All entries for Wednesday 25 April 2007
April 25, 2007
iTunes: the cornerstone of Apple's business strategy?
Apple's last quarter profits up by a massive 88%
This isn't a Shuffle its Quicktime :-)
Apple sold more than 10.5 million iPods in the first three months of 2007, helping the US technology firm to record an 88% increase in profits. (BBC Technnology Story: Wednesday, 25 April 2007
From computer manufacturer to vertically integrated consumer media company
The figures above certainly confirm the argument developed below that Apple is situating itself as a vertically integrated company placing itself in a strategic position in the rapidly growing downloading music market. Furthermore, through its strong brand name, it is positioning itself on the strategic heights so that it can take advantage of what is likely to be a hugely popular cash generator in the near future. This is the downloaded video market whether this is via computer, iTV or iPhone. The Apple new media hardware products being linked through the powerful iTunes downloading site which also acts as a client side media organiser. This will allow the iTunes customer to be able to access what they want, when they want it and where they want it.
This notion of vertical integration is a contemporary variant of the original model in which everything from raw materials through manufacturing and distribution to sales in the High Street is owned and controlled by a single company. It is a model which has had variants in the past with companies such as Marks and Spencer successfully outsourcing the manufacturing whilst designing and planning in house. At the same time they built a powerful presence on the High Street.
In the world of media there have been interesting styles based upon vertical integration. Sky TV has centered itself upon control of distribution via satellite linked to its own receivers and interactive Skyboxes which inform the company what viewers generic tastes are and trying to push genre accordingly. The current dispute with Virgin Media in the UK bears witness to the powerful position they exert through controlling key elements in the distribution chain. Apple too are creating themselves a similar position within the marketplace which they have largely been responsible for creating. Being able to lock their software so that other distributors cannot use it gives them a powerful position in any developing market place. Whilst they are unlikely to achieve 'total domination' for the forseeable future they are significantly ahead of any rivals who have failed to get into that market position.
A little aside:
Well apart from the fact that for all the flack that Bill Gates gets the Bill and Melinda Gates Foundation is doing some prety good stuff in Africa. They are even developing a cut down version of Vista for developing countries to help them get on the ladder to a networked society. Feeding your iPod could well be feeding Steve Jobs' pockets, anybody know the name of his charitable foundation?
iTunes as a Loss Leader or iTunes as Brand Builder?
For Apple, music has been a loss leader to promote the sale of its iPod MP3 players (Emiko Terazono Financial Times, April 8 2007 18:42)
Apple has managed to sell over 100 million iPods which isn't bad when you consider that is equivalent to about 1 and half iPods for everybody in UK. Part of the growth if the iPod phenomenon has been the growth of iTunes. Terazona is right about aspects of a business being separated out and 'making a loss'. But Jobs' game is a much bigger one than just setting any trends in the market he is adeptly reading customer desires and turning them into products.
By allowing anybody to download iTunes for nothing jobs is building his brand and when people do want to buy through downloading they are likely to be the first place that people will go if they already have installed iTunes as their default music player and library system.
Let's take the UK for example: it is probably further down the road of digitising the old analogue broadcasting system. Once analogue TV is turned off then mobile companies will compete for a lot of bandwidth. The big game in town will be having bandwidth finally available to make mass downloading on line over a mobile device of video streaming. The iPhone and its successors will be well placed to win a high market share of this future dynamic market with iTunes as the hub which allows the whole system to interface.
iTunes legal downloads: bad value?
The reality for the record companies and Apple is that iTunes offers incredibly bad value. Currently at 79 pence (UK) per 'tune' for something which is seriously degraded in quality terms and can only be transferred to a very limited number of other devices is pathetic. Anbody with any sense would go and buy the CD copy it and sell it on or swap it for other ones with friends. That's great publicity for the musicians. The advantage is that the sound quality is considerably higher which is very important for those who might want to listen on a high quality audio system. If you are buying music for the long-term then you would certainly not wish to pay 79 pence per track.
The recent deal with EMI is showing the future for downloaded music. For another 20 pence per 'tune' it will now be possible to download much higher quality sound files although still not as good as a CD. The other thing is that the restriction for the cheaper music which will only play on 5 machines has been removed, it is Digital Rights Management free.
iPod to iPhone
Arguably the iPod has saved Apple Computer and given it some credibility as a consumer brand as well as amongst the designer elites. The extra turnover created by massive iPod sales has enable Apple computers to reinvest in their products. However with the MP3 market now massively comptitive Apple need to keep ahead of the pack. Although iTunes is a 'loss leader' it is better to think of it as integral to the success of iPod. It is certainly the most user friendly 'music player software' although players such as Realplayer are now very good.
