I’m the Pied Piper
Warner Music
At the beginning of 2002 Apple faced a challenge. The seamless connection between your iPod, iTunes software, and computer made it easy to manage the music you already owned. But to get new music, you had to venture out of this cozy environment and go buy a CD or download the songs online. The latter endeavor usually meant foraying into the murky domains of file-sharing and piracy services. So Jobs wanted to offer iPod users a way to download songs that was simple, safe, and legal.
The music industry also faced a challenge. It was being plagued by a bestiary of piracy services—Napster, Grokster, Gnutella, Kazaa—that enabled people to get songs for free. Partly as a result, legal sales of CDs were down 9% in 2002.
The executives at the music companies were desperately scrambling, with the elegance of second-graders playing soccer, to agree on a common standard for copy-protecting digital music. Paul Vidich of Warner Music and his corporate colleague Bill Raduchel of AOL Time Warner were working with Sony in that effort, and they hoped to get Apple to be part of their consortium. So a group of them flew to Cupertino in January 2002 to see Jobs.
It was not an easy meeting. Vidich had a cold and was losing his voice, so his deputy, Kevin Gage, began the presentation. Jobs, sitting at the head of the conference table, fidgeted and looked annoyed. After four slides, he waved his hand and broke in. “You have your heads up your asses,” he pointed out. Everyone turned to Vidich, who struggled to get his voice working. “You’re right,” he said after a long pause. “We don’t know what to do. You need to help us figure it out.” Jobs later recalled being slightly taken aback, and he agreed that Apple would work with the Warner-Sony effort.
If the music companies had been able to agree on a standardized encoding method for protecting music files, then multiple online stores could have proliferated. That would have made it hard for Jobs to create an iTunes Store that allowed Apple to control how online sales were handled. Sony, however, handed Jobs that opportunity when it decided, after the January 2002 Cupertino meeting, to pull out of the talks because it favored its own proprietary format, from which it would get royalties.
“You know Steve, he has his own agenda,” Sony’s CEO Nobuyuki Idei explained to Red Herring editor Tony Perkins. “Although he is a genius, he doesn’t share everything with you. This is a difficult person to work with if you are a big company. . . . It is a nightmare.” Howard Stringer, then head of Sony North America, added about Jobs: “Trying to get together would frankly be a waste of time.”
Instead Sony joined with Universal to create a subscription service called Pressplay. Meanwhile, AOL Time Warner, Bertelsmann, and EMI teamed up with RealNetworks to create MusicNet. Neither would license its songs to the rival service, so each offered only about half the music available. Both were subscription services that allowed customers to stream songs but not keep them, so you lost access to them if your subscription lapsed. They had complicated restrictions and clunky interfaces. Indeed they would earn the dubious distinction of becoming number nine on PC World’s list of “the 25 worst tech products of all time.” The magazine declared, “The services’ stunningly brain-dead features showed that the record companies still didn’t get it.”
At this point Jobs could have decided simply to indulge piracy. Free music meant more valuable iPods. Yet because he really liked music, and the artists who made it, he was opposed to what he saw as the theft of creative products. As he later told me:
From the earliest days at Apple, I realized that we thrived when we created intellectual property. If people copied or stole our software, we’d be out of business. If it weren’t protected, there’d be no incentive for us to make new software or product designs. If protection of intellectual property begins to disappear, creative companies will disappear or never get started. But there’s a simpler reason: It’s wrong to steal. It hurts other people. And it hurts your own character.
He knew, however, that the best way to stop piracy—in fact the only way—was to offer an alternative that was more attractive than the brain-dead services that music companies were concocting. “We believe that 80% of the people stealing stuff don’t want to be, there’s just no legal alternative,” he told Andy Langer of Esquire. “So we said, ‘Let’s create a legal alternative to this.’ Everybody wins. Music companies win. The artists win. Apple wins. And the user wins, because he gets a better service and doesn’t have to be a thief.”
So Jobs set out to create an “iTunes Store” and to persuade the five top record companies to allow digital versions of their songs to be sold there. “I’ve never spent so much of my time trying to convince people to do the right thing for themselves,” he recalled. Because the companies were worried about the pricing model and unbundling of albums, Jobs pitched that his new service would be only on the Macintosh, a mere 5% of the market. They could try the idea with little risk. “We used our small market share to our advantage by arguing that if the store turned out to be destructive it wouldn’t destroy the entire universe,” he recalled.
Jobs’s proposal was to sell digital songs for 99 cents—a simple and impulsive purchase. The record companies would get 70 cents of that. Jobs insisted that this would be more appealing than the monthly subscription model preferred by the music companies. He believed that people had an emotional connection to the songs they loved. They wanted to own “Sympathy for the Devil” and “Shelter from the Storm,” not just rent them. As he told Jeff Goodell of Rolling Stone at the time, “I think you could make available the Second Coming in a subscription model and it might not be successful.”
Jobs also insisted that the iTunes Store would sell individual songs, not just entire albums. That ended up being the biggest cause of conflict with the record companies, which made money by putting out albums that had two or three great songs and a dozen or so fillers; to get the song they wanted, consumers had to buy the whole album. Some musicians objected on artistic grounds to Jobs’s plan to disaggregate albums. “There’s a flow to a good album,” said Trent Reznor of Nine Inch Nails. “The songs support each other. That’s the way I like to make music.” But the objections were moot. “Piracy and online downloads had already deconstructed the album,” recalled Jobs. “You couldn’t compete with piracy unless you sold the songs individually.”
At the heart of the problem was a chasm between the people who loved technology and those who loved artistry. Jobs loved both, as he had demonstrated at Pixar and Apple, and he was thus positioned to bridge the gap. He later explained:
When I went to Pixar, I became aware of a great divide. Tech companies don’t understand creativity. They don’t appreciate intuitive thinking, like the ability of an A&R guy at a music label to listen to a hundred artists and have a feel for which five might be successful. And they think that creative people just sit around on couches all day and are undisciplined, because they’ve not seen how driven and disciplined the creative folks at places like Pixar are. On the other hand, music companies are completely clueless about technology. They think they can just go out and hire a few tech folks. But that would be like Apple trying to hire people to produce music. We’d get second-rate A&R people, just like the music companies ended up with second-rate tech people. I’m one of the few people who understands how producing technology requires intuition and creativity, and how producing something artistic takes real discipline.
Jobs had a long relationship with Barry Schuler, the CEO of the AOL unit of Time Warner, and began to pick his brain about how to get the music labels into the proposed iTunes Store. “Piracy is flipping everyone’s circuit breakers,” Schuler told him. “You should use the argument that because you have an integrated end-to-end service, from iPods to the store, you can best protect how the music is used.”
One day in March 2002, Schuler got a call from Jobs and decided to conference-in Vidich. Jobs asked Vidich if he would come to Cupertino and bring the head of Warner Music, Roger Ames. This time Jobs was charming. Ames was a sardonic, fun, and clever Brit, a type (such as James Vincent and Jony Ive) that Jobs tended to like. So the Good Steve was on display. At one point early in the meeting, Jobs even played the unusual role of diplomat. Ames and Eddy Cue, who ran iTunes for Apple, got into an argument over why radio in England was not as vibrant as in the United States, and Jobs stepped in, saying, “We know about tech, but we don’t know as much about music, so let’s not argue.”
Ames had just lost a boardroom battle to have his corporation’s AOL division improve its own fledgling music download service. “When I did a digital download using AOL, I could never find the song on my shitty computer,” he recalled. So when Jobs demonstrated a prototype of the iTunes Store, Ames was impressed. “Yes, yes, that’s exactly what we’ve been waiting for,” he said. He agreed that Warner Music would sign up, and he offered to help enlist other music companies.
