Apple celebrated the first year of its iTunes Music Store yesterday – and analysts were optimistic about its results so far.

Inside Digital Media analyst Phil Leigh observed that Apple's success in the digital music distribution market rests on its clear focus on music: "It's that very intensity of focus that is permitting Apple to transform itself into the first breakaway success in consumer digital media."

Apple CEO Steve Jobs yesterday repeated his mantra that Apple's digital music plans are: "about the music, stupid", and stressed his opinion that portable video and other devices are foreground activities, while music is a background activity. In other words – no video iPod.

Leigh commented: "Video will come, but in its own time. For now there is a deca-billion dollar market for recorded music that is gradually going to transform from physical to digital distribution with all of the certainty of edgy language in an Eminem song."

Technology Business Research senior analyst Tim Deal told MacCentral: "The digital music download market is poised to become ultra-competitive and in order for Apple to maintain its market lead it must continue to increase the iTunes value proposition."

Leigh observes that rather than focusing on the fact that Apple missed its 100 million song-sales target, "we think it is important to note that the 770 million actually sold was probably around 60 million more than anyone else."

Jobs felt the same, telling analysts yesterday: "I think to go from zero to 70 million sales in a year is pretty good. If we'd said we could do that a year ago, people would have laughed."

WMA conversion coup

Leigh also welcomed Apple's new iTunes 4.5 software, calling its facility to transform unprotected Windows Media Audio files into the Apple-favoured AAC format "one of the most revealing changes" in the release.

"What this really means is that consumers who have used Microsoft software default settings to encode their CD collection into digital files on their PCs, can now convert those files into a format that will play in the Apple iPod."

Many in the industry have been saying that Apple's refusal to license its own proprietary digital rights management system FairPlay to third parties will hinder growth of the new industry, calling it a "format war".

Leigh observes that the facility to convert from WMA to AAC: "Is further evidence that Apple is concentrating on trying to establish iTunes and iPod aas a de facto standard for the legal distribution of recorded music. An ambitious objective that is seriously challenging Microsoft’s hegemony in the PC market for the first time in memory."

Deal praised Apple's new software and its offering now of 700,000 songs (with a million tracks promised for sale by the end of 2004) as matching customer demand. Apple's promise to offer a free song download each week also won praise, he said: "Whenever a company tosses the word 'free' into the mix, customers take notice. I think this a particularly effective marketing tool for Apple."

Jupiter Research senior analyst Joe Wilcox told MacCentral that many of the new features in iTunes 4.5 match consumer desires identified in surveys they have conducted, citing iMix as a case in point as that feature allows consumers to share music with others.

The fact remains that it's all about the music – and for Apple this means it is all about the iPod.

Leigh said: "For Apple to stay in front, a major part of its ultimate success will depend on whether iPod can maintain its market share. The future success of iPod will depend on how future versions of the product measure-up to new models from competitors."

CBS Marketwatch reports Merrill Lynch analyst Steven Milunovich, who believes Apple should be able to see off competitors in the digital music space.

Milunovich said this was because: "Apple's solutions work better at the beginning of the technology lifecycle." The analyst expects Apple to raise $8.83 billion in revenues in 2005, with iTunes generating $17 million in operating income in the period.

In related news, RealNetworks saw its quarterly loss widen because of restructuring costs and expenses relating to its ongoing lawsuit against Microsoft. It returned a net loss of $10.4 million in the quarter. Company CEO Rob Glaser did say that business was accelerating, driven by the success of its music services.