RYAN ANSON
It was the size of a deck of cards, had enough space for about 1,000 songs and no one knew what to make of it.
On Oct. 24, 2001, The New York Times published a story about a quirky new portable music player made by a computer company that was small enough to fit in just about anyone's front pocket.
The story appeared on page 8 of the newspaper's business section. Not exactly prime real estate.
Analysts were bemused. The device had limited commercial potential, they said. After all, it was only compatible with less than 5 per cent of the computers in the United States. To the rest of the Windows crowd, "it doesn't make any difference," one observer opined.
Indeed, it was an inauspicious start for the iPod.
The day before the Times story appeared, Apple Inc. co-founder and chief executive officer Steve Jobs unveiled his creation and laid out his vision of the future to a gathering of technology journalists and analysts in California.
"Interestingly enough, in this whole new digital revolution, there is no market leader," he told them. "No one has found the recipe yet for digital music. And we think not only can we find the recipe, but we think the Apple brand is going to be fantastic, because people trust the Apple brand to get their great digital electronics from ... we're introducing a product today that takes us exactly there, and that product is called iPod."
And with that, Mr. Jobs pulled the white, rectangular device out of the front pocket of his jeans and held it up for the audience. Polite applause. Many looked like they didn't get it.
That was just fine with Mr. Jobs. They'd understand soon enough.
Perhaps no other company has benefited from the rise of digital media as much as Apple.
Before music lovers downloaded billions of songs from iTunes, before white ear buds became as common as sunglasses on a morning commute and before the iPhone was the most sought-after consumer gadget in the world, Apple was a computer company with a small – albeit devoted – following.
Although the Cupertino, California-based company revolutionized home computing in the mid-1980s, by 1997, the company was a bit player in an industry dominated by Microsoft Corp.'s Windows operating system. It's stock price hovered between $13 and $22 a share (today it's closer to $130 a share).
But consumer demand for digital media, and the iPods to play it on, transformed Apple from a niche PC maker into a consumer electronics juggernaut. Today, Apple enjoys a stranglehold over the market for digital music players, controlling a 70 per cent market share in 2008, is the largest retailer of music in the United States – digital or otherwise – and with the iPhone, has evolved into one of the most powerful technology companies on the planet and is now worth around $115-billion.
Not bad for page 8.
However, the story of Apple is merely the tip of the iceberg when it comes to how digital media has transformed the business world. Few industries, from retail operations to artistic production; from newspapers to telecommunications have been immune to the shifting habits of mass consumption. Digital media has fundamentally altered financial models that existed for more than a century, and in the process has redrawn the power map in the corporate world.
Any company in the business of producing artistic content and intellectual property – be it words, music, photos, motion pictures or other forms of interactive entertainment such as video games – now must contend with the Internet. The ability to reproduce endless digital copies of media by reducing it to the ones and zeroes of binary code has upended industries that once depended on billions of dollars of infrastructure devoted to producing, distributing and marketing physical products.
"Every movie has had its price reduced to zero," Chris Anderson, editor in chief of Wired Magazine said in an interview. "Every bit of music, every bit of content, every bit of software has had its price reduced to zero. Now, it's not the only version in the marketplace, there's also a version in the marketplace that has a price of whatever the creator intended, but it's happened and there's nothing new about it."
Record companies and movie studios claim they're losing billions in revenue. Newspapers such as the Rocky Mountain News and Seattle Post Intelligencer stopped printing while others hemorrhage cash. Competing with free has become a Sisyphean task for media companies struggling to maintain their footing while rapidly trying to adapt to the new consumer reality.
Disseminating that content has produced its own stars and dogs over the past 10 years as the digital sands shift. Record stores, which once were the front lines of the music industry, are folding as consumers turn to the Internet. Music World and Tower Records stores have been replaced by iTunes and eMusic. Movie rental businesses such as Blockbuster are facing the prospect of bankruptcy as they fight against Hulu, YouTube and The Pirate Bay.
Still, for every company that has suffered as a result of the digital revolution, another has found a way to make the new reality work for it.
Companies that have played a role in the build out of the Internet that consumers demanded with the rise of digital media have benefited handsomely. Internet service providers (ISPs) have watched their numbers of high speed subscribers rise in parallel with increasing revenue, helping to fuel the growth of their other businesses, such as mobile networks and content services.
Finally, computer manufacturers, software firms, microchip makers and other technology companies have seen demand for their products explode as consumers sought faster, larger-capacity machines and more convenient portable devices that were capable of getting and playing all that digital material.
Although the world has effectively said goodbye to the Walkman, the boombox and the VCR, the digital revolution has produced the iPhone, the Kindle and TiVo.
Now, 10 years after Napster set the wheels of The Download Decade in motion, many businesses that remain tied to older business models are suffering and being driven to the brink of insolvency in the face of the worst economic recession since the Great Depression.
Digital media acted as a tsunami that crashed through the business world, reordering traditional power structures. Now the collapse of global financial markets could be the tide that washes away those businesses not strong enough to fight the current.
