Steve Jobs on iTunes, Music, and the Digital Hub

Well, ladies and gentlemen, Steve Jobs. I figured no point in an introduction, you know. Well, when you were here last year, your music store, your iTunes music store had been out I think two or three weeks and you showed it to people and we talked a good deal about it. So let's start with that topic. Legal downloading, you've been the leader in it. Where does it stand today? How do you think it looks for the future? We've crossed 85 million songs, so 100 million is within striking range.

And all the people that license music from the music companies have to report their sales data every week to SoundScan, which aggregates them. It doesn't break them out by company, but it aggregates them. And since we know what ours is and we know what the total is, we can compute market share every week. And we have about 70% market share of the legal downloads, which is great. So, but if you look at everybody together, 100% of the legal download market, we've gone from pretty much 0% a year ago to about 2% of the legally sold music in the U.S. In other words, if you take all the music sold on CDs, all the tracks, it's about 10 billion tracks. Now, people don't want to buy all of those, but they have to because they come on a CD. Yeah. So, they buy some that they don't, but they buy 10 billion tracks a year.

And our industry is approximately 200 million tracks a year rate. So, 2% is not a giant number, but if you look at it and say it's been accomplished in a year, and you look at the trajectory, it's not inconceivable to see it breaking through 5% in the next 24 months, as an example, maybe sooner. How about the illegal downloading side, though? Do you have any way of measuring whether you think that's... It depends on who you believe. There are some studies that say it's gone down. There are some studies that say it continues to go up. We don't know. Our take is that it's probably moderated a little bit and come down a little bit because of the threat of lawsuits. But it's still bigger by some X than what you're doing, right? It's big, yeah. And that's what we compete with, really. I mean, we don't compete with the 30% guys anymore.

We compete, really, with piracy and trying to offer a better product, which is what took us so long to convince the labels of and continues to take us ongoing efforts to convince the labels that, really, piracy is what we have to compete with. Let's talk about the labels for a minute because I think they're going to be Harvard Business School cases forever taught about how to be really stupid in the face of technology. The Journal has been tracking, my colleagues who cover the music industry have been tracking what I think is just an astonishing development, which is that one year into this, when you only have this 2% share, there's still a ton of piracy out there. They're actually discussing raising prices.

They're actually discussing raising the price of singles. They've already begun, I guess, to raise the price of certain albums, not only on your store but all the others that have licenses with them. What are they smoking there? What's going on? Well, you can't speak of the labels with one voice. I mean, there are five major labels, and even within each of the labels, there's a lot of different voices. One of our concerns is we'd like there to continue to be five labels, which is why we've gone on record opposing the Sony-BMG merger because we think right now it's better if there's five voices versus four or three or less. But within each label, there are many voices. And the problem is, if I said to you, you know, we're starting a record company or a movie company in Apple, you'd, you know, if you were in the movie business or the record business, you'd roll your eyes and you'd go, no first-rate talent would ever go to work for them.

You know, no good A&R people would ever go to work for Apple because they can get, they can join the culture in the record industry, get paid more, get more recognition, et cetera, et cetera. In the same way, if you said a technology person's gone to work for a music company, we'd kind of roll our eyes, and we'd say, you're going to get a third-rate technology person working at a music company. And so there are people at these music companies that are giving advice to the people making the decisions, and they're giving them really bad advice. And what's going to happen if they say to you, our hot new singles have to be $1.29, not 99 cents? Well, we've, you know, we've just finished renewing our deals with the music companies. We had one-year deals, and they were up in April, and we renewed them all.

And we have longer-term deals now. So we're going to be at the prices we're at for the foreseeable future. And we had to be, we had to express our opinion fairly strongly that we think the customer doesn't want to pay more than $0.99 for a song. I think the customer should pay less than $0.99, actually. Maybe they should. But we don't think they should pay, we don't think they're going to pay more than $0.99. And it turns out the music companies make more money when we sell a song for $0.99 than they do when they sell it on a CD. So you think this idea of raising the price is dead? Well, the prices aren't going up on iTunes, I can tell you that. Okay. Yeah. Let's talk for a minute about the overall direction of Apple.

I was thinking this morning that if I were talking to you when you first came back to take over the company or in the next couple of years after that, and our discussion was primarily about selling music or the iPod, this device that's been so successful at playing music, it would have seemed bizarre because you were a computer company. You still are, obviously, a computer company. You've always been sort of a hybrid of a hardware and software company but around computers. Is Apple's future going to continue to be as primarily a company that creates and sells computers? Well, we do a lot of stuff. I mean, we make hardware. I think we make some of the best in the business. We make an operating system. We make really only the second high-volume operating system in the business, and we think it's the best now. We think Microsoft's following our taillights again, which is kind of fun.

