Y! depending on Microsoft is bad?

In an effort to more frequently put on my tech pundit hat for the rest of the world, rather than just for the poor souls who really don’t care about this stuff but are forced to listen to me ramble on about it at work, I’m starting with a response to Russell Beattie, who’s a Yahoo employee and is concerned about Y! using Microsoft’s DRM for their new subscription music service. Scoble commented about this on his blog. Russell says:

So all this and I really didn’t mention Apple. Yes, Apple has lock in right now for their 10 million iPod users. Big Woop. It’s such a small piece of the pie it’s not funny and they’re going to get crushed like a bug. The thing is, by holding the only competitor to the Janus codec (FairPlay) so close to their chest, Apple is not only bringing about their eventual demise in the media market, but also everyone else as well. I’m sure Yahoo (like every other Music/Media service out there) begged Apple to open up their codec for the YME and Apple said no. That just gave Microsoft a little more power. It’s like 1989 all over again when everyone was begging to license the Mac OS. Two years later Windows 3.0 showed up and Apple is now at 2% market share. If you don’t think the same thing is happening in the media space, you’re dreaming.

I think you’re vastly underestimating Apple’s ability to not make the same mistake for the fourth or fifth time :). Sure, all their past history would lead you to believe they’ll go right ahead and do it again, but I think the strategy is really different this time. At this point in the game, Apple is in the lead in the digital music player market and looks to be that way for at least probably the next year. Eventually, as the early adopters begin to trickle off and music players are truly mainstream, I think you’ll see Fairplay licensed to low-cost competitors. Their hardware for now is their primary revenue source, but the iPod and ITMS is potentially the biggest bid to get into the software market, ever. The pent up demand for licensing of FairPlay, by the time Apple opens it up, will be extraordinary and should be a higher margin and higher revenue source long term than iPod sales.

At this point, Apple has no incentive to license FairPlay. Microsoft offers a strong competitor in terms of their codec and DRM, but the Bellevue Apple Store wouldn’t constantly be out of iPods if there were a good competitor for the device. Of course, I could be wrong, and Apple could screw it up all over again just like they did in the Early 90s. I wouldn’t put it past them, but I just don’t see it happening again.

Scoble writes:

Russell, is there anything we can do to help reduce your fear? What would you like to see Microsoft change? Yahoo is one of our most important customers and we only win if you do.

I think Russell is afraid for the same reason many Microsoft ISVs love Microsoft but live in fear of them as well. Microsoft makes great platforms that are easy to develop for and provide quick-to-market solutions, but Microsoft has a long history of becoming direct competitors with customers for which they previously only provided a platform. Microsoft is already in beta with a music store product. I don’t think it’s far to reach to see them with a device, after being continually frustrated with their customers inability to come up with a good iPod competitor (how many iPod killers have there been already?). It will have excellent marketing, will be easy to use, and will provide everything the customer needs with easy access from the Windows desktop or the Windows Media Player interface. Microsoft will sell the customer on the integration, and the customer will love it. I can see it plugging directly into your Xbox 360 which integrates with your home-office Media Center PC that’s storing all your data. Strangely enough, in this particular instance, Apple could actually be competing head on, and they won’t be at a significant price disadvantage. Also, if my above ideas are correct, they’d be licensing their DRM as well to their competitors.

On the other hand, Y! suffers from the same problem as all the .com companies did, and I think it’s a bit of crying over spilled milk. During the .com boom, the companies who made out like kings were the infrastructure companies (Cisco, Sun, Nortel, etc), because for every infusion of cash into every portal and content play, there was dollars being thrown into infrastructure. I think this is yet another case where the infrastructure player is going to make a bundle and the content companies are going to scrape by with what pennies the record companies allow them to take for being middlemen between them and the consumers. From Russell’s perspective, I think he’s exactly right. If you’re scared of being run out of business by someone who can offer an integrated solution, you shouldn’t be using their technology to power your service, especially if you’re already a technology company capable of competing in that space. Unfortunately for Y!, they’re just a little late to be coming to the party with another DRM strategy, and thusly, their offering will probably be largely irrelevant while the battle comes down to Apple and Microsoft.

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