Ok people, we’re back on track with the second part of our  three-part tech series.

This week, it’s my goal to give everybody a peek into the personal  music player industry, which obviously will focus on the Apple  iPod – considering they hold 75% of the entire digital music  player market!

For Apple, this should be an all too familiar scenario…it was  only 20 or so years ago when it was the dominant player in another  emerging market – personal computers. We all know how that story ended.

So the real question is – did Apple learn from its previous  mistakes, or is it setting itself up for another disaster? Well, let’s start at the beginning – the beginning of the iPod  at least. The first version of the Apple iPod was released back  in November of 2001, and in only four short years has become a  global phenomenon.

I’d be hard pressed to think of a time in the last 12 months  when I’ve walked into a gym, a Starbucks or a New York City  subway and have not seen half a dozen people wearing those  characteristic iPod ear buds.

From the beginning, the folks at Apple tried to make its  hardware a bit different. They used a super fast FireWire  connection (USB 2.0 for PC’s), used ultra-small hard drives  and a unique “play wheel” that allowed for a compact interface  and an ease of use unparalleled on other players of the time. Back then most portable players were all black, while Apple  preferred to go with a high-gloss white – good call guys!

History has shown that when you combine ease of use and great  technology, wrap it in a pretty package – and then combine all  that with the sheer energy of a man like Steve Jobs – you’ll  have a successful product. He did it 20 years ago with the Mac, and did it even more  recently with the iMac…should we have expected any less  from the iPod?

Over the last four years, the iPod’s sales growth and market  share have exploded! To give you a clear picture of what I mean, in its first  year, the iPod sold roughly 700,000 units…it sold over  6 million in the last quarter alone. To date the company has sold just about 28 million iPods. This has also helped to boost Macintosh PC sales which have  generously added to the company’s bottom line.

All of this success hasn’t caused Apple to rest on its  laurels – the company recently announced two major innovations  within a month of each other. First, there is the iPod Nano. This credit card sized version of the iPod will replace the most  successful iPod model, the iPod Mini. The second major debut in  as many months is the new iPod Video which will play both music  and full length videos in the palm of your hand – very exciting  times on the Apple campus.

When one thinks of buying a portable music player, they will  inevitably think of buying an iPod. There is no doubt about  it; the iPod has become not just a music player, but a pop  culture phenomenon. It’s not just the most popular kid in  town – at times it seems like it’s the ONLY one.

But that’s certainly not the case…

There are a number of other players in the market such as  Sony, Samsung, and Dell. Some of these  companies – ahem…Sony – would’ve been the obvious front  runners in the portable music player market, but somehow  let the money slip right through their fingers.

Now they not only have to contend with the iPod’s dominant  hardware sales, but the compounded problem of having Apple control  the software end of the market as well. Apple currently owns iTunes which is the No. 1 online music  retailer. Apple, in a move that seems reminiscent of its original PC  strategy (marrying the software and hardware), will not allow  other players to play the iTunes music format.

While its players remain a hot commodity, that only reinforces  its online dominance, which also reinforces its hardware  dominance. In the short term, this was a brilliant competitive move by the  Apple camp. They have a virtual choke hold on the electronic music industry – what is a competitor to do?

Well, let’s first examine what Apple is doing in terms of its  competitive strategy. First of all, it is putting itself in a  position that Michael Porter (author and foremost authority on  Competitive Strategy) would call being “stuck in the middle.”

Stuck in the middle is exactly what the name implies, a company  that is competing on two different fronts…the same rules apply to  war, You can’t (or at least shouldn’t) fight two enemies at the  same time on opposite ends of the battlefield – you’ll eventually  get defeated somewhere in the middle.

Right now Apple is competing in both the hardware market with the  iPod, and the software market with iTunes.

This is extremely familiar territory for Apple considering this is  just what it did with the Macintosh two decades ago. It took a  college drop-out in Washington (if you read last week’s article,  you know who I am referring to) to realize that the value wasn’t  in the hardware, but rather in the software and the ability to  distribute that software onto as many pieces of hardware as  possible.

Has Apple learned from past mistakes?

Who knows? Maybe its short term success has blinded it to the  reality of the current situation. Companies like Sony are gunning  for the top spot. This is a company who has consistently set the  tone for personal electronic equipment for as long as I can  remember. Then there’s Dell, the company that came out of nowhere  to be the lowest cost provider and the dominant market share holder  for PC’s. Now it’s looking to do the same for personal media  players.

Its 30 GB player is currently 10% less than the iPod.

In the beginning of an industry – any industry – consumers will  tend to go with what they consider to be either the cool choice or  the safe choice. As of now, the iPod provides both – this is why Apple can afford to  charge higher prices. Furthermore, if you ask four of your friends  which digital music player you should buy, three of them will tell  you to buy an iPod because they already own one.

This definitely adds to the perceived reliability of the product. But like most industries, this period of rapid growth will be  followed by a period of maturity. It is in this phase that consumers  become much more informed about the product in question and much  more price-conscious.

It is here where Apple will have to decide if its going to  specialize in hardware or software. As Dell continues to cut costs  and Sony continues to innovate, the iPod player will be much more  vulnerable to competitive attacks.

Also, the technology powering cell phones is advancing at an  extremely rapid pace. Bill Gates was quoted last year as saying  cell phones will eventually be the media player of choice for most  consumers.

Maybe this is why Apple teamed up with Motorola to carry iTunes  on their latest cell phone. It’s good that it’s looking for other  devices to distribute its software offerings, but on that end it  will soon be competing with many other and more vicious rivals –  like Microsoft.

Apple’s stock is currently trading at about 35 times earnings while  Dell and Sony are trading at 23 and 29 respectively. I’m not sure  if the price premium is justified or not, but what I do know is  the competition in this lucrative industry will definitely  intensify, and my hope is that Apple has learned from its own  history – and are not doomed to repeat it.

I hope this week’s article inspired some of you to go out and do  some research into a few of the companies I’ve mentioned. I also  hope it made you a little more informed about some of your options  for purchasing a new portable music player. As for next week, I’ll  be talking about a service that I know every single one of you has  used, and probably uses often (and no, I’m not talking about  public rest rooms – that’s for the week  after – just kidding) – Google.

So until next week folks…