The real reason Apple's mad about 'Harmony'
By John C. Dvorak
Last Updated: 8/4/2004 12:36:00 PM
SAN FRANCISCO (CBS.MW) -- The flap over the announcement by RealNetworks that it has hacked the iPod has some people baffled.
RealNetworks (RNWK) announced last week that its new product, dubbed Harmony, will allow iPod users to access and buy songs using its digital rights management service and file system called Helix.
This gave users a new source for downloadable music and put Apple (AAPL) in a tizzy. See related story. Despite the success of Apple's iTunes, a pay-per-tune music service, the sales of the iPods is what puts money in the bank for Apple. You'd think the Real announcement would mean more iPod sales, not less. And you'd think Apple would be happy about that. So what's wrong with this picture?
It's not about the music and the player. It's about a scheme afoot to monopolize music delivered to cell phones. Although the online music business is expected to grow to $1.7 billion by 2009, few people realize that the dopey cell phone ringtone market is already past that with $2.3 billion worldwide sales in 2003 according to the Yankee Group. And this is for an idiotic product -- a funny phone ring for your cell phone.
Apple and Motorola (MOT) are working on a deal to put iPod technology on Motorola cell phones. According to published reports, the hope is to create a cell phone/iPod sub-platform that can be licensed to other makers such as Nokia and Samsung. The idea is to develop a proprietary music delivery system with the phone carriers. This gives them a new opportunity to add additional fees to the already burgeoning cell phone bill, this one for music.
Billed as either a monthly service or pay-per-tune, everyone expects a bonanza. We already know that cell users will pay a dollar for a ring tone. They'll pay a dollar for a catchy tune, too. The potential sales could dwarf the music business if the ringtone business is any indication of potential. You could even make these songs your ringtone. Currently any pop songs selling as a ringtone go for as much as $4 each.
This grand scheme only works if the platform is secure. You can't sell an iPod phone and lock in all this easy money if people can buy from just anyone or just use bootleg music, can you? So along comes the RealNetworks hack, which screws up this scheme. Suddenly the iPod looks a lot like any other MP3 player except for its good looks, and those go away when it's in the phone.
This explains why Steve Jobs and Apple wouldn't let RealNetworks license any of its technology when asked last April. You can be certain that the Apple-Motorola scheme hatched before that and probably right after Ed Zander, Jobs' friend, took over Motorola in January. With this scheme they had to keep the iPod locked down and that meant no licenses for interlopers and potential competitors.
Now it's not even a matter of Apple changing some of its software code to prevent Harmony from running on the iPod. The damage has already been done. The iPod has been hacked and no matter how insignificant the hack, it's a bad thing by definition.
The Recording Industry Association of America music moguls and the phone moguls just see that it's been hacked and that can't be good. They're freaky that way.
I suspect that the efforts to put music streams on cell phones will go ahead with Apple just one player among many, RealNetworks included. If the ringtone business is any indication, there will still be plenty of money for everyone, just no monopolies.
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