Jobs flew east to show the service to other Time Warner execs. “He sat in front of a Mac like a kid with a toy,” Vidich recalled. “Unlike any other CEO, he was totally engaged with the product.” Ames and Jobs began to hammer out the details of the iTunes Store, including the number of times a track could be put on different devices and how the copy-protection system would work. They soon were in agreement and set out to corral other music labels.
Herding Cats
The key player to enlist was Doug Morris, head of the Universal Music Group. His domain included must-have artists such as U2, Eminem, and Mariah Carey, as well as powerful labels such as Motown and Interscope-Geffen-A&M. Morris was eager to talk. More than any other mogul, he was upset about piracy and fed up with the caliber of the technology people at the music companies. “It was like the Wild West,” Morris recalled. “No one was selling digital music, and it was awash with piracy. Everything we tried at the record companies was a failure. The difference in skill sets between the music folks and technologists is just huge.”
As Ames walked with Jobs to Morris’s office on Broadway he briefed Jobs on what to say. It worked. What impressed Morris was that Jobs tied everything together in a way that made things easy for the consumer and also safe for the record companies. “Steve did something brilliant,” said Morris. “He proposed this complete system: the iTunes Store, the music-management software, the iPod itself. It was so smooth. He had the whole package.”
Morris was convinced that Jobs had the technical vision that was lacking at the music companies. “Of course we have to rely on Steve Jobs to do this,” he told his own tech vice president, “because we don’t have anyone at Universal who knows anything about technology.” That did not make Universal’s technologists eager to work with Jobs, and Morris had to keep ordering them to surrender their objections and make a deal quickly. They were able to add a few more restrictions to FairPlay, the Apple system of digital rights management, so that a purchased song could not be spread to too many devices. But in general, they went along with the concept of the iTunes Store that Jobs had worked out with Ames and his Warner colleagues.
Morris was so smitten with Jobs that he called Jimmy Iovine, the fast-talking and brash chief of Interscope-Geffen-A&M. Iovine and Morris were best friends who had spoken every day for the past thirty years. “When I met Steve, I thought he was our savior, so I immediately brought Jimmy in to get his impression,” Morris recalled.
Jobs could be extraordinarily charming when he wanted to be, and he turned it on when Iovine flew out to Cupertino for a demo. “See how simple it is?” he asked Iovine. “Your tech folks are never going to do this. There’s no one at the music companies who can make it simple enough.”
Iovine called Morris right away. “This guy is unique!” he said. “You’re right. He’s got a turnkey solution.” They complained about how they had spent two years working with Sony, and it hadn’t gone anywhere. “Sony’s never going to figure things out,” he told Morris. They agreed to quit dealing with Sony and join with Apple instead. “How Sony missed this is completely mind-boggling to me, a historic fuckup,” Iovine said. “Steve would fire people if the divisions didn’t work together, but Sony’s divisions were at war with one another.”
Indeed Sony provided a clear counterexample to Apple. It had a consumer electronics division that made sleek products and a music division with beloved artists (including Bob Dylan). But because each division tried to protect its own interests, the company as a whole never got its act together to produce an end-to-end service.
Andy Lack, the new head of Sony music, had the unenviable task of negotiating with Jobs about whether Sony would sell its music in the iTunes Store. The irrepressible and savvy Lack had just come from a distinguished career in television journalism—a producer at CBS News and president of NBC—and he knew how to size people up and keep his sense of humor. He realized that, for Sony, selling its songs in the iTunes Store was both insane and necessary—which seemed to be the case with a lot of decisions in the music business. Apple would make out like a bandit, not just from its cut on song sales, but from driving the sale of iPods. Lack believed that since the music companies would be responsible for the success of the iPod, they should get a royalty from each device sold.
Jobs would agree with Lack in many of their conversations and claim that he wanted to be a true partner with the music companies. “Steve, you’ve got me if you just give me something for every sale of your device,” Lack told him in his booming voice. “It’s a beautiful device. But our music is helping to sell it. That’s what true partnership means to me.”
“I’m with you,” Jobs replied on more than one occasion. But then he would go to Doug Morris and Roger Ames to lament, in a conspiratorial fashion, that Lack just didn’t get it, that he was clueless about the music business, that he wasn’t as smart as Morris and Ames. “In classic Steve fashion, he would agree to something, but it would never happen,” said Lack. “He would set you up and then pull it off the table. He’s pathological, which can be useful in negotiations. And he’s a genius.”
Lack knew that he could not win his case unless he got support from others in the industry. But Jobs used flattery and the lure of Apple’s marketing clout to keep the other record labels in line. “If the industry had stood together, we could have gotten a license fee, giving us the dual revenue stream we desperately needed,” Lack said. “We were the ones making the iPod sell, so it would have been equitable.” That, of course, was one of the beauties of Jobs’s end-to-end strategy: Sales of songs on iTunes would drive iPod sales, which would drive Macintosh sales. What made it all the more infuriating to Lack was that Sony could have done the same, but it never could get its hardware and software and content divisions to row in unison.
Jobs tried hard to seduce Lack. During one visit to New York, he invited Lack to his penthouse at the Four Seasons hotel. Jobs had already ordered a breakfast spread—oatmeal and berries for them both—and was “beyond solicitous,” Lack recalled. “But Jack Welch taught me not to fall in love. Morris and Ames could be seduced. They would say, ‘You don’t get it, you’re supposed to fall in love,’ and they did. So I ended up isolated in the industry.”
Even after Sony agreed to sell its music in the iTunes Store, the relationship remained contentious. Each new round of renewals or changes would bring a showdown. “With Andy, it was mostly about his big ego,” Jobs claimed. “He never really understood the music business, and he could never really deliver. I thought he was sometimes a dick.” When I told him what Jobs said, Lack responded, “I fought for Sony and the music industry, so I can see why he thought I was a dick.”
Corralling the record labels to go along with the iTunes plan was not enough, however. Many of their artists had carve-outs in their contracts that allowed them personally to control the digital distribution of their music or prevent their songs from being unbundled from their albums and sold singly. So Jobs set about cajoling various top musicians, which he found fun but also a lot harder than he expected.
Before the launch of iTunes, Jobs met with almost two dozen major artists, including Bono, Mick Jagger, and Sheryl Crow. “He would call me at home, relentless, at ten at night, to say he still needed to get to Led Zeppelin or Madonna,” Ames recalled. “He was determined, and nobody else could have convinced some of these artists.”
Perhaps the oddest meeting was when Dr. Dre came to visit Jobs at Apple headquarters. Jobs loved the Beatles and Dylan, but he admitted that the appeal of rap eluded him. Now Jobs needed Eminem and other rappers to agree to be sold in the iTunes Store, so he huddled with Dr. Dre, who was Eminem’s mentor. After Jobs showed him the seamless way the iTunes Store would work with the iPod, Dr. Dre proclaimed, “Man, somebody finally got it right.”
On the other end of the musical taste spectrum was the trumpeter Wynton Marsalis. He was on a West Coast fund-raising tour for Jazz at Lincoln Center and was meeting with Jobs’s wife, Laurene. Jobs insisted that he come over to the house in Palo Alto, and he proceeded to show off iTunes. “What do you want to search for?” he asked Marsalis. Beethoven, the trumpeter replied. “Watch what it can do!” Jobs kept insisting when Marsalis’s attention would wander. “See how the interface works.” Marsalis later recalled, “I don’t care much about computers, and kept telling him so, but he goes on for two hours. He was a man possessed. After a while, I started looking at him and not the computer, because I was so fascinated with his passion.”
