(FORTUNE Magazine) – widget (n.) 1. Gadget 2. An unnamed article considered for the purposes of hypothetical example.

"We build the whole widget." That's one of Steve Jobs' favorite explanations for why he thinks Apple Computer's products are so darn cool. What he means is that Apple's own engineers design much of the hardware and virtually all the key software for Macintosh computers, rather than merely wielding screwdrivers to assemble prefabricated kits cooked up by the geeks at Intel and Microsoft. The result is a distinctive line of computers that are more stylish and reliable and easy to use than their Wintel PC counterparts, and that, despite Apple's Lilliputian 5% market share, often set the aesthetic and technical standards for what a PC should be. Several of Apple's Macs have even wound up at New York City's Museum of Modern Art as examples of exceptional design and engineering. But "widgets" they are not.

Now, with the introduction of the sleek little iPod, a $399 personal digital-music player, Steve has finally built a widget. About the size of a pack of cigarettes, the iPod is more than just a portable sound machine, however. It's a new kind of gadget that has the potential to change how we think about personal audio-entertainment gizmos, much as Sony's first pocket-sized transistor radio did in 1958, and the Sony Walkman portable stereo tape player did 20 years later. The progeny of an eight-month crash-development project, the iPod also vividly illustrates how Apple's engineering and software skills could make it a force to be reckoned with in the consumer electronics business long dominated by leviathans like Sony and Matsushita. "This is the 21st-century Walkman," boasts Jobs, as he lovingly fondles an iPod.

If you took a ball-peen hammer to the hermetically sealed stainless-steel and polycarbonate case, the components you'd find inside the iPod wouldn't seem all that extraordinary, at least by computer industry standards. There's a teensy five-gigabyte hard drive, capacious enough to store up to 100 hours of MP3 music files--the equivalent of about 100 CDs. There's a lithium-polymer battery that can power the iPod for ten hours between full charges. The box also contains 32 megabytes' worth of memory chips--far more than a typical Palm organizer--and an array of other circuitry, including a microprocessor like those used in handhelds. And it sports a high-resolution liquid-crystal display about the size of a matchbook.

The most unusual component is an ingenious two-inch-diameter thumb-wheel on the faceplate for scrolling through hierarchical menus on the six-line display. (I mastered the scroll-wheel interface in a couple of minutes. It's easiest to use with one hand.) Aside from the standard headphone jack, there's only one other socket, for connecting the iPod to a computer via a special Firewire cable, which not only allows high-speed transfers of digital files but also recharges the iPod's battery at the same time.

"So what?" you say. Most of those components and features show up in other digital devices, from Pocket PCs to laptops, and besides, portable MP3 players that link up to computers have been around for several years. The big differences, however, are the high-speed connection and the software that makes it all go. When you plug the Firewire cable into a Macintosh (a PC-compatible version won't come out till next summer at the earliest), the Mac immediately recognizes the iPod and starts up the iTunes music-management program included with all Apple computers. If you don't have the latest version of iTunes, no problem. The iPod has it right on its little disk, and it will zap the software directly to your Mac. iTunes keeps track of MP3 music files that have either been downloaded from the Internet or "ripped" from a conventional audio CD. It also lets users set up playlists of favorite songs and sort them by artist, album, or title. Within seconds, the Mac automatically starts to transfer all the music and playlists to the iPod. Downloading 1,000 songs takes only about ten minutes. And the next time you connect, iTunes quickly transfers only new music and playlists, much like "syncing" a Palm or a Pocket PC. As Jobs puts it, "Plug it in. Whirrrrrr. Done."

That is what Steve really means when he talks about "building the whole widget." Until the iPod came along, most MP3 players were awkward afterthoughts that only a propeller-head could love. They had much slower USB connections for downloading music from a PC. A single CD's worth of MP3s would take three to five minutes to transfer over USB, vs. five to ten seconds for the iPod. Nor did previous MP3 players have the smarts to accommodate multiple playlists that you put together on your computer or a versatile user interface for navigating quickly through hundreds of titles. But then, it didn't much matter, because most players could store only a couple of dozen songs. A few other MP3 players on the market do hold as much as the iPod, but they're much bulkier, and finding the songs you want to hear on them is as annoying as setting the digital clock on your VCR.

