Apple Replays Old Mistakes

Published November 1, 2004

It might seem difficult to believe, but there was a time when Microsoft’s Bill Gates was begging Apple’s Steve Jobs to license the Mac operating system to PC vendors. Apple turned down the offer, and was later crushed by Gate’s plan B: Windows.

That was in 1985. Thanks to Jobs’ mistake, Gates doesn’t need to beg for anything anymore.

Microsoft probably wouldn’t have created Windows if Apple had agreed to license the Mac OS to PC vendors. And even if Microsoft did have a future plan for Windows, Apple would have been in a much better position to compete if it had cooperated with other companies.

Instead, Apple was almost completely destroyed because the company wanted absolute control over its product. Currently, Apple has less than 4 percent of the market for personal computers. In spite of this rather harsh lesson, it appears Jobs is about to replay history.

This time, the focus is on digital music, encompassing Apple’s iPod music player and the iTunes software. Apple’s iTunes service made it easy and cheap to download songs, a great relief for consumers. For 99 cents, it’s possible (and perfectly legal) to download an old Eagles tune and relive old times, resulting in increased revenues for Apple. The company sold 860,000 iPods in its most recent fiscal quarter alone, a 183 percent increase over iPod sales during the same quarter in 2003.

Unhappy Consumers

But Apple’s iPod music player plays only songs in the company’s “FairPlay” digital rights management (DRM) format, and songs downloaded from iTunes play only on the iPod. A person who downloads a song from iTunes and wants to play it on his or her Rio player is left disappointed. Similarly, someone who owns an iPod music player can play on it only music purchased from iTunes, even though there are many other services on the Web, such as Napster and RealNetworks’ RealRhapsody.

These restrictions don’t make consumers happy, and many music services, including RealNetworks, have noticed the problem. In a Bill Gates-type move, RealNetworks’ CEO Rob Glaser sent a message to Steve Jobs suggesting that Apple allow others to provide music for the iPod. As he did 20 years ago, Jobs dismissed the idea. Like Microsoft, RealNetworks resorted to Plan B.

Real came up with a way to fix the problem without Jobs’ blessing–it developed a software workaround named “Harmony” that lets people listen to music in RealNetworks’ format on iPod devices. The reaction from Apple wasn’t pretty.

Going it Alone

Apple accused RealNetworks of adopting the “tactics and ethics of a hacker.” Apple then went even further and said in a statement, “It is highly likely that Real’s Harmony technology will cease to work with current and future iPods.”

Apple’s resolve to go it alone backfired in the past and will likely do so again. Jobs would do well to note Adam Smith’s observation that markets work best when individuals follow their self-interest to serve others.

When a warped idea of self-interest leads people to cut themselves off from others, the system tends to break down. Jobs has been there before, and it boggles the mind that he appears set on a return trip.

The French online music store Virgin Mega has filed a complaint against Apple for refusing to license its DRM. But if history is any indication, by the time a bureaucrat in France gets around to acting on the complaint, Apple won’t be the leader anymore. Apple is now, but the market is open to win or lose.

Microsoft and several other companies also are competing in the digital music space. Microsoft already has sealed deals with other digital device makers and some big content companies. If Microsoft winds up overtaking Apple in this space, no one should cry antitrust.

Sonia Arrison ([email protected]) is director of technology studies at the Pacific Research Institute.