The Microsoft iPod-Killer Myth

According to proponents of this myth, Microsoft is out to kill Apple's iPod with a player they will design and build on their own. Once it arrives, they expect Microsoft to clean up not only the music player market, but also online music sales, leaving Apple on the sidelines. They're wrong, here's why.

Why the Myth was Woven

This myth, like the iPod Phone Myth, is based on a fundamentalist faith that insists that Microsoft is Invincible and Apple is Inconsequential. All other alternatives are just too difficult for lazy tech analysts to fathom.

Consequently, tech analysts are very excited about any prospects for returning things back to the mid 90's, where Microsoft could do nothing wrong, and Apple could do, well, nothing at all.

Tech analysts have warned consumers about the eminent death of Apple's iPod at the hands of devices built by Microsoft's WMA partners, and spelled out the clear facts behind their logic:

• WMA music players offer users a choice of players, all built upon Microsoft's reference designs;
• WMA music players can offer users unlimited access to a large music library for a monthly fee;
• WMA music players can buy songs from a variety of Microsoft aligned music stores.

The iPod can't do any of those things. It doesn't even natively support features like tuning in radio stations or voice recording, which many WMA players do.

That leaves an appearance of clear logic behind the prophecies of iPod doom: Apple may have reigned supreme for years, but Microsoft and their huge arsenal of partners, along with their powerful desktop PC operating system monopoly, will surely unseat Apple sometime real soon now.

Unraveled with Extreme Prejudice

The idea of a Microsoft iPod seems to make a lot of sense. Microsoft does have a history of entering markets late, but then successfully taking over and cleaning up:

• Microsoft's Windows 95 arrived ten years late, but then took over the graphic desktop OS consumer market;
• Microsoft's Windows NT decimated the entrenched UNIX workstation market and destroyed OS/2;
• Microsoft's Office apps killed several entrenched products, including Lotus 123 and WordPerfect;
• Microsoft's Internet Explorer browser dethroned Netscape.

The End of Microsoft's Monopolies

However, as I pointed out in the Microsoft Invincibility Myth, all of the company's previous successes revolved around automatic OEM software sales, and relied on undercutting competition on pricing.

In the case of Windows, Microsoft worked to block any competition in the PC operating system market, and effectively priced any new competition out of existence by bundling Windows with every new PC. They then used low cost PC hardware to mount an attack against workstations. In both markets, they could paradoxically undercut competitor’s pricing without lowering their own software prices at all.

That effectively suffocated any free market for PC operating systems, while preserving high margin software sales of Windows. Microsoft could then leverage their Windows monopoly to drive Office and server sales.

The majority of those sales came from institutional purchasing. The relatively high price of Office meant individuals were far more likely to either obtain licensing from their employers, or pirate copies of Office. That piracy only further entrenched Office as the standard software for use in business applications. At the same time, it kept Microsoft flush with easy revenues from cost-insensitive business users.

With new threats from Linux and other open source developments unfolding in the business world, those formerly safe Windows and Office monopolies are now at risk, but that's not the worst news for Microsoft. Those threats are overshadowed by a larger problem involving the company’s future prospects for revenue:

Their strategies, products and services are all dead wrong.

WMA's Spectacular Failure

Microsoft's ventures beyond Windows and Office, and in particular those related to consumer electronics, have turned out to be spectacular failures. Microsoft has little experience in selling competitive retail products successfully; the vast majority of their revenues come from the automatic software taxes levied on every new PC sold.

WMA hoped to be Microsoft's first strong success outside of the PC world, but just as they were completing work on rolling out their rental DRM and joining hands with an array of device manufacturers to deploy it, Apple came out with the iPod and simply cleaned up the entire market.

It is increasingly difficult for analysts to insist that the iPod is a passing fad. It's even more painful for them to have to admit that Apple won customers over with a better product offering a better experience at a competitive price, not by stifling competition or tying new iPod sales to an existing monopoly. What‘s really hard, however, is defending the crap strategies, products, and services that Microsoft and their partners are churning out.