Why in the world would Apple want to jump from the frying pan of the virtually profitless PC industry into the roaring fire of the hypercompetitive consumer electronics business? After all, just a few days before Apple's splashy introduction of the iPod, Intel announced that it would close down its own disappointing consumer electronics division, which made, among other things, portable MP3 players, digital still cameras, kiddie videocameras, and a much ballyhooed digital microscope.

For starters, the iPod fits right into Jobs' so-called Digital Hub strategy for the Macintosh. In the past 18 months Apple has introduced several free "digital lifestyle" software applications that let Macintosh computers hook up to various genres of consumer electronics products so that users can play around with the digital content they create. There's iMovie for editing home videos made with camcorders, and iDVD for burning those edited movies onto a DVD. And, of course, there's iTunes, which, besides managing and playing back MP3 audio files on a Mac, can also burn them onto conventional audio CDs. In the next few months Apple will probably release another application for managing digital photos.

Jobs hopes those "iApps" will stir consumers to buy more Macs, but he recognizes that the strategy could also drive sales of digital gadgetry, and he wants a piece of that action. Camcorders and digital still cameras are beyond Apple's ken, but digital-music players are remarkably similar to computer peripherals. (The iPod, when you think about it, is basically a portable hard drive.) And, better yet, judging from the hundreds of millions of Walkman-type products in use, portable music devices have almost universal appeal.

Moreover, electronics industry analysts believe that the iPod may yield more profit per unit than Apple's slick iBook laptop computers, which cost three times as much, mainly because so much less goes into it. The iPods hit store shelves Nov. 10. Jobs won't say how many Apple hopes to sell, other than to say "as many as we can make." When pushed, he concedes that contract manufacturers in Taiwan have tooled up to pound out "hundreds of thousands a quarter," which would translate into hundreds of millions of dollars in new revenues in 2002. Such sums aren't chicken feed for a company that saw its annual sales erode in fiscal 2001 by 33%, to $5.4 billion. Only a week before the iPod's unveiling, Apple reported that fiscal fourth-quarter profits declined from $170 million last year to $66 million (most of which was investment income from its $4 billion cash hoard). Now the company hopes to see a material gain in profits in the December quarter, thanks to the little guy--if it sells as well as Steve thinks it will.

The project to develop the iPod came as close to instant gratification as the computer industry ever gets. It was only last April that Jobs asked Jon Rubinstein, the senior vice president for hardware development, to put together a SWAT team that could produce a device in time for the Christmas shopping season. Says Rubinstein: "Senior management had been talking about something like the iPod since late last year, but we started with a clean sheet of paper." Even by Apple's tight-lipped standards, secrecy was intense. Rubinstein quickly recruited a handful of hardware and software engineers, including several from outside the company, without telling any of them exactly what they'd be working on until they signed up. Other Apple engineers drifted in and out of the project as their expertise was needed, and some were never told the purpose of their efforts either. At any one time, about 50 people were working on the iPod.

The engineering team confronted a host of thorny problems, not least of which was figuring out how to cut power consumption so that users wouldn't have to worry all the time about running out of juice. In essence, the iPod loads songs onto its memory chips so that the power-hogging hard drive can shut down during playback; the result is a ten-hour battery life, vs. two or so for other MP3 players.

While the team worked on the innards, Jonathan Ive, Apple's vice president for industrial design, took on the job of creating the look and feel of the device, including the scroll-wheel feature. "Like everyone else on the project, I knocked myself out, not so much because it was a challenge--which it was--but because I wanted to have one," he says. "Only later, as it came together, did the broader significance of what we were working on become apparent."

