{ January 10, 2004 }

The HP / Apple Dance

There are so many angles concerning the recently announced HP / Apple collaboration you could fill pages upon pages of conjecture. Everyone on the web seems to be scurrying about, trying to figure out what in the world Apple is doing moving outside the Mac-related stratosphere and "getting a room" with HP -- a peecee company of all things. Hasn't Apple's strategy all along been to offer "insanely great" software to lure customers into buying their hardware? Is this the same Steve Jobs who in the 80s stubbornly sat on the original Macintosh, refused to license it, and eventually allowed clones only to return years later and squash them all over again?

What makes the alliance so intriguing is that there is zero precedence for it. Apple has never -- ever -- licensed their intellectual property to a third party in such an open way. Not just any third party, but a company that also happens to sell computer hardware. In other words, a competitor.

So what in the world is HP doing re-branding a piece of Apple hardware as their own, and putting Apple's software on their computers? And for that matter, what would possess Steve Jobs to allow another company (a Windows based one for God's sake) to piggy-back on all the success Apple has had with the iPod / iTMS?

Here's how I see it -- HP could have soaked untold millions of dollars in R&D manufacturing their own mp3 player and music service, which at this point would be a risky, tardy investment. Or, they could do what Dell did and license / re-brand third party products just to maintain face and remain competitive in the industry. At this stage in the online music download race, the latter makes the most sense. But if you're going to get in the game this late, would you want to start at the bottom of the ladder, or the very top?

By licensing the iPod and offering iTMS on their desktops, HP moves themselves immediately to the front of the line (alongside Apple). HP will be able to offer their customers (who probably know and trust the HP brand but have never owned anything by Apple) a superior experience to the competition. Literally overnight HP becomes not just a player in the online music race, but a leader.

So what does Apple get out of all this? For one, easy money. Apple will receive cash for every HP-iPod sold without having to do any of the heavy lifting (marketing, distribution, etc.) They also get their software on the almighty Windows desktop, where an alias to an application is worth its weight in gold. And to top it all off, Apple further strengthens the open standard audio format iTMS runs on -- AAC.

And this brings us to what is probably the biggest point of all -- the fight for standardization. Microsoft is pushing their own proprietary audio format, Windows Media, and have succeeded in inking deals with companies like BuyMusic.com and Napster to standardize their services on their codec. In doing so, the aforementioned third parties take a huge (and in my mind, shortsighted) risk by technologically wedding themselves to Microsoft, and by ignoring the most popular mp3 player on the market -- the iPod. In return, Microsoft would work to further strengthen the Windows Media format in both software and hardware design, and eventually try to choke the life out of anyone who dared enter their backyard. If they succeeded, Microsoft's proprietary audio format would become the de-facto technology behind a slew of products; forcing third party companies (like HP) to license it if they wanted to offer consumers anything that had to do with digital audio. And that alone probably scared the crap out of HP.

This cannot be said enough -- 'AAC' does not stand for "Apple Audio Codec" or anything of the like. It is an MPEG-4 audio format created by Dolby Laboratories and licensable to any hardware / software manufacturer creating an audio encoder and/or decoder. The difference between Apple and Microsoft couldn't be more clear -- Microsoft has everything to gain by selling Windows Media licenses, while Apple has nothing to gain on AAC, other than supporting an open audio standard they chose to use. Obviously, Apple would sell more product if the audio format they used was widely adopted, but they are not in the business of selling audio licenses, and thus promote an open standard in their own best interest.

But there's a weakness to Apple's format of choice: if next week a company licensed AAC and developed an 'iPod killer' that was technologically superior to Apple's offering, Apple could be run out of the mp3 player market, and would gain nothing from the continued use of AAC. Microsoft on the other hand could offer their own Windows Media portable audio player, and risk nothing if the player bombed in the marketplace. Microsoft would still earn money from the codec being used by their competition.

Who's strategy is the smartest isn't the point here, but rather what is best for the consumer in a highly competitive marketplace. Apple's alliance with HP is not just a victory for each company (each will reap millions from it), but for the general marketplace. By further cementing AAC, untold numbers of devices could flood the marketplace and offer consumers a true choice in what they buy.

For an example of what happens when one company holds the purse strings, all you have to do is look at Internet Explorer, which is used by the vast majority of internet users, but faces little competition thanks to tight integration into the Windows OS. And as a result, Microsoft sees little reason to improve the product, and the web stagnates on a browser that is now four years old.

Drawing an analogy between Internet Explorer / Windows Media and HP / Apple / AAC may seem a little silly (and truth be told I didn't think I was going to go down that road when I started typing this), but it effectively illustrates a much larger battle that is currently brewing -- the fight for companies (like HP) looking to further unhinge themselves from Microsoft in their quest for technological independence.