And Longhorn's basically a copy of Mac OS X about a year ago, and so that's kind of fun. And we also make application software. We're the largest provider of pro-video editing software in the world and things like that. And we also make this little thing called an iPod, which is really a special-purpose computer. There's a lot of hardware and a lot of software in that thing, and we also run a service called iTunes, which is actually pretty complicated, but it just looks easy. It looks simple. And you can tell that because everybody thought it looked so easy. They'd make one, too. And we've seen what's happened. It turns out it's a little harder than it looked. So we do all of these things, and we will do even more. And we're having a blast.

Good. I'm glad you're happy and having fun. But my question is, is the nature of the company, are we seeing the beginning of a change in the nature of the company? Most of the things you mentioned, other than the iPod and iTunes, are computer things. Even if it's application software, whatever it is, it's around this computer platform you have, and that's 20 years old. Well, clearly we're doing some new stuff. I mean, the iPod grew from nothing to a billion-dollar-a-year business by year two. You know, the iPod was two years old last November, and the holiday quarter, we did over a quarter billion dollars' worth of business in the iPod. And we thought it would go down in the January quarter, but it went up. So the iPod's a billion-dollar business in two years. That's got to get our attention.

However, if you look at the core of Apple, what Apple's great at is figuring out how to invent cool technology, but making it wonderfully easy to use. That's what we've always done. That's what the Mac was. You know, that's what a lot of things we do are. So that's what the iPod is, and that's what the music store is, too. And we're taking those core talents of the company and applying them to some end products where we don't have the 5% market share ceiling, and it's great. Okay, but that's my very point. You have this – for all the things you've done, we talked about it last year. I should ask you again now. The needle on Mac market share has not moved in any significant way up. And you've come back. You've sort of rescued the company. You've done products that almost every reviewer likes.

People love them, but you still have a very, very tiny market share. You say 5%. Most of the studies show you at much less than 5%. But with the iPod, and I've seen you say this in public before, it's refreshing to not be in single-digit market share. Does that foretell a broadening of the company to doing in selected ways where you can make an impact other digital devices that are not full-blown computers? Have to wait and see. I'm asking you, though. Have to wait and see. We never talk about stuff that we haven't introduced. All right. Okay. Let me put it another way maybe. Is there a – in the digital world, is there any reason there should be a difference between a consumer electronics company and a computer company that sells heavily to consumers?

Just be theoretical for a minute. They're all digital things now. The way we look at it is we don't want to get into something unless we can invent or control the core technology in it because we'll get slammed if we don't. And the more we look at it, the more and more consumer devices, the core technology in them is going to be software. If you really look at the iPod, I mean, from the very beginning, we looked at that and we said, the ultimate competitive barrier is going to be software in this thing. You know, we're pretty clever at hardware, but ultimately people will, you know, copy us and do other things. barrier will be software. And the more consumer products, as we see them evolve, the more and more they look like software in a box.

And a lot of traditional consumer electronics companies haven't grokked software. Right. So since you do good software, by most people's account, does that mean that you'd be interested at least in looking at some of these other things over time? We look at a lot of things. But one of the things I've said to you before is I'm as proud of the products that we have not done as I am of the ones we have done. What's your favorite thing you've not done? PDA. OK. We got enormous pressure to bring back the Newton or do a PDA. And we looked at it, and we said, wait a minute. 90% of the people that use these things just want to get information out of them. They don't necessarily want to put information into them on a regular basis. And cell phones are going to do that. So getting into the PDA market means getting into the cell phone market. And getting into the cell phone market means we're not so good at selling to the enterprise where you've got, in the Fortune 500, 500 orifices called CIOs.

In the cell phone market, you've got five. One of them is here. Yeah, exactly. So we figured we're not going to be very good at that. And indeed, you go talk to the handset manufacturers now, and they're not real happy guys. Is there any prospect for significant increase in Mac market share? And by significant, given the levels you're at, even another couple of points. You know, we've got 25 million customers. And our market share has gone down some in education. Our unit volume in our pro markets has been low in the last few years, because a lot of them have been advertising-based. But that's really picking up now. But the unit volume being low has hurt us market share-wise in the calculations.

And our consumer market share has expanded. It's grown. We've got now an over-billion-dollar retail store business that's bringing in a lot of new customers. Over half the customers that we're selling CPUs to in our retail stores are new to Mac. Almost all of them use Windows, and they're buying their first Mac. So I think we've got a very healthy 25 million customer base. And we love them, and we love to delight them with new products, and that's a very healthy business. But you're saying you're selling into your same base, that even when you get new people with some churn, and so you're still, you imagine yourself having this 25 million base? Or is there a chance you can get a 30 million base? Well, we're trying, doing everything we can. Let me talk for a minute about these retail stores. I was stunned the other day. I was reading a trade publication in the consumer electronics industry, and they had an annual ranking of consumer electronics retailers.

So I was looking through it. I wasn't thinking about Apple at all. And I was amazed to see that I think you're like number 23 or something in terms of consumer electronics sales, bigger than like JNR and a number of other well-known consumer electronics retailers. Was that your intention with these stores, or was your intention primarily to promote your brand? No, our intention was very simple. Our intention was that all of our competitors sell the same product. They're all designed by the same company in Taiwan. That's not what Carly just said. Well, that's how we see it. So at the point of distribution, you don't have to know very much to sell them. You don't have to be able to explain them, because they're all the same. And you just have to be able to point to the one where your company gets a point more of gross margin that week.

