In October 2001, the music industry was riven by piracy and had no idea how to solve it. Enter Steve Jobs, whose new device created a digital music market – and made Apple into a titan
In 2001, the record business was in freefall due to digital piracy, and the best way out of this accelerating crisis came in the shape of a white device the size of a deck of cards. The iPod, launched 20 years ago this week, was also how Apple’s Steve Jobs was able to prey on a failing business in order to avenge his own past failures – exiled between 1985 and 1997 from the company he co-founded – by turning Apple into the most profitable company in history.
Before the iPod lifeline arrived in October 2001, record labels were in full panic mode. In its annual report for 2001, record company trade body IFPI called it “a turbulent” year, blaming filesharing and CD burning for a revenue slump. Jay Berman was chief exective of IFPI at the time and calls the scale of filesharing then “a crisis of momentous proportions” for record labels. “It really was,” he says, “a foreign invasion.”
The industry responded by attempting to sue filesharing service Napster and the copycat services that came in its wake: litigation rather than innovation.
“[Litigation] was a bellwether for idiocy,” claims Jim Griffin, an industry consultant who cut his digital teeth at Geffen in the 1990s, putting out the first full-length song legally online in June 1994 (Head First by Aerosmith). “Whatever the music industry thought, that’s what you shouldn’t do.” So the iPod benefited not just from the design deficiencies of the MP3 players before it, but also from an early mover taking all the legal heat from a record business spooked into fight mode.
The first digital music players emerged in late 1998 and early 1999, notably the Personal Jukebox (developed by Compaq Research), which held the equivalent of a CD’s worth of music and was prone to skipping if bumped. It was Diamond Multimedia and its Rio range of MP3 players that first caught the public’s imagination and the music business’s ire. Record labels felt it should be subject to a blank media levy and pay royalties to copyright owners on every device sold.
The record labels “wanted the player off the market”, says Hilary Rosen, who was CEO of the trade organisation Recording Industry Association of America (RIAA) between 1998 and 2003. In October 1999, however, a US district court judge denied the RIAA’s demand for an injunction against the Rio and more than 200,000 players were sold soon after. Jobs viewed this as an unmissable opportunity, damning the Rio and its competitors as “brain-dead” due to clunky software and design. He was convinced only Apple could successfully streamline digital music.
iTunes, launched in January 2001, enabled the ripping and management of CDs on a user’s computer. The next step was to develop a music player that shunted its rivals into the ditch, and from there followed a move into music retail with the iTunes Store.
It was an enormous gamble but Jobs’s timing was, not for the first or last time, impeccable. After the failed Rio litigation, there had been a change in temperature among labels, slowly accepting it was better to work with rather than against such devices. “Once the iPod came along, they were more open to a middle ground,” says Rosen. She adds that record labels saw it as one thing “to sue that little company Diamond” but something else to “try and take on a behemoth” such as Apple.
The design and functionality of the iPod was something Jobs obsessed over during its gestation period. The issue of limited storage was cracked by Toshiba developing a cheap 5GB disc drive that could hold about 1,000 songs. Apple swooped and signed them as exclusive manufacturers, slamming the door on Creative Labs which was simultaneously working on their Zen MP3 player.
I approached Apple to talk about the legacy of the iPod. The company, usually reticent to speak in pieces that include non-Apple voices, initially said it could put forward Eddy Cue, who oversaw the creation of iTunes and now heads up everything from Apple Music to Apple TV+. The company soon reneged, however, and said it would not have any company executives speak about the iPod.
This secrecy defined the original development of the device, with only a few Apple executives allowed to see the iPod, codenamed P-68 (and, colloquially, Dulcimer). The eureka moment was the click wheel, conceived by Phil Schiller, Apple’s marketing chief, that enabled nimble search and control without a keyboard. Jobs wanted it as small as possible, with an apocryphal tale circulating that he tossed one prototype in a fish tank, pointed at the bubbles coming out and said they indicated dead space that should be removed.
It was unveiled at an Apple event on 23 October 2001, with Jobs talking through the device specs and then, like a digital conjuror, pulling it out of his pocket. “There it is right there,” he said holding it up as the room erupted in applause.
Record labels initially insisted that it be a Mac-only device, with Apple then only accounting for 5% of global computer sales. It was seen as a small and safe testing ground. Its success eventually strengthened Apple’s hand to persuade labels to allow it to be compatible with Windows, giving the company a huge market to target.
Apple bolstered this with marketing and advertising spend – notably with its powerful “silhouette” ads – in the tens of millions of dollars, something far beyond what labels had ever attempted. “That was an unheard of amount of money at the time for an advertising budget,” says Rosen.
The launch of the iTunes Store (in 2003 in the US and 2004 in Europe) was the next key step in Apple’s domination of digital music. The record labels had tried to launch their own legal download services but Pressplay and MusicNet were hampered in part by incomplete catalogues (as labels were initially barred from cross-licensing their music for monopoly reasons) but mainly because they were clunky and costly. “You really needed an outside player to come in and go copyright holder to copyright holder to get the agreements,” says Rosen.
