ITunes Music Store's Position in the Online Industry - Case Study Example

 Apple Table of Contents Table of Contents 1 Introduction 2 Environmental Analysis 3 PEST analysis of UK 7 TOWS matrix 8 Reasons for iTunes success 10 iTunes and Porter’s Generic Strategy 11 Competitor analysis 12 Recommendation for future Strategy to remain competitive 13 Conclusion 13 References 14 Introduction ‘Apple’ this is the one name that has changed the world of computer and music. Three people who founded Apple in 1976 are Steve Jobs, Steve Wozniak and Ron Wayne. The next year was the year of official creation of Apple Inc. (The History of Computing Project, n.d.). Over the years the company has created several innovative products starting from GUI to iTunes. It is known for its simplicity, quality and beauty. It is also famous for being secretive and quiet regarding its future plan. It is quite surprising that the company enjoys all its commercial success without giving much focus on the beta testing or focus group testing. There are some elements of surprise with each of the Apple product. This element of surprise has been the primary strategy for Apple. Whenever Apple launches a new product, million dollars are generated in free internet publicity. This has been an important part of Apple’s carefully designed strategy in order to gain customer attention (O'Grady, 2008). Today some of the major products of Apple include Macintosh computer, Apple TV, iPod, iPhone, iTunes etc. In April, 2003 Apple first launched its online music store, iTunes. The music store was launched with 200,000 tracks. There are exclusive tracks 20 special artists which include U2 and Bob Dylan (Borland, J. April 28, 2003). Apple, with the launching of this new online music store, has made its position stronger than it was ever before in the digital music world. Now, the question is that could this dominance of Apple be stopped. This paper includes an in depth strategic analysis of Apple as well as of iTunes. Strategic tools that are used are Porter’s five forces model, PESTLE analysis, and Porter’s generic model. The paper also includes a critical analysis of Apple’s competitor analysis, its current market share and position. Finally the paper ends with conclusion and some specific recommendation. Environmental Analysis iTunes Music Store was launched in United kingdom in mid of 2004. Almost 800,000 songs were sold in the first week only. With this huge figure Apple surpassed OD2 which is the main competitor of the company in the first few days. As far as features were concerned UK stores were almost identical to the stores in US. Competitiveness of online music stores market could be better analyzed with the help of Porter’s Five Forces model. Any industry’s structure could be analyzed by analyzing its competitive forces. According to Michael Porter there are five competitive forces that play an important role in shaping the structure of any industry. These five forces are bargaining power of buyers, bargaining power of suppliers, rivalry among competitors, threat of new entrants and finally threat of substitutes. Stronger these forces are, stronger the challenges for the organizations. Each of these forces is analyzed in the context of online music industry in UK and Apple iTunes. Bargaining power of buyers Bargaining power of buyers could be referred to the influence of customers on the business and its profitability. Value is being created in the process of transaction between the buyer and seller. But an organization would not be able to capture most of this value if buyers are having more bargaining power. Generally buyers have more bargaining power when they are huge in number and purchase a large amount of the product. In the context of Apple and its iTunes in UK market it could be stated that buyers’ bargaining power is quite strong as there are huge number of customers who prefer to purchase music online. With the increase in the number of internet user in the country this power is likely to be stronger in future. In the first week of launching Apple iTunes almost 800,000 songs were sold. This shows how powerful buyers could be in this industry. Suppliers bargaining power Suppliers generally have significant amount of bargaining power as every business requires some inputs which include labor, raw materials, parts and services. Suppliers bargaining power could be realized at the time of negotiations regarding prices and various other terms and conditions. Suppliers are likely to have more bargaining power when there is less number of suppliers in the market or required inputs are unique in nature or suppliers are able to sell the product directly to the end customers. Online music industry is not like any other traditional industry where there are defined panel of suppliers. In case of Apple iTunes Music Stores as well as online music industry major suppliers include renowned music companies like EMI, BMG, Universal, Sony and Warner. Since all these music companies well established organizations in the music industry they would be in a more powerful position in the process negotiation. Rivalry