News item: Amazon.com releases its MP3 store

News item: Amazon.com releases its MP3 store

Analysis: we are witnessing the beginning of a big shift in the balance of power in the online music industry.

Legal download of MP3 songs is nothing new. Apple's iTunes music store has been selling songs from EMI music major in MP3 format for months now. Recently, Universal announced a 6 months trial where they would sell unprotected MP3 music through a variety of online retailers (Gbox as well as some music label's own sites).

But this is the first time that an online music store proposes such a wide offer of legal MP3s. A one-stop shop where one can easily buy pretty much all the legally available MP3 songs on the market. This means a lot of the top songs we can hear on the radio. And it's not even from Apple!

Needless to say, this is terrific news for digital music sales. Customers can now purchase more songs in MP3 format. At a cheaper price ($.89, contrary to Apple that hiked up the price from $.99 to $1.29 for unprotected songs). And from a known retailer. All this will likely boost online music sales (very few people still believe that copy-protected music prevents any piracy).

But this move also contributes to a shift in the balance of power in the online music business. Until now, proprietary song formats gave the power to companies like Apple or Microsoft. Wanna sell songs using the AAC format for the iPod? Gotta go through Apple. Wanna sell songs using the WMA format for the Zune? Gotta go through Microsoft.

Music majors seem to be interested in cutting deals with as many online retailers as possible (that might eventually include iTunes, as much as the music execs hate Steve Jobs). Why? Because the widespread use of legal MP3 erodes online music stores competitive advantage over each other. It shifts the power to the music majors. When music companies wanted to raise prices for hit songs, Steve Job was able to convince them otherwise because he holds the key to iTunes which held the key to the iPod. But if there are several online retailers who can all sell songs for the iPod and have very little to differentiate from each other, the music majors have much more bargaining power. As long as at least one store agrees to jack up the prices as they desire, they can afford to shun the stores that don't.

So what we're witnessing is a change from a highly integrated model (Apple providing all the components but the songs themselves) to a more horizontal one. Eventually the online stores will compete on price alone. Considering that the incremental cost for a digital song is pretty much zero, this means they are likely to end up with razor-thin margins while the music majors reap most of the profits.

Now, if you recall, when entering the music market, Microsoft initially embraced the horizontal model with its own operating system and music format on one hand, and 3rd party MP3 player manufacturers and online retailers on the other hand. Unfortunately for Redmond, the customer experience was far less smooth as Apple's integrated solution. Will the same problem happen? It's actually a moving target. On the one hand, the adoption of the MP3 standard greatly simplifies the workflow. Retailers provide a MP3 format knowing it will work with any MP3 player, and don't have to worry about compatibility with Microsoft's latest specs (which was the problem with Microsoft initial strategy).

On the other hand, thanks to Wi-Fi support, the latest iPods can now download songs directly from iTunes without having to download them first on a computer. Future will tell whether retailers like Amazon can add plug-ins to the iPod to provide a smooth Wi-Fi integration. But for now, most iPods do not support Wi-Fi, so Amazon's current integration is just good enough for most people.

In the meantime, the music execs must be ecstatic at the thought of breaking Apple's control of what legal song is played on the iPod. For the time being the prices are likely to decrease as retailers start competing with each other. But one can bet that, when they feel they have enough power, the music execs will push again for a huge price increase for the hit songs. Unless they believe that breaking customers' expectations (i.e. getting used to pay a buck or so a song) can actually hurt sales.

News item: IBM announces a free office suite competing with MS Office

News item: IBM announces a free office suite competing with MS Office called Lotus Symphony.

Analysis: an office suite competing with Microsoft Office is nothing new. There has been some for decades, all trying in vain to survive in a market dominated by Redmond. Even a free office suite is nothing new (OpenOffice).

So is Symphony doomed before it is even released? Not necessarily. There has been office suites from known vendors such as Lotus or Borland, but they were not really cheap so people preferred the "real thing" and purchased MS Office. OpenOffice is free, but very few people hear about it because it has no marketing muscle. This is the first time there is a free office suite distributed by such a big name as IBM.

Why does it matter? Because IBM has both the marketing muscle and a greater ability to distribute its office suite through THE channel that matters: pre-installed on new PCs, starting with any Lenovo computers.

It's only as pre-installed that people will really start using Symphony (forget about free downloads or even free CDs). And IBM should focus first on individuals who are more price-sensitive and use much less features than their corporate counterparts.

Once individual start getting used to Symphony (and provided they like it at least as much as MS Office) only then does IBM's office suite has a chance in the corporate workplace. MS Office will however always have a stronghold in the corporate world, unless Microsoft really gets too cocky.

