Getting Played by Apple

With iPod sales growing so rapidly, a swarm of companies has attempted to cash in on the business. These include component manufacturers such as PortalPlayer that provide the technology underlying the iPod, and companies such as Bose and Griffin Technology that make an assortment of accessories for the devices, including external speakers and car-stereo adapters.

Although it's an extreme case, PortalPlayer illustrates the lure of the iPod opportunity. Thanks to iPod-related sales, the company's revenue jumped from just $20.9 million in 2003 to $225.2 million last year.

Meanwhile, the company's bottom line swung from an $8 million loss in 2003 to a $48.2 million profit last year.

But as last week's announcement indicates, keeping that growth going is anything but certain.

"It's in a very difficult spot right now," says one portfolio manager who is short PortalPlayer.

The problem facing PortalPlayer and other companies trying to cash in on the iPod's success is that they need Apple and the iPod far more than Apple needs them. And Apple's not afraid to let them know.

Indeed, even when Apple hasn't had as much leverage as it has with the iPod, it has often been a difficult company for partners to deal with. Many Apple resellers have complained in recent years that Apple's growing suite of retail stores is eating into their business, for example.

Back in the late 1990s, the company basically killed off a number of start-up companies that had begun sell Macintosh clones after Steve Jobs decided he would no longer license Apple's operating system.

Dominant technology products or platforms can often create tension between the companies that make them and their suppliers and partners. Microsoft (MSFT Quote) and eBay (EBAY Quote), for instance, have both had difficult relationships with software developer partners.

In terms of the iPod platform, an early example of the potential perils of depending on that business came last year, when Synaptics (SYNA Quote) lost its exclusive contract to make the click-wheel for the iPods. The company's sales and earnings have slumped ever since.

In recent months, iPod accessory vendors have also gotten a glimpse of the precarious situation they are in as Apple has started to introduce its own line of iPod add-ons, such as an FM tuner and an external speaker system.