Apple and Interoperability

Well, here we go again. Two decades after losing out on the Macintosh due to proprietary technologies that Steve Jobs refused to license, Apple Computer now has a dominant share of the digital music market -- both for downloaded songs (iTunes Music Store) and players (iPod). Many are claiming that if it refuses again to license, Apple will lose this advantage to "open standards." Meanwhile, competitors like Real Networks are already trying to crack or hack the Apple code in order to sell protected music files that play on iPods.

But I prefer to think of this like Peter Burrows of BusinessWeek, who writes that "the market for legal digital music may be an exception" to conventional wisdom that open standards are better economically. To my mind, if a company wants to keep its technology proprietary because it thinks it has built a better mousetrap, it is entitled to a marketplace test of that proposition. Recall Beta v. VHS. No one says Sony will die just because it keeps the formats for its MediaStick proprietary, instead of using open-standard digital storage devices.

More importantly, open standards really only work in markets with "network effects," where the more people on a platform -- whether a telephone network or a computer operating system -- the more valuable it is for any individual user. (It's actually more complex than that, because network effects markets will only "tip" to a single standard or provider if there are scale economies, but leave that economic theory aside.) There's nothing in digital music that makes it seem like a network effects market -- and most digital files use the open MP3 format anyway -- so Apple may become the "Windows" of AAC, its DRM-encoded product that finally convinced the major record labels to make their libraries available for online sales.

Oh, and Microsoft has done pretty well with Windows, which for sure is not an open standard. And it's nowhere with the WMA format (also prorietary), like Real itself, which pioneered streaming Internet audio and still maintains a proprietary standard. We can and should ignore the hypocrisy of Apple's rivals. But perhaps the analysts are right that Apple is poised to become the "Microsoft of music."

 Posted by glenn