Because the other factor is Microsoft's behavior. Devoid of any real competition, Redmond has been greedier and greedier, trying to charge more and more for each new release of what is basically the same product (let's face it, most of us under-use the product and barely anybody knows the new features of the latest versions).

Of course, should Symphony start be successful, Microsoft might start
charging more reasonable fares. But at least Symphony would help restrain Redmond's appetite to charge more.

In any case, this will be a long battle. Even in the best case scenario, don't expect Symphony to overthrow MS Office overnight.

But more generally MS Office's true competitor is ODF (Open Document Format) which is supported by most new competing office suites nowadays (from Symphony to Google Docs). Contrary to Microsoft's OOXML format, ODF is ISO-certified which grants it some brownie points when considered by administrations all over the world. Furthermore, ODF shifts the competitive advantage for Office Suites from the customer base ("everybody has MS Office, so I should too") to features, convenience and price (where Microsoft is not in its strongest position).

Microsoft in the long run

Every once in a while we hear people wondering: is the end of Microsoft near?

On the one hand there's been so many announcement of its supposedly imminent demise it's not funny anymore. On the other hand they did lose their mojo.

Microsoft has two historic cash cows: Windows (on the desktop) and Office. If since managed to successfully foray into the server market which has become another cash cow. Unfortunately for Bill Gates, his company has failed to capture any new strong revenue stream ever since.

Sure, Microsoft was able to defeat several incumbent giants in their own markets. But no market that bring enough revenue to significantly complement (let alone replace) the current cash cows. On top of that, a lot of these victories were hollow.

Microsoft wanted to overthrow Netscape in order to control the future Web standards. If it succeeded at killing Netscape it failed at imposing any Web standard. .NET never really took off and Ajax became the way to spice up Internet applications. Also, Adobe is silently but surely progressing in the Internet client space. For instance, Adobe technology is little by little replacing Windows Media Player when companies want to display videos on their websites. It started with YouTube, but didn't stop here.

Microsoft wanted to overthrow Palm to prevent it from becoming a major player. It succeeded and put a halt on any innovation on the PDA market. But that was before the Apple iPhone and its very dangerous Mac OS X embedded operating system.

Microsoft wanted to dominate the video game console market. If it was able to launch a very successful Xbox 360 and capitalize on Sony's mishaps, the Nintendo Wii came from nowhere to become the #1 seller. Plus, Microsoft is nowhere near controlling the living room electronics (the real reason why it's all of a sudden interested in video games). As a matter of fact, Apple (once again) might be better poised with their Apple TV. Steve Job's company already has an appliance that allows to watch and listen music and movies on one's TV. It wouldn't be surprising if one of these days the Apple TV allowed to also browse the Web and work as an appliance completely independent from any computer.

So that leaves Microsoft with its traditional cash cow markets. Enough to stay prosperous for decades to come, but not enough to be a mover and shaker (ala IBM in other words). Some of these markets are well protected and are not moving away anytime soon, but some might suffer from erosion.

The most endangered market is the home market. History has shown that this market can change very fast. That's how individuals in their huge majority switched very quickly to Web-based email clients instead of applications installed on their computers. Likewise, a successful Internet appliance (see above) could cater to the people who do not need a full-fledged computer and can live on Internet applications only. To that regard, Microsoft's attempt to push Vista down people's throats doesn't help. So much also for Redmond's coveted dream to rent us their operating system and office suite.

Same thing for the MS-Office suite. Ajax-based online word processors haven't exactly been impressive, but a Flex-based online office suite like Buzzword is really promising. If Microsoft fails to have its OOXML document format accepted by the ISO, competing standard ODF (already certified ISO) might win more and more ground as online office suites gain traction.

In either case, don't expect Microsoft to lose its cash cow overnight. This is a potential, gradual decline.

In the corporate world however, there is little indication of any change anytime soon. Just like banks still have mainframe computers, legacy applications are here to stay on the corporate desktop. After all, corporate users still heavily rely on Microsoft Outlook.

News item: Microsoft and Sun announced an alliance to better integrate their products

News item: Microsoft and Sun announced an alliance to better integrate their products

Analysis: people familiar with the two companies were very surprised by such an announcement, considering how Sun has historically been trying to lead the anti-Microsoft front. So much that some experts are questioning whether the announcement isn't pure hype.

In hindsight, such an alliance doesn't seem so abnormal. After all, Microsoft is a software company and Sun is a hardware company. But why now and not sooner? Two factors have come into play.

The first factor is the stepping down of Scott McNealy, Sun's former emblematic CEO for decades. McNealy would have probably never agreed to struck an alliance with Microsoft. But is successor surely doesn't have McNealy's hatred for Microsoft and is thus more pragmatic.

