Before You Bite Into That Apple ...

Man, talk about a tough crowd.

I wrote yesterday that Wal-Mart (NYSE: WMT  ) is starting to sell DRM-free tracks through its website. I also happened to mention that Apple (Nasdaq: AAPL  ) may finally have some real competition. Just minutes after my story was published, my inbox started buzzing.

"Apple is too hip." "The iTunes interface is too good." "iPod users don't shop at Wal-Mart." You get the drift.

Well, if you don't, allow me to share some of the anti-Wal-Mart/pro-Apple snippets out of my email inbox.

Wal-Mart's slippery cyber-slope
"Apple doesn't need to watch its back," goes one unsigned response. "These fools haven't a clue or chance to touch Apple's iTunes."

"Wal-Mart will launch this service, nurse it along for a while, and then in six months quietly drop it," predicts a writer named Howard, who was alluding to Wal-Mart's flawed attempt to take on Netflix (Nasdaq: NFLX  ) in the DVD-rental mail-order market.

Howard and the other nameless respondent are correct, to a certain extent. Wal-Mart has been a clown in cyberspace. Beyond its misjudgment in taking on Netflix without the willingness to commit to the regional distribution centers necessary for speedy disc deliveries, Wal-Mart's path is lined with dot-com tears.

  • Walmart.com was marred with a blundered launch and relaunch several years ago, and it lost its head along the way.
  • Wal-Mart once sold Internet access -- don't laugh; Kmart did, too -- but it now lets AOL and Netscape handle that.
  • In one of its more recent online blunders, it launched a social-networking site in a "back-to-school" shopping wrapper last summer. Kids love crass commercialization as much as they like crabby lunch ladies ladling up gloppy fare. "School Your Way" lasted fewer than two months.
  • Wal-Mart's recent attempt in social networking through Facebook proved unpopular with the college crowd.

However, Wal-Mart has gotten smarter with its Web presence over the years. Yes, Alexa.com ranks Apple as the 33rd most popular website in the country, but Wal-Mart isn't too far behind in 54th place.

You can't assume that a bumbling offline juggernaut won't get it right on the Web eventually. Just look at Blockbuster (NYSE: BBI  ) . Its success with Total Access has led Netflix to scale back its year-end subscriber targets dramatically, twice in recent months.

The power of iTunes and iPods
It's easy to fall in love with the iTunes Music Store. It's slick, stylish, and far from the dentist's-waiting-room aesthetics that you'll find at rival digital-music sellers.

Back to the emails. "The iTunes music store has gone through so many changes and upgrades to constantly change with user needs and experience," Dennis writes. "Will the lack of DRM make a difference? I doubt it."

"Apple shareholders are going to laugh all the way to the bank," writes Thomas. "After all, more places selling digital music means more people buying iPods, where Apple makes the most markup."

I don't see it the same way as Dennis and Thomas do. iPod users have gone through 3 billion downloads on iTunes because iTunes is pretty much the only show in town for iPod-ready downloads. Most of the other digital-music merchants sell tunes in the WMA format, which works on more conventional MP3 players but cannot penetrate the protected iPod fortress.

An MP3 file is universal. It will work on any and all players, the same way a ripped physical CD would. And if a record label makes its tunes available as standalone MP3 files -- the way EMI has for Wal-Mart, Apple, and eventually Amazon.com (Nasdaq: AMZN  ) -- it doesn't matter where you get the track. As more studios begin to back the unshackled MP3 format and more Web retailers begin to sell them, the line will also blur as to who makes your digital-music player, if audio is your bag.

How can this be good for Apple? Even if Apple was a pioneer in calling for the record labels to do away with protected song files, the end of DRM-cuffed song files will also force Apple to play on a more level playing field. That goes for both its song files and its players.

"I don't think $0.05 is going to make single bit of difference to 98% of current iTunes users," notes one writer.

But it's not just a nickel. Wal-Mart is pricing MP3 files at $0.94 apiece, but Apple's $0.99 tracks aren't MP3s. Apple's original plan was to price premium MP3 tracks at $1.29 each. If you want your music to follow you, no matter who makes your next digital music player -- and you should -- why pay Apple 37% more?

For the love of Apple
If you've followed my occasional coverage of Apple, you probably know that I am quite fond of the company. I was one of the few to believe in the stock back when it belonged to an unloved company trading for little more than its balance-sheet liquidity.

I may be a PC user, but my home is blessed with an old Mac and a pair of iPods. As a former Pixar investor, I'm a big fan of Steve Jobs. I applaud when style and substance -- two things that Apple does brilliantly well -- prevail.

However, I also realize that no single product market is impenetrable. No one is building a better mousetrap than Apple, but a DRM-free world will be loaded with cheaper knock-off mousetraps. With the world's largest retailer (Wal-Mart) and the country's most popular e-tailer (Amazon) nibbling on the cheese, something's going to snap.

It's a trap.

Amazon.com and Netflix are Motley Fool Stock Advisor picks. Wal-Mart is an Inside Value recommendation Turn up the investing music for free with a 30-day trial subscription to either newsletter service.

Longtime Fool contributor Rick Munarriz isn't a subscriber to any digital-music service, even though he does have satellite radio. He does not own shares in any of the companies in this story, save for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy is DRM-free.


Read/Post Comments (0) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 535161, ~/Articles/ArticleHandler.aspx, 8/23/2014 1:50:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement