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Technology > Tech Biz
Apple's real problem
Refusing to license its FairPlay system has cost Apple control. That may be a good thing.
July 29, 2004: 10:05 AM EDT
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - What do you get when one company aligns with another company, against the second company's will?

You get a situation resembling the story that broke Monday, when Real Networks debuted its Harmony software, which lets users of Real's digital-music service play their downloads on a number of new devices, most notably Apple's iPod.

Apple intended the iPod and iTunes to be a closed system, allowing no other company to sell iPod-compatible downloads. To be sure, eMusic offers MP3 downloads that play on iPods, but eMusic's subscriber numbers amount to a rounding error in the digital-music world.

"There's probably a certain amount of broken furniture at Apple headquarters," says Josh Bernoff, an analyst with Forrester Research. "I think they're trying to figure out what to do."

Indeed, Apple released a statement Thursday, accusing RealNetworks of adopting "the tactics and ethics of a hacker to break into the iPod."

Interesting consequences

I spoke with Real chief strategy officer Richard Wolpert just after he premiered the technology at Jupiter Media's PlugIn conference Tuesday in New York. When I noted that Apple had canceled its keynote at the conference, reportedly due to illness, he joked, "That was the first time a demo I gave got someone sick."

To create Harmony, Real reverse-engineered Apple's proprietary AAC format, and created a way for Real's downloads to appear in AAC format when loaded onto an iPod. Industrious hackers have attempted such a feat but have been spooked by legal threats.

Apple may yet decide to challenge Harmony in court, but it should carefully think through the consequences: Harmony may actually prove beneficial to Apple and the industry as a whole.

As for Real, it gets some great press and momentum heading into the fall, when Microsoft is expected to launch its long-rumored digital-music offering.

New markets, and a challenge

For Apple, it opens up another market for the iPod. Real's subscriber numbers are still relatively small, but they're growing.

"Harmony could help iPod sales," says Charlie Wolf, an analyst with Needham & Co. "It could also take some sales away from the iTunes store, but it's the iPod that makes the money." Wolf owns Apple shares and has a "buy" rating on the stock. Needham & Co. has no banking business with Apple.

Obviously, this isn't the way Apple wanted to let people into its iPod system, and it forces the company to face a crossroads that wasn't in Steve Jobs's master plan.

The question the company now must answer is, Is it strategically more important to preserve its closed system, or is the iPod the future profit machine for the company? In the latter case, it should pump up sales numbers at any reasonable cost. It's quite a pickle.

"They need [an answer] that doesn't sound anti-consumer and yet preserves the system they've built for themselves," Bernoff says. "I can't think of a response that satisfies both of those requirements."

Real Networks
Music file swapping

I don't know the answer either. But I do know that in most cases -- especially when it comes to consumer electronics -- open standards and consumer choice usually win. Giving consumers the ability to choose which store they want to purchase music from instead of locking them into one store is sound policy.

On Tuesday, Jobs again showed he's not averse to partnering when it comes to music, pairing with Motorola to allow new Motorola cell phones to carry a limited number of iTunes-based songs. My advice to Steve Jobs, then, would probably not be taken: Ignore Real and take your partnering efforts one step further, licensing your FairPlay technology so Apple, not Real, controls the relationship with the other stores.

Licensing isn't a word often found in Apple's playbook, however, and now its choice has been made for it. Apple will need to respond to Real's Harmony fairly quickly, as the other digital-music download stores will likely want to add the "iPod Compatible" sticker to their sites and Real seems ready to license it.

"We haven't announced [Harmony licensing plans], but we're in discussions and happy to be in discussions with people," says Real's Wolpert. "Let's grow the industry."

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