This article was originally published in Maclean's Magazine on October 9, 2006
Apple Faces Microsoft for Digital Music Supremacy
When Microsoft Corp. announced the upcoming Christmas-season release of Zune - the digital music player envisioned as the long-awaited iPod killer - one of Bill Gates's hotshot executives took a swipe at the competition. The iPod, says J Allard, a Microsoft vice-president, is "the Pong of digital music." Comparing Apple's wildly popular MP3 player to the terribly simplistic Atari game from the early '70s marked the beginning of a new battle in the 30-year war between the two tech giants.
Round one, as everyone knows, went to Gates. Apple set off the personal computer craze in the 1970s, but today it controls less than five per cent of the global computer market. Microsoft's operating systems run almost all the rest. But Apple - with design and marketing flare - has a stranglehold on digital music. The 60 million iPods sold worldwide amount to about 80 per cent of the market. And iTunes, Apple's online music store, is responsible for more than 70 per cent of all legally downloaded music, with about 1.5 billion songs sold since its launch in 2003.
The world's largest software maker desperately wants in, and hopes that Zune - which looks very similar to the iPod - will help it shed its dull image. Zune, which is scheduled to hit U.S. stores in December, will feature 30 gigabytes (7,500 songs) of storage. And unlike the iPod, it will have a built-in FM tuner and allow for the wireless transfer of music from other players. Music obtained wirelessly will be deleted after three days or three plays, whatever comes first. Having secured deals with several record labels, Microsoft will preload its players with music, and users will be able to download more songs from Zune Marketplace, Microsoft's new online store.
Many think that Apple has an insurmountable lead, and predict Microsoft's foray into digital music will be a costly failure. But this isn't the first time Microsoft has entered a market late and been forced to play catch-up. In 2001, the Seattle-based company launched Xbox, six years after Sony introduced the original PlayStation. Back then, analysts were skeptical that Microsoft, which until then had focused almost entirely on applications, would have much success in the video game console business. But Gates opened his war chest, pouring US$500 million into an international marketing campaign to compete against the big three (Sony, Nintendo and Sega). It was also reported that Microsoft lost US$100 on every US$249 unit sold. Five years later, Xbox has made serious inroads - capturing about 30 per cent of the overall market - but is still well behind PlayStation's share.
But the struggle for the video gaming market was a mere warm-up for the battle ahead - one that pits Microsoft against the company to which it owes much of its success. In 1985, Gates and Apple's CEO John Sculley signed a licensing agreement that gave Microsoft the right to use certain visual displays available on Macs when creating Windows 1.0. The PC boom turned Microsoft, which had aligned with most computer companies, including IBM, into one of the world's largest companies. Windows instantly became the industry standard, and Apple quickly lost momentum. "The original Mac was revolutionary but had its problems," says Owen Linzmayer, author of Apple Confidential 2.0. "When they first came out they cost about US$2,500 - which a lot of people at the time thought was too much - they weren't very expandable and they were kind of slow."
When Microsoft released Windows 2.03 in 1988, Apple fought back. It launched a copyright infringement lawsuit, seeking to prevent Microsoft from using any Mac software elements on its new, improved application. After a four-year legal battle, the case was dismissed. (Apple also lost an appeal in 1994.) "Apple always thought it was a much more limited licence," says Linzmayer, "and hoped the court would agree. It didn't."
In 1996, Steve Jobs returned to Apple - the company he had founded two decades earlier and which was now desperate for a saviour. And though he sparked interest with the release of the award-winning iMacs in 1998, things didn't turn around instantly. "If you look at the business pages even after Jobs came back, everyone was saying that Apple wasn't going to make it another quarter," says Linzmayer. "There was a lot of talk about breaking up the company and selling off its pieces." Things didn't really take off again until Jobs decided that the future was in digital music. Soon, iPod hit the shelves and Apple rocketed back to the forefront of the tech universe.
While Apple has cornered the market on cool, Microsoft has flat out cooled. Critics argue that it's become a bit complacent - too focused on the application sectors where it already holds control, including Office and Windows. Of the billions that Microsoft pours into research and development every year, a large portion of it is still spent on improving the core part of the business. Although the company still makes a lot of money, some analysts say that Microsoft lacks the brilliant new innovations that made it a global powerhouse in the first place.
There have also been some smaller, far less publicized skirmishes in the software side of the business. "Apple has slowly eroded the importance of Microsoft to the Macintosh community by developing a lot of excellent applications in-house," says Linzmayer. "Microsoft used to have the dominant browser for Macintosh users. But then Apple came out with Safari and shortly thereafter, Internet Explorer was no longer No. 1 with Mac users. One by one Apple has been knocking down the pieces of Microsoft Office. They're eliminating the threat that Microsoft always had over them, which was 'hey, don't piss us off too much, or we'll stop developing for the Mac.' " Linzmayer predicts that the next big battle will take place next year between Mac OS X and Microsoft's Vista. "Apple now feels confident enough to take on Vista, and by all reports that I've heard, Apple's new version of OS X is light years ahead of what Microsoft is producing," he says. "The big question is whether Apple will produce a version of OS X that will run on non-Apple hardware. I think they're going to this time and just don't want to tip their hand."
But first, the focus is on digital music. Can Zune kill the mighty iPod - the Sony Walkman of our generation? One analyst predicts that it "isn't even going to give the iPod a bad case of the sniffles." Another, Shaw Wu, thinks that the best Microsoft can hope for is to capture the 20 per cent of the market that Apple hasn't cornered - hurting their partners in the process. "It's going to be more of a civil war than anything," says Wu, an analyst with American Technology Research. "Microsoft partnered with a bunch of companies and gave them a couple of years to compete with Apple. But since they haven't done all that well, Microsoft is now pretty much saying, 'forget it, we'll just handle it ourselves.' "
As a warning, Wu points to Dell Computers' failure to crack the digital music business. After three years, Dell - which has much higher computer sales than Apple - gave in to Apple's dominance and discontinued its MP3 player business this year. "Nobody, except Apple, is really making money in this space," says Wu. "It's not that good a business to begin with unless you're the king - the dominant player. It only looks good because Apple is doing well."
Since launching the iPod in 2001, Apple has increased in total value (it currently sits at US$63 billion), and has seen its stock rise more than sevenfold (to about US$75 a share). Microsoft, meanwhile, has watched its stock bounce around in the mid-US$20 range for years. That's largely because Microsoft's operating system business has levelled off considerably, while its Internet efforts - against Google and Yahoo! - and the Xbox business have been so costly so far, Wu says.
But Bill's billions (his company has US$34 billion in cash), and the fact that Microsoft can learn from Apple's mistakes, has some analysts more bullish on Microsoft's chances of loosening Apple's digital music death grip - at least over the long haul. "Price," says Wu, "is Microsoft's only weapon." It's been reported that Zune will retail for US$284 - although the company will only say that it will be priced competitively. But Apple recently countered by announcing that its new 30-gig iPod will sell for US$249, US$50 cheaper than the current retail price. "Microsoft definitely has the pockets," says Wu, "but I think at some point enough is enough."
Maclean's October 9, 2006