But getting back to the Apple / HP deal -- clearly Jobs learned something from Apple's past, and realized the continued growth of his company relied upon making inroads with the competition. If you hit a home run with a product, as they have with the iPod, and offer the best possible user service with the iTunes Music Store, the right thing to do doesn't include squatting and sticking your tongue out at everyone else, but cementing your accomplishment by allowing your work to be adopted by others. Jobs clearly knows he has a very good thing going with the iPod, and Apple's rapid success (both in units sold and downloads at the store) is their own to lose. With a 1000lb. gorilla of partner like HP however -- which I should note earns billions per quarter compared to Apple's millions -- Apple has not only strengthened their own platform, but further pushed the online music space in a direction that ultimately benefits everyone.

Comments

This is also a big move for HP. Because the are trying to become a company that sells a solution. Not hardware. In their pursuit to become an "Adaptive Enterprise" HP would do best to show that they can make a solution out of anything. What is the one thing that no pc companies don't do? Work with Apple. HP further embraces the notion that they will not wed themselves to any one thing, and will back the winning horse in a race.

Posted by: dr.u at January 10, 2004 1:12 PM

It is not true that apple has "never ever" licensed their technology. This is not unprecidented, just not common for Apple. In the end it is a good thing for Apple, and a questionable move for HP.

Posted by: Michael at January 10, 2004 1:40 PM

It looks like the HP iPod WILL GET WMA support.

From Paul Thurrott:
"HP's blockbuster deal with Apple will have one exciting side effect, I discovered today. The company will be working with Apple to add support for Microsoft's superior Windows Media Audio (WMA) format to the iPod by mid-year. You heard it here first. "

http://www.winnetmag.com/windowspaulthurrott/Article/ArticleID/41423/windowspaulthurrott_41423.html

I think this is a good thing if they were to support WMA. iPod users will finally have CHOICE on where to buy their music. Nobody can argue with that.

Posted by: Woody at January 10, 2004 1:46 PM

My point about there being "zero precedence" for the deal is that (as far as I know) there has never been a unit of Apple's hardware line that has been re-branded and licensed in such a visual manner to a company as large and powerful as HP. HP has plenty more resources than Apple, but chose to go with what they felt was the best solution out there to meet their needs. It's an astonishing sight (for a longtime Apple user like myself) to see such a heavyweight "cross lines" like HP has.

Posted by: Todd Dominey at January 10, 2004 2:19 PM

This deal is obviously huge, with Apple being a big winner. Todd's right -- the goal here, I think, is to make sure that AAC is the preferred format, not WMA. This would take away any market advantage Microsoft might try to leverage in the future with things such as movie downloads.

And yes, Paul Thurrot claims that the HP iPod will play WMA files, but I wouldn't bet on it. When it comes to any prognostications, I compare Thurrot to Dvorak -- they don't care about accuracy, just eyeballs. By opening up the iPod to WMA, Apple would lose the format battle they're trying to win.

Posted by: August Trometer at January 10, 2004 5:01 PM

"By opening up the iPod to WMA, Apple would lose the format battle they’re trying to win. "

As a music consumer, I don't care about format. I just want to buy my music anywhere, and not rely on one single store or one single tech company.

Whatever happened to the "freedom of choice" argument of anti-microsoft advocates.

I love the iPod, and really want one, but the all-apple solution makes me a little nervous.

Posted by: Woody at January 10, 2004 5:13 PM

iTMS isn't a money-maker for Apple. Rather, it is something that helps them sell iPods. If the iPod supported AAC, MP3, and WMA (how 'bout OGG too?), then they would have the ultimate player. My guess would be that the majority of people who have iPods have it filled with MP3s, not AACs.

Sure, if all the music sales when through iTMS they would stand more to gain, but I think they'd rather get their iPod everywhere (and I mean *everywhere*).

But I'm still skeptical about WMA support. I'll believe it when I see it.

And, Todd, nice post.

Posted by: David S at January 10, 2004 5:14 PM

"iTMS isn’t a money-maker for Apple. Rather, it is something that helps them sell iPods."

I couldn't agree more ... so wouldn't it make sense to support more formats? I would buy one immediately if it supported purchases from other stores, and I think others would as well. What's holding Steve back? Is it his dislike for MS? The fact he allowed HP in and created a windows version of iTunes, shows me he has learned from his mistake of not licensing the OS way back when. Apple shouldn't get caught up in a format war, but to make the best possible portable music player. Nobody beats them there.