Which businesses survive and which are relegated to the textbooks of first-year economics students may depend on their ability to finally stop worrying about digital media, and learn to love the ones and zeroes.
THE DECADE THE MUSIC DIED
Before digital came along, the music industry had total control over its format transitions. Labels would introduce new formats slowly to wean the public off previous generations, eking out every possible benefit. The industry touted eight tracks and cassettes as alternatives to vinyl records because they offered portability and then applied the same philosophy to the transition from cassettes to CDs.
"In prior shifts between technology platforms – vinyl to cassettes, cassettes to CD – these had been shifts that were stage-managed by the business end of things," said Graham Henderson, president of the Canadian Recording Industry Association in an interview with the Globe. "When a new technology came along such as cassette – which might not have been the greatest in audio quality, but it offered portability – that was gently introduced into the marketplace when the time was right and the same thing would have been true of the CD."
However, with each format change, control slowly transferred from the record companies to the consumer. With cassettes, music fans could make copies of records, albeit at a lower quality, and the industry was not happy with the situation. Throughout the 1980s, the British Phonographic Industry, a trade group representing the record industry, conducted one of the first anti-piracy campaigns. It was dubbed "Home Taping is Killing Music" and the posters featured crossbones beneath a cassette made to resemble a skull, similar to a pirate flag.
CDs were seen as a leap forward for the industry, which was now able to produce high quality remastered original recordings from their catalogues. Although users could still make tapes for their friends, the higher quality offered by CDs was supposed to keep consumers coming back.
Although the MP3 file format dates back more than 20 years, it wasn't until 1995 with the release of a program called WinPlay3 that the format started gaining traction on PCs. Still, with the average MP3 weighing in at anywhere from three to five megabytes (MB) and the average computer containing only about 500 MB of storage capacity, the MP3 wasn't quite ready for prime time.
Remember, this was at a time when Windows 95 was the dominant operating system and required just 55 MB of free hard drive space to run, as opposed to Windows Vista, which requires 15 gigabytes, about 300 times as much space.
It wasn't long, however, before hard drives started getting bigger and computers got faster. Soon, computer makers were packaging CD-burners in with their PCs.
Suddenly, users could buy a bunch of CDs, rip the music to their computer and create near perfect copies or mix CDs of the recordings on blank discs for their friends.
Then along came Napster in 1999, offering users the ability to take those files on their computer, skip the burning process, and share their MP3 files with their friends.
Effectively, the ability to share digital files removed the music industry from the distribution equation.
It's hard to understate the financial impact that the transition to digital has had on record labels.
In just 8 years, the music industry has watched its global revenue fall from $36.9-billion (U.S.) in 2000 to $18.4-billion last year, according to reports from the IFPI. Although more than 5 billion songs have been sold through iTunes and digital music generated $3.7-billion worldwide in 2008, digital sales only account for 20 per cent of the industry's revenue.
Globally, the industry estimates that of the millions of songs that are downloaded from the Internet every day, only 5 per cent are actually paid for, while the other 95 per cent are pirated.
Over the past 10 years, the music industry has struggled to catch up to the digital wave. As a result, the industry has been forced to fight for survival in the courts, while artists take it upon themselves to experiment with new business models.
After scoring a legal victory over Napster, the industry has continued to take on file sharing websites and Internet services, including peer-to-peer networks such as Grokster, Morpheus and Kazaa, and have their sights set now on file sharing search engines that utilize BitTorrent technology, such as TorrentSpy and The Pirate Bay.
At the same time, the industry has launched its own online services. Some, such as iTunes and eMusic, utilize the a la carte model, where users pay a single price to download a song or album. Others, such as Rhapsody Unlimited, offer a streaming or "all you can eat" model where fans can pay a single price to listen to as much music as they like for a flat monthly fee.
"At first, the industry thought that MP3s would probably not be attractive to their music customers because their focus for years had been to constantly improve the quality of their recordings," said Cary Sherman, president of the Recording Industry Association of America in an interview. "Turns out that free was much more of an attraction than record companies actually thought. Quality was really not as important as free. Record companies began thinking of all sorts of ways that they could take advantage of digital, the online phenomenon."
The reality is that record companies are much smaller today and can support much fewer artists than before. (Even Will Smith has lost his record deal).
Some artists have even begun to abandon record companies on their own, embracing their own new models. Nine Inch Nails frontman Trent Reznor dropped his record label to develop a closer relationship with his fans. Radiohead invited fans to pay whatever they felt like for their latest album, In Rainbows , over the Internet, reportedly raking in more than $10-million in the first few days of sales.
Artists such as David Usher, who rose to fame in the 1990s as the lead singer of Moist under the old record company model and who now performs as a solo artist, have embraced social media as a means of connecting with and maintaining his fan base.
"If you look at labels and how much they've shrunk in the last five years, a lot of them have had huge layoffs," Mr. Usher said in an interview. "The reason being is because when you're not selling that piece of plastic any more, you can't support the infrastructure that delivers that piece of plastic and is built to sell that."
