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Little MP3 player spawns an industry

In the weeks leading up to last month's Macworld conference, few people knew what the notoriously secretive Steve Jobs was going to announce.

Gavin Downey, the director of product management at Belkin Corp., listened to all the rumors leading up to the everything-Apple conference in San Francisco, from the outlandish to the logical. He had to. His job is making sure there are cases, rechargers and other accessories that add features to all the variations of iPods that Apple Computer makes. Any change in direction by Apple means his company has to scramble.

In September, for instance, on the eve of the previous Macworld conference, Belkin's lead designer was dispatched to China. There he waited for word of the rumored replacement to the iPod Mini, which turned out to be the slim Nano.

Despite the radical redesign, different from any previous iPod, the Belkin designer was able to mock up prototype cases within two weeks. Models were in the stores well before Christmas. "There is no room in this industry for lack of execution," Downey said.

Not when making add-ons for the iPod is a $1-billion business. Does that sound like hyperbole? Consider this: Last year, Apple sold 32-million iPods - or as its public relations machine puts it, 100 iPods every minute. But for every $3 spent on an iPod, at least $1 is spent on an accessory, estimates Steve Baker, an analyst for the NPD Group, a research firm. That works out to three or four additional purchases per iPod.

That obviously makes accessorymakers happy. It thrills retailers, whose profit margin on the accessories is much higher than on an iPod. And it delights Apple because the racks of add-ons made just for the iPod, 2,000 different items at last count, send a strong statement to consumers that the Apple player is far cooler than a Creative or Toshiba player, for which there are few accessories.

Sales of all those cases, car rechargers and docking stations totaled $850-million last year, Baker said, and that is not even counting Internet sales. Sales will easily soar well beyond $1-billion this year. "Most of us were caught a little bit by surprise by the growth trajectory," admitted Rob Humphreys, director of marketing for Kensington, a maker of computer peripherals and now one of the biggest iPod accessorymakers. The accessories account for about 20 percent of Kensington's total sales.

An entire ecosystem has emerged around the music player, introduced by Apple in October 2001. Other manufacturers had produced MP3 players earlier. But the simple design of the iPod, plus Apple's iTunes store, quickly helped Apple to dominate the market. And that simple design - some might even call it bland - encouraged people to personalize the machine.

There are now more than twice as many iPod accessories as there were last summer, according to Apple. And that number does not include the docking stations that will be available in 40 percent of cars sold in the United States this year.

About 28 percent of all accessories are cases. You can find microfiber sleeves or neoprene iPod cases made by dozens of startups for $10 or $20 or a $200 python-skin case made by Coach, the maker of stylish leather handbags. About 30 percent of sales are for car chargers or transmitters and the remainder are speakers and docking stations.

But the forest of products includes a baby stroller from Kolcraft with a slot for the iPod, and a belt with an iPod holder as the buckle called the TuneBuckle. For sheer extravagance, Hammacher-Schlemmer lives up to its reputation for selling the ridiculously expensive in its catalogs with the $4,000 Triode-Tube iPod speakers with old-fashioned vacuum tubes that glow through see-through panels. Sharper Image has a $700 iJoy massage chair in its catalog.

The iBoom is a white boom box that Digital Lifestyle Outfitters is selling for $150. At the Consumer Electronics Show in January in Las Vegas, a company showed a prototype of a black-and-yellow boom box, the size of a worksite gasoline-powered generator, for the tiny iPod.

Apple could not be happier about this exploding iPod economy. "For us it's great because the decision to buy an iPod is reinforced when consumers see all the accessories," said Greg Joswiak, Apple's vice president of worldwide iPod product marketing.

Some products, like Disney's Mickey Mouse or Mattel's Barbie dolls, created an enormous market for accessories, but most of those items, like the Mickey Mouse watch or the Barbie Dream House, were licensed or made by the same company that created the original product. In contrast, Apple has encouraged a free-for-all, and its own share of the accessories market remains small.

That will change. Apple has seen the power of this market and is getting more active.

At the recent Macworld conference, Apple demonstrated that it wanted more of this lucrative market. It made a splash with an attachment, the $50 Radio Remote, that plays FM radio through the iPod. Meanwhile, Kensington, with a new device that transmitted music from an iPod to an FM radio and also received FM broadcasts, was overshadowed.

Until recently, Apple's add-ons have been low-impact items like colorful cloth sleeves for the iPods that it calls socks. "We've chosen to participate in the market, not overwhelm it," Joswiak said.

By standardizing the 30-pin electronic connection on all of its models, Apple allows companies that stick with its standards the right to use an official "Made for iPod" logo. In return, Apple gets a small royalty for the logo's use.

However, Apple, always tight-lipped, does not give much else to the accessorymakers. "We may get a day's notice even with our strong relationship with Apple," Humphreys said. "In a meeting you might get a hint that something is going to happen, but you don't know what. You occasionally get a, "I don't think you want to go in that direction,' but you never know why they say that."

It could be because Apple will introduce a new size, as it did with the Nano, or because it is moving its connector from the top of the unit to the bottom, or because Apple has plans to introduce a competing product.

Undaunted, the big makers like Logitech, Griffin Technology, Targus and Xtreme Accessories keep working on electronics that add functions and battery power to the iPod. Devices that turn the iPod into a home media center, allowing consumers to shuttle music from one room to another wirelessly, have become very popular.

One big reason for the size of the iPod economy is that retailers love the accessories business. "Retailers have a love-hate relationship with iPod," Humphreys said. They must compete against Apple's own retail outlets for sales and the gross profit margins are slim, less than 15 percent.

Retailers' margins for the iPod accessories are much higher. Baker of NPD estimates that margins for the electronics are about 25 percent, while cases hold 50 percent margins. "They make money on that and they make no money on the iPod," he said.

While there is shelf-space competition among the hundreds of vendors, there has not been a lot of price competition, so profit margins hold. The iPod economy is also wide because the accessories are not limited to retailers like Best Buy or Circuit City as they had been with personal computers. IPod accessories are showing up in Urban Outfitters stores and auto dealerships.

If at times the iPod economy seems packed with iThis and iThat, it is because manufacturers have recognized the selling power of the iPod. Take clock radios, which have been a sleepy category for more than a decade. Bose turned that around by creating the iHome clock radio, which Apple says was the strongest selling accessory last year.