This Apple Isn't Rotten

Most of the time, I see eye-to-eye with Rick Munarriz, my buddy and Rule Breakers teammate. But not today, and not when it comes to Apple (Nasdaq: AAPL).

Here's how Rick put it yesterday, in sizing up the threat Wal-Mart (NYSE: WMT), RealNetworks (Nasdaq: RNWK), and their co-conspirators present to the Mac's daddy:

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?

Can I ask another question, Rick? How could that possibly be bad for Apple?

The iLife starts with the iPod
Before you answer, let's rewind to 2001. That October, nine months after the debut of the original iTunes software, Apple introduced the first iPod -- a 5-gigabyte monster that today looks a like brick paperweight.

But it was revolutionary at the time -- and well-marketed. As CEO Steve Jobs said during the iPod's debut, the new music player promised to put "1,000 songs in your pocket."

Consumers were hooked. By the end of the year -- not even two months after the initial rollout -- Apple had sold 125,000 iPods, or roughly 2,450 per day. Those aren't iPhone numbers, but they are impressive. And let's remember that all this occurred before:

(a) The iTunes music store existed (it would be launched in May of 2003).
(b) Apple had a meaningful retail presence.

In fact, were you to check the 10-Q for Apple's first-quarter 2002 results, which correlate with the financial period that ended in December 2001, you'd find that the Mac maker had just 27 stores at the end of that year, and that 19 of those stores were newly opened locations. Today, Apple has 185 stores.

Props to iTunes
None of this suggests that iTunes is a hanger-on, like that buddy of yours who had that one great moment where he rescued you from an oncoming bus, and who now asks for money every time he sees you. (Stop calling, Cliff. I'm out of cash, OK?)

To the contrary; iTunes has draped a halo around the iPod, and to this day, it sings "Ave Maria" in perfect pitch. So much so that Yahoo! (Nasdaq: YHOO), Microsoft (Nasdaq: MSFT), Sony (NYSE: SNE), and others sound like Roseanne Barr singing the national anthem. (Apple is widely reported to hold at least 70% of both the portable music player market and the market for digital music sales.)

But as great as the numbers are -- Apple sold its one millionth iPod less than two months after opening the iTunes store -- I can't escape one simple but brutal fact:

A very small portion of the songs in my iTunes library, and in the libraries of those I know, comes from the iTunes store.

Go ahead, take a bite
Therein lies the mistake when it comes to assuming that a new music store will dampen, if not outright destroy, Apple's entertainment franchise. The iPod was a hit long before the iTunes store arrived.

What made the iPod a hit? Its small size and hard-drive-enabled storage capacity. ("1,000 songs in your pocket.") Or, in simpler terms: design. As long as the iPod remains the best-designed gadget of its kind, more content -- and especially more unrestricted content -- should lead to ever-greater iPod sales.

Of course, it's possible that Wal-Mart's partners will design a player that outshines the iPod. But it's also possible that I'll be struck by lightning while finishing this story in my basement office. And yet, here I remain.

So will Apple, Rick.

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Fool contributor Tim Beyers leads a three-Mac household but didn't own shares in any of the companies mentioned in this article at the time of publication. Find Tim's portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy just bought a brand new iPod flea.