THE CHANGING FACE OF YONGE STREET
In the early 1990s, the corner of Yonge and Gould Streets in the heart of Toronto's downtown core was somewhat of a Mecca for music fans.
On one corner of the city's strip sat a mammoth, multi-level outlet owned by HMV Canada Music Stores Ltd. Across the street stood Sunrise Records. A few blocks south in the base of the Eaton Centre was one of the first Tower Records locations in the city, while Canadian-owned Music World Ltd. had its own shop inside the mall.
Just a crosswalk away from HMV, stood the iconic flagship outlet for Sam the Record Man, a Toronto institution thanks in part to the gigantic neon signs emulating spinning records that hovered over its entrance.
Then Napster came along.
Today, everything has changed. Tower Records has long since disappeared. The Music World chain was pushed into bankruptcy in 2007. HMV and Sunrise were forced to increase their selection of DVDs, video games and action figures as consumers stopped buying CDs.
Even the spinning records above Sam The Record Man have gone. The storefront they once adorned has been torn down and the company was forced to close the Toronto location it opened in 1961 amid competition from iTunes, big box stores such as Wal-Mart and of course, file sharing.
Jason and Bobby Sniderman, the sons of Sam's founder Sam Sniderman, opted to shutter the business in June of 2007, citing ubiquitous music downloads.
"We are making a responsible decision in recognizing the status of the record industry and the increasing impact of technology," said Bobby Sniderman in a press release.
There are now only two Sam the Record Man locations remaining in a chain that once boasted more than 130 stores.
Canada's last surviving national record chain, Music World, filed for bankruptcy protection in Nov. 2007.
"The music industry has gone through tremendous turmoil in recent years," said Kai Voigt, one of the chain's owners at the time. "Purely music retail has a sad epitaph."
Obituaries for some the largest chains in the U.S. have also been written. Tower Records closed its North American brick and mortar locations in 2006, and Virgin Megastores, the country's last national chain of music stores announced in March of this year that it would be shuttering all of its locations by mid-June.
Spencer Dusten owns one of the last remaining Sam's locations in the Bay of Quinte Mall in Belleville, Ont. He bought his first Sam's franchise in 1979 and since then he's lived through great upheavals in the music and entertainment industries. He watched the transition from vinyl to cassettes, he survived the "Home Taping is Killing Music" panic of the 1980s and he eventually watched as the vinyl section of his story shrunk as consumers demanded CDs.
At one time, he owned five Sam's locations in southern Ontario. Now, he's down to just one. It's hard to imagine, but there was a time not that long ago when independent record stores were seen as viable business opportunities.
The winds of change began sweeping through Mr. Dusten's stores in the mid-1990s. CD sales dropped. People bought computers that could download and burn songs. So Mr. Dusten started ramping up his selection of DVD movies. Now, that business is under siege. Today, his store also sells Mick Jagger action figures, board games based on the television show CSI, t-shirts and other paraphernalia. He's even started selling video games, borrowing a page from HMV's strategy.
"I'm looking for revenue streams," he said. "I'm not looking at my music sales declining – I see that and I'm trying to do everything I can to stop that – but I'm not saying, woe is me, I'm going to go into games, and if its not games I'm going to serve cheeseburgers on the side. I don't care what it takes, but that's how we survive."
"That same attitude and belief should be with the music companies and the movie companies. Downloading is there, but the question isn't how do I stop it, the question is, how do I bring those people into those industry, working to make the product better so we can all benefit."
COMING TO A DOWNLOAD SITE NEAR YOU
But the music industry was just the beginning.
Since the creation of Napster, the movie and television industries as well as video game producers, book publishers and newspapers have all struggled to come to grips with the new reality and develop business models that work in the online world.
On March 31 this year, the executives at 20th Century Fox woke up to a development that they hoped was an early April Fool's Day joke. A copy of the unfinished and unreleased film X-Men Origins: Wolverine leaked onto the Internet and was spreading like a virus around the world.
It wasn't a joke. It was a nightmare. A recurring one.
A copy of The Dark Knight was available online less than 24 hours after its U.S. theatrical premiere last July. Iron Man , starring Robert Downey Jr. was available the day before its release in May.
It's a scene that has played out all too often for the movie industry. Advances in data transfer technology, computer storage and Internet speeds have allowed movies and television programs to be copied, uploaded to the Web and sent around the world as easily as music files were in the days of Napster.
Sometimes, as was the case with The Dark Knight , the version of the film that ends up online is a video recording made by someone in a theatre with a clandestine camera. During Oscar season, copies of films such as Slumdog Millionaire , Frost/Nixon and Milk are ripped from the DVD screeners that are sent out to voting members of the academy. In many instances, it is not uncommon for downloaded copies to have a screen stamp saying which studio the film belongs to, and that piracy is illegal.
