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Originally published Monday, December 20, 2004 at 12:00 AM

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Apple's computers languish next to iPod

With hip new ads and an even hipper marketing deal with rock band U2, the iPod has revived Apple Computer's image as a cutting-edge company. Shares of Apple have nearly tripled...

Knight Ridder Newspapers

With hip new ads and an even hipper marketing deal with rock band U2, the iPod has revived Apple Computer's image as a cutting-edge company.

Shares of Apple have nearly tripled this year, and the iPod has captured nearly 90 percent of the market for portable hard-disk music players. The device, introduced three years ago, and its offspring, the iPod mini — the slimmer, lighter player that had its debut this year — are icons.

The word iPod "is a generic noun for a portable music player," said Michael McGuire, research director for media at GartnerG2, a technology-research company in Stamford, Conn.

But is Apple playing the same old song, teasing investors yet again with a sizzling product that in the end will provide it with only a temporary boost? Perhaps.

Some analysts suggest that Apple's core products — its desktop and notebook computers — could ride the coattails of the iPod's overwhelming success. More than 2 million of the players were sold in Apple's fourth quarter, which ended in September, and predictions for the holiday season range as high as 4 million (reports of retailers being out of stock surfaced last week).

That would be a welcome boost and sweet revenge at a time when old rival International Business Machines has just sold its PC business.

But some analysts also worry that Apple's stock has shot up too high, too quickly.

Likewise, several shoppers at the Apple store at a shopping mall in King of Prussia, Pa., doubted that the iPod's success would translate into broader Apple sales. They were there for the iPod, period, and had no intention of giving up their Microsoft Windows-based computers, which overshadow Apple's iMac and G5 computers in the marketplace.

Apple's market share in personal computers peaked at 16 percent in 1986 and has hovered in the low single digits since the late 1990s.

Even as the iPod was becoming a cultural and business phenomenon, the company ranked just 10th among all PC-makers in the third quarter of this year with 1.9 percent of the market, according to research firm IDC.

An old story

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It's a familiar story for Apple watchers. Creating innovative technologies and high-quality products that lead the industry has been a hallmark of the Silicon Valley company, but it is equally famous for failing to maintain momentum.

Some examples: Apple produced one of the first personal digital assistants, the Newton, which disappeared after the Palm and Microsoft-based Pocket PC devices appeared.

It revived itself with colorful, bubble-shaped iMacs in the late 1990s, but they produced only a small upward blip in market share that has since subsided.

Now, Dell, Rio and others are nipping at Apple's heels with their own digital-music players, and analysts do not expect Apple to hang onto its enormous lead in that market forever.

Still, at least some think this time may be different — that the iPod frenzy will drive sales of Apple's computers because the device works more seamlessly with Apple's own products.

"We believe that fiscal year 2005 could mark the year when ... the iPod story 'hands off' to the Mac story," Benjamin Reitzes of UBS Investment Research said in a recent report.

Playing with Windows

Another difference this time, some note, has been Apple's willingness to make the iPod play well with Windows products. The company released versions of the player and its associated software, iTunes, for Windows computers, and made its online music-downloading store available to all computer users, not just its own customers.

It also forged partnerships with a variety of companies — including Hewlett-Packard, BMW Group and Motorola — to get the iPod into different areas of the marketplace quickly. HP, for instance, is reselling an HP-branded version of the iPod.

Apple "needs to extend its reach as broadly as possible," said Steve Lidberg, an analyst at Pacific Crest Securities in Portland.

In the past, Apple, which declined to comment for this article, limited its reach by refusing to license its technologies — namely, its operating-system software. In contrast, Microsoft licensed its MS-DOS and Windows systems to everyone, and Dell's cut-rate computers allowed it to dethrone Apple as king in the education market.

Gartner's McGuire said that while Apple was likely to continue focusing on computers as its core business, the iPod could be a sign that it — along with other computer-makers — needs a foothold beyond PCs.

"The PC is important, but no longer the center of the universe," McGuire said. "It's other things that connect to the Internet and can get content. ... Everybody's racing to outfit the digital living room."

Hollywood connection

If computer makers indeed continue evolving into broader consumer-electronics companies, Apple would seem to be well-positioned to become a leader again. Co-founder and visionary Steve Jobs, who is also chairman and chief executive officer of Pixar Animation Studios, has become a Hollywood power broker with his finger on the pulse of pop culture.

Already, in the company's fourth quarter, 23 percent of its $2.35 billion in revenue came from iPod sales.

Roger Kay, a vice president at IDC, said the iPod should allow Apple to drill down on the consumer market like never before. Kay expects the company to announce more iPod-related products, including possibly an iPod video player, next year.

"The one play they've got is the consumer," Kay said. "Consumers represent the wild card for Apple."

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