The development of the iPhone promises to provide many of the winning features of the iPod with many other advanced technologies to produce a market beating 'all in one device'. The heavy investment by Apple has been shown by the fact that they are holding up the next upgrade to their Apple computer operating systems Leopard. There seem little doubt that Apple is playing a high stakes games. Should the phone not work as well as is claimed the current hype could well backfire. There is also no doubt that Sony-Ericson, Samsung, Nokia, Motorola will be working round the clock to release their own competitive products.
Is the future mobile video devices?
The larger iPods are good for playing video as they have a large storage capacity. Enter the iPhone. Currently the iPhone when launched is expected to have flash memory of 4 & 8 Gb. But we can soon expect this to be dwarfed by the new flash memory launched by Sandisc which can give 32 Gb of memory in a 2.5 inch drive which is ideal for travelling around as it is far more stable than a hard drive. This would give adequate memory to play large video files.
Downloading movies, or being able to access the viewable trailers online like The Queen (see below) could be good way of passing some downtime on a transport system. This is where the iPhone linked into iTunes could be an attractive proposition enabling potential customers to think about what to download fully when at home. The advantage of a 3.5 inch screen which can be turned through 90 degrees to make a widescreen is a winning combination (see below) especially if it can be synched to iTunes.
There is an excellent array of photographs of Steve Jobs prelaunch press briefing on the Engadget pages.
There seems little doubt that this handheld video device is going to be the one to beat in the near future. (Providing that is, it delivers what it says on the box. There are plenty of people who remember Apple's first Newton. Well, nice try Apple but....
It seems as though the future of Apple is as some sort of multi-media institution
At the moment it isn't clear how Apple will respond to these and other challenges.
The key to understanding the company is to realise that it is not a software company like Microsoft.
Apple makes the computers and portable music players it sells, it doesn't just provide the programs to run on them.
Until relatively recently, it was more like IBM or DEC or the other old-time computing companies, but now that the downloading business is so important to its plans, I think that Apple is more like Sony than anyone else. After all, Sony makes all sorts of hardware, from consumer electronics to computers, and it has its own content business, making films and distributing music.Sony also finds it hard to deal with the conflict between the desires of its hardware people to make really cool systems that can play any content and give people freedom, and a content division that wants to limit and control what people can do. (Bill Thompson, Friday, 31 March 2006)
Bill Thompson makes a useful point yet there is a strong difference between Apple and Sony and which I think gives Apple a developing business model which is closer to Rupert Murdoch's than Sony's. Sony is a company fighting on many fronts in the consumer electronics marketplace and also the professional end when it comes to TV recording equipment.
The key to Apple's success is successful design, be it product design or software design. It is able to market itself as being user-friendly, aesthetically pleasing and doing what it says on the box. The brand is considered highly desirable. Unlike Sony it has now positioned itself as a key player in content distribution through iTunes. First it was music but it will increasingly be video based products. this puts it much closer to Sky who dream up designs for the Sky-box but outsource the manufacturing. The product itself is the delivery vehicle to the end consumer locking them into premium products.
Wikipedia has identified Apple as a company practising a form of vertical integration in the way it manages the business.
Apple is one of the few vertically integrated businesses in the information technology sector. The company designs the computer hardware, accessories, operating system and much of the software itself. Production, however, has been transferred to specialized suppliers such as Foxconn, which also manufactures computer hardware for other companies. This arrangement is similar to that of most high-tech companies today. Although no longer participating in the actual manufacturing process, Apple has recently established a chain of high-profile upscale retail outlets, establishing a type of forward vertical integration which ensures that it retains some measure of control over its product image and marketing strategy.
What iTunes business strategy appears to be is moving into a world in which it acts as a distributor of media content through iTunes. It owns some of the content through its relationship to Walt Disney and it makes a variety of different hardware media / computing products which work well together.
For Steve Jobs, who recently became the largest individual shareholder in Disney after it bought Pixar Animation Studios, a solution would seem to present itself. He could bring together the two separate areas of his working life, and unify Disney and Apple.
That way he would have the content and the platform, and he wouldn't be quite so reliant on the agreement of others to make it all work.
As one of the few people who truly understands both the computing world and the content world, he might even show Sony how to make a success of an integrated company. (My emphasis: Bill Thompson ibid)
Steve Jobs integrated media guru
With the whole of the New Media market still very much in its early years any conclusions must be a highly provisional affair. The dynamics are still playing themselves out and there are still a number of key groups in this market all of which are very highly capitalised companies. Microsoft and Apple, News Corporation and Sony are all older companies and well established. It remains to be seen what powerful new companies such as Google can achieve. Currently there is still plenty of room for all of these companies to expand in their own chosen paths but increasingly these are likely to overlap and conflict. Right now Apple, moving away from its origins, looks set to become a very powerful media style company who provide the creative marketplace with serious computing and the domestic market with highly pleasing easy to use new media equipment providing access to vast libraies of cultural information.