It's not just movies. Within hours of airing, television episodes are ripped from PCs and personal video recorders and posted online. An HD copy of a new episode of The Simpsons , House or How I Met Your Mother can be online in less than an hour after airing. In fact, television shows are the most downloaded files from The Pirate Bay, the world's largest destination file sharing search engine.
The Motion Picture Association of America estimates the film and television industries lost as much as $18.2-billion (U.S.) in revenue from piracy in 2005.
In Canada, the film and television industries account for as much as $5.2-billion (Canadian) in production volume annually, provide jobs to 130,000 Canadians in the industry and support countless more in movie theatres, catering companies and other services around the industry, said Wendy Noss, executive director of the Canadian Motion Picture Distributors Association, the Canadian wing of the MPAA.
"It's common sense," Ms. Noss said in an interview. "All of the things we're learning over the last 6 months about market failures in other areas, where things defied common sense, things that defied logic, that were too good to be true. It just defies common sense that somebody can take something, make money selling it and that the legitimate market can continue to survive."
Every time a copy of the latest episode of Lost is downloaded from the Internet or someone purchases a bootlegged DVD copy of Beverly Hills Chihuahua , the industry counts it as a lost sale.
However, some experts believe that file sharing can lead to sales. A recent study from the BI Norwegian School of Management in Norway found that those who download music illegally are 10 times more likely to pay for songs than people who don't.
Perhaps taking a cue from the destruction of the music industry, the movie and television industries have taken the initiative to get their content online. With demand for online video growing, television studios have worked with broadcasters to make more programs available online through network sites, partnership sites such as Hulu.com and now YouTube.
"There are more than 275 legal websites around the world that provide high-quality digital content online, and that ranges from ad-supported viewing, rental viewing, permanent downloads, subscription downloads, all of those huge arrays of consumer choice where consumers can get access to filmed entertainment the way they want it, on the device they want it, at the time they want it and at a variety of price points," Ms. Noss said.
I WANT MY INTERNET TV
Bram Cohen created a technology that is responsible for distributing more video around the Web than YouTube. But he's got an image problem.
In 2001, Mr. Cohen was working at a startup in California that ran out of money. Out of work and wondering what to do, he bounced a couple ideas off his friends, one of which was for peer-to-peer technology that could break up files into tiny pieces and make them easier to download, much like it's easier to move a desk up a flight of stairs once it's been taken it apart.
By 2003, the BitTorrent protocol was fast becoming a Web sensation. People around the world were using the technology to share not just songs, but entire albums of music. Video games and other software could be downloaded much faster than before with direct transfers. But it was the large data files used for video that benefited the most from BitTorrent's technology.
Just how popular is BitTorrent? Some experts believe BitTorrent traffic accounts for as much as half of all the Internet traffic in the world.
"It really made video on the Web happen," Mr. Cohen said in an interview with The Globe. "One of the creators of YouTube actually credits BitTorrent for his inspiration in starting YouTube in the first place."
Unfortunately, even though Mr. Cohen says he has never used the technology to download a copyright-infringing file in his lifetime, that's exactly what most people around the world are using the technology to do.
BitTorrent has become synonymous with illegal file sharing. Because the technology is freely available online, Mr. Cohen and his company, BitTorrent Inc., have virtually no control over how the technology is used by other people.
It wasn't long before so-called "torrent tracker" sites began cropping up online. These sites, which act as underground Google-like search engines where users can search for downloadable files or "torrents" have replaced peer-to-peer services as the number-one enemies of the entertainment industry.
The music and movie industries have spent millions of dollars in legal fees fighting sites such as TorrentBox, The Pirate Bay and Canada's isoHunt, arguing that by indexing and linking to these files, these sites are facilitating copyright infringement.
Last month, a Swedish judge found the four men behind Pirate Bay guilty of aiding in copyright infringement, in what has already been dubbed the trial of the year in Sweden. The trial thrust BitTorrent's technology into the spotlight.
That's the problem. The Pirate Bay has nothing to do with BitTorrent Inc.
"We really are a software and services provider, a very straightforward one," Mr. Cohen said. "People seem to make assumptions that we're some kind of pirate community project or something like that. We're not. We make software that is best in class for its technology and we're trying to promote it for everyone.
"We have created technology that has affected the world tremendously and we have an enormous user base," Mr. Cohen said. "It's really a question for us of how do we, obviously we wish to grow that user base, but also there's a real question of how do we monetize that user base. That's an ongoing question for us. We're doing a bit better on it now, but we did last year have to do a lot of cutbacks."
That's where Eric Klinker comes in. Mr. Klinker is the chief executive officer of BitTorrent Inc., the company Mr. Cohen founded to attempt to monetize his creation. While Mr. Cohen spends his time crafting new technologies and finding new uses for the BitTorrent protocol, Mr. Klinker's job is to make money.
"Simply put, we are software that gives users access to this protocol," Mr. Klinker said. "What users choose to do with it and who chooses to publish content using it is completely outside of our control. We simply provide the technology that makes this happen."