Jobs unveiled the iTunes Store on April 28, 2003, at San Francisco’s Moscone Center. With hair now closely cropped and receding, and a studied unshaven look, Jobs paced the stage and described how Napster “demonstrated that the Internet was made for music delivery.” Its offspring, such as Kazaa, he said, offered songs for free. How do you compete with that? To answer that question, he began by describing the downsides of using these free services. The downloads were unreliable and the quality was often bad. “A lot of these songs are encoded by seven-year-olds, and they don’t do a great job.” In addition, there were no previews or album art. Then he added, “Worst of all it’s stealing. It’s best not to mess with karma.”
Why had these piracy sites proliferated, then? Because, Jobs said, there was no alternative. The subscription services, such as Pressplay and MusicNet, “treat you like a criminal,” he said, showing a slide of an inmate in striped prison garb. Then a slide of Bob Dylan came on the screen. “People want to own the music they love.”
After a lot of negotiating with the record companies, he said, “they were willing to do something with us to change the world.” The iTunes Store would start with 200,000 tracks, and it would grow each day. By using the store, he said, you can own your songs, burn them on CDs, be assured of the download quality, get a preview of a song before you download it, and use it with your iMovies and iDVDs to “make the soundtrack of your life.” The price? Just 99 cents, he said, less than a third of what a Starbucks latte cost. Why was it worth it? Because to get the right song from Kazaa took about fifteen minutes, rather than a minute. By spending an hour of your time to save about four dollars, he calculated, “you’re working for under the minimum wage!” And one more thing . . . “With iTunes, it’s not stealing anymore. It’s good karma.”
Clapping the loudest for that line were the heads of the record labels in the front row, including Doug Morris sitting next to Jimmy Iovine, in his usual baseball cap, and the whole crowd from Warner Music. Eddy Cue, who was in charge of the store, predicted that Apple would sell a million songs in six months. Instead the iTunes Store sold a million songs in six days. “This will go down in history as a turning point for the music industry,” Jobs declared.
Microsoft
“We were smoked.”
That was the blunt email sent to four colleagues by Jim Allchin, the Microsoft executive in charge of Windows development, at 5 p.m. the day he saw the iTunes Store. It had only one other line: “How did they get the music companies to go along?”
Later that evening a reply came from David Cole, who was running Microsoft’s online business group. “When Apple brings this to Windows (I assume they won’t make the mistake of not bringing it to Windows), we will really be smoked.” He said that the Windows team needed “to bring this kind of solution to market,” adding, “That will require focus and goal alignment around an end-to-end service which delivers direct user value, something we don’t have today.” Even though Microsoft had its own Internet service (MSN), it was not used to providing end-to-end service the way Apple was.
Bill Gates himself weighed in at 10:46 that night. His subject line, “Apple’s Jobs again,” indicated his frustration. “Steve Jobs’s ability to focus in on a few things that count, get people who get user interface right, and market things as revolutionary are amazing things,” he said. He too expressed surprise that Jobs had been able to convince the music companies to go along with his store. “This is very strange to me. The music companies’ own operations offer a service that is truly unfriendly to the user. Somehow they decide to give Apple the ability to do something pretty good.”
Gates also found it strange that no one else had created a service that allowed people to buy songs rather than subscribe on a monthly basis. “I am not saying this strangeness means we messed up—at least if we did, so did Real and Pressplay and MusicNet and basically everyone else,” he wrote. “Now that Jobs has done it we need to move fast to get something where the user interface and Rights are as good. . . . I think we need some plan to prove that, even though Jobs has us a bit flat footed again, we can move quick and both match and do stuff better.” It was an astonishing private admission: Microsoft had again been caught flat-footed, and it would again try to catch up by copying Apple. But like Sony, Microsoft could never make it happen, even after Jobs showed the way.
Instead Apple continued to smoke Microsoft in the way that Cole had predicted: It ported the iTunes software and store to Windows. But that took some internal agonizing. First, Jobs and his team had to decide whether they wanted the iPod to work with Windows computers. Jobs was initially opposed. “By keeping the iPod for Mac only, it was driving the sales of Macs even more than we expected,” he recalled. But lined up against him were all four of his top executives: Schiller, Rubinstein, Robbin, and Fadell. It was an argument about what the future of Apple should be. “We felt we should be in the music player business, not just in the Mac business,” said Schiller.
Jobs always wanted Apple to create its own unified utopia, a magical walled garden where hardware and software and peripheral devices worked well together to create a great experience, and where the success of one product drove sales of all the companions. Now he was facing pressure to have his hottest new product work with Windows machines, and it went against his nature. “It was a really big argument for months,” Jobs recalled, “me against everyone else.” At one point he declared that Windows users would get to use iPods “over my dead body.” But still his team kept pushing. “This needs to get to the PC,” said Fadell.
Finally Jobs declared, “Until you can prove to me that it will make business sense, I’m not going to do it.” That was actually his way of backing down. If you put aside emotion and dogma, it was easy to prove that it made business sense to allow Windows users to buy iPods. Experts were called in, sales scenarios developed, and everyone concluded this would bring in more profits. “We developed a spreadsheet,” said Schiller. “Under all scenarios, there was no amount of cannibalization of Mac sales that would outweigh the sales of iPods.” Jobs was sometimes willing to surrender, despite his reputation, but he never won any awards for gracious concession speeches. “Screw it,” he said at one meeting where they showed him the analysis. “I’m sick of listening to you assholes. Go do whatever the hell you want.”
That left another question: When Apple allowed the iPod to be compatible with Windows machines, should it also create a version of iTunes to serve as the music-management software for those Windows users? As usual, Jobs believed the hardware and software should go together: The user experience depended on the iPod working in complete sync (so to speak) with iTunes software on the computer. Schiller was opposed. “I thought that was crazy, since we don’t make Windows software,” Schiller recalled. “But Steve kept arguing, ‘If we’re going to do it, we should do it right.’”
Schiller prevailed at first. Apple decided to allow the iPod to work with Windows by using software from MusicMatch, an outside company. But the software was so clunky that it proved Jobs’s point, and Apple embarked on a fast-track effort to produce iTunes for Windows. Jobs recalled:
To make the iPod work on PCs, we initially partnered with another company that had a jukebox, gave them the secret sauce to connect to the iPod, and they did a crappy job. That was the worst of all worlds, because this other company was controlling a big piece of the user experience. So we lived with this crappy outside jukebox for about six months, and then we finally got iTunes written for Windows. In the end, you just don’t want someone else to control a big part of the user experience. People may disagree with me, but I am pretty consistent about that.
Porting iTunes to Windows meant going back to all of the music companies—which had made deals to be in iTunes based on the assurance that it would be for only the small universe of Macintosh users—and negotiate again. Sony was especially resistant. Andy Lack thought it another example of Jobs changing the terms after a deal was done. It was. But by then the other labels were happy about how the iTunes Store was working and went along, so Sony was forced to capitulate.
Jobs announced the launch of iTunes for Windows in October 2003. “Here’s a feature that people thought we’d never add until this happened,” he said, waving his hand at the giant screen behind him. “Hell froze over,” proclaimed the slide. The show included iChat appearances and videos from Mick Jagger, Dr. Dre, and Bono. “It’s a very cool thing for musicians and music,” Bono said of the iPod and iTunes. “That’s why I’m here to kiss the corporate ass. I don’t kiss everybody’s.”
Jobs was never prone to understatement. To the cheers of the crowd, he declared, “iTunes for Windows is probably the best Windows app ever written.”
