Thursday, April 14, 2005

Taking a Bite Out of Apple’s iPod

Apple Computer Inc. (Apple) has enjoyed a leading share in the digital music industry since its iPod exploded onto the marketplace in late October of 2001. According to MSN, it is estimated that the Company currently controls a whopping 92% of the U.S. market and over 60% of the global market for digital music devices. Since the iPod’s introduction, many other MP3 players have been introduced, but none have yet been able to touch Apple’s iPod empire. However, cell phone manufacturers like Sony, for example, recently entered this lucrative and growing industry segment with MP3-supported music phones, which are capable of downloading songs from the Internet just like the iPod. (Please see articles in Techwhack and the San Francisco Chronicle for further information about Sony’s new MP3-supported Walkman, and articles in The Register and The Wall Street Journal for more information about Sony’s MP3-supported music phone versus the iPod.)
Just what will become of this fragmented industry? Many observers feel that Apple’s iPod cannot possibly maintain its market share in such a highly competitive industry, and that the push by cell phone manufacturers to infiltrate the market is the beginning of the end of Apple’s reign. Arguments made in The Wall Street Journal (cited above) suggest that separate hand held music players and cell phones will be replaced by an integrated music phone, which would serve both functions. Others point out that the digital music sector is still quite young, and while Apple is currently the leader, its position can change quickly in such a dynamic environment. First mover advantages can be fleeting, with the gains often being more profitably harvested by early followers. However, these arguments fail to take into account the brand loyalty of many in the Apple (and specifically iPod) community. They also ignore the power of the iTunes Music Store, which has been unmatched in quality and quantity of online music by any other MP3 device manufacturer.
According to the Yankee Group, a technology research firm, revenue from purchasing mobile music on cell phones is expected to grow nearly 30 times to $350 million by 2008. Industry executives project that cell phone manufacturers and carriers will be the companies that ultimately take digital music to the mainstream audience; however, the new music phones do not have hard drives with the same storage capability of an iPod. An iPod can hold 15,000 songs, while the new phones can hold only 150 to 500 songs. Thus it may take some time before music phones will penetrate the mainstream market. Some analysts believe that consumers will still want devices designed for a specific purpose. According to JuniperResearch (in WSJ article cited above), “It’s hard to view the music phone as a direct threat to music players, any more than camera phones have put cameras out of business.”
Three major groups of competitors are eyeing the potential entry of cellular phones into the digital music sector: Apple, cellular phone manufacturers, and wireless carriers. Apple is trying to enter the cell phone market by licensing iTunes to Motorola. The risk for Apple is that Motorola or any other cell phone manufacturer could cannibalize iPod sales, and current iPod customers would not be willing to pay for songs a second time over their phones. Cell phone manufacturers face the risk that Apple could restrict the music storage capacity on phones to limit the threat to the iPod.
According to the head of the wireless practice at A.T. Kearney Inc, wireless carriers want customers to pay to put music on phones. The biggest wireless carriers have no interest in conceding the booming digital music market to the technology companies. They think downloading a full song should be like downloading a ring tone, for which customers pay between $0.99 and $3.00. Some analysts say that wireless carriers have considered charging users a monthly iTunes premium as a way to collect revenue.
Currently, there are three options to resolve the issues between the three parties. Wireless carriers could set up their own digital music stores. Although Apple and Motorola would object to this, there are other phone manufacturers that are planning to take such actions. On the other hand, there are also smaller wireless carriers who might be willing to sell the Motorola-Apple phone without charging a premium for downloaded music. Lastly, Motorola and Apple could bypass the carriers altogether and sell the phone on their websites and in their retail stores. However, these phones will be more expensive since they won’t have carrier subsidies. According to an analyst at Gartner, “Who wants a $500 iPod phone when you can buy a phone and an iPod for that much?”
It is still unclear just how successful new entrants into the Apple-dominated digital music sector will be. As mentioned above, current prototypes of music phones do not have the same song storage capacity of an iPod, nor do wireless carriers have access to the same vast song library that Apple cleverly established. However, competitors will likely overcome the storage problems as technology develops, and strategic alliances with music vendors could overcome the second concern. In addition, a music phone offers the advantage of combining functionalities in a single portable device, and research conducted by JupiterResearch (see link above) indicates that 76% of those surveyed carry a cell phone, while only 7% carry a music player. Perhaps Apple has saturated the available market for its trendy iPod, leaving untapped the broader mass market of individuals who carry a cell phone and might enjoy adding music capabilities to it, but wouldn’t purchase an extra portable device just for music.
It also remains to be seen whether the iPod, like many Apple products, is a small niche player or a concept with broad market appeal. After several years on the market, it may well be that 7% market share is all that Apple will ever garner for the iPod. Apple users are generally known to be an eclectic and small group; perhaps the iPod is another Apple product with inherent limited potential. In that case, competitors such as Sony will likely succeed at growing the portable music market with their walkman phone by targeting a broader mass audience.
In our opinion, it is likely that Apple will attempt to gain market share in the mainstream cell phone segment, as we have already seen in the joint venture with Motorola. In order to be successful, they will not only need to participate in more joint ventures with cell phone manufacturers but also be willing to offer the wireless carriers a cut of the revenue. They must take a risk of cannibalizing iPod sales, as the size of the opportunity for digital music phones is much larger. We feel they will not survive on iPod sales alone and there is huge potential to capitalize on the iPod and iTunes technology. If Apple ignores the threat from the newly emerging competition, this could very well be the beginning of the end of their digital music reign.
By: Tara Duhan, Michelle Fedunyszyn and Katherine Palmer


Blogger Rachel Soloveichik said...

I wonder whether Apple will try to move into the cell-phone market. Now, a lot of Asian companies are willing to build the cell phones, so Apple could stick to design and marketing, which it's really good at. I think a lot of people are willing to pay $500 for an attractive and well designed cell phone, even if it doesn't have a lot of features.

9:27 PM  
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5:18 PM  

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