Although the protocol is one of the most efficient means of distributing content around the Web, the company has received a cold shoulder from much of the entertainment industry.
"Probably one of the major stumbling blocks indeed, it would be hard to argue against it," Mr. Klinker said of the service's reputation. "It's a little baffling to us; we're a technology provider and arguing against technology is like having an argument with gravity, it's not something that really makes a lot of sense if you think about it. But there's very clearly an emotional reaction that many mainstream publishers have to the brand or its perceived involvement in these activities. It's entirely misplaced, but it's there nonetheless."
A few years ago, BitTorrent Inc. struck a deal with the MPAA to run a destination site where users could pay to download music using the technology.
"If you go looking for that property today, unfortunately you're not going to find it," Mr. Klinker said. "We had to submit to some business realities there and shut it down as of November of last year. It simply proved to be not a business that we were particularly well-suited to pursue. We're a transport technology company ... and being in the media business is a very different business altogether."
If only it were just an optics problem.
For it's not just the entertainment industries which have vilified BitTorrent. Internet service providers say that one of the biggest threats to the integrity of their networks and the ability to offer consistent service to their users is due to people using BitTorrent to download large files such as movies or games.
They argue that BitTorrent data clogs their networks by using a large percentage of their traffic space, which leads to a poor experience for the rest of the customers, the same way a lumbering tractor trailer can impede flow on the highway. Their solution has been to "shape" traffic, essentially slowing down certain kinds of Internet activity while giving other data priority. Most of the traffic being shaped is BitTorrent traffic.
Kevin Crull is the president of Bell's residential services division. One analogy he likes to use to describe the effect of BitTorrent traffic on the company's high speed networks is that of a buffet restaurant.
"You're second in line, and the person in front of you lets in a bus load of people," Mr. Crull said. "We have a dedicated link from your home to our serving office, but then you go onto a shared network. And if there are only two people using that shared network, each of you gets half of it. If there are only 3 people using that network, each of you gets a third of it. What BitTorrent does is open up 10s or 100s of strings, so that if you are using the same shared network with a BitTorrent user, you might only get 1/100th of the available capacity because it opens up hundreds of links all at once. It's a clever technology."
Bell is by no means the only ISP to institute traffic shaping policies. Rogers does it too. In the U.S., most of the major ISPs, including Comcast and Verizon, employ similar tactics.
Critics of this policy argue that by de-prioritizing certain traffic, ISPs are violating the unwritten democratic principle of net neutrality, which states that all Internet traffic must be treated equally.
Bell has come under fire for its traffic shaping policies from the Canadian Association of Internet Providers, an industry group representing independent ISPs, which has filed a complaint with the Canadian Radio-television and Telecommunications Commission. The CRTC plans to hold hearings on the matter later this summer.
"Ideally, if it was a perfect world, I'd be happy with the BitTorrent user and I'd just charge him his fair share, but we're not there yet," Mr. Crull said.
With the way that BitTorrent currently operates, Rogers Communications chief strategy officer Mike Lee said it could be difficult for Mr. Cohen & Co. to turn BitTorrent Inc. into a legitimate business.
"There seems to be a 12-step program for peer-to-peer developers where everybody eventually wants to create a legitimate service," Mr. Lee said in an interview. "The challenge I think is that when someone has to operate a legitimate business and the gives and takes associated with that, you find ways to make things work that can accommodate everybody's interest. The challenge is that they [BitTorrent]don't actually control the protocol any more. The protocol is a separate entity that is more driven around the objectives of either developers or consumers of the behaviour. So it's very difficult to predict. Even now we are seeing a shift from peer-to-peer and some of the behaviour and moving more toward downloading as opposed to full on symmetrical file sharing."
A DOUBLE EDGED SWORD
Although downloading has since become a headache for Canadian ISPs, it wasn't always that way.
In fact, Canada's most powerful cable and telecommunications companies owe a great deal of their fortunes to the rise of downloading.
Back in 1999, Bell had just 51,000 high-speed Internet subscribers. Napster went online in June of that year. By 2000, the company's user base had jumped 560 per cent to 336,000. By 2002, the company boasted more than 1.1 million high-speed clients, many of whom upgraded so they could download music faster. Rogers, which first began offering high speed Internet access over its cable network in 1995, saw its user base triple from 186,000 in 1999 to nearly 640,000 in 2002.
Although telecom companies throughout North America had begun investing billions of dollars into building out the Internet with high-speed fibre networks before the birth of digital media, the ability to get digital music on a computer finally gave them the tangible use case they needed to drive adoption.
"I think you could make an argument that downloading is, just generally, has been one of the primary applications where people really understood and experienced the direct benefit from a broadband connection," Mr. Lee said. "It has definitely driven greater capacity demand on the network, but at the same time, if you think about where we were going historically, the different manufacturers of technology and equipment were at the same time solving a lot of those capacity demands with new innovations in fibre, with new innovations in modem technology, new innovations in compression. So it was a nice symbiotic relationship."
