From the May 2006 issue of Entrepreneur

Four years ago, Jason Entner was first in line to snap up Apple Computer's original iPod. He loved its size and sound, and it became his traveling companion at trade shows, where he promoted his fledgling home-accessories design firm. But Entner felt something was missing. His iPod needed a case, and there wasn't anything on the market. So he started designing his own cases. "It was something to house my iPod, as well as [an] extremely deficient [niche] in the market," says Entner, 33.

Today, Lifepod, founded in 2002, designs and manufactures funky accessories for iPods, from cases and "cooler bags" to wallets and iPod-friendly laptop cases. Lifepod's products are sold at Urban Outfitters, specialty stores and college bookstores. It's been an amazing ride for Entner, who works alongside Lifepod's four full-time employees in the company's New York City office. Apple Computer has sold about 42 million iPods to date, which in turn powered Lifepod's 2005 sales to more than $1 million. Three years ago, "nobody knew what an iPod was, so why would anybody buy a case for one?" he says. "This past Christmas, the [iPod] was one of the [must-have] gifts."

The trend toward personalization is a driving force behind today's accessories market. "People want to buy a product because everyone else is buying [it], but they want to differentiate it from everyone else's," says Arvind Malhotra, associate professor of entrepreneurship at the University of North Carolina, Chapel Hill's Kenan-Flagler School of Business. "As an entrepreneurial business, there's a huge opportunity if you can offer any sort of customization."

Risky Business
Creating accessory products for another company's hot seller is risky business, however. Big companies are famously secretive about impending releases, forcing support players to wait until something hits the market to respond. Worse, today's hot seller can suddenly become tomorrow's unsold inventory. "This is not a traditional product life cycle where you analyze the market, [identify] demand and market it to the demand," Malhotra says. "The demand is so volatile that it's going to be there and then it's gone."

The company you're feeding off of could also eliminate the product line you support, create its own version of your product at half the price, or change its operating philosophy over-night. "A new CEO comes in [or] a new board member says, 'Why are we leaving that kind of money on the table? I know how to get 50 percent margins out of these services,'" says Ken Bender, managing director of Software Equity Group, a San Diego boutique technology investment bank.

You're likely to be disappointed if you expect a close working relationship with the company that has the hot seller. "Apple doesn't need the small niche player as much as the small niche player needs Apple," Malhotra says. "You're going to have even less help [as an accessories company]."

Entner approached Apple about carrying Lifepod's products on Apple's website for the first time last fall. He's still waiting on a final answer. He thinks it's important to work out the kinks in your system and get good media buzz before making your move. "You only get one or two shots with these guys before they're like, 'You know what? Great stuff, great idea, but you guys don't have it together.' It's too difficult for them to deal with a small company," he says. "You have to be willing to go it alone."

Short of some magical inside track, product-centric blogs and news sites are your best sources of information about impending releases. "The advantage for the entrepreneur is that there is enough information online," Malhotra says. "You might not know the exact dimensions, but pre-design adapting [can be done]."

Entner follows sites like iLounge and Gizmodo, and says Lifepod has been lucky so far with its one-size-fits-all approach that works with all iPods currently on the market. But as Apple zigs, Lifepod zags. "We have some Mini case inventory we need to eventually liquidate, and [we need to] go into the Nano more deeply," Entner explains.

Understand the complexity and life cycle of the product you're going to support, build sturdy marketing and distribution channels, and work hard to create your own brand identity and customer base. "Think about the reliability of the big company you're about to hitch your star to. Will it continue with this product line?" Bender asks. "Will it see you as competition?"

You'll also have to diversify your product line if you're in it for the long haul. Lifepod is refocusing on emerging technologies such as MP3 phones and satellite radio. "I won't say we've moved on from the iPod, but we're already trying to reposition ourselves into a new area," Entner says. "Relying on one product as the basis of your business is a very slippery slope." But with hard work and some good luck, it can be a very profitable gig in the short term.