The Digital Music Market: Apple iTunes - Essay Example

The Digital Music Market: Apple iTunes Executive summary The digital music market is a rapidly expanding field in the music industry. There is also a convergence of the music industry with mobile communications. This area has registered a highly pluralistic growth trajectory in the past decade or so. In fact digital music platforms and deliverable architectures now account for around 20% of recorded music sales and this trend is bound to increase further in the coming years. The UK digital music market as explained in this report has a lot of prospects for future development. Surveys have proven that over the years the demand for digital music has increased by manifolds. Apple iTunes’ market entry strategy into the UK is more likely to succeed if carried out with much more concentration on customer satisfaction and value creation fronts while at the same time focusing on a market penetration pricing strategy coupled with incremental growth strategies in niche market centric operations. 1. Introduction to Apple’s i-Tunes Operated and managed by Apple Inc. the iTunes Store is a software-based online digital media store. It was opened as the “iTunes Music Store” on April 28, 2003 (www.images.apple.com). According to a research study conducted by London based researcher Xtn Data, it was mentioned that Apple’s iTunes Music store has a larger share of the UK digital music download market than the sum total of its competitors put together, i.e. accounting for about 54% of the market. It has been reported that as the demand for digital music has increased along with Apple’s market share (www.apple/tunes.com). 1.1. Strengths Apple is a very fast growing enterprise. Sale of its iTunes has increased rapidly in recent years. Apple maintains a good brand image. Thus it has a loyal customer base that helps to recruit new customers and to retain them. Thus its customers are enticed to buy new products such as iTunes when it was introduced (Dunmore, 2008). 1.2. Weaknesses There is tremendous pressure on Apple from the music industry itself to increase the price of its music downloads. This is because as digital music has become popular the music industry makes more money from iTunes (i.e. downloadable music files) than from their original CD sales. So far the company has not given in to this pressure, but if it gives in, it will be seen as a commercial weakness. Apple has had a long-standing contractual relationship with IBM to supply it with chips. In early 2005 Apple threatened to terminate this relationship, and switch on to IBM’s rival Intel. Some industry people are of the opinion that this change could confuse Apple’s customers (Hart-Davis, 2009). 1.3. Opportunities Apple could further develop its iTunes and music player technology into a mobile phone format. A device of this nature has already been developed by Motorola. It’s called the Rokr mobile phone. It has an advanced camera system, stereo speakers and a color screen. A version of Apple's iTunes music store has been developed for this phone so users can manage the tracks they store on it. Downloads are available through a USB cable and it is devised in such a manner so that software on the handset pauses music if a phone call comes in. Apple has revolutionized techniques and got in to alliances with other service providers that could offer more opportunities for Apple (Dan, 2008, www.macworld.com). Downloadable radio shows called podcasts that can be downloaded from the Internet can be played back on iPods and other MP3 devices at the convenience of the listener. The listener can subscribe to Podcasts for free and revenue could ultimately be generated from the sale of other downloads (Miser, B 2006). 1.4. Threats The digital music industry is very competitive today, and since Apple is a successful company it attracts competition. This is a potential threat. Apple invests a lot on research and development and marketing in order to stay ahead of other companies in the digital music industry. The popularity of iPod and Apple Mac are subject to demand. If economies are negatively affected the demand for these products would fall. Given the fact that the digital music industry is evolving very fast, even though iPod and MP3 are in vogue today, tomorrow’s technology might be much different. Wireless technologies could replace the need for a physical music player (Barton, 2005). Apple Company is faced with the risk of employees themselves divulging secrets about its new technology, this could cost it a lot of profits. File sharing is another threat. When one customer buys a file, if others are allowed to share this, it’s a threat. Figure 1: Merrill Lynch's Four Links analysis model Source: Writer’s own diagram Informal Co-operative Links- Informal relationships and partnerships can also be formed by Apple iTunes with other firms and suppliers to share market knowledge and technology. In this process there is no legally binding contract between the organizations. Co-operative Links- Formal legally binding partnerships can be formed with other digital music producing companies to share knowledge and technology. These links should be formed after much consideration and mutual understanding over a considerable period of time and there must be a great degree of trust between the organizations involved (Goldstein, 2009). Complementors’ Links- Apple iTunes could improve the quality of their products. Then due to the greater quality of their music files, manufacturers of MP3, 4, 5 players would be compelled to manufacture their products to make them compatible with these files, because customers would be lured to buy Apple iTunes as they are of superior quality (Freeman, 2006). Government Links- If the quality of Apple’s iTunes is very good, the UK government will be interested in buying them. When the government itself is a customer this would be an advantage to that company (Rohde, 2005). Figure 2: Approaching the digital music industry by Apple iTunes according to Grove’s Corporate Survival Model Source: www.oup.com/uk/orc/bin/9780198782292/freelecturer/.../ch09.ppt Potential Entrants- There is always a risk of pirated digital music being sold in the market for example through mobile phones imported from countries such as China (Enigmax, 2010). There is the threat of new entrants to the market such as Streaming audio and video with v-cast (Verizon), on demand online services similar to i-tunes (Spear, 2009). Government Ideology &Policy- It’s better for Apple’s iTunes to get loans from commercial banks rather than selling their shares to shareholders. This is because the company would have to pay its creditors first and then pay dividends to shareholders. The digital music industry is evolving very fast. There is always the threat of a new company introducing something totally new to the market such as wireless technology that could replace the