Today, ISPs use services like YouTube to illustrate the speed of their networks, according to Hunter Walk, director of product management at YouTube, which is owned by Google Inc.
"Products like YouTube help their [ISP's]consumers understand the value of broadband connections in a way that just marketing material doesn't do a great job of," Mr. Walk said in an interview. "One example there would be the success we've had partnering with a lot of the mobile operators as they try to help their consumers upgrade from just voice plans to data plans. They use applications like YouTube to really drive home what the capabilities of these new IP-connected Web browsing devices would do for that."
ALL ABOUT APPLE
Although this project has been dubbed the Download Decade, it could just have easily been called the Apple Decade or even the iPod Decade.
Digital media, and Apple's ability to provide it to consumers, has resulted in the company becoming one of the most famous turnaround stories in the history of business. Apple has consistently pushed the envelope with products and services that allowed customers access to digital media in new ways.
First it was the ability to take music mobile with the iPod, then it was the ability to buy music and videos at home through iTunes, now the two have been combined with access to iTunes on the go through the iPhone.
The story of the iPod begins in 1997. After more than a decade in the wilderness away from the company he founded with his business partner Steve Wozniak in the 1970s, Mr. Jobs returned to Apple. He was forced out of the company in 1985 after a bitter power struggle with the board of directors.
Over the ensuing 12 years, Apple tread a relatively pedestrian path and it remained a bit player in a market dominated by machines running Windows.
Mr. Jobs on the other hand, kept busy. In 1986, he purchased the computer graphics wing of Lucasfilm Ltd. and renamed it Pixar Animation Studios. The company developed animated commercials for various companies, but by the mid-1990s moved into making feature length pictures. Pixar has since released a long line of modern animation classics, including Toy Story , Monsters Inc. and Finding Nemo .
When Walt Disney Pictures finally purchased Pixar in 2006 for $7.4-billion, the deal made Mr. Jobs the largest individual shareholder in Disney.
Shortly after leaving Apple, Mr. Jobs got back into the computer business. He founded a company called NeXT, that was devoted to building specialty computers for universities and corporations. Although sales of its machines weren't great, what made NeXT special was its NeXTSTEP operating system.
Apple was one of the first companies to recognize the potential of the NeXT operating system, and in 1996, the company went back to its departed founder and offered to purchase his new venture for $429-million. NeXTSTEP would go on to form the foundation for the company's revamped Mac OS operating system.
But what Apple really got out of the deal was a new lease on life, a visionary leader and a springboard for the future.
Mr. Jobs took over as interim CEO shortly after the Independence Day weekend in 1997 and immediately began his own internal revolution within Apple.
Suki Dunham remembers it well. Ms. Dunham spent seven years as a business manager in Apple's worldwide product marketing division from 1995 to 2002 before leaving the company to found her own business – OhMiBod, a firm that designs and sells a line of iPod-connected vibrators – Ms. Dunham remembers the immediate impact Mr. Jobs had on the business.
"I was there in the dog days, when things were really tough and Gil Amelio ran the company for a while," she said. "You had the company, in terms of products, trying to go off in all these different directions because there wasn't somebody at the top with this really fabulous vision."
At the time, Apple was dabbling in the enterprise market and sold dozens of varieties of Mac and Power Mac computers, confusing its consumers. Mr. Jobs wasted little time changing the Apple tune.
"We had I don't know how many SKUs of Power Macs and iMacs – tons – and he brought it down and said, we're doing four," she said.
Mr. Jobs strategy was two-fold. First, he wanted to make things easier on the customer; a mantra of simplicity that would eventually work its way into every product, service and piece of software the company has created.
Second, as David Sobotta, the former head of Apple's federal sales division explains, was that the company was moving from being a computer maker to being a consumer electronics company.
"There was a mission for a long time at Apple to switch from selling very few of expensive products to selling very many of inexpensive products," he said in an interview. "The iPod was seen as one of the first products that was to do that. So there was a lot of hope built around the iPod."
But the iPod would have to wait. Music wasn't even on Mr. Jobs's radar in 1997. He was still focused on the movie business and restructuring Apple.
Inside Apple, all roads lead to the CEO's door. Mr. Jobs' control over the company is total and his link to Apple is tied to the company's value in a way that few other CEOs can match.
He also meticulously controls every aspect of the Apple brand. Mr. Sobotta remembers running an Apple booth at a trade show in Washington D.C., where the company was spending a paltry $100,000 to showcase its wears to the federal government.
Mr. Jobs personally selected the type of chairs used in the booth.
"You have to understand Steve Jobs a little bit, and one of the best ways that I can explain that is talking to you about executive briefings," Mr. Sobotta said. "When you go to take someone to Apple, and of course you're taking some huge egos to Apple, most of the huge egos would like to meet Steve Jobs."
"If you took them to Dell and you took them to meet [founder and CEO]Michael Dell? Slam drunk. If you take them to meet Steve Jobs, you have to apply for them to meet Steve, and you don't know until he shows up at the meeting whether or not he's going to come. In fact, you're in the meeting, and sometimes you'll be told, Steve has decided not to come. And if he does come, he will talk about whatever he wants to talk about.