That's it. And we can't thrive in that environment. We innovate. Let's say we have a dozen major breakthroughs a year. We can advertise three or four of them, or otherwise if we do more than that, the consumer thinks we're a little nuts. And so the rest of them have to be delivered at the point of sale, and we looked at the point of sale, and we said, this point of sale is eroding. It's going to be Best Buy and other people like that. The competence level's getting less at the point of sale. Even if you train them, they turn over every 120 days, so it's impossible to get knowledge at the point of sale. And we wanted to make the best buying experience in the world, because this was at the beginning of the digital hub revolution that we saw, with digital photography, digital music, and everything else. And we thought, people are going to need to know more about this stuff. It's going to get more complicated as we've got these amazing peripherals like digital camcorders and digital cameras that have to connect and make it all work. And we wanted to make the best buying experience in the world, and so that's what we've done.

And what's been interesting is, we didn't set out to do this, but the record for going from $0 to $1 billion in retail sales was held by Old Navy. It's part of the gap. We just beat it. Our retail stores went from $0 to $1 billion faster than anyone's ever done it before. Faster than Old Navy, yeah. Are you losing money on those stores? No, we're making money. We're making money, yeah. So maybe you're going to become a retailer. We are a retailer, yeah. Do you sell a significant volume of other people? I know you do sell other people's products in those stores. We do. One of the nice things is you can go in and buy. Not other people's computers, but a lot of people's. No, I know, but you can buy a digital camera, camcorder. I think you have some PDAs, things like that. Are you selling any significant volume of other people's stuff? Yeah.

OK, interesting. Let's talk about Digital Hub. You mentioned it a minute ago. Last night, Bill Gates was, I think, clear about what he felt was the centrality of the PC, acknowledging that they're making software for lots of other devices, but he thinks the PC is central. If I didn't misunderstand her, I think Carly was a little less emphatic about that just now. You've had this Digital Hub strategy, but since you came out with that a few years ago, we certainly have seen the cell phone as a great example. Lots of devices that can communicate with each other and communicate out to the internet, gaining more capability, where there are things you can do on, say, a trio today that you would have needed a Mac or a PC to do a few years ago.

Do you still hold to your idea that the Mac or the PC is the center? Oh, yeah. I mean, where are you going to put your 5,000 digital photographs? You're not going to put them on your cell phone for safekeeping. Where are you going to put your 5,000 songs? You're not going to keep them on your cell phone. What we see that the phones are like that. Well, I have my 5,000 songs on an iPod, right? And so the iPod organizes them. But you also have them on your computer so that when you buy a new iPod, you don't have to re-enter them. You can just dock it and it automatically syncs. So if you lose your iPod, you don't lose your 5,000 songs. So you have them on your computer where you've got this nice big screen to buy them off the music store and to search through them in your jukebox. And then you just sync them to your portable device to take them with you. But if you lose that portable device or if you upgrade that portable device, it's very easy to replicate what's on your Akashic memory of your personal computer into that portable device.

And that's what cell phones have been missing. Cell phones haven't docked with computers. And so every time you buy a new cell phone, you're sitting there putting in the numbers and stuff. It's crazy. And you want these things to dock with your PC so that they grab your calendars, they grab everything else. And eventually, some do it over the airwaves, some don't, depending on the cost of the devices. But if you want to start managing, I want to carry 100 photos with me on my business trip. Those 100 photos are on your PC. They're not in your camera because you might have taken them three months ago and you've erased the memory card, et cetera, et cetera. They're on your PC. And you want a very easy way to get them to your cell phone to configure that cell phone for how you want it for the next week. But does that relegate the role of the PC to almost just being a backup server for all this other world of things? Or is the PC still a thing where you're going to have exciting experiences on the PC itself?

Well, if people keep innovating, you are. I mean, look, there's no other place to put digital photographs than on a PC. That's where they all are. So without a PC, we wouldn't have digital photography. And that'd be kind of a drag. Without a PC, we wouldn't have digital music. And that'd be kind of a drag. You can't edit video on a camcorder. So I think the digital hub has been a resurgence of relevance for the PC. Well, let me ask you about something that may change that. You certainly, one of the things you did with the iPod was to take advantage of the shrinking of hard disk, the physical size of hard disk. That was one of the things that made the iPod possible. The 1.8-inch disk on the regular iPod and the 1-inch Hitachi disk on the iPod mini, those kinds of hard disks probably will show up in phones at some point.

They'll show up in digital cameras. Won't that change the game? Because you just say you can't put 5,000 photos on a camera. Maybe you will be able to if there's a hard disk in the camera. And you might be able to, but you won't want to have the only copy of them on the camera or the cell phone. Because if you lose it, there goes your life. And you're not going to want to sit there and edit these things. You're not going to want to sit there and browse music on these tiny little screens. So there's a place for everything. One of the things, despite Apple and you personally being identified so much with music and digital music and media and all that, but one of the things you haven't been very prominent in, or really at all, which actually Microsoft has done some work on, is this idea of the 10-foot interface, the Media Center PC, the further idea that they're going to roll out in the fall and that a number of other companies are rolling out of moving your music and your video around the house.

