Apple & HP's iPod Partnership: A Pivotal Moment in the DRM Race?

Yesterday, at this year’s CES--that’s Consumer Electronics Trade Show, for those of you not in the know—Hewlett-Packard announced that it would re-sell a variation of Apple’s iPod player, in addition to supporting Apple’s popular iTunes online music store. This partnership highlights a massive strategic shift for Apple, and is one that could potentially reap Apple huge dividends down the road.

In the past, Apple has tended to adopt a “go it alone” strategy, and has assiduously avoided making its software available for Windows machines, or manufactured devices that were compatible with Windows-based machines. Apple’s strategy for much of its 20+ year history has been to try and generate profits by releasing superior products or software than those based on the Microsoft/Intel standard, in an attempt to recapture the dominant position that it once held in the highly lucrative OS market in the early 1980s. The Windows-version of iPod, coupled with Windows iTunes store, marked the beginning of a shift, insofar as it was the first time that Apple had begun aggressively courting Windows-based users.

Apple ostensibly claimed that it was pursuing Windows-based users as a means to sell more of its highly profitable iPod. However, as readers of the BuzzSponge blog will note, it’s highly unlikely that the iPod will continue to be as profitable for Apple in the long run, especially now that much more cost-efficient manufacturers like Dell & Samsung have gotten in the game. These players will likely drive down Apple’s pricing ability over the long run, thereby cutting into profits.

Apple had a much better reason to pursue Windows-users than simply to sell more iPods, however. The war of digital music players is rapidly becoming a battle over who will control the software that will control media content—in short, it’s a battle for owning a digital rights management standard. In this match-up, Apple is pitting its proprietary AAC format for playing music against Microsoft’s WMA format, and Real Network’s RAM format. The rewards are large—theoretically, licensing fees from all content played over a particular software standard. Hence, the competition has been fierce—the last few months have seen a variety of MP3 players either being released or announced that will play an exclusive standard.

The phenomenal popularity of the iPod, the only player capable of playing iTunes, has enabled Apple to pull far ahead of Microsoft and Real Networks in the DRM race with its AAC format. HP joining forces with Apple marks a significant gain for Apple—and a potentially large loss for Microsoft—since it means that an additional number of Windows users will be pushed towards the AAC format. The importance of this cannot be understated, since it looks like the DRM race will be settled via “network effects”—e.g. the first player whose format reaches scale the fastest will likely be support by the majority of copywrite holders and intellectual property manufacturers. Once this happens, the DRM race will be over, and only one standard will prevail. By attaching itself to HP’s PCs and marketing clout, Apple has greatly increased the odds of its AAC format winning the battle.