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The iTunes Storm

Jobs's entire chair strategy, built around the iPod, iPhone, Mac, and AppleTV, depends not on the company's personal-computer business but on the iPod, which has become the engine of the empire. Apple has sold more than 110 million of the devices, and their popularity has radiated the much-discussed "halo effect," boosting sales of its computers, which in the first three quarters of 2007 contributed 41% of Apple's sales, up from 36%. This synergy, in turn, trickles down to other products such as software and Wi-Fi routers.

It's worth remembering that Apple lost money in 2001, the year the iPod was introduced, and had smallish profits in 2002 and 2003, when iTunes was created and the iPod took off. In other words, the iPod's success didn't come solely from elegant, simple, novel design, but also from the fact that the iPod and iTunes appeared together and, essentially, in a vacuum. The market in MP3 players was small at the time, and there were few legal ways to obtain music for them; Jobs was able to exploit both factors in taking control, then cemented that position by making iTunes available to Windows users. Today, Apple commands about 70% of music downloads.

The iPod-iTunes pairing was the product of a historical moment that may never be reproduced. It was an ideal closed system:an utterly new music machine and something exclusive to load into it, something very hard (or illegal) to obtain otherwise. The device and the service together became the basis of a subculture, an iPod aesthetic. The perfect business storm they generated allowed Apple to build a near-monopoly.

But if iTunes is the driver for iPod sales (which, in turn, boost Mac sales), then Jobs's chair sits on a floor he doesn't own. The content that launched the iPod isn't his. And now the music industry is striking back.

Leading the fight is Vivendi Universal. The world's biggest music company has already decided not to extend its licensing agreement with iTunes, although it hasn't yet pulled its music. (The disagreement centers on price and control: Jobs wants to keep downloads at 99 cents, while music executives want variable pricing so they can charge more for new releases.) Universal has also announced a five-month pilot with other online music retailers, including Wal-Mart and Best Buy, to sell music that can play on any player. Universal is reportedly in discussions as well with Sony BMG Music Entertainment and Warner Music Group--together they'd control more than three-quarters of the music sold in the United States--to create an industry-run subscription supersite called Total Music.

Such subscription services have to be especially unsettling for Apple. "A subscription-based model à la Rhapsody or Napster lets a music consumer do something unthinkable in the physical world: have access to 5 million songs," says Morgan Keegan's McCourt. "Likewise, the music industry makes about $10 a month on a Rhapsody/Napster subscriber versus $1 to $2 a month on an iTunes subscriber, so if they were rational--no guarantee--they would help push subscription services."

Video Download

The music skirmishes are simply a precursor to the impending battle over video, where the digital download market for films and TV shows is still in its infancy. The mobile-video audience grew by more than 30% in 2007, to 8 million, according to M:Metrics, a market research firm. That sounds an awful lot like the heat around the MP3 phenomenon back when the iPod was introduced. The difference is, an iTunes for video will never happen. The Web is already awash in video and there are plenty of devices to play it on. What's more, Hollywood saw what Jobs did to the music industry and has no intention of ceding similar control. NBC has decided not to renew its iTunes contract in favor of Amazon and, with News Corp., has formed an online video venture called Hulu. At the same time, other movie and TV executives are exploring options for distributing their wares, and Wal-Mart is partnering with all six major Hollywood studios to sell movies and TV shows. Whoever wins in the end, the crush has begun.

The fourth leg on Jobs's chair, AppleTV, is naturally dependent on the evolution of the video market. Before he rolled out the new box, which links your computer to your TV, Jobs called AppleTV the "missing piece" in Apple's product line. After it flopped, he referred to it as a "hobby." That was likely more an attempt at damage control than a true description of Apple's hopes for the device, especially if you consider that AppleTV was built around the video boom in the same way the iPod was conceived around the MP3: as a branded conduit between the Web and the consumer. It's a critical part of Apple's closed delivery system. Jobs sees your living room as his next big growth opportunity, with the iPhone serving as the remote control for your entire life--the hub connecting your stereo, computer, and television. But if there isn't an AppleTV at the heart of that system, what, exactly, will the iPhone control?