among existing players Rivalry between the existing players is often found to be the strongest among the Porter’s five forces. Nature of this rivalry is found to be different in different industry. Organizations’ ability to reduce or increase prices is very much dependent on this competitiveness. As a result organizations’ profit is also influenced by the nature of the rivalry. Rivalries are intense in nature when there are few numbers of firms are competing with each other to be the market leader. Rivalries are also high when the market is not growing at a reasonable rate; market is shrinking and switching cost between products for the customers are not high. At present there is not much of competition in the online music store industry. Competitors of iTunes have been found to be unable to take off because of bandwidth and technical restrictions. But this competition is likely to be more intense in the coming future as number of players in the industry would increase. IT companies have found that there is huge potential of making profit in this kind of industry as then popularity of online music store would increase with the increase in the use of internet throughout the world. Threat of New Entrants New entrants are potential threats for the existing organizations in the same industry. Main reason behind this fact is that new entrants always come up with significant amount of resources as they want to grab the market share as early as possible. Analysis of the threat of new entrants would involve the analysis of barriers to make entry. It would also involve the analysis of predictable reactions, coming out because of these new entrants, of existing organizations (Purdue University, n.d.). As far as Apple iTunes Music Store is concerned, threat of new entrants is moderate. This is information age where advanced technology is practiced by most of the companies in the world. In digital music industry companies need innovative technology and business model to sustain. So, it is very much possible that tomorrow IT giants like Microsoft or Google would come up with a new online music store with several innovative features and this would be considered as a big threat to the Apple as well as its iTunes Music Stores. Since companies like Microsoft or Google are very strong when their technical expertise or financial capability is concerned, it would not be difficult for these companies to get into this online music store industry. But if new companies want to get into this industry, it would require huge technical expertise as well as financial strength which might not be easy for them. As a result it could be concluded that in online digital music store industry threat of new entrants is moderate. Threat of Substitutes Threat of substitutes arises when there is an alternative product in the market with lower price and same or better features. Complimentary products may also serve as a threat to the main product. The threat from substitutes is based on the following factors namely, 1. Customer Brand loyalty 2. Customer relationships 3. Switching costs 4. Current trends 5. Relative price of substitute performance In this information era technology is changing rapidly. Any technology which is heavily used today could be obsolete tomorrow. Today Apple’s iTunes Music Store is very much popular because of its features which are based on advanced information technology. But there is high possibility that any other IT giant would come up with some new concept of online music store which would be more user friendly and more technologically advanced. So, it is very much possible that tomorrow a new concept of online music store would come and replace iTunes Music Store. Apple itself is master of creating new innovative products in this industry, so it is quite possible that the company itself would come up a new concept that would replace the existing one. PEST analysis of UK PEST analysis refers to the analysis of Political scenario, Economical, Social and Technological environment of a particular country. Organisations can have clear understanding regarding the external environment of the organisation by the help of PEST analysis. Political scenario: UK government is constitutional monarchy type. There are large numbers of political parties in the country. Some of them worth mentioning like Democratic Unionist Party, Labour Party, Liberal Democrats etc. Apart from these political parties there are many political pressure groups which greatly influence country’s political scenario. Few of them are Campaign for Nuclear Disarmament, National Farmers' Union, Confederation of British Industry etc. Prime Minister Gordon Brown is the chief of the government. He is also the head of Labour party. In UK prime minister is responsible for appointing the cabinet. Economical state: UK economy is one of leading financial centre and trading power in the global economy. It is one of the very few trillion dollar economies not only in Europe but in the whole world. Over the past few decades public ownership is significantly reduced in UK. UK produces most of its food requirements. The country