Do you not believe in things like Media Center, that concept, I don't mean their product per se, but do you not believe in that concept? Well, it's not just us that doesn't believe in it, but the market doesn't seem to believe in it because it's been a big flop. You can read the statistics on it. Hewlett-Packard, I believe, was the largest seller of Media Center PCs last year, and they sold a total of 200,000. Wouldn't that be good for you, too? No, that's even a flop by Apple standards. And the tablet PC has been another one. For all the hype around it. I know you don't like the tablet. No, it's not that I don't like it, it's just that it hasn't sold very well. Right. And Bill's answer to that would be? It's just starting. Mañana it'll get there. Well, now wait a minute.

You've known him a long time. I mean, he's very patient. Things tend to happen maybe not right away with them, but they persevere. They throw money at things, and things happen. But on the idea of kind of, I mean, the PC is the digital hub, you say, but what about this idea of, I mean, I think at CES there must have been 100 companies introducing things to move video and music and things around the house, not Apple. Right. A lot of people are talking a lot about these kinds of things. And several companies have introduced little gizmos to do that. And it's a great idea, but they're not selling. And the reason they're not selling is because they're not seamlessly integrated, and they're really expensive.

They're like $500 to $1,000. And a lot of them are trying to solve problems that people don't think they have. So one problem that people do have right now, and we've certainly heard in Earful, is I've got a lot of music on my computer, I want to play it on my stereo. And we've heard a lot about that. And so we have a solution for that, and we're actually, Walt said I could introduce it today. Yeah, we have a demo. He's gonna introduce a product here. This was a topic I had written down to ask him about before I knew what he was gonna introduce. He's gonna introduce something in this area. So why don't you show people what you've got. Okay, great. Walt told me I could break one of his rules and run through a few slides real quick, and then I'd love to show you what this is. So hopefully you've all seen the iTunes Music Store.

85 million songs, 70% market share. We just sent out the invites last night. We're taking it to Europe next week. We'll be announcing the iTunes Music Store there. So that's the iTunes Music Store, and it is, right now, the most popular place to buy online music. What I want to talk about for a minute, though, is the most popular places to listen to music. Because now that people have this music, they want to listen to it in different places. The first place is on your computer. And we were successful in our negotiations with the music companies to increase it from three to five computers that you can listen to music that you buy online on. And five computers pretty much covers most things people want to do. You can mix and match Macs and PCs. So that's great. Second is the iPod. And as you know, this is the cumulative install base of iPods. Q1 was last quarter, so this goes through the end of March.

But you can see the slope on that curve. And it's a pretty steep curve. And I don't see that changing in the near future. Now, the iPod's market share is 52% in terms of units. That includes the flash players, the cheap? Yeah, that includes all. And that's not dollars, that's units. That's units. It includes $50 flash players that get given as gifts and never used, because they only hold 16 songs. You all got a flash player in your bag, by the way, so. Thought I'd just point that out. So 52% of the units are iPods. So that's another place you can listen to music. Third place people want to listen to music is their car. And right now, the solutions aren't very good. You get an iPod, you get a cassette adapter, or one of these FM transmitters, and people want a much better solution for listening to this music in their car. We're working with some folks, and hopefully there'll be some exciting announcements later this year.

And then people want to listen to music in their living room. And living room, quote unquote, living room, kitchen, bedroom, wherever. People have stereos, and they want to listen to music on their stereo like they used to. Well, one thing that's happening, of course, you can go out and get a dock for your iPod and hook it onto your stereo. We sell a lot of docks. The second thing that's happening is products like this. It's a product that Altec Lansing came out with. It sells for around 100 bucks. And they're selling these as fast as they can make them. You just drop an iPod in it, and you've got a stereo. Runs on AC or batteries, and they're selling a lot of them. But what happens if you have a computer in part of your house, and you have a stereo, and you want to play the music from your computer, and you want to play it on your stereo? Simple thing. The products that have come out to do that are, again, very complex.

They don't quite solve the problem. They're not seamlessly integrated, and they're expensive. Well, obviously, if you're gonna do this, you need wireless networking. And we were one of the pioneers in that. Matter of fact, we were the first folks to actually ship 802.11 on PCs in 1999. And then we were the first people to do 802.11G. That's the 54 megabit per second version in January 2003. And today, we're gonna be the first ones to introduce a mobile 2000G base station, which will have some relevance to this. And it's called Airport Express, and it looks like this. And you just plug it into the wall. It's a base station built into a wall transformer. And it's really cute. We've got customers now that carry around the big airport base stations to hotel rooms and plug them in so they can sit on their bed with their portable and do their work.