Posted by: Woody at January 10, 2004 5:48 PM

Todd, you said, in your comment:

"there has never been a unit of Apple’s hardware line that has been re-branded and licensed in such a visual manner to a company as large and powerful as HP."

Not to quibble on facts that aren't particularly relevant to your piece, but the Newton platform/devices were licensed to Motorla, Sharp, and Siemens. While Motorola and Sharp are smaller than the current incarnation of HP/Compaq, Siemens is bigger. You can find the details about the Motorola Marco here: http://newton.plumbrook.com/marco/device/index.html

Having said that, there was nowhere near the amount of publicity or exposure in that set of licensing deals as this current one. While all Based on Microsoft's comments, I have to feel like this is a good thing for the marketplace, as you said very eloquently.

Posted by: Robert Occhialini at January 10, 2004 6:05 PM

Don't foget the Bell & Howell branded Apple II:
http://www.applefritter.com/apples/bhappleii/

Posted by: Marc at January 10, 2004 7:17 PM

Just a simple comment to say "great post." I always enjoy reading your blog.

Posted by: Dave at January 10, 2004 9:32 PM

"Whatever happened to the “freedom of choice” argument of anti-microsoft advocates."

Not to sound like this guy, but I think choosing not to adopt WMA is about protecting freedom. Choosing to adopt open standards like AAC (and hopefully they will add OGG and FLAC soon), Apple is providing less incentive for future music stores to choose WMA over an open standard.

Is giving you the freedom to play WMA on an iPod, worth jeapordizing control over audio formats to MS? When was the last time IE squashed a CSS bug?

Posted by: scott at January 10, 2004 10:13 PM

It's easy to see that this is all based on computer companies merging into consumer-based products. We've bought the compuers, we've bought the monitors. We need MP3 players, cameras, phones. PCs/Macs are too powerful for the everyday user.

HP is doing itself a favor by lining up with Apple's iPod. Now if I can get that 4GB iPod 20 bucks cheaper...

Posted by: Tom at January 10, 2004 11:18 PM

Very enlightening post.

I recently bought an iBook and a 10gb iPod. After using my iBook, my wife went and got her own. But she was still trying to decide between the iPod, an iRiver device and another player made by Dell as Christmas came and went. She was in limbo until the multi-colored mini's came out last week. Now, I have orders to have a silver one giftwrapped and ready for her birthday.

The average user probably doesn't care about AAC versus WMA. They just want a online music store that is easy to use and has their favorite artist's work. And they want a cool-looking gadget player. HP, like my wife, has realized that Apple has no serious competition on either front.

Posted by: Louis at January 10, 2004 11:39 PM

For an audio player out there to play AACs downloaded from the iTunes Music Store, they must support Apple's DRM, FairPlay. Real just announced a music downloading service which will use AAC and is based on Helix - their DRM, rather than FairPlay - Apples. This does not mean that the iPod will play music downloaded from the Real Music site, nor does it mean that players made for the Real site will play music downloaded from the Apple Music site. Apple DOES get money to license FairPlay, and it will be interesting to see if the new crop of media players that come out to support the Real Music Store will support both Helix and FairPlay (if you are adding the AAC codec [yes, I know that is like saying ATM Machine], might you not try and leverage the ability to play the already installed base of 30 Million + songs?)
Another interesting thing is while FairPlay is implemented at the QuickTime layer, I don't know where helix is implemented. What that means is a song downloaded from the iTunes Music Store should play through the RealPlayer on that machine, since the song will look to see if the machine is authorized to play the song. the same I do not know of a song bought on the Real Music Store (will a song bought from Real play in iTunes?)

This is all very interesting....
and lastly, all iTunes installations include QuickTime - and HP, unlike Dell, has the engineering and talent to pull something together like iLife - and base it around QuickTime like Apple did...
I think HP wants to NOT be dependent on MSFT, and be able to make media appliances that can talk to both Macs and PCs.
Eytan

Posted by: Eytan Bernet at January 10, 2004 11:59 PM

For an audio player out there to play AACs downloaded from the iTunes Music Store, they must support Apple's DRM, FairPlay. Real just announced a music downloading service which will use AAC and is based on Helix - their DRM, rather than FairPlay - Apple's. This does not mean that the iPod will play music downloaded from the Real Music site, nor does it mean that players made for the Real site will play music downloaded from the Apple Music site. Apple DOES get money to license FairPlay, and it will be interesting to see if the new crop of media players that come out to support the Real Music Store will support both Helix and FairPlay (if you are adding the AAC codec [yes, I know that is like saying ATM Machine], might you not try and leverage the ability to play the already installed base of 30 Million + songs?)
Another interesting thing is while FairPlay is implemented at the QuickTime layer, I don't know where Helix is implemented. What that means is a song downloaded from the iTunes Music Store should play through the RealPlayer on that machine, since the song will look to see if the machine is authorized to play the song. the same I do not know of a song bought on the Real Music Store (will a song bought from Real play in iTunes?)

