You know you've got market power when even society's lawless elements are following your playbook. Apple (AAPL) products have become so popular, so in demand, and so integrated into mainstream culture that even software pirates are increasingly beginning to adapt to its draconian standards. One of the quirks of the iOS mobile devices has always been that they can only play a limited selection of video formats. DivX, the codec of choice for video pirates, does not happen to be one of them. You don't hear about this much in the media because it hasn't really mattered here in the good ole' US of A, where most of us still believe in the archaic idea that you should pay for the products you use.
But in fast growing emerging markets like China, where the very notion of paying for media is considered ridiculous, being incompatible with pirated video has always been one of the biggest weaknesses of Apple's iOS line up. In fact, when Apple released the first generation iPad in China, it was criticized by an official Chinese government newspaper for not being pirate-friendly. According to The People's Daily, the iPad had "many disadvantages...for example you cannot install pirate software on them, you cannot download [free] music, and you need to pay for movies you watch on them." How inconsiderate of Apple, right?
This is all rapidly beginning to change. Due to the enormous popularity of iOS devices, major video piracy groups are beginning to release their media in MPEG4 instead DivX, a codec that is compatible with the standard video player on the iPhone and iPad. Large online piracy portals such as Sweden's The Pirate Bay are increasingly hosting more and more torrents encoded in MPEG4. I would provide a source link to back this statement up, but my editor advised against linking to a piracy website, so consider this article an informational heads up. Readers who are dubious can easily confirm for themselves (after all, it isn't illegal to visit a piracy website for research purposes, though I wouldn't recommend utilizing their services unless you don't mind the RIAA/MPAA serving you up with a lawsuit for downloading a tracked torrent).
For better or worse, the landscape of media piracy is undergoing a major upheaval, with all the moving pieces consolidating more and more around the standards set by iOS. As with any major development, there are a lot of people who are unhappy with the change and wonder why it's necessary. Proponents argue that MPEG4 is a technologically superior codec that simultaneously delivers higher quality at smaller file sizes, but it's been around for more than a decade. The piracy community hasn't begun to embrace it until recently, so what changed? The catalyst can be summed up in one word: Apple. Software pirates may not be risking their liberty for money (hard to do that when your product is free), but in the sense of following consumer demand, they operate much like a for-profit business. The equation is simple. The number of people who own Apple products is going up, which means the number of people who own Apple products and are looking for device-compatible pirated software is also going up. The solution: change codec standards to make your product available to a bigger market of consumers. Rather than Apple adapting to piracy, it's happening the other way around.
This is a win for Apple, but a loss for all of Apple's competitors. The evolution of software piracy is a trend that all global technology companies need to pay attention to, not just Apple. I don't support piracy, and believe that innovation and creativity can only be sustainable if the people who come up with the great ideas are paid for their hard work. But investors and businesses don't have the luxury of being able to fix all of the world's problems and reshape society into an ideal. We play with the hand that we're dealt, and try our best to make money in a world that is the way it is. Right now, it is a reality that software piracy is standard consumption practice in the emerging market economies. That means that it's also a reality that iOS devices without pirated media compatibility operate at an enormous competitive disadvantage when held up against the devices released by rivals like Google (GOOG) and Research in Motion (RIMM).
Newer Android tablets like Dell's (DELL) Streak series and RIM's BlackBerry PlayBook all support DivX. Hewlett Packard's (HPQ) TouchPad didn't, and that may be one of many contributing factors to why it went the way of the dodo. Compounding this shortcoming was the fact that the TouchPad had a severely limited universe of apps, so consumers willing to download a third party video player for their DivX needs still experienced difficulty.
The show doesn't end there: today it's DivX vs MPEG4. Tomorrow it's Flash vs HTML5. MPEG4 is what pirates use for peer-to-peer video files, but Flash is their bread and butter for streaming media. Furthermore, the importance of Flash extends beyond pirated media: it is used ubiquitously by legitimate websites as well. Right now, the biggest advantage companies like Google, Dell, and RIM have in the emerging markets is the DivX and Flash compatibility of their devices. If this trend continues and more and more Web-based organizations choose to abandon the status quo to adopt Apple's standards, that edge will shortly be erased.
It will take some time for all this to play out. Right now, the world is infatuated with Apple, and most emerging market consumers couldn't care less that its devices aren't compatible with their pirated software. Many people in China are spending several months of salary on an iPhone just to use it for voice calls. But as anyone who has been in a relationship can testify, infatuation doesn't last. Sooner or later it will wear off, and there has to be something real beneath it if the relationship is to prosper. If Apple's brand power is to be maintained, not only must its devices beat out competing products in form, but in function as well.
The day may come when the Chinese consumer looks at his iPad and thinks, "Yeah, this looks cool, but is it really worth paying so much for it when I can get a cheaper tablet that can also play all the movies I downloaded?" Apple is leveraging its tremendous success and enormous market influence to slowly change the rules of the game so that that day will never arrive. So far, it looks like it's working.
Disclosure: I am long AAPL.