Dark Side of the iPod: Will Filesharing Come Back To Haunt Apple? (AAPL)

| About: Apple Inc. (AAPL)

A short time ago we noted that illegal filesharing could launch Apple's (ticker: AAPL) video iPod 'into the stratosphere' -- but that Apple execs aren't likely to acknowledge this major driver of growth. Today's Wall St. Journal (sub. req.) addresses filesharing matter more generally vis-a-vis iPods -- for music as well. Key extracts:

  • Apple refused to talk to the WSJ about the issue (no surprise there), but since 'Apple CEO Steve Jobs is being touted as the savior of the beleaguered recording industry, it is at least worth exploring how all those iPods he is selling to the public are really being used.'
  • The gap between iPod vs. iTunes sales is telling indeed -- especially given the proprietary control Apple has over the songs that work on iPods: 'week-over-week growth of online song sales this year, including from the iTunes Music Store, has significantly slowed as iPod sales soared. In a research report last month, Richard Greenfield, an analyst at Fulcrum Global Partners, estimated the average annual song purchases per iPod online fell to 15 songs per iPod in the third quarter from 25 in the same quarter last year.'
  • 'File-sharing has never been stronger. The amount of downloading from file-sharing networks is roughly double what it was two years ago when iTunes started. File-traders swap more than a billion songs a month, says research firm BigChampagne.'
  • Music industry insiders aren't happy about the lost sales the Apple channel is causing: 'Some executives in the music industry privately express buyer's remorse at the bargain they struck with Apple's Mr. Jobs, who is making big bucks from selling iPods... Hilary Rosen, former head of the Recording Industry Association of America and now an industry consultant, thinks Apple has held back legitimate online music sales by not sharing its copy-protection software with other Internet music services, which would let iPod users buy songs from multiple sites. "This interoperability issue is only going to get worse" as Apple gets into video, she says.'

Observation: If it wants to flex muscles here, the music industry has two options -- try to squash filesharing, or press Apple to share its copy-protection software. The latter is clearly the preferable option for Apple -- it could even work a licensing deal with other music service providers. But if the entertainment powers-that-be ever get serious about finding and prosecuting file-sharers, and even a 30% drop in illegal downloads ensues, Apple may be scrambling to explain the parallel drop in iPod sales.