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iPod Competition – a Fighting Retreat

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The Stalwart follows up on the news that Dell (DELL) is abandoning the MP3 player market and makes a case for the mobile phone being the ‘next threat’ to Apple (AAPL). They make the observation that the fight for market share in dedicated MP3 players could be pyrrhic, and that the real battle is moving to other markets. We agree.

Still perhaps these mp3 competitors aren’t so much worried about Apple as they are about their overall product segment. The stand alone mp3 player’s days could be numbered as mp3-capable mobile phones multiply.

Meanwhile, Apple is starting to use another, deadly weapon that their market scale has given them. Price. The Dell DJ Ditty at 512Mb now sells for the same price as a 1Gb iPod Shuffle. Perhaps Dell can still revise their press release and scrub the Ditty as well.

I agree the mobile phone is the next logical place for Apple- it is easily re-tasked as an MP3 player, and the costs wash out if you use removable flash. I don’t see barriers to this convergence other than applications where people want micro-sized players, and in that situation they will probably have two players – a phone player for everyday and micro-player for exercise etc.

The problem is they don’t control the infrastructure. Jobs has called the wireless carriers the “Four Orifices” in the past ( a rather graphic description of the way they roll out new phone hardware)- it’s unclear if they would allow Apple to set up an MVNO. The release of the Motorola ROKR device was a joke, as carriers forced Motorola to cripple the capabilities of the device so that it wouldn’t compete with upcoming music delivery services they want to launch. Sony Ericsson has some slick new Walkman phones that are the best example of hybrid phone/MP3 players.

Slick MP3 Phone hardware alone won’t dent the iPod lead. It’s the user experience Apple brings to the table via ease-of-sync and iTunes, and increasingly the content they have on iTunes. I hate the walled garden Apple products force upon their users, but the iPod system is very tempting. If they had a subscription service I would convert to Apple in an instant – if Apple did this the game would be over, at least for a while.

I think Microsoft (MSFT) is trying to address the user experience issue with new Vista features. I offered my opinions here in a highly controversial post that was well commented on at Seeking Alpha. History shows that when Microsoft is backed into a corner they come out swinging. I came across a good post from Bill Grosso, an Entrepreneur in Silicon Valley.

Microsoft scares me. When I look at what’s in .NET, and I look at what’s going on in Vista, and I look at the overall platform strategy that Microsoft is embarked upon, I see three things: long-term planning, coordinated action, and fundamental innovation.

When I look at the valley, I see a lot of innovation. But it’s surface innovation instead of deep innovation. To dramatically overstate the case: we’re focusing on building better event calendars and better blog aggregators. And on bringing the same functionality, slightly tailored, to all the nooks and crannies of the long tail.

Microsoft is focused on changing the game entirely.

I also see a lot of bright people in the valley swarming after the same things. And that’s really dangerous because we’re taking a generation of entrepreneurs and technologists and training them in the art of short-term thinking (when a swarm of people are pursuing the same goal, there’s going to be a lot of small releases and jockeying for incidental advantages. Which means customer-driven and surface innovation, not deep innovation).

It’s time for companies to take the battle with Apple onto more favorable terrain and stop fighting incremental battles (Creative (CREAF) seems focused on a head to head slugfest that makes no sense to me). The next logical battlegrounds are phones and cable set top boxes. Microsoft is running hard with the Xbox 360 and Xbox Live – my detailed thoughts on those endeavors are here and here.

Apple has never had a problem innovating, but last time they were this far in the lead hubris got the better of them. Jobs better find a way to play nice with carriers, stop referring to them as waste outlets, and get Apple’s superior user experience extended to more consumer items. Or someone else more willing to share the spoils with the infrastructure providerswill.