Dear Dell: How to beat the iPod

August 7, 2008: 9:29 AM ET
Dell's first "iPod killer," the Dell Digital Jukebox, was discontinued in 2006 ...
... while Apple's iPods continue to dominate the MP3 player market with a 70 percent share. Photos: Dell, Jon Fortt

From: Jon Fortt

To: Michael Dell

Subject: Taking down the iPod

Dear Michael,

You might remember our recent chat at Fortune's Brainstorm Tech conference, when you shared with me a theme you've sounded before: "I think the sign of a great company is that it can kind of learn from its mistakes," you said, "and go on to greater heights."

You were talking about Dell's (DELL) PC business, where you've tweaked the direct sales strategy in response to a changing market. But you could just as easily have been referring to your company's tentative plans to release another MP3 player this fall to compete with Apple's (AAPL) iPod. I think if you follow your own observation, you'll delay the product launch. Dell's not ready to make this mistake again.

Let's think back on your first effort at dethroning Apple. It crashed and burned. The Dell Digital Jukebox, which resembled nothing more than an electric razor when it launched in 2003, tried to use commodity components and licensed software to beat the iPod on price, and thus win market share. But the DJ fell short in physique (bigger and heavier than the iPod), originality (it was based on another company's design) and music management software. Dell used Musicmatch Jukebox, which was, well, no musical match for Apple's iTunes.

To your credit, this time around Dell executives seem to be considering a slightly different tack. Not only have you gotten better at designing devices, you see the folly in just making a gadget that depends on someone else's software to operate. Dell now has its own: You last year purchased Zing Systems, a company that uses Wi-Fi to beam songs - and potentially video - to various devices. The new plan would be to blend this improved software with snazzier hardware.

But I'll argue there's a better route for you to take, if you really want to K.O. the iPod: Hold off on the gadget. First, just launch the software.

I know this is a little counter-intuitive. People love gadgets! But hear me out.

Click above for Jon Fortt's interview with Michael Dell.

If you want to compete with Apple in digital music, your biggest obstacle isn't the iPod. It's iTunes. Most of your target market already has iTunes installed on their PCs, and it's going to take a lot more than a shiny gadget to get them to ditch the way they've been managing their favorite songs. Of course, improving on iTunes is a tall order – it's the best thing out there for keeping track of digital media – but that's the game you're saying you want to play. If you can't figure out how to improve on iTunes, there's really no point in trying to beat Apple on the hardware front. Can't be done.

That's why I say you should just focus on releasing the best free music app you can (on Windows, Mac and Linux). Software is hard, so if you're going to give iTunes a run for its money, the project will require your full attention. You're going to need hardware partners like SanDisk (SNDK) and Sirius Satellite Radio (SIRI) to embrace your approach. You're going to need time to make mistakes. You're going to need customer feedback. But if in the end you've gotten enough people hooked on a new system that includes your wireless transmission technology, you'll have created a loyal base of users who trust you enough to ditch their iPods for your next great MP3 player.

Of course, you can ignore this, and maybe you'll manage to launch both a sweet music service and an iPod killer that both start grabbing serious share from Apple right off the bat. But the odds are pretty long on that. Microsoft (MSFT), Sony (SNE) and an army of other well-heeled competitors have been trying to eat Apple's lunch for years now, without success.

Their mistake, in my opinion: they tried too hard to match Apple in hardware design (which is hard enough), and they launched everything at once. In the process, they failed to focus on Apple's real soft spot: iTunes. Think about it: Even Apple didn't launch iTunes and the iPod at the same time. I was in the audience when Steve Jobs gave us iTunes in January 2001; he didn't call us to the Apple campus to show off the first iPod until nine months later. And Apple waited until April 2003 to open the iTunes Music Store. You've got to let these things stew for a while.

So anyway, Michael, thanks for sitting down for the chat. It was cool to see some of the new stuff you guys have coming out this year. And as a gadget guy, I do hope you eventually come out with some innovative music hardware that pushes the market forward. But just my opinion: That's a big job, so first things first. And the first thing is getting the software right.

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