Our World. Our Minutae.

Saturday, December 18, 2004

Why the iPod is AND isn't a Monopoly

First of all, everyone presumes a monopoly is illegal. It is not. There are different kinds of monopolies that are legal and encouraged - such as most utilities (how many water companies does a city really need?). Another kind of monopoly is defined in economic term as a "natural monopoly." The easiest example is Morton Salt. There is absolutely nothing preventing you from starting up a salt manufacturing/processing company - all you need is is cash. But the salt business is not exactly a huge profit/high margin business (considering you can buy 5 lbs of salt for about $5) so as long as Morton doesn't gouge us too much, we don't really care there's not another choice. The ipod/itunes is a natural monopoly in an even better sense. It is probably simpler to enter the portable mp3 business. All you need is a company in China willing to stamp your name on a product (just like Virgin) and Microsoft/Loudeye will be happy to set you up as a WMA store tomorrow - you do need cash but maybe even less than it would be to process & ship salt. Now, of course, distribution to retail, marketing, and sales are another matter but Apple is NOT lifting a finger to stop you - as evident by the hundreds (if not thousands) of portable mp3 players on the market and the dozens of WMA online stores. ipod/itunes is a natural monopoly because consumers have made a choice. It might be frustrating or painful for competitors such as Rio, Creative, Real, Napster, MS & others but Apple is not doing anything to prevent them getting shelf space or launching an internet online store. Consumers have made a choice and up to now, they have overwelhmingly chosen ipod/itunes. NOTHING wrong or illegal about that. Ahh, but what about the AAC M4p issue? It only plays on the ipod and not another portable device? All you have to do is look at Sony's decisions until recently. They not only sold a format that they owned lock, stock and barrel but they insisted/demanded that you convert every other format to ATRAC 3 before their player would work. Again, NOTHING illegal about it. As a consumer you get to make that decision everyday in everything you buy - is that format acceptable to you? NO product (Consumer electronics or otherwise) offers you EVERY conceivable function, feature or serve every one of your needs. It is always a compromise and YOU decide if those compromises still serve your needs. Most digital camera only accepts 1 type of memory card or closer to home, most foods that taste good are fattening. And to extend out further why ipod/itunes/acc m4p is not a monopoly, unlike Sony's ATRAC 3, Apple does NOT insist you convert everything to AAC m4p (locked or not). You can load up to 8 formats on your ipod - there are at least 6 other audio formats floating out there that the ipod does not support natively - there is NO law that says your product has to support a competing format nor do you have to offer it to your competitors ... Just like there are exclusive toys, you also cannot use your Macy's card at Kohl's department stores nor can you buy Tiffany's diamonds at Wal-Mart. DIFFERENT stores are allowed to sell DIFFERENT things. It is up to YOU, the consumer to decide if it serves your needs or not. Just like the Sony portable players hold a tiny sliver of the market because people want an mp3 player that actually plays mp3's and hardly anyone wants an ATRAC 3 player. And another firm legal leg Apple stands on - AAC m4p can be converted to CD audio in 30 seconds, playable on BILLIONS of devices worldwide and Apple even allows you THREE loss-less formats to reload it back into your ipod without ANY DRM. And another legal point? You can not only use your ipod without EVER visiting the itunes music store - in fact, Apple is probably the only company that allows you to use its free software (itunes) and turn off the music store FOREVER with a click in the preferences. Do I presume correctly the MS Media Player doesn't offer that? And another legal point? Most WMA stores allow you to burn songs to a CD so you are free to use ANY WMA store and load your songs onto the ipod - either in one of the THREE loss-less formats or in another 4 format choices so there is NOTHING restricting you from buying or moving your songs from Real, Napster, Virgin, etc ... onto your ipod. Is it slightly more inconvenient? But that's actually more convenient than our analog world where you can't buy a red sweater at JCPenney and try and trade it in for a blue one at Neiman Marcus. And while the itunes music store is the only music store that is built into itunes, there are dozens of sites that sell mp3's (and not WMA's) such as artistdirect.com, Traxsource, emusic, eclassical, et al that you can load into your ipod buy dragging from a folder - while not as 100% as good as itunes music store, I think it's safe to say it's a nice 99.9% solution and not really all that inconvenient? Still not good enough for you? Of the 1-million+ songs on itunes, only a handful are not available on CD so AAC m4p's are NOT a restraint of trade in a broad manner (remember, stores are allowed to offer exclusives). So, there is no legal manner or evidence that the ipod/itunes is a monopoly except a natural monopoly decided by CONSUMERS! Apple is not preventing anyone from manufacturing, distributing or selling at retail a portable mp3 player (most stores carry dozens of choices). And unlike MS who threatened computer manufacturers that they would pull their Windows OS license if the Netscape icon was featured on the desktop (that's restraint of trade!). Apple does not stop you from launching a competing online music store - as if you include record labels (large and small) selling tracks online, there are probably a couple hundred worldwide. The ipod loads up to 8 different digital audio formats - you never have to use the itunes music store if you choose not to. You can load any tracks from a CD (CD-R) with music from every other online store on this planet - in 3 loss-less formats and several other compressed formats - by JUST DRAGGING into itunes - hardly a deal breaker. There are some audio formats it does not play natively but since what it sells is essentially available in dozens of other online stores and thousands of retailers in the form of CD's - again, no restraint of trade. And while Apple does not let anyone sell AAC m4p's, it's their right to restrict their products distribution. Just as you cannot LEGALLY, randomly sell Coach or Chanel, you have to be a licensed distributor and or retailer. There's no law that says Tiffany has to make their diamonds available at the DIAMOND OUTLET store - the exact same thing applies to AAC M4p. You as the consumer make the ultimate decision. If you find the distribution too restrictive or inconvenient to you (like Sony's ATRAC 3) you will stop buying and that company (apple or otherwise) has to decide if they wish to change but if it pleases you enough - then sometimes there are natural monopolies because it happens to be the best solution for the most number of people at that time. That may change over time but a natural monopoly is NOT illegal.

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