Microsoft was not grateful. “They’re pursuing the same strategy that they pursued in the PC business, controlling both the hardware and software,” Bill Gates told Business Week. “We’ve always done things a little bit differently than Apple in terms of giving people choice.” It was not until three years later, in November 2006, that Microsoft was finally able to release its own answer to the iPod. It was called the Zune, and it looked like an iPod, though a bit clunkier. Two years later it had achieved a market share of less than 5%. Jobs was brutal about the cause of the Zune’s uninspired design and market weakness:
The older I get, the more I see how much motivations matter. The Zune was crappy because the people at Microsoft don’t really love music or art the way we do. We won because we personally love music. We made the iPod for ourselves, and when you’re doing something for yourself, or your best friend or family, you’re not going to cheese out. If you don’t love something, you’re not going to go the extra mile, work the extra weekend, challenge the status quo as much.
Mr. Tambourine Man
Andy Lack’s first annual meeting at Sony was in April 2003, the same week that Apple launched the iTunes Store. He had been made head of the music division four months earlier, and had spent much of that time negotiating with Jobs. In fact he arrived in Tokyo directly from Cupertino, carrying the latest version of the iPod and a description of the iTunes Store. In front of the two hundred managers gathered, he pulled the iPod out of his pocket. “Here it is,” he said as CEO Nobuyuki Idei and Sony’s North America head Howard Stringer looked on. “Here’s the Walkman killer. There’s no mystery meat. The reason you bought a music company is so that you could be the one to make a device like this. You can do better.”
But Sony couldn’t. It had pioneered portable music with the Walkman, it had a great record company, and it had a long history of making beautiful consumer devices. It had all of the assets to compete with Jobs’s strategy of integration of hardware, software, devices, and content sales. Why did it fail? Partly because it was a company, like AOL Time Warner, that was organized into divisions (that word itself was ominous) with their own bottom lines; the goal of achieving synergy in such companies by prodding the divisions to work together was usually elusive.
Jobs did not organize Apple into semiautonomous divisions; he closely controlled all of his teams and pushed them to work as one cohesive and flexible company, with one profit-and-loss bottom line. “We don’t have ‘divisions’ with their own P&L,” said Tim Cook. “We run one P&L for the company.”
In addition, like many companies, Sony worried about cannibalization. If it built a music player and service that made it easy for people to share digital songs, that might hurt sales of its record division. One of Jobs’s business rules was to never be afraid of cannibalizing yourself. “If you don’t cannibalize yourself, someone else will,” he said. So even though an iPhone might cannibalize sales of an iPod, or an iPad might cannibalize sales of a laptop, that did not deter him.
That July, Sony appointed a veteran of the music industry, Jay Samit, to create its own iTunes-like service, called Sony Connect, which would sell songs online and allow them to play on Sony’s portable music devices. “The move was immediately understood as a way to unite the sometimes conflicting electronics and content divisions,” the New York Times reported. “That internal battle was seen by many as the reason Sony, the inventor of the Walkman and the biggest player in the portable audio market, was being trounced by Apple.” Sony Connect launched in May 2004. It lasted just over three years before Sony shut it down.
Microsoft was willing to license its Windows Media software and digital rights format to other companies, just as it had licensed out its operating system in the 1980s. Jobs, on the other hand, would not license out Apple’s FairPlay to other device makers; it worked only on an iPod. Nor would he allow other online stores to sell songs for use on iPods. A variety of experts said this would eventually cause Apple to lose market share, as it did in the computer wars of the 1980s. “If Apple continues to rely on a proprietary architecture,” the Harvard Business School professor Clayton Christensen told Wired, “the iPod will likely become a niche product.” (Other than in this case, Christensen was one of the world’s most insightful business analysts, and Jobs was deeply influenced by his book The Innovator’s Dilemma.) Bill Gates made the same argument. “There’s nothing unique about music,” he said. “This story has played out on the PC.”
Rob Glaser, the founder of RealNetworks, tried to circumvent Apple’s restrictions in July 2004 with a service called Harmony. He had attempted to convince Jobs to license Apple’s FairPlay format to Harmony, but when that didn’t happen, Glaser just reverse-engineered it and used it with the songs that Harmony sold. Glaser’s strategy was that the songs sold by Harmony would play on any device, including an iPod or a Zune or a Rio, and he launched a marketing campaign with the slogan “Freedom of Choice.” Jobs was furious and issued a release saying that Apple was “stunned that RealNetworks has adopted the tactics and ethics of a hacker to break into the iPod.” RealNetworks responded by launching an Internet petition that demanded “Hey Apple! Don’t break my iPod.” Jobs kept quiet for a few months, but in October he released a new version of the iPod software that caused songs bought through Harmony to become inoperable. “Steve is a one-of-a-kind guy,” Glaser said. “You know that about him when you do business with him.”
In the meantime Jobs and his team—Rubinstein, Fadell, Robbin, Ive—were able to keep coming up with new versions of the iPod that extended Apple’s lead. The first major revision, announced in January 2004, was the iPod Mini. Far smaller than the original iPod—just the size of a business card—it had less capacity and was about the same price. At one point Jobs decided to kill it, not seeing why anyone would want to pay the same for less. “He doesn’t do sports, so he didn’t relate to how it would be great on a run or in the gym,” said Fadell. In fact the Mini was what truly launched the iPod to market dominance, by eliminating the competition from smaller flash-drive players. In the eighteen months after it was introduced, Apple’s market share in the portable music player market shot from 31% to 74%.
The iPod Shuffle, introduced in January 2005, was even more revolutionary. Jobs learned that the shuffle feature on the iPod, which played songs in random order, had become very popular. People liked to be surprised, and they were also too lazy to keep setting up and revising their playlists. Some users even became obsessed with figuring out whether the song selection was truly random, and if so, why their iPod kept coming back to, say, the Neville Brothers. That feature led to the iPod Shuffle. As Rubinstein and Fadell were working on creating a flash player that was small and inexpensive, they kept doing things like making the screen tinier. At one point Jobs came in with a crazy suggestion: Get rid of the screen altogether. “What?!?” Fadell responded. “Just get rid of it,” Jobs insisted. Fadell asked how users would navigate the songs. Jobs’s insight was that you wouldn’t need to navigate; the songs would play randomly. After all, they were songs you had chosen. All that was needed was a button to skip over a song if you weren’t in the mood for it. “Embrace uncertainty,” the ads read.
As competitors stumbled and Apple continued to innovate, music became a larger part of Apple’s business. In January 2007 iPod sales were half of Apple’s revenues. The device also added luster to the Apple brand. But an even bigger success was the iTunes Store. Having sold one million songs in the first six days after it was introduced in April 2003, the store went on to sell seventy million songs in its first year. In February 2006 the store sold its one billionth song when Alex Ostrovsky, sixteen, of West Bloomfield, Michigan, bought Coldplay’s “Speed of Sound” and got a congratulatory call from Jobs, bestowing upon him ten iPods, an iMac, and a $10,000 music gift certificate.
The success of the iTunes Store also had a more subtle benefit. By 2011 an important new business had emerged: being the service that people trusted with their online identity and payment information. Along with Amazon, Visa, PayPal, American Express, and a few other services, Apple had built up databases of people who trusted them with their email address and credit card information to facilitate safe and easy shopping. This allowed Apple to sell, for example, a magazine subscription through its online store; when that happened, Apple, not the magazine publisher, would have a direct relationship with the subscriber. As the iTunes Store sold videos, apps, and subscriptions, it built up a database of 225 million active users by June 2011, which positioned Apple for the next age of digital commerce.