Posted by: Eytan Bernet at January 11, 2004 12:26 AM

I just checked. That IS the case. Real can play all the iTuunes Music Store purchased songs. More traction for AAC and FairPlay. Read here:
http://news.com.com/2100-1027_3-5136275.html

Eytan

Posted by: Eytan Bernet at January 11, 2004 1:14 AM

"Real just announced a music downloading service which will use AAC and is based on Helix - their DRM, rather than FairPlay - Apple’s. This does not mean that the iPod will play music downloaded from the Real Music site, nor does it mean that players made for the Real site will play music downloaded from the Apple Music site."

So what's the point of having a "open" standard like AAC?

All the talk of Helix, FairPlay, QuickTime layer, etc... will be over most music listeners head. I just want to know the music I buy today will play on any device or machine I choose to buy five years from now. Maybe I am asking for too much. I just hope multiple types of DRM are supported on the majority of portable music devices in the future. It's the only way I will fill comfortable purchasing all my music electronically. I am more tempted to still purchase CDs, rip them to MP3, and that way they will work everywhere. Unfortunately that removes the convenience of buying music online.

Posted by: Woody at January 11, 2004 1:14 AM

Begs the question:
How much does an alias weigh?
:)

Posted by: ollie at January 11, 2004 1:26 AM

To the comment about encoding your music to AAC vs. MP3 vs. WMA...
any music you encode yourself to AAC using iTunes, will play back on any machine that can play AAC.
Not sure what will happen with Helix wrapped AAC...
Windows Media Player encoded WMA ALWAYS has DRM and cannot be moved from machine to machine. Straight AAC files do not have any limitations, just like straight MP3 files.
Eytan

Posted by: Eytan Bernet at January 11, 2004 2:28 AM

I believe that the home computer market must move towards an environment where the computer hardware you are using is invisible. Macs and PC's are not very different on the hardware level anymore. What will matter are the features bundled with peripherals (media players, printers, cameras, etc...) and the innovative approach of the software (OS's, players, online stores, etc...) that powers the hardware and peripherals.

So my question is this: how long will it be until Apple develops an operating system that will run on Intel/AMD based systems with the grace that OS X runs on the Mac? Maybe fostering this relationship with HP will move Apple into a more global PC market. I almost think this is necessary because you can custom build a much more powerful PC for less than the cost of a Mac. Just because it's not a Mac doesn't mean it HAS to run Windows. It's the Mac OS that makes the Mac truly wonderful, not the hardware - although the great design of their hardware is an added bonus, it's not a necessity.

Although I'm positive all your other arguments are on the mark, I think there is much more at stake here than what is immediately apparent.

Posted by: Chris M. Cooper at January 12, 2004 2:03 AM

Just a few things I haven't seen anyone else mention:

1. Apple licensed Fairplay from Veridisc, and so can anyone else. http://64.244.235.240/explained_contentprovider.asp

2. AOL is also supporting the ITMS with on-screen links and promotion. AOL customers can buy from ITMS without signing up. They just use their AOL accounts.

3. ITunes doesn't work without Quicktime, meaning Apple has found a very clever stealth attack to get Quicktime installed on millions of Windows PCs.

Bill Gates' dentist might want to watch for damage caused by teeth grinding as stuff like this chips away at Bill's plans for a Windows Media monopoly.

Posted by: Craig at January 12, 2004 2:31 AM

If choice is that important, instead of asking Apple to support WMA, why don't you ask all those download sites (Walmart, Napster,etc.) to support AAC? Then everyone would have a choice, eh?

Open source vs. closed MS. You struggle over such a choice?

Posted by: ro at January 12, 2004 3:31 AM

Just a note ... as one of the people who worked on AAC (actually MPEG 2-AAC) I note that it was a consortium that created it. Dolby is the licensing arm, but added very little from a technical point of view. Most of the intellectual property came from AT&T Research (back when that was thriving) and Fraunhofer.

I'm sure this is a slap at Microsoft by HP. MS has most of the PC companies over a barrel with licensing fees - note the huge fight over being able to put Linux on a machine and not pay MS for Windows...

MS intends to control this world and HP's connection with Apple is saying ... wait ... we don't subscribe to your worldview.

HPs move is good for HP, good for Apple and good for the public.