Jac Holzman, founder of Elektra Records, had a roving brief as Warner Music’s chief technologist at the time and admits that creating a good music service was beyond the ken of record labels. “It was better that it came from the outside,” he says, “because the outside – and Apple specifically – would just build it better. We knew [Apple’s] history was excellent. So why not give it a shot?”
Record companies, though, were deeply unwilling to torpedo the lucrative CD business just because digital had come along. “These were the guys who had been in the industry for a long time and you would not have called them computer savvy,” says Berman of the IFPI. “Probably a great many of them had their personal contracts tied to the sales of CD. The initial response was very much: protect what we have.”
Rosen concurs, saying labels regarded “moving into something completely different” as anathema to how they worked. “Like Butch Cassidy and the Sundance Kid, where you have to jump into the river below because they are coming for you, and praying that you’ll live,” she says by way of analogy. “They just resisted doing that.”
Holzman puts it even more bluntly. “The record executives back in that time,” he says, “were not used to change.”
Against such entrenched protectionism, Jobs’s defining – and controversial – idea was bound to clash violently. He wanted to charge a flat price of $0.99 for tracks – new or old – on the iTunes Store and, crucially, let consumers buy individual tracks without having to buy a full album. Even though iTunes, at its peak around 2007, controlled more than 70% of the legal download market, downloads were a negligible margin business for Apple, despite taking a reported 30% cut of all sales. It was there as a driver for the iPod – where the real money was.
Teeth were gnashed at the time, but labels had to accept that Apple steered them into a future they could not have reached under their own steam. “In effect, [Apple’s dominance of legal downloads] was the price you paid for entry into the creation of a legitimate marketplace,” shrugs Berman. “The creation of iTunes was the whipped cream on top. It really did create a sense, once things got off the ground, that this had rescued the recording industry.”
Rosen says she was sold early on the iTunes Store, joining Jobs on “a little bit of a road show” around labels and management companies to get them on side. Apple was, she says, an outlier in Silicon Valley as a company that believed that all content – and especially music – should be paid for.
“Not only did he become an advocate for the music industry where we had none, the music industry was really ridiculed by the tech industry,” she says. “They didn’t see what we created as valuable.” Jobs couriered her an iPod on the day it launched. “He sent it to me with a big circle around the ‘don’t steal music’ [warning on the box]. Those three words were a comfort blanket to the industry before the iTunes Store launched.”
Apple also blossomed because no other technology company could develop a convincing iPod challenger. “Microsoft tried to get in there and had a few devices – but it never clicked as they were more cumbersome,” says Rosen. “Apple had the field to themselves for a long time.”
She is more forgiving about the flaws of rival devices than Jobs ever was. Jim Goldman, a reporter at CNBC, interviewed Jobs in January 2008 and recounted how Robbie Bach, the executive in charge of the Zune, told him that Microsoft’s player was a “worthy alternative to Apple’s iPod”. Jobs did not miss the opportunity to kick a galumphing rival. “Was he inebriated?” he asked. “Do you even know anyone who owns a Zune?”
Apple also had the magnetic power to bring in celebrity endorsement. Engaging in shuttle diplomacy between California and Dublin, Jobs and Apple’s lead designer Jony Ive enlisted the help of Jimmy Iovine of Interscope Records to persuade one of his label’s marquee acts to break their blanket ban on advertising. A black and red iPod was created for U2 to coincide with the November 2004 release of their How to Dismantle an Atomic Bomb album. The band, paid a royalty rate on each device sold, also agreed to appear in commercials for the device in exchange for phenomenal levels of marketing spend by Apple.
It was the iPod Mini, also launched in 2004, that proved the tipping-point device that, according to Walter Isaacson in his 2011 biography of Jobs, “truly launched the iPod to market dominance, by eliminating the competition from smaller flash-drive players”. Before the Mini launched, Apple controlled 31% of the portable player market; within 18 months, Apple held 74%. At the start of 2007, the iPod alone made up half of Apple’s business.
Sales of iPods passed 100m in April 2007 and its peak individual year was 2008 when it saw sales of 54.8m. But Apple already had its succession plan in place, launching the iPhone in 2007 and slowly “retiring” its lines of iPods, with only the iPod Touch surviving today. Now iPhones along with MacBooks, AirPods, iPads and Watches are Apple’s new centre of gravity.
“I don’t know how you describe something as the perfect product,” says Berman looking back at the iPod’s impact, “but it pretty much filled that description at that time.”
It also showed how digital technology, seen in 2001 as the nemesis of the record business, could actually save it. But this rescue plan came with hard conditions, benefiting Apple considerably more than it benefited the record business. At its first day of trading on the Amsterdam Stock Exchange on 21 September 2021, Universal Music Group, comfortably the biggest label and publisher in the world, hit a peak valuation of $54.3bn. In March 2021, Apple reported a market capitalisation of $2 trillion.