Microsoft Befriends Foe and Takes Aim at iTunes

Yesterday (10/11/05) Apple announced record numbers and amazing profits. A third of Apple's revenue comes from iPod sales. So Apple takes the music/media business very seriously. Today Steve Jobs unveiled a new video iPod along with a new complementary version of iTunes that allows people to buy music videos. To top all this Walt Disney and Apple Computer have reached an agreement under which ABC and Disney Channel television shows will be available for download from iTunes for $1.99 per episode. Apple is clearly on a media roll.

All this is beautiful, Right?

Not really. Microsoft astutely chose this moment to settle its problems with RealNetworks in a two-part deal under which Microsoft pays $460M in cash to RealNetworks to settle the antitrust claims and $301M in cash to support RealNetworks' music and games efforts. Microsoft will recoup money by earning credits (amounts were not disclosed) for each Rhapsody subscriber referred through MSN. RealNetworks will support MSN Search and Microsoft will be a huge channel for RealNetworks music and also assist in the performance of RealPlayer on Windows. Here is another big win for RealNetworks: users of MSN Messenger will be able to play music from the Rhapsody catalog of 1 million songs while chatting. More details on this deal can be found here.

Bottom line:
Apple has iTunes the leading online music store, as well as iPod the leading digital music player. I hate to say it but the benefit of the M$FT/RealNetworks alliance is interoperability and openness. The truth is that Apple's strategy is based on customer lock-in (in fact I am one of those locked-in customers). Apple does all it can to make sure people who buy music via iTunes play it on the iPod. Can they continue to do this and maintain market leadership? Microsoft and RealNetworks beg to differ. Let’s see how all this media business unfolds and what role will Yahoo and AOL play in this battle. So stay iTuned... or not.