Apple needs to vastly expand the music store and continue to add functionality. They now have people who were on the fence joining them (note the 12,000 DGG tracks). Sony's entry will probably fizzle and if Apple can keep momentum for 6 months and double or triple the size of the store, they may win the first round.

Posted by: Steve at January 12, 2004 7:09 AM

"Open source vs. closed MS. You struggle over such a choice?"

MOST MUSIC BUYERS DO NOT CARE ABOUT FORMATS AND OPEN SOURCE. They want to be able to buy from more than one source and know they can play it any device down the road. Now which format has the most choices?

Posted by: Woody at January 12, 2004 11:32 AM

HP has always been sort of cozy with Apple. Back in 99 they bucked the industry and released Mac compatible cameras that did really well for them. I bought one and was impressed on how easy it was to use on my Mac.

What I thought was interesting about this deal was the verbiage used by HP. CEO Carly Fiorina plainly said they chose Apple's music solution because it's 'the world's best digital-music offering'. Steve Jobs took a swipe at the rest of the pack by insisting that the competition was spending too much time & money offering 'a multitude of incompatible proprietary technologies'. Both execs went on to say that a consumer backlash to that strategy was well underway and that both companies would be recognized as leaders in digital music. Maybe a bit of press release hyperbole or maybe true insight.

I agree with Woody. Consumers do not care about what format it is, just that it works on the stuff they already own. This Apple & HP deal works right in line with that.

Posted by: mr. ken at January 12, 2004 1:08 PM

Apple always fails to breach the larger market because even as their brand starts with the proposition that it is simple, elegant, and requires no 'techie' knowledge, in the end, the value proposition does require 'techie' knowledge to sustain the exceptional aspects (for example, one asks: why can't download music I bought at iTunes to my Rio? One might ask the reverse of the Rio, but iTunes is perceived, rightly so, as a conduit, so it should be transparent; instead, I have to hear this 'mumbo-jumbo' about codecs and MPEG-4). But Apple has always intentionally narrowed its demo (see the NYT article from Nov[?]). They want the world to change to their way of the thinking, not the other way around. I'm not criticizing this approach (after all, they know how to make a computer and I don't), but noting that is less likely to be effective.

Also, no one has mentioned the role of the RIAA and the music companies in all this. iTunes was a success not because they had the iPod connection, but because they had 500,000 songs for $0.99, and you can bet the there was an intractable demand for DRM in order to get the contracts they did. I doubt MS was returning Jobs calls, if he was, in fact, calling them for their DRM. So Apple bought the best DRM available at the time, to be the first in the market with cheap songs in large quantities. The iPod and iTunes will die or change once Napster or Dell (not Wal-Mart, since they will edit content too much) doubles or triples the iTunes inventory (I'm sure Apple has some exclusivity, but it is probably tied to sales). I think it is unfortunate that they think that trying to establish their own quasi monopoly (I know it isn't, but it sure feels that way to my Rio) is the best way to ensure penetration and share. Considering it has never worked for them before (becuase they end up seeming exclusionary in a bad way; those iPod people are so damn precious), I also wonder why they thought it would this time.

Posted by: nic at January 12, 2004 1:17 PM

In the end, I don't think it comes down to whether or not Apple will support a .wma format. I think it's still simply a question of supporting standards. It's something Microsoft seems less and less willing to do (in this arena as well as the web). The .wma format is proprietary, where AAC is not.

I mean, Windows could be getting a piece of the iPod market if they really wanted, but they're pushing .wma on everyone.

HP's move tells me they're hoping to get a little freedom, which I think has got to be a reaction to Microsoft's strategy, which seems bent on everybody playing their game by their rules. "Our software, our codecs, our languages, our world."

That's why I so vehemently oppose them and all their minions!!

Posted by: Doy at January 12, 2004 2:50 PM

Wow, i missed that HP got their 'own' blue iPod.

Hmmm....
I had no idea I needed this until right now.

Posted by: mr. ken at January 12, 2004 3:46 PM

No, in the end the question is:

Will Apple, or who ever actually owns the rights to FairPlay, license fairplay to other companies at a reasonable price (as inexpensively as WMA DRM)? If so, then what people should be asking is why isn't RIO supporting fairplay?

Apple is trying to stop yet another MS monopoly here. If Microsoft controls the DRM used for music, they control online music purchasing. Ultimately, DRM needs to be owned and licensed by a standards comity like AAC is to ensure that nobody can ever hold the industry hostage (not Apple or Microsoft).

Just my thoughts.

Posted by: Doug Petrosky at February 2, 2004 11:47 AM