The other factor is that Sun over the years reluctantly departed from its vertical integration model. During its heydays the company was designing and building almost everything in its computers, from its own CPU (the SPARC processor family) to the operating system (SunOS and then Solaris). But it's hard to compete against specialized vendors such as Intel that enjoy the vast economies of scale of the PC market. It's hard to fight against such huge opponents as Windows or Linux.

So Sun decided to attack the Linux hardware market even if it's at the expense of Solaris. As a result, its stopped trying to push its own operating system down people's throats. Likewise, just like Apple switched to Intel processors after decades of Intel bashing, Sun began to sell servers with Intel-compatible chips (its buys them from AMD, so some honor is saved). Once again, it now has a better chance in the Linux hardware market as well as the virtualization market even if it comes at the expense of the SPARC processor.

Sacrificing Solaris isn't really a setback for Sun as the operating system has always mainly been a way to sell hardware. Sacrificing SPARC's monopoly on its computers must have been harder though, but the company nevertheless remains a computer manufacturer at heart that designs most of the electronics of its machines.

The processor and the operating system were the remaining stumbling blocks that prevented an alliance with Microsoft. Now that one can buy a Sun machine powered by a x86-compatible processor and without having to use Solaris, an alliance with Redmond makes much more sense.

So will Sun become just another PC manufacturer? Not so as it still aims to build high-end computers aimed to serve high end uses such as virtualization or data centers. Such markets indeed still offer the ability to differentiate from the competition. A good example is the Sun Blackbox portable data center, a whole shipping container filled with 250 SunFire servers and ready to be plugged to a company's network with very little work. Sun can use its expertise and engineering knowledge to design and build high performance systems while avoiding selling commodities unlike most PC manufacturers.

But like any market, shooting for the high end is only a temporary solution. Computer performance almost always eventually offshoots customer demand, and when that happens the pool of high end customers is shrinking fast. Just like today PC manufacturers are able to sell computers to put behind heavy-duty websites, tomorrow they too will be able to sell plug-and-play data centers - still with relatively low profit margins. That day, Sun will be forced to shoot for even higher end customers - if it can.

But at least Sun has bought itself some time. If the announcement is not pure hype of course.

Apple in the long run

With the release of the iPhone, Apple has struck another brilliant move. In a market already filled with several incumbent giants, newcomer Apple not only succeeded to generate a huge buzz with its iPhone, but that buzz translated into sales (270,000 iPhone sold on the first 30 hours, not too shabby).

Now, let's take step back and examine Apple's hit products, past and present:
- Apple I & II
- iPod
- iPhone

(no, the Mac doesn't make the cut. If generations of Macs have been generating a lot of buzz over two decades, they nevertheless only represented a niche market)

What do those products have in common? They are/were all in a relatively new markets where integration matters. The significant exception was with the Newton as Apple failed to enter the PDA market, but this has probably more to do with CEO of then John Sculley's lack of proper leadership than anything else.

What Apple excels at is design as well as integrating components into a sleek product. The Apple I was designed by an electronics genius in his garage. Cramming all the iPod components into a Nano case was an engineering feat. Same thing for the iPhone.

But there comes a time where integration doesn't matter anymore. Consider the personal computer. In the 70's and early 80's all personal computer vendors were designing all the electronic boards because they had to. The only thing they could buy off the shelf was electronic chips. Designing the motherboards where those chips would fit was up to them, and that's where they provided value. But standard like ISA and later PCI took over, and all of a sudden pretty much any vendor could assemble high-quality components from different specialized vendors. Sure, a Mac still runs smoother than a PC thanks to a tight control on the hardware. But the PC is good enough, and has numerous other advantages.

And such a day will eventually come for portable devices as well. When batteries and flash memory become small enough, pretty much everybody will be able to design an iPod Nano or an iPhone. The way the different components may even be standardized. This day, Apple's added value will shrink. They could go horizontal and license the embedded version of Mac OS X used inside the iPhone to other manufacturers but this is highly unlikely (and would really be a first) as Apple has a strong vertical integration culture. They want to sell us some gizmos directly, not sell components to a vendor that will sell us the gizmos, as Microsoft prefers doing.

What can they do then? First of all they may move on to new markets where integration still matters. After all this is what they've done with the iPod. But this time they may also be able to keep their position on the MP3 player market thanks to some proprietary standards. For instance, keeping control of the connecting standards between an iPod / iPhone and any other device allows to control the access those hundreds of devices (people buy an iPod because there are so many peripherals, and and peripheral vendors only produce for the iPod because it holds the market). But it will be a tough fight for Apple to stay on top in the long run.