Mixed Signals? Or A Dent In Apple’s Music Universe?

All good things come to an end. So it may be with Apple’s reign on top of the internet music world. iPods are #1. iTunes Music Store is #1. Apple is #1. What’s the problem? Things change.

I’m no longer convinced that Apple will remain the king of portable music, either with the iPod or the iTunes Music Store.

Why? Daily sales to iTMS appear to have hit a wall despite the huge growth in iPods over the past 12 months, now estimated at about 35-million units.

Apple says sales at the iTunes Music Store now top 600-million, though the growth rate appears to have stalled at well less than 2-million downloads per day.

The iPod nano and new iPod with video appear to be big sellers and with the holiday season will give Apple another great quarter of revenue and profits.

The so-called iPod ‘halo effect’ which drives many Windows PC customers to the Apple Store, and they buy Macs, will continue for another quarter.

On the horizon, I see increased competition in the online music field with Real Networks boasting hundreds of millions of dollars in cash and a new marketing relationship with Microsoft (whose Chairman and CEO both want to put a dent in Apple’s music universe).

I see Napster continuing to grow revenue and narrow losses as the subscription music model begins to get traction.

AOL just bought MusicNow and their marketing power remains substantial with an installed base of AOL users still approaching 30-million.

All of these competitors use the Microsoft Windows Media Player and play music on many different portable players.

Apple remains the ‘darling’ of the industry, but the record labels don’t like Apple’s strong-arm tactics and single tiered pricing structure. They want more control and more diversity in the online marketplace.

Over time, users will begin to want more features, an area where Apple usually does not compete well, and where the iPod has serious shortcomings when compared to other music players.

The new iPod with video was supposed to usher in the ‘portable video’ age with downloads for top TV shows, popular music videos, and Pixar shorts—at a mere $1.99 each.

One look at the iTunes Music Store’s video section will tell you one thing. Selection is slim. There’s about 2-million songs on iTMS but only 2,000 or so music videos, and fewer ‘name brand’ artists (Madonna, Michael Jackson, Shania Twain have many videos; few other artists are listed).

The TV show listing is even more paltry than music videos with less than half a dozen ‘popular’ TV shows available.

To be fair, the infrastructure required to offer music video and TV shows and feature length movies still needs to be put into place. High speed broadband access to the internet is just over half the US household population.

Either Apple is right on the cusp of a new revolution in portable digital content, or the air is about to come out of the bag. I hope for the former, but fear the latter.

Most customers love the iPod because it’s simple and it works. That formula can’t last forever as the needs of the customer will change (more features, more capability) and Apple will be required to change or lose out to the wave of competition.

Online music purchasers love the iTunes Music Store because the selection is good, the price is competitive, and the whole ‘ecosystem’ of iTMS to Mac/PC to iPod is a no brainer and works.

That’s where the competition sucks pond scum. It won’t be that way forever. Indeed, it’s changing now. Portable players with more features means more competition. Online downloads for movies are already here.

Even cell phone companies are pushing ahead with downloadable music, TV shows, and soon, movies. To a cell phone.

What’s Apple doing? Let’s not talk about the Dud of 2005, Motorola, Cingular, Apple’s iTunes ROKR.

Apple is at the peak, at the top, they reign in music, portable players, but not video. Not yet, anyway. Probably not at all. The handwriting, so to speak, is on the wall.

The 80-percent marketshare enjoyed by Apple in portable players and online music sales will go down as the competition heats up and the market becomes more fragmented.

When? 2006 will see a revolt from the record companies and price changes. 2006 will see video player competition. 2006 will see a drop in Apple’s stock as iPod sales and marketshare being to taper off, and drop.

Unless? Unless Apple’s got more up the sleeve, and there’s no indication of anything special in the pipeline. Steve Jobs has carried the company about as far as it can go.