And now they can just literally pop this in their bag. I've got one right here in my pocket. It's not that I'm just happy to see you. And that's it. So you just plug it in. So this is about the size of the power brick on like a power book. And this is a Wi-Fi base station. That's an 802.11 Wi-Fi base station, 802.11G. I'll go into a few things that it does in just a second here. So it's got three connectors on it. One is ethernet, so you just plug it into the broadband connection in your hotel room or plug it into your DSL at home or whatever. And it's a base station. It also has a USB port on it for printing. So you take your HP inkjet printer and plug it in here, and you can wirelessly print from any one of your computers. Hardly anybody does that. It's also got a full firewall, and it's a repeater.

If you need a repeater to extend the range of your 802.11 around your house, just plug it in the wall, and it's a repeater. Oh, wait a minute, repeater. Yeah. But not everybody has your airport base station. Frankly, it was way overpriced by the end recently. So if I have a link sys that I bought, I can plug this into another room, it will pick up the signal and repeat it in the other room. That's pretty good. Is there a lot of, how about configuration? Do I have to go crazy making it work as a repeater? No, actually, what I'm about to say in a minute is we've made the PC a first-class citizen for this, and so we ship an app that installs us on a PC as easy as a Mac. PC as easy as a Mac? Yeah. Just like iTunes. All right. So, here, can you hold this for me? So, two connectors, and you just take this and throw it in your pocket, but what's this have to do with audio?

Well, if you notice, there's a third connector on here, and we've built audio out right into this base station. Analog and digital, right into every single one of these. So we've got analog and digital output, and the digital is fiber optic, so its TOSLINK goes right into almost every stereo. It's stereo and 5.1 surround sound. We do lossless data compression over the airwaves, so there's no loss of quality of your music over the airwaves. We encrypt the data stream to make the music companies happy, and we seamlessly integrate it with iTunes. So, there's no separate software, because most of these that I've seen, you need to put a separate program in. There's no software to buy. Okay. We have a new version of iTunes that's available today. You can download it. It's got everything built in for free. It's Mac plus PC, as I said.

PCs are first-class citizens, just like with iTunes. So, Airport Express, and we call it AirTunes. That's what we call this, sending music all around everywhere. So, here's how it works. Basically, you have a Mac or PC. You have a living room. These things automatically find each other using our technology called Rendezvous, right? They automatically find each other. Now, wait a minute. Let's think about that for a minute. Let's say that's a Windows machine. It's gonna automatically find this thing? I don't have to go into the Windows network setup? It's gonna automatically find it, because Rendezvous is built into iTunes. So, if you've downloaded Windows on your PC, or if you've downloaded iTunes on your Windows PC, or if you've got an HP PC, which ships with iTunes as the default music player, you already have Rendezvous. It will already automatically find this thing. And when it does, it will automatically transmit music to it.

Again, you can have a second stereo, let's say in the kitchen, and you can select that one and automatically transmit music to it. You can have a third computer, let's say a Windows PC in the office, and again, pick one of these things and automatically transmit music to it. So it's very, very simple, and it works. Now, the cool thing is, it's automatically tied in with iTunes. When iTunes detects any one of these things with an audio output plugged in, it automatically creates a pop-up list down at the bottom and puts a computer there, and that pop-up list will just show you whatever you've named these base stations. Name one living room, it shows up as living room. You select living room, your output from iTunes goes to it, it just works. Can I send an output to two different rooms? Not right now, you can only send it to one. Okay.

Yeah. So, we think we've solved this problem, at least got a start at solving this problem, with Airport Express. It's Mac and PC, we're gonna ship them next month in July for $129. And so that's what we're doing. And so I'd love to show you. Okay. So I've got a Mac here, and let me go ahead and launch iTunes. And there's iTunes right there, and I've got some playlists here, and I've got mine here. I'm just gonna pick a song, and I'm gonna start playing it. Now it's playing on this portable, I'm gonna put my mic up here. You hear that? And now what I'm gonna do is, I've got a stereo over there that has got a base station on it, it's right here.

And so we're gonna go over here, and it shows up right here, and we're just gonna push up this pop-up list, and we're gonna pick living room, because that's what it's labeled. Stops playing it here, a few seconds later it finds it. Plays it over there. Simple. So. And again, whatever you got, playing in your living room. Very, very simple. When you're doing that, it stops playing off the laptop? Stops playing on the computer, yes. Okay. Now, let me go ahead and play it on something else actually. Let me go ahead and I've got some surround sound content here and let me go ahead and I'll pick home theater for that.

Home theater is wired into the surround, we put a few extra surround speakers around the room so you can just hear the surround sound. Here's the intro that's played in movie theaters that we got from them, so you can just hear that. Let's see. That's enough. This has got some nice surround sound content too. Anyway, it's pretty cool. It's pretty cool. Okay. Thanks. Sure. So, this doesn't solve every problem in the world.