Warner Music
At the beginning of 2002 Apple faced a challenge. The seamless connection between your iPod, iTunes software, and computer made it easy to manage the music you already owned. But to get new music, you had to venture out of this cozy environment and go buy a CD or download the songs online. The latter endeavor usually meant foraying into the murky domains of file-sharing and piracy services. So Jobs wanted to offer iPod users a way to download songs that was simple, safe, and legal.
The music industry also faced a challenge. It was being plagued by a bestiary of piracy services—Napster, Grokster, Gnutella, Kazaa—that enabled people to get songs for free. Partly as a result, legal sales of CDs were down 9% in 2002.
The executives at the music companies were desperately scrambling, with the elegance of second-graders playing soccer, to agree on a common standard for copy-protecting digital music. Paul Vidich of Warner Music and his corporate colleague Bill Raduchel of AOL Time Warner were working with Sony in that effort, and they hoped to get Apple to be part of their consortium. So a group of them flew to Cupertino in January 2002 to see Jobs.
It was not an easy meeting. Vidich had a cold and was losing his voice, so his deputy, Kevin Gage, began the presentation. Jobs, sitting at the head of the conference table, fidgeted and looked annoyed. After four slides, he waved his hand and broke in. “You have your heads up your asses,” he pointed out. Everyone turned to Vidich, who struggled to get his voice working. “You’re right,” he said after a long pause. “We don’t know what to do. You need to help us figure it out.” Jobs later recalled being slightly taken aback, and he agreed that Apple would work with the Warner-Sony effort.
If the music companies had been able to agree on a standardized encoding method for protecting music files, then multiple online stores could have proliferated. That would have made it hard for Jobs to create an iTunes Store that allowed Apple to control how online sales were handled. Sony, however, handed Jobs that opportunity when it decided, after the January 2002 Cupertino meeting, to pull out of the talks because it favored its own proprietary format, from which it would get royalties.
“You know Steve, he has his own agenda,” Sony’s CEO Nobuyuki Idei explained to Red Herring editor Tony Perkins. “Although he is a genius, he doesn’t share everything with you. This is a difficult person to work with if you are a big company. . . . It is a nightmare.” Howard Stringer, then head of Sony North America, added about Jobs: “Trying to get together would frankly be a waste of time.”
Instead Sony joined with Universal to create a subscription service called Pressplay. Meanwhile, AOL Time Warner, Bertelsmann, and EMI teamed up with RealNetworks to create MusicNet. Neither would license its songs to the rival service, so each offered only about half the music available. Both were subscription services that allowed customers to stream songs but not keep them, so you lost access to them if your subscription lapsed. They had complicated restrictions and clunky interfaces. Indeed they would earn the dubious distinction of becoming number nine on PC World’s list of “the 25 worst tech products of all time.” The magazine declared, “The services’ stunningly brain-dead features showed that the record companies still didn’t get it.”
At this point Jobs could have decided simply to indulge piracy. Free music meant more valuable iPods. Yet because he really liked music, and the artists who made it, he was opposed to what he saw as the theft of creative products. As he later told me:
From the earliest days at Apple, I realized that we thrived when we created intellectual property. If people copied or stole our software, we’d be out of business. If it weren’t protected, there’d be no incentive for us to make new software or product designs. If protection of intellectual property begins to disappear, creative companies will disappear or never get started. But there’s a simpler reason: It’s wrong to steal. It hurts other people. And it hurts your own character.
He knew, however, that the best way to stop piracy—in fact the only way—was to offer an alternative that was more attractive than the brain-dead services that music companies were concocting. “We believe that 80% of the people stealing stuff don’t want to be, there’s just no legal alternative,” he told Andy Langer of Esquire. “So we said, ‘Let’s create a legal alternative to this.’ Everybody wins. Music companies win. The artists win. Apple wins. And the user wins, because he gets a better service and doesn’t have to be a thief.”
So Jobs set out to create an “iTunes Store” and to persuade the five top record companies to allow digital versions of their songs to be sold there. “I’ve never spent so much of my time trying to convince people to do the right thing for themselves,” he recalled. Because the companies were worried about the pricing model and unbundling of albums, Jobs pitched that his new service would be only on the Macintosh, a mere 5% of the market. They could try the idea with little risk. “We used our small market share to our advantage by arguing that if the store turned out to be destructive it wouldn’t destroy the entire universe,” he recalled.
Jobs’s proposal was to sell digital songs for 99 cents—a simple and impulsive purchase. The record companies would get 70 cents of that. Jobs insisted that this would be more appealing than the monthly subscription model preferred by the music companies. He believed that people had an emotional connection to the songs they loved. They wanted to own “Sympathy for the Devil” and “Shelter from the Storm,” not just rent them. As he told Jeff Goodell of Rolling Stone at the time, “I think you could make available the Second Coming in a subscription model and it might not be successful.”
Jobs also insisted that the iTunes Store would sell individual songs, not just entire albums. That ended up being the biggest cause of conflict with the record companies, which made money by putting out albums that had two or three great songs and a dozen or so fillers; to get the song they wanted, consumers had to buy the whole album. Some musicians objected on artistic grounds to Jobs’s plan to disaggregate albums. “There’s a flow to a good album,” said Trent Reznor of Nine Inch Nails. “The songs support each other. That’s the way I like to make music.” But the objections were moot. “Piracy and online downloads had already deconstructed the album,” recalled Jobs. “You couldn’t compete with piracy unless you sold the songs individually.”
At the heart of the problem was a chasm between the people who loved technology and those who loved artistry. Jobs loved both, as he had demonstrated at Pixar and Apple, and he was thus positioned to bridge the gap. He later explained:
When I went to Pixar, I became aware of a great divide. Tech companies don’t understand creativity. They don’t appreciate intuitive thinking, like the ability of an A&R guy at a music label to listen to a hundred artists and have a feel for which five might be successful. And they think that creative people just sit around on couches all day and are undisciplined, because they’ve not seen how driven and disciplined the creative folks at places like Pixar are. On the other hand, music companies are completely clueless about technology. They think they can just go out and hire a few tech folks. But that would be like Apple trying to hire people to produce music. We’d get second-rate A&R people, just like the music companies ended up with second-rate tech people. I’m one of the few people who understands how producing technology requires intuition and creativity, and how producing something artistic takes real discipline.
Jobs had a long relationship with Barry Schuler, the CEO of the AOL unit of Time Warner, and began to pick his brain about how to get the music labels into the proposed iTunes Store. “Piracy is flipping everyone’s circuit breakers,” Schuler told him. “You should use the argument that because you have an integrated end-to-end service, from iPods to the store, you can best protect how the music is used.”
One day in March 2002, Schuler got a call from Jobs and decided to conference-in Vidich. Jobs asked Vidich if he would come to Cupertino and bring the head of Warner Music, Roger Ames. This time Jobs was charming. Ames was a sardonic, fun, and clever Brit, a type (such as James Vincent and Jony Ive) that Jobs tended to like. So the Good Steve was on display. At one point early in the meeting, Jobs even played the unusual role of diplomat. Ames and Eddy Cue, who ran iTunes for Apple, got into an argument over why radio in England was not as vibrant as in the United States, and Jobs stepped in, saying, “We know about tech, but we don’t know as much about music, so let’s not argue.”
Ames had just lost a boardroom battle to have his corporation’s AOL division improve its own fledgling music download service. “When I did a digital download using AOL, I could never find the song on my shitty computer,” he recalled. So when Jobs demonstrated a prototype of the iTunes Store, Ames was impressed. “Yes, yes, that’s exactly what we’ve been waiting for,” he said. He agreed that Warner Music would sign up, and he offered to help enlist other music companies.
Jobs flew east to show the service to other Time Warner execs. “He sat in front of a Mac like a kid with a toy,” Vidich recalled. “Unlike any other CEO, he was totally engaged with the product.” Ames and Jobs began to hammer out the details of the iTunes Store, including the number of times a track could be put on different devices and how the copy-protection system would work. They soon were in agreement and set out to corral other music labels.
Herding Cats
The key player to enlist was Doug Morris, head of the Universal Music Group. His domain included must-have artists such as U2, Eminem, and Mariah Carey, as well as powerful labels such as Motown and Interscope-Geffen-A&M. Morris was eager to talk. More than any other mogul, he was upset about piracy and fed up with the caliber of the technology people at the music companies. “It was like the Wild West,” Morris recalled. “No one was selling digital music, and it was awash with piracy. Everything we tried at the record companies was a failure. The difference in skill sets between the music folks and technologists is just huge.”
As Ames walked with Jobs to Morris’s office on Broadway he briefed Jobs on what to say. It worked. What impressed Morris was that Jobs tied everything together in a way that made things easy for the consumer and also safe for the record companies. “Steve did something brilliant,” said Morris. “He proposed this complete system: the iTunes Store, the music-management software, the iPod itself. It was so smooth. He had the whole package.”
Morris was convinced that Jobs had the technical vision that was lacking at the music companies. “Of course we have to rely on Steve Jobs to do this,” he told his own tech vice president, “because we don’t have anyone at Universal who knows anything about technology.” That did not make Universal’s technologists eager to work with Jobs, and Morris had to keep ordering them to surrender their objections and make a deal quickly. They were able to add a few more restrictions to FairPlay, the Apple system of digital rights management, so that a purchased song could not be spread to too many devices. But in general, they went along with the concept of the iTunes Store that Jobs had worked out with Ames and his Warner colleagues.
Morris was so smitten with Jobs that he called Jimmy Iovine, the fast-talking and brash chief of Interscope-Geffen-A&M. Iovine and Morris were best friends who had spoken every day for the past thirty years. “When I met Steve, I thought he was our savior, so I immediately brought Jimmy in to get his impression,” Morris recalled.
Jobs could be extraordinarily charming when he wanted to be, and he turned it on when Iovine flew out to Cupertino for a demo. “See how simple it is?” he asked Iovine. “Your tech folks are never going to do this. There’s no one at the music companies who can make it simple enough.”
Iovine called Morris right away. “This guy is unique!” he said. “You’re right. He’s got a turnkey solution.” They complained about how they had spent two years working with Sony, and it hadn’t gone anywhere. “Sony’s never going to figure things out,” he told Morris. They agreed to quit dealing with Sony and join with Apple instead. “How Sony missed this is completely mind-boggling to me, a historic fuckup,” Iovine said. “Steve would fire people if the divisions didn’t work together, but Sony’s divisions were at war with one another.”
Indeed Sony provided a clear counterexample to Apple. It had a consumer electronics division that made sleek products and a music division with beloved artists (including Bob Dylan). But because each division tried to protect its own interests, the company as a whole never got its act together to produce an end-to-end service.
Andy Lack, the new head of Sony music, had the unenviable task of negotiating with Jobs about whether Sony would sell its music in the iTunes Store. The irrepressible and savvy Lack had just come from a distinguished career in television journalism—a producer at CBS News and president of NBC—and he knew how to size people up and keep his sense of humor. He realized that, for Sony, selling its songs in the iTunes Store was both insane and necessary—which seemed to be the case with a lot of decisions in the music business. Apple would make out like a bandit, not just from its cut on song sales, but from driving the sale of iPods. Lack believed that since the music companies would be responsible for the success of the iPod, they should get a royalty from each device sold.
Jobs would agree with Lack in many of their conversations and claim that he wanted to be a true partner with the music companies. “Steve, you’ve got me if you just give me something for every sale of your device,” Lack told him in his booming voice. “It’s a beautiful device. But our music is helping to sell it. That’s what true partnership means to me.”
“I’m with you,” Jobs replied on more than one occasion. But then he would go to Doug Morris and Roger Ames to lament, in a conspiratorial fashion, that Lack just didn’t get it, that he was clueless about the music business, that he wasn’t as smart as Morris and Ames. “In classic Steve fashion, he would agree to something, but it would never happen,” said Lack. “He would set you up and then pull it off the table. He’s pathological, which can be useful in negotiations. And he’s a genius.”
Lack knew that he could not win his case unless he got support from others in the industry. But Jobs used flattery and the lure of Apple’s marketing clout to keep the other record labels in line. “If the industry had stood together, we could have gotten a license fee, giving us the dual revenue stream we desperately needed,” Lack said. “We were the ones making the iPod sell, so it would have been equitable.” That, of course, was one of the beauties of Jobs’s end-to-end strategy: Sales of songs on iTunes would drive iPod sales, which would drive Macintosh sales. What made it all the more infuriating to Lack was that Sony could have done the same, but it never could get its hardware and software and content divisions to row in unison.
Jobs tried hard to seduce Lack. During one visit to New York, he invited Lack to his penthouse at the Four Seasons hotel. Jobs had already ordered a breakfast spread—oatmeal and berries for them both—and was “beyond solicitous,” Lack recalled. “But Jack Welch taught me not to fall in love. Morris and Ames could be seduced. They would say, ‘You don’t get it, you’re supposed to fall in love,’ and they did. So I ended up isolated in the industry.”
Even after Sony agreed to sell its music in the iTunes Store, the relationship remained contentious. Each new round of renewals or changes would bring a showdown. “With Andy, it was mostly about his big ego,” Jobs claimed. “He never really understood the music business, and he could never really deliver. I thought he was sometimes a dick.” When I told him what Jobs said, Lack responded, “I fought for Sony and the music industry, so I can see why he thought I was a dick.”
Corralling the record labels to go along with the iTunes plan was not enough, however. Many of their artists had carve-outs in their contracts that allowed them personally to control the digital distribution of their music or prevent their songs from being unbundled from their albums and sold singly. So Jobs set about cajoling various top musicians, which he found fun but also a lot harder than he expected.
Before the launch of iTunes, Jobs met with almost two dozen major artists, including Bono, Mick Jagger, and Sheryl Crow. “He would call me at home, relentless, at ten at night, to say he still needed to get to Led Zeppelin or Madonna,” Ames recalled. “He was determined, and nobody else could have convinced some of these artists.”
Perhaps the oddest meeting was when Dr. Dre came to visit Jobs at Apple headquarters. Jobs loved the Beatles and Dylan, but he admitted that the appeal of rap eluded him. Now Jobs needed Eminem and other rappers to agree to be sold in the iTunes Store, so he huddled with Dr. Dre, who was Eminem’s mentor. After Jobs showed him the seamless way the iTunes Store would work with the iPod, Dr. Dre proclaimed, “Man, somebody finally got it right.”
On the other end of the musical taste spectrum was the trumpeter Wynton Marsalis. He was on a West Coast fund-raising tour for Jazz at Lincoln Center and was meeting with Jobs’s wife, Laurene. Jobs insisted that he come over to the house in Palo Alto, and he proceeded to show off iTunes. “What do you want to search for?” he asked Marsalis. Beethoven, the trumpeter replied. “Watch what it can do!” Jobs kept insisting when Marsalis’s attention would wander. “See how the interface works.” Marsalis later recalled, “I don’t care much about computers, and kept telling him so, but he goes on for two hours. He was a man possessed. After a while, I started looking at him and not the computer, because I was so fascinated with his passion.”
Jobs unveiled the iTunes Store on April 28, 2003, at San Francisco’s Moscone Center. With hair now closely cropped and receding, and a studied unshaven look, Jobs paced the stage and described how Napster “demonstrated that the Internet was made for music delivery.” Its offspring, such as Kazaa, he said, offered songs for free. How do you compete with that? To answer that question, he began by describing the downsides of using these free services. The downloads were unreliable and the quality was often bad. “A lot of these songs are encoded by seven-year-olds, and they don’t do a great job.” In addition, there were no previews or album art. Then he added, “Worst of all it’s stealing. It’s best not to mess with karma.”
Why had these piracy sites proliferated, then? Because, Jobs said, there was no alternative. The subscription services, such as Pressplay and MusicNet, “treat you like a criminal,” he said, showing a slide of an inmate in striped prison garb. Then a slide of Bob Dylan came on the screen. “People want to own the music they love.”
After a lot of negotiating with the record companies, he said, “they were willing to do something with us to change the world.” The iTunes Store would start with 200,000 tracks, and it would grow each day. By using the store, he said, you can own your songs, burn them on CDs, be assured of the download quality, get a preview of a song before you download it, and use it with your iMovies and iDVDs to “make the soundtrack of your life.” The price? Just 99 cents, he said, less than a third of what a Starbucks latte cost. Why was it worth it? Because to get the right song from Kazaa took about fifteen minutes, rather than a minute. By spending an hour of your time to save about four dollars, he calculated, “you’re working for under the minimum wage!” And one more thing . . . “With iTunes, it’s not stealing anymore. It’s good karma.”
Clapping the loudest for that line were the heads of the record labels in the front row, including Doug Morris sitting next to Jimmy Iovine, in his usual baseball cap, and the whole crowd from Warner Music. Eddy Cue, who was in charge of the store, predicted that Apple would sell a million songs in six months. Instead the iTunes Store sold a million songs in six days. “This will go down in history as a turning point for the music industry,” Jobs declared.
Microsoft
“We were smoked.”
That was the blunt email sent to four colleagues by Jim Allchin, the Microsoft executive in charge of Windows development, at 5 p.m. the day he saw the iTunes Store. It had only one other line: “How did they get the music companies to go along?”
Later that evening a reply came from David Cole, who was running Microsoft’s online business group. “When Apple brings this to Windows (I assume they won’t make the mistake of not bringing it to Windows), we will really be smoked.” He said that the Windows team needed “to bring this kind of solution to market,” adding, “That will require focus and goal alignment around an end-to-end service which delivers direct user value, something we don’t have today.” Even though Microsoft had its own Internet service (MSN), it was not used to providing end-to-end service the way Apple was.
Bill Gates himself weighed in at 10:46 that night. His subject line, “Apple’s Jobs again,” indicated his frustration. “Steve Jobs’s ability to focus in on a few things that count, get people who get user interface right, and market things as revolutionary are amazing things,” he said. He too expressed surprise that Jobs had been able to convince the music companies to go along with his store. “This is very strange to me. The music companies’ own operations offer a service that is truly unfriendly to the user. Somehow they decide to give Apple the ability to do something pretty good.”
Gates also found it strange that no one else had created a service that allowed people to buy songs rather than subscribe on a monthly basis. “I am not saying this strangeness means we messed up—at least if we did, so did Real and Pressplay and MusicNet and basically everyone else,” he wrote. “Now that Jobs has done it we need to move fast to get something where the user interface and Rights are as good. . . . I think we need some plan to prove that, even though Jobs has us a bit flat footed again, we can move quick and both match and do stuff better.” It was an astonishing private admission: Microsoft had again been caught flat-footed, and it would again try to catch up by copying Apple. But like Sony, Microsoft could never make it happen, even after Jobs showed the way.
Instead Apple continued to smoke Microsoft in the way that Cole had predicted: It ported the iTunes software and store to Windows. But that took some internal agonizing. First, Jobs and his team had to decide whether they wanted the iPod to work with Windows computers. Jobs was initially opposed. “By keeping the iPod for Mac only, it was driving the sales of Macs even more than we expected,” he recalled. But lined up against him were all four of his top executives: Schiller, Rubinstein, Robbin, and Fadell. It was an argument about what the future of Apple should be. “We felt we should be in the music player business, not just in the Mac business,” said Schiller.
Jobs always wanted Apple to create its own unified utopia, a magical walled garden where hardware and software and peripheral devices worked well together to create a great experience, and where the success of one product drove sales of all the companions. Now he was facing pressure to have his hottest new product work with Windows machines, and it went against his nature. “It was a really big argument for months,” Jobs recalled, “me against everyone else.” At one point he declared that Windows users would get to use iPods “over my dead body.” But still his team kept pushing. “This needs to get to the PC,” said Fadell.
Finally Jobs declared, “Until you can prove to me that it will make business sense, I’m not going to do it.” That was actually his way of backing down. If you put aside emotion and dogma, it was easy to prove that it made business sense to allow Windows users to buy iPods. Experts were called in, sales scenarios developed, and everyone concluded this would bring in more profits. “We developed a spreadsheet,” said Schiller. “Under all scenarios, there was no amount of cannibalization of Mac sales that would outweigh the sales of iPods.” Jobs was sometimes willing to surrender, despite his reputation, but he never won any awards for gracious concession speeches. “Screw it,” he said at one meeting where they showed him the analysis. “I’m sick of listening to you assholes. Go do whatever the hell you want.”
That left another question: When Apple allowed the iPod to be compatible with Windows machines, should it also create a version of iTunes to serve as the music-management software for those Windows users? As usual, Jobs believed the hardware and software should go together: The user experience depended on the iPod working in complete sync (so to speak) with iTunes software on the computer. Schiller was opposed. “I thought that was crazy, since we don’t make Windows software,” Schiller recalled. “But Steve kept arguing, ‘If we’re going to do it, we should do it right.’”
Schiller prevailed at first. Apple decided to allow the iPod to work with Windows by using software from MusicMatch, an outside company. But the software was so clunky that it proved Jobs’s point, and Apple embarked on a fast-track effort to produce iTunes for Windows. Jobs recalled:
To make the iPod work on PCs, we initially partnered with another company that had a jukebox, gave them the secret sauce to connect to the iPod, and they did a crappy job. That was the worst of all worlds, because this other company was controlling a big piece of the user experience. So we lived with this crappy outside jukebox for about six months, and then we finally got iTunes written for Windows. In the end, you just don’t want someone else to control a big part of the user experience. People may disagree with me, but I am pretty consistent about that.
Porting iTunes to Windows meant going back to all of the music companies—which had made deals to be in iTunes based on the assurance that it would be for only the small universe of Macintosh users—and negotiate again. Sony was especially resistant. Andy Lack thought it another example of Jobs changing the terms after a deal was done. It was. But by then the other labels were happy about how the iTunes Store was working and went along, so Sony was forced to capitulate.
Jobs announced the launch of iTunes for Windows in October 2003. “Here’s a feature that people thought we’d never add until this happened,” he said, waving his hand at the giant screen behind him. “Hell froze over,” proclaimed the slide. The show included iChat appearances and videos from Mick Jagger, Dr. Dre, and Bono. “It’s a very cool thing for musicians and music,” Bono said of the iPod and iTunes. “That’s why I’m here to kiss the corporate ass. I don’t kiss everybody’s.”
Jobs was never prone to understatement. To the cheers of the crowd, he declared, “iTunes for Windows is probably the best Windows app ever written.”
