Why the iPod can be conquered

Apple's hugely popular digital music player isn't as ubiquitous as most people think, which explains why rivals like Microsoft keep trying to dethrone it, writes Fortune's Richard Siklos.

By Richard Siklos, Fortune editor-at-large

(Fortune) -- Far be it for any mortal to tell Steve Jobs how to flog his world-beating iPod music machine, but here's one humble suggestion: consider reviving the old Pantene Shampoo slogan: "Don't hate me because I'm beautiful."

A week doesn't go by without some reminder of how seemingly dominant the iPod has become in the portable media world business - at least in the United States - and how annoying that fact must be for its rivals and, in some cases, its partners.

Apple doesn't have a lock on the digital music player market, which is why rivals like Microsoft and Sony haven't given up.

It must be said that iPod deserves all the kudos it gets for design, functionality and straightforwardness. But where Apple (Charts, Fortune 500) (with some justification) sees its iTunes music store as the best legitimate alternative to illegal downloading, others view it as a kind of digital pied piper designed to sell gadgetry at the expense of intellectual property.

Just a few recent ripples of discontent against the iPod include Universal Music Group, the world's biggest music company, this summer downgrading its licensing deal with the online iTunes store to an "at will" basis so that it can do exclusive sales deal for its music with other download outfits.

Or NBC Universal (Charts, Fortune 500) pulling downloads of its TV shows - some of which were top sellers on iTunes - from the online service, because, like their distant cousins at UMG, they bristled at the terms Apple was offering. (Among other things, songs purchased on iTunes can't be played on non-Apple machines and the company has been steadfast that one-size-fits-all pricing is critical iTunes' success.)

Last week, the news was that Microsoft (Charts, Fortune 500) is coming out with a new and improved version of its Zune music player, the latest iPod-slayer contender. The first generation Zune sold some 1.2 million units since coming on the market nearly a year ago, a small fraction of what the iPod sells annually. And Microsoft has tried to present itself as a chum to the challenged music industry, reportedly putting $1 from each Zune sold aside to share with the label chiefs.

Still, by most accounts Apple holds more than 70 percent of the market for portable music players and some 80 percent of the online music sales business through its iTunes Music Store - a fairly daunting lead, as contenders like Samsung and Sony (Charts) have also found.

And, meanwhile, as its rivals scramble to catch up and the music industry staggers through its digital transition, you could argue that Apple is moving the game to another level with its iPhone, video iPod and AppleTV receiver.

So why do they bother coming at Apple in the business of mobile music at all? Because, as iconic and singular as the iPod is, it is not as ubiquitous as one might think.

According to Solutions Research Group (SRG), a research firm based in Toronto, Apple is on track to have shipped nearly 120 million iPods worldwide by the end of this year, and nearly half that amount - about 60 million - Americans own at least one of the devices. (Many iPod owners are repeat buyers.)

Thus, while the iPod is by far the leading mobile music player, it's penetration of the U.S. population stands at around 20%, and it is lower overseas.

By comparison, according to SRG's Kaan Yigit, Motorola (Charts, Fortune 500) has just under 30 percent of the considerably larger mobile phone market - 230 million handsets - in the United States. And, of course, that's a lot lower penetration than Microsoft's domination of desktop computer operating systems. In short, the iPod's numbers mean that MP3 players have not achieved must-have status for most people.

Then again, given the numerous ways people can enjoy music - with live performances, physical album sales, digital downloads, streaming services, music videos, satellite radio and good old terrestrial radio all jockeying for your eardrums - perhaps it was never meant to.

But the idea that the market might still be up for grabs also helps explain why its rivals want to stop the iTunes juggernaut while they can, and its partner-suppliers are pushing back before Apple extends its lead into the emerging world of digital video distribution and the already crowded mobile-phone market (where services like Verizon's (Charts, Fortune 500) V Cast, are taking their own stab at the iPod crowd and everyone else.)

Indeed, perhaps the greatest ingenuity of the iPod is the way that it has helped spur sales and boost market share of Mac computers by tapping into the most primal, emotional, and personal form of media.

Like so much else in business, the ultimate measure of why everyone wants a piece of the iPod is market cap envy. Remember, a decade ago, Apple was nearly done for and Steve Jobs returned to the company as what was supposed to be interim CEO.

With it stock trading at around $5.25, his nemesis Bill Gates' Microsoft invested $150 million in exchange for a kind of detente between the two companies.

Friday, Apple stock closed at $161.45 and its market cap stands at $140 billion, almost exactly half the value of the Microsoft leviathan and bigger than, just to pick some companies at random, the combined values of Sony, Walt Disney, Warner Music Group and what some private equity firms recently paid for EMI.

In other words, they hate the iPod because it's beautiful.  Top of page