"I can still remember having a bunch of NASA scientists out there, I mean, this was a whole room full of really, really high-level scientists. Steve comes into the room, and he's in shorts and sandals – of course most of them have suits and ties on – and he wants to talk about iTunes and iPhoto. I think it's the whole idea that Steve was focused on what he saw that was going on and the company is going on around him ... I think that's his genius, is the ability to concentrate on where he saw things going and the belief that those things are of interest to people that don't even know they're of interest to them."
Mr. Sobotta looks to the first iMacs, which were launched in 1998, as the beginning of Apple's push to become a major player in the entertainment business. Those iMacs had no floppy disk drive, came with an Ethernet jack built in and featured a CD burner.
"The whole idea was that you would get most of what you needed from the Internet," Mr. Sobotta said. "It was a cloud computer before the cloud."
Apple also needed to start selling its computers online to compete with companies such as Dell and Gateway, who were beating it in the consumer market. To fix this problem, Mr. Jobs brought in Mike Janes, a 14-year veteran of FedEx, and the first vice president of the package delivery company's e-commerce business. Mr. Janes took over Apple's fledgling online store in 1998 and ran it for more than five years.
"Apple was actually very late entering the music space," he said in an interview. "If you go back and look at the history, you'll see the very first application that Apple launched was iMovie – and that may have been influenced because Steve liked video and was still involved with Pixar ... but actually with the rise of Napster and the addition of CD burners on computers and all that, Apple was actually pretty late to the party."
That was something that didn't sit well with Mr. Jobs.
"Apple got burnt really badly on the CD burning thing," said Mr. Sobotta, who now sells real estate in North Carolina. "People were burning CDs for music, and Apple didn't have a CD burner in computers until well after other people, and I think that really stung Steve and probably led to him developing the iPod."
Many of the world's top technology companies employ so-called "evangelists" who are brought on board to promote the company's products and spread the gospel. Although these roles are somewhat common today, Guy Kawasaki was one of the first in Silicon Valley when he was hired in the mid-1980s to interact with the Mac community.
"For most of its recent history – i.e. pre-iPod – Apple was a one trick pony, i.e. Macintosh," Mr. Kawasaki, who is now a venture capitalist and the owner of the news aggregation service Alltop.com, said in an interview. "The iPod is a completely different pony ... so now instead of having a one horse sleigh, you have a two horse sleigh."
But what allowed Apple to succeed in the MP3 player category where so many other players had failed? Companies such as Creative and Sony had developed their own stand-alone digital music players, but weren't able to generate the buzz the iPod created.
"Taking your music mobile was not a new concept," said Mr. Janes, who now runs the online ticketing site FanSnap.com. "Sony obviously invented the concept and frankly they should have invented the iPod. They had a major head start. But of course what Apple did was probably a recurring design theme or thought process that Apple always goes through ... what Steve would refer to as a chain of pain. I just want to do XYZ, so why do I have to go through seven steps to get this done? Whether it's building software, building computers, building consumer devices or building phones, they just take these recurring multi-step processes and distill them down to their very essence; what is it that the user is trying to get done and how do we make that as simple as possible?"
Mr. Jobs saw an opportunity for simplification once again.
"Any time you have a device that is hard to use, but has a high potential for usage, you raise just huge flags for Steve Jobs," Mr. Sobotta said. "It's like waving a red flag in front of a bull. All of a sudden he sees something and says, wait a minute, if we do this really right, we can own it."
More than anything else, though, the one thing that simplified the process of getting music from CDs and other sources onto a user's iPod was a piece of software called iTunes, which was released in January of 2001.
Even before the iPod was released, Apple was enjoying great success with its music library software, iTunes, which enabled users to rip their CDs to their iMacs. But the iPod was something more for Apple, it opened up an entirely new category for the company.
"The beauty of the iPod is not the iPod itself, but the integration with iTunes. iPod without iTunes would be just another MP3 player," Mr. Kawasaki said. "But iPod with iTunes is now a total solution. It's a very different selling proposition. The iPod has ironically helped Macintosh because of greater brand awareness of Apple's and people who are using Macintoshes who might never have used Macintoshes before have iPods and they are part of the Apple phenomenon now."
More than 275,000 people downloaded iTunes in the first week that it was released. But people still had to get their music somewhere else, from providers that weren't Apple. Once Napster was effectively shut down in 2001 and people tired of ripping their CDs, then what? The online music stores of the time offered limited selection, and many of their songs couldn't be played on iPods.
In October of 2003, Apple changed all that when the iTunes music store went online. It launched with the support of the major record labels and featured more than 200,000 songs, including exclusive tracks from more than 20 artists, including Bob Dylan and Sheryl Crow. Every song was the same price – 99 cents – and users could purchase them individually or by album with the click of a button. It was the closest thing that users had experienced to online file sharing in the legitimate market.
