown little compunction about bundling functionality offered by its ISVs into the operating system. iTunes itself was based on code derived from utility vendor Casady & Green, which recently ceased trading. But if Microsoft was behaving 'well' and Apple behaving 'badly', who has gained most, Windows users or Macintosh users?

Comparing the two monopolies - one horizontal, one vertical - is an interesting exercise. Under which monopoly are users happier?

Well, perhaps Mac owners are collectively suffering from Stockholm Syndrome, because under the jackboot of this proprietary computer systems company, they don't look such an unhappy lot. And the theoretical benefits of the horizontal model don't seem to be quite working out as planned. The theories look quite beautiful on paper, but once put into practice these theories will encounter if not a Bill Gates, then someone who very much wants to be a Bill Gates.

Now if this sounds like an abstract parlour conversation to you, then we humbly bet to differ: you'll see this particular platform war fought out on these very terms, using such buzzwords as 'choice' in the coming few months. There's a lot at stake.

Drop the iPod or drop the DRM?
As Ken 'Caesar' Fisher writes in a very astute Ars Technica editorial, Fester #2's claims are very well made.

Apple is attempting to build a vertical business where a business doesn't exist right now, and Microsoft is retaliating by arguing that horizontal values - or choice - matter. Apple is able to do so because it has its own proprietary DRM, one which the record industry pigopolists find palatable, thanks to its playback device in the form of the iPod[***]. The ends here matter.

Unlike Sony, Microsoft doesn't make hardware devices, so you can see why it's pushing hard for 'choice'. Until Apple decides to license the iPod, or it licenses its DRM to iPod-alike-licensees, Apple's particular flavor of vertical music service is the only game in town.

Ars's Ken has a good look at the options and wonders which might go first - the exclusive DRM or the exclusive iPod. Of course right now, as it's early days, nothing has to give. But if iTMS is a runaway success, one or the other will have to go.

His conclusion is surprising, but based on sound assumptions. Apple reports that its margins on iPod sales are "healthy" albeit below the margins on other hardware products. By contrast, Apple makes next to nothing on sales from the music store, as most of that 99 cents is swallowed up by the RIAA and the credit card companies. It's no reflection on Jobs' negotiating talents, but more a sign of how poorly the technology industry as a whole has played its hand, that these cartels have managed to force such a good deal for themselves.

So, Apple can enter the high volume music sales business or it can maintain its leadership position in the low volume, high margin premium playback device business.

Must it be either/or, you ask? Well, this is how Wall Street likes to think. Finance capitalists make their money from 'creating new markets', rather than being held accountable to the consequences of their actions (because we are reluctant to hold them to account for anything) and so the easiest way to create new markets is to slice up vertical businesses and make them horizontal. As we saw in the dot.com bubble, these free-marketeer shysters have typically taken the first train out of town by the time the shit hits the fan. So don't blame us, dear readers, we're simply following the twisted logic of Wall Street to guess how things might take shape.

And as we stressed earlier, Apple doesn't have to make a jump either way just yet. Cast your minds back to May, to the Microsoft /AOL-TW rapprochement. Time Warner (as it is now) agreed to license Microsoft's Internet Explorer components for another seven years, and in return Microsoft got an agreement that AOL would maybe, sort of, take a favorable look at Microsoft's media player and DRM technology.

The real deal

At the time, Bill Gates boasted that the deal was "the most comprehensive media licence we've done". Well, hidden in last week's announcements from Apple was a deal with Time Warner that sees all of AOL's customers get one-click access to the Apple music store. By implication, as we've explained, that means they get access to Apple's DRM, and if they want to take their music with them (CD-burning loopholes aside), they might like to think about buying an Apple playback device, too.

That's a killer deal for Apple, one which suggests that it doesn't have to make the choice between its prime assets just yet. When the game of musical chairs has stopped, though, who knows where it will pan out?

For Microsoft, too, faces a pretty blunt choice: it can proselytize choice all day, but it needs to have (and forgive us for throwing the IT industry's most meaningless jargon back at you) an 'end to end' hardware platform, a strong brand that Joe User can recognize, and trust that works. And as we've seen in the phone business, today's horizontal Microsoft isn't particularly effective at persuading consumer hardware manufacturers to surrender their brand equity in favor of Microsoft's suck-it-and-see reference platforms. Can Microsoft learn to be a hardware designer? Does such a thing even exist in the sacred screeds of horizontal business model textbooks?

It's a delicious mess, and eventually, something's got to give. ®

Bootnotes

[*] Denial - proof - source

[**] Microsoft® Word X for Mac® X (Service Release 1) does not appear to have the word 'competitive' in the default dictionary. Can readers report similar sightings?

[***] When we first uncovered the media sector's plans to put CPRM on hard drives (see FAQ and Full Coverage), we concluded no single company should ever be allowed to control both the content and the playback device.

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