The Wrong Business Strategy

Microsoft is out of luck in trying to using its age old business strategies against Apple’s iPod. They have no capacity to undercut software pricing; iTunes is free for both Macs and PCs. Microsoft has nothing to leverage in undercutting hardware costs either; Apple already drives large economies of scale in building the iPod.

Apple actually sells far more iPods than all of the devices from all of Microsoft's WinCE partners put together. Microsoft can spend billions to subsidize sales of WMA music players, as they are doing with the Xbox game console, but what would that buy them?

Game console subsidies are a strategic risk designed to sell high profit game titles. Music players don't generate significant software sales. Apple runs their iTunes Music Store at just a slight profit; it's designed to sell iPods, not to create huge profits from media sales or rental fees. Apple even works to keep song prices from rising.

Apple has expended significant efforts in creating an online store within iTunes that just works. They’ve built partnerships with a wide range of music labels, TV broadcasters, Audible books, universities, and have integrated free features like podcasting. All together, the iTMS is designed to add unique value to the iPod. Microsoft and their partners haven’t even been able to copy the iTMS, much less make any money on downloads their own way.

Microsoft doesn't even run its own music store, so they'd have to share any hope of future profits with their music store partners. How long could Microsoft afford to give away cheap hardware and free music before their investors started questioning such a pointless strategy? Microsoft has already proven they can spend money at failure; they really need to work on finding a business strategy that works.

The Wrong Product

The most recent rumors of a Microsoft designed iPod rival say Microsoft will challenge the iPod with a larger screen and WiFi wireless sharing. Microsoft's previous successes in consumer hardware designs top out at a wireless keyboard. How are they going to rival Apple's next generation iPod if all of their partners, who all have far more experience in designing consumer electronics, can't?

Apple has remained profitable while competing against both the entire gamut of WMA partners’ devices and Sony's designs. Microsoft’s epiphany of a WMA player is now going to spring fully formed from the forehead of Zeus? Nope.

And are consumers really interested in trading battery life for the prospect of experimental wireless file sharing from a company who hates any transactions that don't involve fees, and has one of the worst security records in the tech industry? Microsoft clearly doesn't even have the capacity to invent good vaporware ideas.

In fact, Microsoft lacks any idea of how to create hardware that the general public might seriously find useful. Any remaining doubts can be answered in one word: Origami.

The Wrong Service

Microsoft ignored market research that showed that users were not at all interested in renting music, or that consumers had already grown accustomed to the fair use rights that WMA intended to destroy. WMA was designed from the ground up by Microsoft to please media moguls’ ideas about how to take advantage of consumers.

Two years ago, the company was excited about Janus, yet another take on rented music that Microsoft thought would drive new customers to the WMA platform. After all, Apple's iPod has no capacity to kill music after the user stops paying; even if their account was revoked, iTunes users could strip the encryption off protected AAC tracks without much trouble.

Microsoft worked hard to develop the technology in WMA to utterly destroy the concept of fair use rights and obliterate any hope of salvaging music after rental fees lapsed. Microsoft somehow thought this would be well received by consumers. News.com quoted Jason Reindorp, the group manager for Microsoft's digital media division as saying:

"Enabling access to unlimited downloads on consumer devices will open up all new scenarios for the distribution and enjoyment of digital content."

He was wrong. Two years later, Apple had sold a billion songs through the iTMS, and Janus rentals (aka PlaysForSure, WMA Subscription) hadn't gone anywhere. Why is Microsoft so intent on deploying their WMA service as a rented model? Because it is the only hope for creating another market where competitors can't exist, prices can remain high, and users pay through the nose on a regular basis.

More Nails in the Coffin

Quite obviously, consumers don't want a choice of various Microsoft players and various Microsoft stores, but rather the choice offered by players like the iPod, which can play a user's own ripped CDs, their own MP3s, and offers the option of buying songs online, which will work in expected ways. Microsoft clearly just doesn't get it, and the market will consequently punish them severely for it.

I really like to hear from readers. What do you think? Leave a comment or email me with your ideas.

Next Article: Why Apple is Winning in Media Downloads

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Tech: Online Music & Media