INDUSTRY ANALYSIS
Apple Replays Old Mistakes

It might seem hard to believe, but there was a time when Microsoft's (Nasdaq: MSFT) Bill Gates was begging Apple's (Nasdaq: AAPL) Steve Jobs to license the Mac operating system to PC vendors. Apple turned down the offer, and was later crushed by Gate's plan B: Windows.

That was in 1985, and thanks to Job's mistake, Gates doesn't need to beg for anything anymore.

However, back then, Gates wrote a memo to Apple executives asking that Apple "open the Macintosh architecture" in order to create "the independent support required to gain momentum and establish a standard." This would allow production of "a wide variety of peripherals, much faster than Apple could develop the peripherals themselves." And Microsoft wanted to help.

Gates understood that Apple had a good system and he wanted to help make products like programming tools and office applications in order to expand the pie for everyone. Instead, he was locked out and told to go away.

Nearly Destroyed

Microsoft probably wouldn't have created Windows if Apple had agreed to license the Mac OS to PC vendors. And even if Microsoft did have a future plan for Windows, Apple would have been in a much better position to compete if it had cooperated with other companies.

Instead, Apple was almost completely destroyed because the company wanted absolute control over its product. Currently, Apple has less than 4 percent of the market for personal computers. In spite of this rather hard lesson, it appears that Jobs is about to replay history.

This time, the focus is on digital music, encompassing Apple's iPod music player and the iTunes software. Apple's iTunes service made it easy and cheap to download songs, a great relief for consumers. For 99 cents, it's possible to download an old Eagles tune and relive old times, resulting in increased revenues for Apple. Indeed, the company sold 860,000 iPods in the last quarter alone.

Unhappy Consumers

But Apple's iPod music player only plays songs in the company's "FairPlay" digital rights management (DRM) format and songs downloaded from iTunes only play on the iPod.

For instance, a person who downloads a song from iTunes and wants to play it on his or her Rio player is left disappointed. Similarly, someone who owns an iPod music player is limited to buying music exclusively from iTunes, even though there are many other services on the Web, such as Napster and RealNetworks's (Nasdaq: RNWK) RealRhapsody.

These restrictions don't make consumers happy, and many, including RealNetworks, have noticed the problem. Indeed, in a Bill Gates-type move, RealNetworks' CEO Rob Glaser sent a message to Steve Jobs suggesting that Apple allow others to provide music for the iPod.

Like he did 20 years ago, Jobs dismissed the idea. Like Microsoft, RealNetworks resorted to plan B.

Real came up with a way to fix the problem without Jobs' blessing -- it figured out a method to allow people to listen to music in RealNetworks' digital file format on iPod devices. Real named the software work-around "Harmony." The reaction from Apple wasn't pretty.

Going It Alone

Apple accused RealNetworks of adopting the "tactics and ethics of a hacker," even though that's not how most consumers felt. Apple then went even further and said in a statement that "It is highly likely that Real's Harmony technology will cease to work with current and future iPods."

Apple's resolve to go it alone and not work with others backfired in the past and will do so again if it doesn't change its ways. A long time ago, Adam Smith made some observations that Steve Jobs would do well to note: Markets work best when individuals follow their self interest to serve others.

When a warped idea of self interest leads people to cut themselves off from others, the system tends to break down. Jobs has been there before, and it boggles the mind that he appears set on a return trip.

The French online music store Virgin Mega has filed a complaint against Apple on the basis of its refusal to license its DRM. But if history is any indication, by the time a bureaucrat in France gets around to acting on the complaint, Apple won't be the leader anymore. Apple is now, but the market is open to win or lose.

Microsoft and several other companies also are competing in the digital music space. Indeed, Microsoft already has sealed deals with other digital device makers and some big content companies. If Microsoft winds up overtaking Apple in this space, no one should cry antitrust.