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Apple’s iPhone rivals in a quandary

iTunes sync give advantage over competition

When it comes to music on portable devices, there hasn’t been real competition for a long time. Apple’s iPod and iTunes have the market nailed to the tune of more than 90%.

Even the near ubiquitousness of mobile phones hasn’t resulted in much of a dent in that figure. That’s because nobody has been able to figure out a popular way to bring music to them.

Various download plans offered by major cellular providers such as Sprint and Verizon failed to take off, mainly due to technical restrictions related to device memory and network bandwidth plus high prices and consumer frustration at paying twice to get music on their PC and phone.

Even Apple’s attempt to break the impasse with the Rokr, the iTunes phone it created with Motorola in 2005, was a bomb.

It’s not that the diskeries aren’t making money from phones. Research firm Juniper recently reported the worldwide mobile music market generated $11 billion in 2008. But most of that money was made via ringtones, and much of the rest was generated in Europe and Asia, where streaming and downloadable music services on phones are much more popular, thanks in part to the higher speeds of their networks and also due to cultural tastes.

Then came the iPhone. In less than two years, Apple has sold more than 17 million of its multimedia phones, quickly becoming the hottest tech gadget in the country and the de facto dominator of music phones in the nation. The solution for Americans, it turns out, was simple: Just turn an iPod into a phone.

But that presents the music industry with a quandary: Already, much to their regret, labels have ceded control of the digital music business to Apple. As a result, Steve Jobs and his lieutenants have near-monopoly power in setting prices and terms. Are they ready to give Apple the same power over music on phones?

“While Apple is having tremendous success with their iPhone business, we don’t see this happening so long as the iTunes store is only available to owners of iPhones and Wi-Fi-enabled iPods,” says Rio Caraeff, exec VP of Universal Music Group’s eLabs. “That leaves a tremendous opportunity for other retailers … to serve the billions of other music-capable handsets on the planet.”

Apple’s competitors certainly aren’t ready to give up the fight. The hottest competitors to the iPhone currently are Palm’s Pre and RIM’s BlackBerry Storm. But while both arguably best the iPhone in a number of areas, that’s not necessarily the case with music. Palm’s device has a built-in link to Amazon.com’s MP3 music store but doesn’t sync with iTunes, where most people keep their songs. And while the Storm does sync with iTunes, it doesn’t use that software on its device — good luck getting Apple to license it! — and doesn’t let users download music directly.

“BlackBerrys have not been great for consuming media, such as music and video,” Caraeff notes, “but we know that RIM is focused on fixing that, and we know it’s only a matter of time. This is still an area where the hardware and software together define the user experience. The day-to-day usability (and preference for use as a primary music device) will live or die depending on how much elegance and artistry goes into perfecting the user experience.”

Apple’s digital music competitors like Rhapsody and Amazon will no doubt continue to make deals with phone companies. But they’re left with a simple problem: Americans have overwhelmingly chosen iTunes as the way to organize music on their computers. If they want a phone experience that easily syncs with the computer and doesn’t require them to buy songs twice, they’ll need a phone that works flawlessly with iTunes. Which gives Apple and the iPhone a big advantage over the competition.

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