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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.
April 15, 2007
AS Media New Media Technologies : Second Essay
The Financial Times suggests that Apple's investment in iTunes has allowed it to dictate terms to the industry. How far do you think this is true. Would you expect to see iTunes lose its dominance soon? How might the music companies deal with the future of music via the
Internet? Explain your thinking on this.
The success of the iPod:
CUPERTINO, California—April 9, 2007—Apple® today announced that the 100 millionth iPod® has been sold, making the iPod the fastest selling music player in history.
iTunes and the Music industry
One media consultancy, Enders Analysis, predicted this week that global music sales would fall to $23bn in 2009, down 16 per cent from last year.(My emphasis from FT Published: April 12 2007 22:05)
Steve Jobs CEO (Chief Executive Office) of Apple had distributed an open letter online challenging the big four music companies to allow Apple to distribute their music free of digital rights management.
Some interesting extracts to get you thinking
To begin, it is useful to remember that all iPods play music that is free of any DRM and encoded in “open” licensable formats such as MP3 and AAC. iPod users can and do acquire their music from many sources, including CDs they own.
Universal, Sony BMG, Warner and EMI. These four companies control the distribution of over 70% of the world’s music. When Apple approached these companies to license their music to distribute legally over the Internet, they were extremely cautious and required Apple to protect their music from being illegally copied. The solution was to create a DRM system, which envelopes each song purchased from the iTunes store in special and secret software so that it cannot be played on unauthorized devices.
users to play their DRM protected music on up to 5 computers and on an unlimited number of iPods. Obtaining such rights from the music companies was unprecedented at the time, and even today is unmatched by most other digital music services. However, a key provision of our agreements with the music companies is that if our DRM system is compromised and their music becomes playable on unauthorized devices, we have only a small number of weeks to fix the problem or they can withdraw their entire music catalog from our iTunes store.
Steve Jobs then moves on to consider three different options for the future of downloadable music on the internet:
The first alternative is to continue on the current course, with each manufacturer competing freely with their own “top to bottom” proprietary systems for selling, playing and protecting music. It is a very competitive market, with major global companies making large investments to develop new music players and online music stores. Apple, Microsoft and Sony all compete with proprietary systems. Music purchased from Microsoft’s Zune store will only play on Zune players; music purchased from Sony’s Connect store will only play on Sony’s players; and music purchased from Apple’s iTunes store will only play on iPods. This is the current state of affairs in the industry, and customers are being well served with a continuing stream of innovative products and a wide variety of choices.
Let’s look at the data for iPods and the iTunes store – they are the industry’s most popular products and we have accurate data for them. Through the end of 2006, customers purchased a total of 90 million iPods and 2 billion songs from the iTunes store. On average, that’s 22 songs purchased from the iTunes store for each iPod ever sold. (My emphasis. If you are going to answer a question using downloading as a case study you must have up to date figures.
Today’s most popular iPod holds 1000 songs, and research tells us that the average iPod is nearly full. This means that only 22 out of 1000 songs, or under 3% of the music on the average iPod, is purchased from the iTunes store and protected with a DRM. The remaining 97% of the music is unprotected and playable on any player that can play the open formats. It’s hard to believe that just 3% of the music on the average iPod is enough to lock users into buying only iPods in the future. And since 97% of the music on the average iPod was not purchased from the iTunes store, iPod users are clearly not locked into the iTunes store to acquire their music.(My emphasis)
The second alternative is for Apple to license its FairPlay DRM technology to current and future competitors with the goal of achieving interoperability between different company’s players and music stores. On the surface, this seems like a good idea since it might offer customers increased choice now and in the future. And Apple might benefit by charging a small licensing fee for its FairPlay DRM.
Jobs points out that clever hackers are always trying to break into systems with predictable results:
Such leaks can rapidly result in software programs available as free downloads on the Internet which will disable the DRM protection so that formerly protected songs can be played on unauthorized players.
A related problem is how to:
quickly repair the damage caused by such a leak... It is near impossible if multiple companies control separate pieces of the puzzle, and all of them must quickly act in concert to repair the damage from a leak.
Jobs has therefore developed the following policy:
Apple has concluded that if it licenses FairPlay to others, it can no longer guarantee to protect the music it licenses from the big four music companies. Perhaps this same conclusion contributed to Microsoft’s recent decision to switch their emphasis from an “open” model of licensing their DRM to others to a “closed” model of offering a proprietary music store, proprietary jukebox software and proprietary players.
The third alternative is to abolish DRMs entirely. Imagine a world where every online store sells DRM-free music encoded in open licensable formats. In such a world, any player can play music purchased from any store, and any store can sell music which is playable on all players. This is clearly the best alternative for consumers, and Apple would embrace it in a heartbeat. If the big four music companies would license Apple their music without the requirement that it be protected with a DRM, we would switch to selling only DRM-free music on our iTunes store. Every iPod ever made will play this DRM-free music.
Now we come to the central challenge of Jobs' argument:
Why would the big four music companies agree to let Apple and others distribute their music without using DRM systems to protect it? The simplest answer is because DRMs haven’t worked, and may never work, to halt music piracy. Though the big four music companies require that all their music sold online be protected with DRMs, these same music companies continue to sell billions of CDs a year which contain completely unprotected music. That’s right! No DRM system was ever developed for the CD, so all the music distributed on CDs can be easily uploaded to the Internet, then (illegally) downloaded and played on any computer or player.
In 2006, under 2 billion DRM-protected songs were sold worldwide by online stores, while over 20 billion songs were sold completely DRM-free and unprotected on CDs by the music companies themselves. (My emphasis)
Much of the concern over DRM systems has arisen in European countries. Perhaps those unhappy with the current situation should redirect their energies towards persuading the music companies to sell their music DRM-free. For Europeans, two and a half of the big four music companies are located right in their backyard. The largest, Universal, is 100% owned by Vivendi, a French company. EMI is a British company, and Sony BMG is 50% owned by Bertelsmann, a German company. Convincing them to license their music to Apple and others DRM-free will create a truly interoperable music marketplace. Apple will embrace this wholeheartedly.
Music Companies Strategy
EMI will be the first of the four large record “majors” to remove DRM from its catalogue, although independent labels have always sold their songs without it.
The Financial Times notes that in April 2007
The world’s biggest music companies are expected to ask Apple to introduce a music subscription service to its iTunes digital media store as part of negotiations to renew their agreements with the computer company
Executives at Universal and other labels believe a subscription service could prove more lucrative for them than iTunes’ prevailing model of charging consumers 99 cents per track because it would increase consumption of music. It would also entitle the labels to a share of monthly payments, in addition to small licensing fees each time their songs are played.
Warner Music's response to the Apple challenge:
Edgar Bronfman, Warner Music’s chief executive, on Thursday slapped down Steve Jobs’s suggestion that record companies do away with copyright protections for digital music in order to spur the market’s growth.
Mr Bronfman expressed hope that the two sides could cooperate, but added: “Frankly, manifestos in advance of those discussions are counter-productive.”
Watch this space over the next couple of weeks, there will be some interesting outcomes and you will be right up to date for your exam. They will also effect your day to day practices in terms of gaining access to music.
CDs and the lack of digital rights management
Steve Jobs makes an important point although one need not necessarily agree with his conclusions. When the CD was launched by Sony/Philips as a joint development venture the prospect of them being copied was almost inconceivable. CD players were very expensive initially with even the cheapest of them worth more than many people's playback systems. They were aimed at a well off market conscious of new technologies which promised better sounding playback without the deterioration associated with Vinyl (LPs). A single scratch could easily wreck a whole album and dust was an ever present issue. Delicate cartridges were another issue. Personal computers barely existed then an the concept of the internet was unimaginable for most of the World. We are only talking of the early 1980s here!
As a result the CD didn't have any anti-copying devices in them. The first CD copiers were very expensive and the record companies insisted that they had DRM built in. The breakdown in the sytem came through computing. The invention of programmes which could 'rip' music from the CD to mass produce CDs as pirate copies took off. Then the internet added to the woes of the record companies.
SACD Copy Protection
in 2000 Sony and Philips brought out SACD which is an enhanced sound quality multitracked disc which is far superior to CD in its potential. Naturally these companies both of whom have been employed in producing music cpntent in the past were actutly aware of the problems of piracy. SACD is copyprotected according to the Wikipedia entry:
SACD includes various copy protection measures of which the most prominent is Pit Signal Processing (PSP), a physical watermarking feature that contains a digital watermark modulated in the width of pits on the disc (data is stored in the pit length). The optical pickup must contain special circuitry to read the PSP watermark, which is then compared to information on the disc to make sure it's legitimate.
The problem here for music companies is that unlike CD there is an alternative format DVD-Audio (DVD-A). This is making buyers reluctant to buy equipment which is limited to only one format. At the same time the audio industry has developed a technique called upsampling which improves the quality of CD playback and is available on more upmarket CD players which appeal to an audience who are more discriminateing and better off. This is the market which previously might have bought SACDs and the equipment to play them on.
Can Blueray Save the Music Companies?
The music companies are therefore unable to bring new music out in a different standard format. Ironically it is the development of the new games machine the Sony Playstation 3 which might change the balance. If sony can establish a large base of Blueray players via the games market it should also be able to make an audio only version for the music playback market which offers very high quality along with encryption. Sony are already working on this according to the May 2007 edition of Gramophone magazine aimed at classical music lovers which is a big global market. The younger market will also be able to use Blueray discs in their own audio systems via audio output which will create a much larger user base than SACD and DVD-A.
If this enlarged new user base can be established and music released on blueray discs then for the forseeable future the piracy issue will drop away. The music download will be fat inferior as there won't be the multitracking information available. For the long term the message is don't spend too much money in iTunes because the ground may shift yet again. Watch this space!
If you think this is a far fetched idea look at the remarkable success of the Sony PS3 after its release in Europe. The Chief Executive of Sony quoted in the Financial Times proudly announces the following:
Sir Howard said Sony was close to selling 800,000 units in Europe. “I think [in] the first two days in the UK, £100m ($199m) revenue changed hands and that’s probably the largest consumer electronics sale in history.” My emphasis).
The Financial Times on the power of iTunes over the music industry
Financial Times on EMI going DRM free in a limited way
Financial Times on possible music subscription via iTunes
Financial Times of the Warner response to Steve Jobs
BBC Video on this: