IT’S a great time to be selling ads in America. If the $US3 billion ($3.9 billion) predicted to be spent on this year’s US Congressional election campaigns were not enough, there is also the imminent launch of Microsoft’s first new version of Windows since 2001, which will crank up advertising budgets across the technology sector.
And then there is the emerging contest for the digital living room, which already has Apple saturating the airwaves with ads for its revamped iPod music players and iTunes digital music and movies.
On November 14, when it launches its Zune digital music player just in time for the holiday spending seasons, Microsoft will dramatically raise the stakes in that tussle - and in doing so spend a fortune on advertising.
On the face of it, the iPod-Zune contest should matter a lot more to Apple than to Microsoft. Digital music has grown from nothing to almost half of Apple’s revenues in less than five years, and allowed the once-struggling maker of quirky computers to capture a commanding position in the increasingly blurred space between computers and consumer electronics.
By selling 67 million iPods over the past five years, and winning an 80 per cent share of the digital music market, Apple has both reinvented itself as a company and become one of the world’s most valuable and known brands.
And by finding a pricing, usage and digital rights management formula that balanced the interests of consumers and content owners, Apple both opened the way for the piracy-stricken music companies to survive into the digital era and became an indispensable part of their future.
Microsoft, on the other hand, has in recent years largely looked beyond the consumer PC markets where in the late 1980s and 1990s it built the foundation for its subsequent dominance of the whole IT industry.
The world’s largest software company has instead focused on continuing to sell more software to businesses, on competing with Sony and Nintendo in games, on security, and on emerging threats to its business model from web-based services such as Google and open-source software such as Linux.
Compared to the vast potential of the enterprise and gaming markets and the internet, or the immense downside if Microsoft’s Windows and Office monopolies are eroded by new types of competitor, digital music and other digital media looked like small beer, until recently.
The gradual shift in the way consumers use computers that is moving them out of the den and into the living room was not ignored by Microsoft - it has developed a version of Windows specifically for media-oriented consumer users, and has invested heavily in areas such as media formats and digital rights management - but it was not a top priority.
That changed with the dawning realisation that Apple had built its initial success with the iPod and iTunes into a position where it could conceivably dominate the consumer digital media market.
The boom shows little sign of slowing as yet: Apple’s latest results show it shipped a record 1.6 million Macs and 8.7 million iPods in the third quarter of 2006, on its way to $US4.8 billion in revenue and $US550 million in net earnings.
The company’s year-on-year growth rate is currently north of 30 per cent for both its computer and media arms, and it has $US10 billion in cash on the balance sheet.
While not quite a money machine of Microsoft-like proportions, the sheer scale of Apple’s success finally forced Microsoft to move earlier this year, and so the Zune - an iPod-like portable device capable of playing digital music and video, plus some extra capabilities for wireless communication - was secretly born.
This is not the first time Microsoft has sold hardware wrapped together with its software - the xBox gaming consoles have shown it can be successful using this approach, and the xBox team has apparently led the Zune push.
While it is easy to criticise Redmond for sitting on its hands for five years and allowing an old rival it almost wiped out in the 1990s to re-emerge as a new threat, it’s important to also appreciate how different Apple’s tightly-coupled iPod and iTunes software and hardware strategy was to Microsoft’s preferred model.
In fact some have suggested Apple’s success with this integrated model may be another sign that it is coming back as the most effective way to deliver technology products - as it was in the 1960s and 1970s, but not in the 1980s and 1990s when computers were assembled using “open standards” components - software from Microsoft, chips from Intel, and the rest from other vendors.
There may be some truth to this - in certain current IT products sold to both consumer and enterprise buyers, the advantages of end-to-end bundling seem clear today in a way they were not a few years ago.
But it is still early days for the consumer digital media market - albeit 67 million iPods into it - and it would be premature to write off the model that made Microsoft (and Intel, for that matter) so successful at delivering technology over the past 20 years.
In the meantime, anybody who consumes media in the US can look forward to some further education on the relative merits of the Zune and the iPod this holiday season.