It doesn't connect to your television and send video over or anything else. It solves a... Begins to solve a very simple problem for $129 or if you need a base station anyway for $0. Because it's just an add-on function on the base station. Why doesn't... Why aren't you in the business of sending video at the moment? Is it because you don't think people care about it or you just didn't have the time to develop it in here or... Well, we think there's a lot of... But you certainly have... I mean, you have iMovie on the Mac, you have things that are perfectly capable of dealing with video quick time. You know, I think part of the hardest thing about coming up with new products is to figure out a really cool set of technologies that you can implement it with and make it easy, but also figuring out something that people want to do.

You know, we've all seen products that have come out that have been interesting but just fallen on their face because not enough people want to do them. And I think what we're... We know that a lot of people want to take music from their computer to their stereo. So we're going to take that step and we're going to learn a lot. We're not hearing that a lot of people want to take, you know, movies that they've bought or, you know, somehow gotten off the internet and put them on their television. Does that mean... Yes. Does that mean you risk being late? I mean, you were late on music. You've done okay since then, but you were late on music. We want to make them cheaper still. I mean, we're not happy with iPods costing, you know, $300 and $400, and we want to keep driving the prices down on them. So we're working very hard on that. How low can the price of an iPod with the quality you want and all of that go?

I don't know, but we're working hard on it. I do have to say, I should say publicly since he's on the stage, when he brought out the iPod mini at $249, I wrote a column that basically said, this is a really nice device, but it's $50 too expensive, and I'm not sure if people will snap them up, and that was really wrong. Basically, you can't find one in the stores. We're making them as fast as we can. Is that because there's a shortage of the components or... Well, there's not a shortage of anything. There's exactly what we planned, but just the demand is much bigger, and we can only ramp up the factory so fast on the hard drives. So you're feeling quite good about the music thing right now in terms of your market share for the players and the stores, but aren't you headed for real trouble? You can't possibly believe that Microsoft will have no impact on this when they bring their store out.

Maybe you want to say that they'll have no impact. I assume they'll have some impact. Most people assume they'll have some impact. Oh, I think they'll have a lot of impact. If you're a rock CEO or music match, you're going to get destroyed. They're going to eat their young. So basically... Actually, Dennis Mudd, the CEO of Music Match is out here, so... That's one thing they're going to do, and it will be painful to watch. The other thing, though, that you said is you said you're selling lots of iPods, you're feeling good. Actually, to be honest, the reason we're feeling great is because the iPod and the iTunes Music Store have caused so many people to rediscover music again, and one of the reasons we did this is we love music. We love music, and it's cool.

This is altruism? No. We love music, and it's great. You said earlier in this conversation, you pointed out the truth, that you haven't had great success in selling to corporations. You do have some products in that area, you do have some servers and so forth. We're doing pretty well with them, too, I mean, for us. Well, that's what I was going to ask you. Why bother? I mean, is there really a significant opportunity for you, or should you just admit that you're basically a company that sells to consumers and prosumers and that's it? Well, our prosumers are what got us into the servers and the storage. We make a really kick-ass server with G5s in it, and we make this thing called Xserve, which is RAID storage, which is like half to a third of the price per gigabyte that Dell sells storage for.

But they sell a lot of servers, and you don't, right? So what's the secret? Well, it's all relative. I mean, we started from zero, and we've actually surprised ourselves with how many we've sold, so who knows where it goes. But it is worth continuing to try and invest in, you think? Sure. In a significant way? You know, we're very lucky in that we've got a successful, profitable business. We innovated our way through the downturn, and we have a lot of engineering groups doing some really fun stuff, and we've got almost $5 billion of cash in the bank and no debt. So we have the resources to do a few of these things and keep at them and see if we can do a good job. Let me ask about you personally. You're very unusual in that you're the CEO of two hot companies, really, Apple and Pixar. You had a huge success with Finding Nemo.

I don't remember if it's... Is it still... Was it the box office champ last year? $339 million. It was the most successful animated film in history. Shrek 2 may pass it, but so far, hasn't. And you won... Did you win an Oscar for that? Yeah, won an Academy Award for it. So how do you divide your time between these two companies? Tell me, how much of your time do you spend at each one, or do you go there, you know, Thursday and Friday, and you go to Apple Monday, Tuesday, and Wednesday, and how do you do it? A little something like that, but there's email and things like that, so I'm in touch pretty much all the time. It all depends. When we have a movie coming out of Pixar, I'm there more, but I don't direct the movies. So... Would you like to direct someday? No. Okay. No, the talent we have at Pixar is off the charts.

It's just... It's mind-blowing, and it's a privilege to hang around with these guys, and it's just... You know how when you go see David in the Academy in Florence, and you think, how could a human have done that? That's what I think every time I'm at Pixar. How could humans do this? Because these films are all handmade. I mean, they use the most powerful pencils in the world, but basically, they're handmade. And the technology there and the artistry there is just mind-blowing. Last year, you talked... Because you have this dual experience, you talked, I think, many people were fascinated about the differences in personality and the nature of creative people and technology people. Just a year later, do you see any more kind of comedy there, any more coming together of those cultures?