Indeed, although priority No. 1 was to make the iPod the ultimate personal digital-music player, the team also knew they were designing what was in effect a computer platform that could be improved with software upgrades and adapted to other uses. That's because, like a PC, the iPod has its own operating system, a microprocessor, and lots of memory. In fact, the initial model can double as a portable hard drive for holding computer files of any type--digital photos, documents, or arrays of data.

So you don't have to be a rocket scientist to imagine how Apple might one day build other configurations of the iPod outfitted with, say, a larger full-color screen, or the ability to work with other iApps that manage videoclips and personal calen- dars. And while Apple never discusses work in progress, the iPod platform might also underpin a whole range of Apple consumer electronics devices, like a home content server or even an enhanced cell phone, each of which would link back to a Mac in some way.

At first glance, the idea of equating the iPod to such seminal products as Sony's transistor radio and Walkman seems like typical Jobsian hyperbole. At the very least, the iPod will have a tough time matching the Walkman's mass appeal. Apple will have to develop a version of iTunes for non-Macintosh computers or "sync" with at least one maker of jukebox software already popular on those machines. Owners of most Wintel PCs will also need to add a Firewire connection at a cost of $100 to $150--just the sort of nuisance and expense that can slow a technological revolution. And while the $399 iPod delivers far more bang for the buck than the $249 Rio MP3 player (which holds only two hours of music), it still costs ten times more than a Walkman or its many copycats.

Even so, Jobs may have a point in invoking the Walkman. That product, because it employed cassette tapes as the medium for recording music, marked the beginning of the marginalization of the analog LP record and brought big changes to the recording industry. If music lovers didn't buy prerecorded cassettes to play on their portable players, they simply dubbed their LPs onto tape and put the fragile and unwieldy vinyl disks back on the shelf to gather dust. In other words, LPs became, for the most part, archives, and were soon rendered virtually obsolete by the arrival of the CD digital format in the 1980s.

It was the emergence of MP3 digital audio compression technology in the late 1990s that really roiled the recording industry and gave musicians apoplexy over the potential for rampant illegal copying and sharing of digital music over the Internet. Hence the celebrated Napster legal donnybrook, in which record companies persuaded the courts to crack down on Websites that facilitated digital song swapping. But MP3 technology, because it allows so much music to be electronically stored in such a relatively compact space, has triggered other changes in how people use the recorded music they legally own--changes that could encourage record companies to alter yet again how they package and distribute their music. And the iPod may hasten this change.

That's because Apple, a staunch defender of its own intellectual property, took great care to make it difficult for anyone to use the iPod to share recorded music. While the device can automatically download digital music from your own Mac, Apple made it a tricky proposition to transfer music from your iPod to a different computer; you can't easily use your iPod to collect music from someone else's computer either. Steve explains how it works: "If you try to sync your iPod with someone else's Mac, it stops you and gives you a choice: Either you can cancel the request to sync to this 'foreign' Mac and unplug your iPod, or you can agree to let it blow away all the music you now have on your iPod before it downloads the music library from the new sync partner. But then, when you go back to your own Mac, the same thing happens."

Besides, says Jobs, the whole point of the iPod isn't to help you share music with your friends; it's to let you carry around your entire personal music collection wherever you go. So, like the Walkman before it, the iPod, if it really catches on, could change the format in which music lovers "consume" much of their music. Most will still buy their music, which will keep the record companies and recording artists happy. But after ripping their CDs into MP3s and loading them onto the iPod, they'll leave the disks on the shelf in their cases for months at a time. That'll even be true for people who want to listen only at home. The iPod can plug into standard audio equipment and bring playlist convenience to the living room; audiophiles unhappy with MP3 sound quality can set the iPod to allot more digital bits to each second of music.

And because Apple has made it so difficult to pirate music with an iPod, maybe, just maybe, the record companies will get brave enough to start selling MP3-format music online bigtime. So, strange as it may seem, if Steve's iPod really does become the Walkman of the 21st century, and millions of people pack them in their pockets and purses, the record companies might ultimately be among this widget's biggest fans.

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