is very much agriculture intensive. There are large reserves of natural gas, coal and oil in UK. In 2008 UK’s Gross Domestic Product was approximately 2.67 trillion. In this 2.67 trillion almost 4% was the contribution of energy sector. Recent global financial turmoil has badly affected the country’s economy and it has been found that till February 2009 almost 1.97 million people lost their job and country’s GDP reduced to $1.8 trillion. Currently UK economy is trying hard to recover from global financial meltdown. Central bank rate which was 4.63% at the end of 2008, is now almost 1%. Social condition: As of July 2009 total population of the country is approximately 61,113,205. Most of the population (approximately 90%) of the country lives in urban area. There are several ethnic groups in the country. Almost 83.6% of population in the country is English, 8.6% is Scottish and 1.8% is Indian. According to census of 2001 UK’s 71.6% people are Christian and 2.7% are Muslim. Main language in the country is English. 16.7 percent of total population of UK falls in the age group of 0-14 years. Whereas age of 67.1 percent of population falls in the range of 15 to 64. Almost all the people in the country are officially literate (99%). Technological sectors: Technology is heavily used by the individuals and corporate in UK. Technologically the country is becoming more advanced over the passage of time. This advancement is further driven by the privatisation which is occurring at a high rate (Central Intelligence Agency, n.d.). TOWS matrix TOWS matrix is an important strategic tool that is used for situational analysis. TOWS stands for Threat, Opportunities, Weakness and Strength. Threats and opportunities for an organization would be found in its external environment whereas strength and weaknesses could be found in the internal environment of the organization. In TOWS matrix there are four different strategic options for an organization. These strategies could be adopted by the organization in order to stay ahead in the competition for long time. Four strategies are WT strategy, WO strategy, ST strategy, SO strategy. WT strategies would be adopted with the purpose of minimizing both weaknesses and threats; on the other hand WO strategies would be adopted for minimizing the weaknesses and maximizing the opportunities. ST strategies are adopted on the basis of strengths of any organization for the purpose of dealing with the threats. Finally SO strategies would be adopted for maximizing both strengths and opportunities of the organization (Weihrich, n.d.). TOWS matrix in the context of Apple iTunes Music Store is provide below. Internal Strengths 1. Huge number of music tracks in the library 2. Huge market share, almost 90% (New York University, n.d.). 3. Free preview of songs 4. Strong alliance with five big music companies 5. Availability of all category of music Internal Weakness 1. Expensive TV shows 2. Compressed audios are sold only 3. Because of DRM protection mp3s need to be played only in those mp3 players that are produced by Apple itself (Ghacks.net, n.d.). External threats 1. Complex legal issues regarding downloading of music 2. Strong competitors like OD2, Napstar 2.0, Amazon.com, mp3.com, listen.com etc. 3. IT giants are focusing on this business model ST 1. Make alliance with all the major artists and music companies 2. Updating the library and increase the number of tracks 3. Provide additional features and facilities to the users WT 1. Lower the cost 2. Allow users to play mp3s in any mp3 player but if users choose Apple mp3 player they would be given special offer External opportunities 1. Increase in the number of internet users SO 1. Music in different language could be added in the library 2. Should be heavily promoted in the developing economies where number of internet users is continuously increasing WO Downloading price should be different in different parts of world as the economic condition is different in different region Reasons for iTunes success There are several reasons behind the dominant position of Apple iTunes Music Store in the digital music industry. One of the main reasons is that there is thousands of mp3s which can be downloaded by paying only 99 cents per song. Furthermore free preview of songs are also available for the users. Various category of music like pock, jazz, rap, pop, blues, Latin, Folk, New Age, inspirational, classical, Reggae etc. are available in iTunes Music Stores. Moreover there are exclusive iTunes tracks. Users are allowed to personalize play lists. Apart from all these features iTunes Music Store is perhaps the only online music store that is placed in a legally strong position (Dickey, 11 September, 2003). iTunes and Porter’s Generic Strategy Strategies that are used by Apple in order to make iTunes Music Stores a successful one, could be analyzed in the context of porter’s generic strategies. According to Michael Porter there are four business strategies which are generic in nature. These strategies are adopted in order to stay ahead in the competition. Following figure represents these four strategies