Microsoft was not grateful. “They’re pursuing the same strategy that they pursued in the PC business, controlling both the hardware and software,” Bill Gates told Business Week. “We’ve always done things a little bit differently than Apple in terms of giving people choice.” It was not until three years later, in November 2006, that Microsoft was finally able to release its own answer to the iPod. It was called the Zune, and it looked like an iPod, though a bit clunkier. Two years later it had achieved a market share of less than 5%. Jobs was brutal about the cause of the Zune’s uninspired design and market weakness:
The older I get, the more I see how much motivations matter. The Zune was crappy because the people at Microsoft don’t really love music or art the way we do. We won because we personally love music. We made the iPod for ourselves, and when you’re doing something for yourself, or your best friend or family, you’re not going to cheese out. If you don’t love something, you’re not going to go the extra mile, work the extra weekend, challenge the status quo as much.
Mr. Tambourine Man
Andy Lack’s first annual meeting at Sony was in April 2003, the same week that Apple launched the iTunes Store. He had been made head of the music division four months earlier, and had spent much of that time negotiating with Jobs. In fact he arrived in Tokyo directly from Cupertino, carrying the latest version of the iPod and a description of the iTunes Store. In front of the two hundred managers gathered, he pulled the iPod out of his pocket. “Here it is,” he said as CEO Nobuyuki Idei and Sony’s North America head Howard Stringer looked on. “Here’s the Walkman killer. There’s no mystery meat. The reason you bought a music company is so that you could be the one to make a device like this. You can do better.”
But Sony couldn’t. It had pioneered portable music with the Walkman, it had a great record company, and it had a long history of making beautiful consumer devices. It had all of the assets to compete with Jobs’s strategy of integration of hardware, software, devices, and content sales. Why did it fail? Partly because it was a company, like AOL Time Warner, that was organized into divisions (that word itself was ominous) with their own bottom lines; the goal of achieving synergy in such companies by prodding the divisions to work together was usually elusive.
Jobs did not organize Apple into semiautonomous divisions; he closely controlled all of his teams and pushed them to work as one cohesive and flexible company, with one profit-and-loss bottom line. “We don’t have ‘divisions’ with their own P&L,” said Tim Cook. “We run one P&L for the company.”
In addition, like many companies, Sony worried about cannibalization. If it built a music player and service that made it easy for people to share digital songs, that might hurt sales of its record division. One of Jobs’s business rules was to never be afraid of cannibalizing yourself. “If you don’t cannibalize yourself, someone else will,” he said. So even though an iPhone might cannibalize sales of an iPod, or an iPad might cannibalize sales of a laptop, that did not deter him.
That July, Sony appointed a veteran of the music industry, Jay Samit, to create its own iTunes-like service, called Sony Connect, which would sell songs online and allow them to play on Sony’s portable music devices. “The move was immediately understood as a way to unite the sometimes conflicting electronics and content divisions,” the New York Times reported. “That internal battle was seen by many as the reason Sony, the inventor of the Walkman and the biggest player in the portable audio market, was being trounced by Apple.” Sony Connect launched in May 2004. It lasted just over three years before Sony shut it down.
Microsoft was willing to license its Windows Media software and digital rights format to other companies, just as it had licensed out its operating system in the 1980s. Jobs, on the other hand, would not license out Apple’s FairPlay to other device makers; it worked only on an iPod. Nor would he allow other online stores to sell songs for use on iPods. A variety of experts said this would eventually cause Apple to lose market share, as it did in the computer wars of the 1980s. “If Apple continues to rely on a proprietary architecture,” the Harvard Business School professor Clayton Christensen told Wired, “the iPod will likely become a niche product.” (Other than in this case, Christensen was one of the world’s most insightful business analysts, and Jobs was deeply influenced by his book The Innovator’s Dilemma.) Bill Gates made the same argument. “There’s nothing unique about music,” he said. “This story has played out on the PC.”
Rob Glaser, the founder of RealNetworks, tried to circumvent Apple’s restrictions in July 2004 with a service called Harmony. He had attempted to convince Jobs to license Apple’s FairPlay format to Harmony, but when that didn’t happen, Glaser just reverse-engineered it and used it with the songs that Harmony sold. Glaser’s strategy was that the songs sold by Harmony would play on any device, including an iPod or a Zune or a Rio, and he launched a marketing campaign with the slogan “Freedom of Choice.” Jobs was furious and issued a release saying that Apple was “stunned that RealNetworks has adopted the tactics and ethics of a hacker to break into the iPod.” RealNetworks responded by launching an Internet petition that demanded “Hey Apple! Don’t break my iPod.” Jobs kept quiet for a few months, but in October he released a new version of the iPod software that caused songs bought through Harmony to become inoperable. “Steve is a one-of-a-kind guy,” Glaser said. “You know that about him when you do business with him.”
In the meantime Jobs and his team—Rubinstein, Fadell, Robbin, Ive—were able to keep coming up with new versions of the iPod that extended Apple’s lead. The first major revision, announced in January 2004, was the iPod Mini. Far smaller than the original iPod—just the size of a business card—it had less capacity and was about the same price. At one point Jobs decided to kill it, not seeing why anyone would want to pay the same for less. “He doesn’t do sports, so he didn’t relate to how it would be great on a run or in the gym,” said Fadell. In fact the Mini was what truly launched the iPod to market dominance, by eliminating the competition from smaller flash-drive players. In the eighteen months after it was introduced, Apple’s market share in the portable music player market shot from 31% to 74%.
The iPod Shuffle, introduced in January 2005, was even more revolutionary. Jobs learned that the shuffle feature on the iPod, which played songs in random order, had become very popular. People liked to be surprised, and they were also too lazy to keep setting up and revising their playlists. Some users even became obsessed with figuring out whether the song selection was truly random, and if so, why their iPod kept coming back to, say, the Neville Brothers. That feature led to the iPod Shuffle. As Rubinstein and Fadell were working on creating a flash player that was small and inexpensive, they kept doing things like making the screen tinier. At one point Jobs came in with a crazy suggestion: Get rid of the screen altogether. “What?!?” Fadell responded. “Just get rid of it,” Jobs insisted. Fadell asked how users would navigate the songs. Jobs’s insight was that you wouldn’t need to navigate; the songs would play randomly. After all, they were songs you had chosen. All that was needed was a button to skip over a song if you weren’t in the mood for it. “Embrace uncertainty,” the ads read.
As competitors stumbled and Apple continued to innovate, music became a larger part of Apple’s business. In January 2007 iPod sales were half of Apple’s revenues. The device also added luster to the Apple brand. But an even bigger success was the iTunes Store. Having sold one million songs in the first six days after it was introduced in April 2003, the store went on to sell seventy million songs in its first year. In February 2006 the store sold its one billionth song when Alex Ostrovsky, sixteen, of West Bloomfield, Michigan, bought Coldplay’s “Speed of Sound” and got a congratulatory call from Jobs, bestowing upon him ten iPods, an iMac, and a $10,000 music gift certificate.
The success of the iTunes Store also had a more subtle benefit. By 2011 an important new business had emerged: being the service that people trusted with their online identity and payment information. Along with Amazon, Visa, PayPal, American Express, and a few other services, Apple had built up databases of people who trusted them with their email address and credit card information to facilitate safe and easy shopping. This allowed Apple to sell, for example, a magazine subscription through its online store; when that happened, Apple, not the magazine publisher, would have a direct relationship with the subscriber. As the iTunes Store sold videos, apps, and subscriptions, it built up a database of 225 million active users by June 2011, which positioned Apple for the next age of digital commerce.