Yeah, a little bit, but it's slow going, because they don't understand each other at all. I mean, I was at a meeting, Carly was at the meeting, too, we were down with the Hollywood studio heads, invited several people down, Steve Ballmer, Carly, myself, and others, to talk about this whole piracy issue with Hollywood, because they are trying to get ahead of the curve and figure out what to do. But there's a pretty big gulf there. And it's great that those things take place, but there's a big gulf. And the attitude problem is on both sides? No, I don't think there's an attitude problem, there's just an experience problem. People from technology don't understand the creative process that these companies go through to make their products, and they don't appreciate how hard it is.

And the creative companies don't appreciate how creative technology is. They think it's just something you buy. And so there's a gulf of understanding between the two of them. Do the people that you deal with in the movie and music industries, are they individually actually users of the internet, users of computers, to the same degree that people in other businesses are and other positions are? Large dynamic range. But how about the people that really run these companies? Large dynamic range. Large dynamic range. Some of the smartest guys, like one of the smartest guys I've met in the music business is Doug Morris, who runs Universal, right? I don't think he's ever touched a computer. You send him an email, his secretary prints it out and hands it to him.

But he's one of the smartest guys about online music there is. So I don't know that there's even a correlation there. Okay. We have time for a few questions for Steve. We have the lights up so I can see. Stuart. If you'd allow me, I'd like to ask two questions. The first one's real quick. What's the range on Airport Express? 50? Yeah, 50 feet. I'm trying to figure out how many I need for my house. 50 meters. So you were describing... By two. You were describing by five. Do they only come in white? Are they only white? They're only white, yeah. You can't get pink? You were describing devices, particularly iPod and digital cameras, as, you know, the computer's a place to store all your stuff.

And I think... How many people... I've seen so many of them. How many people have a Trio here in this audience? I don't know. There's a fair number of them here. That's exactly how I use this device. And, you know, whatever you think about Palm and, you know, their history and where they've ended up with this device, I certainly would love to get one of these from Apple. So I guess I'd just say, is there any way you can get over your feelings about the carriers? Maybe you should, you know, visit with Ivan a little later and see if you can get along. We visited with the handset manufacturers and we talked to the Trio guys, and they tell us horror stories. Well, I'm just telling you that I would love it if Apple would be interested. But you have a Trio. So why do we have to make one? They make a good one. Well, buy Palm, then, and make them well run.

Larry? Yeah, Steve, Larry Maggott. This is going to go over a little bit of ground you and Walt did, but in 1981, I took all my data from my Apple II and I moved it over to my IBM PC. In 1984, I moved it all over from my IBM PC to my Apple Macintosh. And since then, I've moved it back and forth between my Macintosh, my Windows machines, and even Linux machines. And the experience has been great, and it's one of the reasons why I continue to buy more Macs and more Windows machines. And it seems to me everybody benefits, including people I share information with. As Walt pointed out, I can't do that with my music. Sure you can. Not really. I have music that I listen to on my iPod, and I have music that I can listen to on my Rio.

And some of the songs, the MP3 songs, I can move back and forth. Anything that I pirated, I can move back and forth easily. But the stuff that I bought legitimately, which is virtually everything, I cannot move back and forth. So basically, I have a technological incentive to pirate or rip. A ripped product or a pirated product is a better product because I can move it back and forth between my Windows-compatible music players and my iPod. And that's not serving me as a consumer. Well, two or three things. Number one, we've gone to the trouble of putting iTunes on Windows. Some people think it's the best Windows app ever written. And so you can have iTunes on Windows.

Secondly, all you have to do is chuck that Rio and get an iPod Mini. But that's not the way the world works. I mean, what people want is the ability to not be hostage to a single company with their data. Yeah, I understand what you're saying. But it is the way the world's working right now with the market shares of 52% on the iPod, including all the flash players that never get used. If you look at the Rio hard disk players, their market share is in single digits. Kind of like apples and computers, right? Yes, like apples and computers. Feels good. Up on the risers. I make desktop software.

And let me ask you a question I get all the time. Kind of study from the master. And it's along the lines of what Walt was saying about the future of PCs. And let's look out five years. You know, you said that, well, you want to store your pictures and your music and this and that on the PC. And the comeback I always get is, well, what about the Internet? It will all be up on the Internet. So we'll have kind of devices, dumb terminals, because, of course, sometimes you want the big screen. And lots of devices and everything will be on the Internet. And so desktop software in particular, desktop PCs will become kind of a thing of the past. Well, that's not exactly what's happened, thank God. What's happened is, is that data is exploding. So, you know, not only does music take, you know, four megabytes a song, but digital photography, you know, is taking a few megabytes a picture.

And they're really easy to click and take. And we've got now thousands of them. When we started off with iPhoto, you know, the average person, a thousand pictures was a lot. Now for the average person, you know, they've got 5,000 pictures. And to upload these all on a server, even with DSL or cable modem, it takes a long time. You end up wanting to have that data locally right on your desk if you want to scroll through your photos and pick one. Of course, you know, when you get into video, it's even, you know, larger data sets. So the data has kept ahead of the bandwidth to the extent that when you really want to use data quickly, like scroll through your pictures, etc., you really have to have it locally. And this whole notion that we're going to have these dumb terminals and our data is going to be stored in the ether just hasn't happened because of the bandwidth to data ratio.

And there's, we see no signs of that changing. Over here. Robert Holt, 0s and 1s. I love my iPod. I love Apple iTunes. It literally has changed the way I buy music. And I don't think anybody that uses it would deny that it's a masterful integration of a whole area that was at one point in time considered an open-ended thing. Well, no, it's not really a but. But the, well, now you've deflected every conversation about the idea of Apple debuting a product that addresses video and movies and deflected the fact that you have a rather unique role and that you have the market share. You've proven the viability of being able to create this trust with these intellectual property builders.

And you're part of that community due to your dual role. Here's my question. As one of your very regular users, I've noticed recently on Apple iTunes that you've migrated the movie trailers site into the iTunes experience. And there's music videos creeping into iTunes. So without putting words in your mouth, what's that all about? And how does that interplay with the rumors? Well, people like music videos, number one. And number two, whenever, you know, we just put out a press release that Apple has the most popular movie trailer download site in the world on the Internet, or streaming site, actually, in the world. So we encode all the movie trailers from all the studios, put them up on the Internet and pay money for you to download them or to stream them.

And more people go to our site than any other site. And we have the highest quality ones. And we've distributed 200 million copies of QuickTime in the last two years, too, which is really fun because that's what we encode them in. And we've since built that into iTunes because iTunes has QuickTime in it as well. And you can just do this one download of iTunes and, you know, watch your music videos, watch your movie trailers as well as your music. And we thought it was just really convenient. There's no giant plan under the covers there. But who knows how things evolve. The interesting thing about movies, though, is that movies are in a very different place than music was. When we introduced the iTunes Music Store, there was only two ways to listen to music, right? One was the radio station. You didn't get to listen to what you wanted to. And the other was you go out and buy the CD.

Let's look at how many ways are there to watch movies, right? I can go to the theater and pay my 10 bucks. I can buy my DVD for 20 bucks. I can get Netflix to rent my DVD to me for a buck or two and deliver it to my doorstep. I can go to Blockbuster and rent my DVD. I can watch my DVD on Pay-Per-View. I can wait a little longer and watch it on cable. I can wait a little longer and watch it on free TV. I can maybe watch it on the airplane. There's a lot of ways to watch movies, some for as cheap as a buck or two. And I don't want to watch my favorite movie a thousand times in my life. I want to watch it five times in my life. But I do want to listen to my favorite song a thousand times in my life. So, they're really different animals. And the movie industry is far more mature in its distribution strategies than the music industry was. So, they're really in very different places. The other thing is that people are much more attuned to visual quality than audio quality.

This is the most amazing thing that happened in the music industry to me. Was that we had the cassette, well, the LP, the cassette, and then the CD, which raised the quality, supposedly, right? Not even. And the next format after the CD should have been a higher quality format, right? Just like we've got television going to high def, but it wasn't. SACD and DVD audio have totally failed. What was the successor to the CD format? MP3. A lower quality format. But one that provided a convenience of being able to transmit music over the Internet that no other format had. So, that convenience went out and people settled for a lower quality format. The first time I've ever seen that in my life happen. So, but that's not going to be the case with video.

With video, people have ratcheted up to the DVD format and no one is going to go back to VHS quality just because they can download it faster over the Internet. It ain't going to happen. So, to download a DVD quality movie takes hours over most people's broadband connections. And we're going to high def in 2007, let's say. That's going to add another 10x of bandwidth. And I don't see bandwidth improving the home by 10x to even stay equal to where we are now. So, it's going to get even slower as we go to high def. So, to download a high def movie is going to take you, you know, half a day. If the bandwidth increases, it's going to take you half a day. Is that instant gratification like a song that's going to take you just a minute to download? No. And therefore, the threats to Hollywood, of which, you know, we're a small member at Pixar, are very different than the threats to the music industry.

And actually, the biggest threat to Hollywood isn't the Internet. The biggest threat to Hollywood is DVD burners. Right? Because what's happened in music, there's a double threat. One was the Internet for the distribution of stolen property. But the other was that every PC turned into a little replication factory with the CD burner. And that's what's starting to happen with standard def DVDs. Now, the DVD burners, I mean, once the CD burners hit 40%, it really happens. And the DVD burners are going to hit 40%. percent in the next year. So we'll see what happens with standard depth DVD. And Hollywood's big challenge is, what do they do about high depth to make sure it doesn't happen? And that is probably the most crucial challenge for Hollywood in the next decade, much more so than the Internet. And likewise, the Internet might not be as big of an opportunity. Part of the other problem with the Internet and downloading movies other than it taking half a day, is they go to the wrong place. Most people don't want to watch movies on their PC. And they could stream them to their television, but there's issues with all of that stuff.

So... Thank you very much. Thank you. I really appreciate it. Okay. Can I give you this?