The cost leadership and differentiation strategies are adopted when the firm is operating in a broad range of market, but cost focus and differentiation focus strategies are adopted when the firm is operating in a narrow industry or market. Apple has always focused on product differentiation and cost leadership. Prior to the launch of iTunes Music Store, free downloading of music was legally not allowed; it was considered as piracy of music. But Apple iTunes Music Store was perhaps the first legal platform for online music download. Apple has differentiated its product from other in this aspect. iTunes has alliance with the major music companies and artists in the industry. Songs are not available free to download, users need to pay 99 cents per song. So it is an entirely new business model from the legal aspects in the context of online music industry. Two of its major competitors (Napstar and OD2) are no where near to its size as there are almost 3 million songs in iTunes library which is the largest in the digital music industry. Competitor analysis Currently there is no such strong competitor of Apple iTunes Music Store in the digital music industry although there are several renowned players like Napstar 2.0, OD2 and Microsoft MSN Music. Apart from these there are small players like mp3.com, listen.com etc. But iTunes Music Store has been found to be the largest online music library till now. If iTMS is compared with its closest competitor Napstar, it could be found that there is difference of 1 million as far as number of songs available is concerned. But price per album in iTMS is 9.99 dollar which is little higher than Napstar (Hartline, Ferrell, 2007). A major challenge iTMS is that music in Microsoft MSN music store and Napstar is sold in the Windows Media Audio format which is supported number of competitors of ipod. This is a major challenge because iTMS format is mainly supported by the famous Apple ipod (Bove, 2005). Recommendation for future Strategy to remain competitive iTunes Music Store needs to be always ready for change in order to gain competitive advantage. There should not be any limitation in playing the sings which are downloaded from the store. The format of iTMS should be changed with the changing nature of competition. Currently songs, downloaded from iTMS could not be played any other mp3 player other than Apple ipod, but in order to stay competitive songs should be allowed to play any upcoming music player. Price is another major concern as there is hardly any difference in the downloading charge in Napstar and in iTMS. So, Apple should give enough consideration to this issue. Online download of music is a major issue in all the developing economies like India and China. So Apple should give special attention to these economies while making strategies. Conclusion Like any other Apple product iTunes Music Store has also been found to be dominated the online industry. It is been one of the most successful products of Apple so far. But there have been several external and internal environmental factors behind the success of iTMS. Its biggest threat is its competitors/. Competition in this industry is likely to be increased as giants like Sony is planning to get into the industry and quite naturally this would make the environment more challenging for Apple. References Bove, T. 2005, Just say no to Microsoft: how to ditch Microsoft and why it's not as hard as ..., No Starch Press Borland, J. April 28, 2003. Apple unveils music store, Cnet News [Online] Available at: http://news.cnet.com/Apple-unveils-music-store/2100-1027_3-998590.html [Accessed on January 31, 2010] Central Intelligence Agency, No Date, United Kingdom, World Fact Book [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html [Accessed on January 31, 2010] Dickey, R. K. 11 September, 2003. CS 453 E-Commerce Technologies Sweet Spot Case Study, iTunes, [Online] Available at: www.cs.virginia.edu/~horton/cs453/casestudies/iTunes.ppt [Accessed on January 31, 2010] Ghacks.net, No Date, How to remove the DRM from iTunes music, [Online] Available at: http://www.ghacks.net/2006/12/07/how-to-remove-the-drm-from-itunes-music/ [Accessed on January 31, 2010] Hartline, M. D. Ferrell, O. C. 2007, Marketing Strategy, Cengage Learning New York University, No Date, How Can Competitors Catch Up to Apple?, Your Music Your Business [Online] Available at: http://blogs.nyu.edu/blogs/zk273/mediabizentertainment/2009/04/how_can_competitors_catch_up_t.html [Accessed on January 31, 2010] O'Grady, J. D. 2008, Apple Inc., ABC-CLIO Purdue University, No Date, Industry Analysis: The Five Forces, Purdue Extension, [Online] Available at: http://www.ces.purdue.edu/extmedia/ec/ec-722.pdf [Accessed on January 31, 2010] The History of Computing Project, No Date, History of Apple, [Online] Available at: http://www.thocp.net/companies/apple/apple_company.htm [Accessed on January 31, 2010] Weihrich, H. No Date, The TOWS Matrix ---A Tool for Situational Analysis, University of San Francisco, [Online] Available at: http://www.usfca.edu/fac_staff/weihrichh/docs/tows.pdf [Accessed on January 31, 2010] Read More