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CORRECTED: Digital competitors ready to take bite out of Apple

August 22, 2005

Please read in paragraph 20, “Today it has more than 10 and
already is No. 1 in flash-based MP3 player sales in Japan,
ahead of Apple, which retains the overall lead” … instead of
… “Today it has more than 10 and already is No. 1 in MP3
player sales in Japan, ahead of Apple.”

By Antony Bruno

SAN FRANCISCO (Billboard) – Enjoy it while it lasts.

That is the message to Apple Computer CEO Steve Jobs from
almost every other company in the digital music space vying for
consumer attention after several years of domination by the
iPod and iTunes.

Apple’s successful combination of sexy design and elegant
usability has propelled the iPod to the top of the digital
music market as the undisputed king.

Every move Apple makes these days results in victory. As
the rest of the flash-player market floundered, Apple took over
the category in a day with the release of the iPod Shuffle. It
turned podcasting from a cool-sounding technology that nobody
used to a legitimate format by adding it to the new version of
iTunes — and generating 2 million subscriptions in less than a
week.

Today, Apple commands 80 percent of the MP3 player market
and 75 percent of online music sales. But even as analysts
predict another massive holiday sales season for the company
this year, many believe Apple’s reign will last only another
12-18 months before the playing field levels out.

“It’s inevitable that over time their market share
declines,” Piper Jaffray senior research analyst Gene Munster
says. “It’s safe to say that nobody can sustain an 80 percent
market share in a consumer electronics business for more than
two or three years. It’s pretty much impossible.”

THE MORE THE MERRIER

Privately, record company executives say they can’t wait.
Not because they want to see Apple stumble, but because a less
dominant Apple means a more robust market for digital music.
The company by itself cannot bring digital music to account for
25 percent of all music sales, as labels hope it will by 2009.

Apple points to the 500 million tracks downloaded on iTunes
to date as a milestone. But dividing that figure by the more
than 20 million iPods sold indicates that each iPod owner has
bought an average of fewer than 30 songs from iTunes. Piper
Jaffray estimates that only nine tracks are bought per month
per iPod user.

“The mass market still is entrenched in a non-MP3 world,”
Munster says. “Until that changes, there’s just too few iPods
out there to move the needle for the overall music industry.”

“There’s a whole lot of green field out there,” Gartner G2
analyst Mike McGuire adds. “Some people at labels are acting
like all this is over because Apple has it. Guys, 98 percent of
music purchases (are) still coming from somewhere other than
online.”

Label sources say Apple stubbornly disregards their
suggestions for drawing in new digital music customers. They
say they would like more flexibility on track pricing and
promotions. But more than anything, labels want to see the iPod
become interoperable with music services other than iTunes.

“It’s a monologue with them,” one label executive who asked
not to be identified says. “They pretty much say, ‘This is what
we want to do,’ and if you disagree with them you’re an idiot.
It’s like dealing with a cult.”

LEVELING THE FIELD

The first step to chipping away at Apple’s dominance is for
a competitor to introduce a device that can capture the
public’s imagination as the iPod has. The story of the digital
music revolution so far has been monopolized by the MP3 player,
and the iPod outsells all others by a ratio of 3-to-1.

The leading competitor to date is Creative Labs. The South
Korean manufacturer has brought to market a full range of
critically acclaimed digital music players, capped most
recently by the Zen Vision, which includes support for digital
video files. But its market share remains about 9 percent,
according to research firm In-Stat.

Industry observers instead look to the much larger consumer
electronics powerhouses Sony and Samsung to lead the next round
of battle against the iPod juggernaut. Unlike Creative, these
two companies are supported by revenue from their other
consumer electronics products and have strong global brand
identity.

Although late to the market, both are taking aggressive
steps to challenge Apple and target the many consumers who do
not yet own a digital music device.

“Only 11 percent of the U.S. population owns an MP3
player,” says Peter Weedfald, senior VP of consumer electronics
sales and marketing for Samsung. “There is plenty of
opportunity to capture market share.”

Samsung has stated its intention to take 10 percent of the
MP3 market this year, and aims to become the global leader by
2007. That is a tall order. Even a company representative,
speaking on condition of anonymity, calls such success
unlikely.

TRACK RECORD

But Samsung has a history of successfully challenging
seemingly invincible market leaders and succeeding. Ten years
ago, the company brashly took on Sony in the broad field of
consumer electronics, and has since surpassed Sony on
InterBrand’s top 100 recognizable global brands list at No. 20
– a 19 percent gain. Sony is No. 28.

Samsung made an equally aggressive push into the mobile
phone market in 2002 with the advent of a camera phone,
catapulting past industry stalwarts Ericsson and Motorola to
briefly capture the No. 2 market position behind Nokia. Samsung
today is No. 3 in market share at 13 percent, behind Nokia and
Motorola, according to Strategy Analytics.

Sony is also making moves. Having shamefully ceded its
dominant portable-music market share to Apple by dropping the
digital ball, the company had exactly one MP3 device on the
market last year. Today it has more than 10 and already is No.
1 in flash-based MP3 player sales in Japan, ahead of Apple,
which retains the overall lead.

The real battle is expected once Sony relaunches its failed
Connect digital music store. Sony is one of the few companies
in the position to offer an integrated device and retail
service with the same brand, similar to Apple’s iPod/iTunes
combo.

HOLIDAY CRUSH

If Apple indeed has only 12-18 months of market dominance
left, the next two months will show exactly how its competitors
plan to mount their attack. Sony, Samsung, MSN and others are
expected to unveil new products and services in time to market
them for the upcoming holiday season.

Anticipated developments include a music subscription
service and subsequent advertising blitz from MSN Music, the
long-anticipated relaunch of the Sony Connect store, several
new MP3 devices and the introduction of mobile music services
from several wireless carriers.

No one assumes Apple will go without a fight. It is
expected to introduce a video-capable iPod in September and
finally unveil its iTunes-compatible mobile phone with
Motorola. It is also rumored to be working on a subscription
service with the help of a former Xbox Live executive.

“They have shown, based on prior performance, that they
have the capability to remake themselves,” McGuire says. “They
have the flexibility to seize opportunities as they’re
presented.”

Reuters/Billboard




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