"Apple's insight was, even though all those other services are free and they're obviously illegal, we think fans of these bands would actually be willing to pay to have a really great experience, really high quality music and downloads that happen really fast and payments that happen really fast," Mr. Janes said. "[iTunes]is a great example that you can built a product so great, an experience so great, that customers will pay for it even though they can get a lesser version for free. Apple competed with free, and won."
From there, the numbers speak for themselves. One million songs sold in the first week. Five million by June of 2004. Ten million songs in the first year.
Mr. Jobs' plan was working. The iPod strategy was starting to pay off, but to truly expand Apple's share of the computer market though, iTunes couldn't remain a Mac-only product. It needed to go Windows.
On Oct. 16, 2003, the Windows world was re-introduced to the Apple brand when they got a chance to try out iTunes. Users downloaded more than a million songs in the first three days.
Although more than 150 million iPods have been sold – the device has become synonymous with portable digital music players the way the Kleenex brand name has become interchangeable with facial tissue – and Apple has become a major player in the music industry through its iTunes music store, Mr. Jobs' initial intention was not to take over the record business. He just wanted to sell more computers.
The iPod would be Apple's gateway drug; a way to get consumers to experiment with the Apple brand, and hopefully, get them hooked.
"I remember when we were close to launching [the iPod]and he had an employee communications meeting," Ms. Dunham recalls. "At the time I didn't realize it and now looking back I see it all ... he had this very longer term, high level vision ... now because of iPod's popularity, you have people buying Apple computers that didn't really consider them before, and it's because of their experience with the iPod. And he had that vision way back when and he's done it."
"The iPod was a sliver of what is a larger company strategy," she said. "Back in the day, they were really looking at iPod as, well, this will help us drive more Mac sales. But now I'm sure that vision has changed a bit and that I think iPod is probably going to be the stepping stone into other areas of electronics."
Today, Apple is no longer seen as a fringe computer company. Quite the opposite, in fact. Thanks to the iPod, the slick design of its products, iTunes commercials featuring hit songs from the Black Eyed Peas and U2 and the seemingly never-ending "I'm a Mac, I'm a PC" marketing campaign.
Apple has repositioned itself as a hip, young brand. Indeed, Macbook computers are as common as flip flops and school sweatshirts on university campuses nowadays.
"Steve Jobs, for all his corporate life has believed that marketing to the young is the best way to own a market," Mr. Sobotta said. "That's how the original iMacs started out, they cut the special deals with university students. He believed that by working with young people he would create the most influence and set the most trends and that's how the original Mac became very successful because universities bought them and university kids carried them into their corporations after they graduated."
Apple's share of the PC market in the United States has grown from about 3 per cent in the mid-1990s, to more than doube that today.
However, Apple's transformations weren't limited to music. With his past involvement with Pixar and Disney, it was little surprise that eventually Apple expanded into other areas of entertainment, namely video, and has since turned iTunes into the digital equivalent of the record store in a local mall.
ITunes now offers music videos, full length movies and television shows. For the movie industry, iTunes provided one of the first legitimate online retail outlets for videos, as they began their own protracted battle with piracy after the emergence of the BitTorrent protocol. Television programs in the U.S. are often available 24 hours after they are broadcast on conventional channels.
The iPod also gave rise to podcasting, a means to taking conventional radio documentaries and packaging them in a downloadable format to be listened to at the user's convenience.
The iPod juggernaut continues to this day. iTunes is now the largest seller of music – digital or otherwise – in the United States, having sold more than 5 billion songs globally. It has become the single most identifiable, game-changing consumer electronics product of the past 10 years – with the possible exception of the BlackBerry.
Of course, Mr. Jobs hasn't been content to rest on his laurels, and in January of 2007 unveiled the device that will take Apple and digital media to the next level; the iPhone.
One can almost imagine Mr. Jobs having a sense of deja vu as he surveyed the smart phone landscape, baring striking similarities to the MP3 market in 2001. Sure there were entrenched leaders -- RIM, Nokia and Microsoft with its Windows Mobile software -- but Mr. Jobs believed, once again, that no one had the right "recipe."
When he took the wraps off the iPhone, Mr. Jobs described it as a combination of three devices: a widescreen iPod with touch-sensitive capabilities, a revolutionary mobile phone and an Internet communications device. In essence, it was the evolution of the iPod, one that would carry Apple into another decade.
As devices converge, Apple is in a unique position. With iPod and iTunes it had created a solid base of users and a destination portal that has become the Tower Records of the online world. By adding a mobile phone to the iPod, Mr. Jobs ensured that the one device people will continue to carry with them has a picture of fruit on the back of it.
Of course, the iPhone has already started to change the mobile phone game. With the introduction of the App Store last summer, Apple created a singular destination for software programs designed to run on the handset. Again, other platforms had applications available before Apple, but none had thought to consolidate them in one location. By placing the App Store within iTunes, Apple simplified the process.
More than a billion games and other applications have been downloaded from the App Store in less than a year.