need for a physical music player. It’s of paramount importance for Apple iTunes to invest a lot in research, and development and marketing in order to keep up with other companies that could introduce newer products to the market (Evans, 2010, www.macworld.co.uk). Suppliers- There is a threat that suppliers might get together and form an organization and maintain one price for their raw materials. This is a potential threat to Apple iTunes. Fashion & Fickleness- Customer’s interests change often. There is a possibility that a new company might come up with a totally new innovation and thus the demand for Apple iTunes may drop. Substitutes- There is always a threat to Apple iTunes from other manufactures who manufacture inferior quality music files at low cost and also the creation of pirated digital music. Customers might be lured to buy these products as they cost less. Other substitutes such as Satellite radio for music, Entertainment media, media and music alternative sources for videos (cable, broadcast) and alternative means to acquire music (Music CDs, DVDs) are potential threats. Complementors- Loss of support from complementors is a potential threat. There is a possibility that competitors of Apple may invent new technologies and patent them. Thus Apple may not be able to use this new technology. Buyers- The Apple company has a bargaining power as a buyer of raw materials and labor because it buys these raw materials or labor in large quantities. Lobby Groups- Lobby groups might stand up against the monopoly of Apple iTunes. 2. Porter’s Five Forces & Apple’s iTunes strategy Porter’s Five Forces are particular importance to understand Apple iTunes’s own strategic imperatives. Porter’s Five Forces signify the contextual significance of supplier power, buyer power, competition, the threat of substitutes and the threat of new entrants into the market (Porter, 2008). Outlined below are the Porter’s Five Forces and their strategic weight on the Apple iTunes’s competition policy. 2.1. Supplier Power Supplier power refers to the degree of freedom that suppliers have over the firm which buys supplies from them. Apple iTunes has to procure supplies from suppliers in the open market where rules of competition might threaten Apple iTunes’s own strategic objectives as well as others. For example Apple iTunes has to employ a variety of marketing techniques to procure supplies in order to meet its customers’ demand. How Apple iTunes’s would respond and how would the rest of the industry respond to all this, depend on a number of other variables such as the concentration ratios in the supplier industries, the availability of and the degree of dependency on credit, macro-economic variables, e.g. interest and business tax rates and a host of other factors. In the internet related service provision industry it’s an unwritten rule that the aggregation of strategic supplier networks across a range of ancillary services – e.g. blogging, interface and social networking sites – have to be carefully managed because smaller firms place their products in strategic sub-segments appropriately and immediately (Gruber, 2007). 2.2. Buyer Power Buyer power is perhaps the most effective force with far reaching consequences for the business that the company has to face. For instance customers of Apple iTunes and other digital music service content providers carry such weight in the decision making process of the individual company to such an extent that they can drive prices down if they happen to boycott a certain provider’s products on the ground that their services are below their expectations. Buyer power has also been studied in the larger context of market segmentation with reference to price and income elasticities of demand. For example consumer demographics such as age groups, incomes, preferences and geographical location have a bearing on the firm’s marketing strategy (Gordon, 2006, www.highbeam.com). Apple i-Tunes has so far been operating successfully elsewhere. The same success story might unfold in the UK given its exhaustive and comprehensive market entry strategy. The digital music market segment is ruled by the same economic principles but its qualitative shift has brought about a highly articulate population of consumers whose demand for the product at a given time is determined not only by the price and income but also by cross elasticity of demand based on comparative competitor advantage. Assuming a price elasticity of demand equal to one for the main search engines and digital communication firms, still Apple iTunes has successively attracted more customers than others by integrating a host of free services that span across seamlessly through connected links to such sites as financial services and share market information. 2.3. Competitive rivalry Rivalry or competition in the internet search engine market segment is almost intense because existing scale economies of individual competitors would serve as the stepping stone to a price cutting war. At any given time a particular digital music service content provider can have excess capacity and thus the slightest hint of cost and productivity benefits associated with the probable winning over of market shares of rivals would compel them to act quickly and decisively (Porter, 2009). Apple i-Tunes has applied the same principle in the UK market. Probably this is going to prove successful in the coming years because Sony Ericsson, Motorola, Nokia and many other competitors haven’t been able to monopolize the market in the UK except to enlist the services of other digital music service content providers including Apple i-Tunes to develop compatibility modes for synthetic delivery architectures. 2.4. Threat of substitutes As a corollary of the above, there is an ever increasing tendency among fairly big firms in technology-centric industries, to merge together to achieve quick returns. The recent spate of acquisitions by Apple iTunes shows this trend. In the digital communication and web search engine industry numerous substitutes exist in the form of price competition, i.e. X-firm’s product which is almost identical to the Y-firm’s product, is preferable if the former product’s price is lower than the latter’s. Apple iTunes is not altogether impervious to this rule. Its current operations are highly determined by its Mergers & Acquisitions (M&A) policy. For instance YouTube’s digital music file sharing business has a very big impact on social networking customers and bloggers. Thus Apple i-Tunes has realized the strategic threat posed by these newly emergent alliances like the one between Google and YouTube. However, its current level market dominance is more likely to prevail into the next few years. of This way it has effectively curtailed the threat of substitutes to a certain extent (Heid, 2004). 2.5. Threat of new entrants Finally Porter’s Fifth Force is about the threat of entry by new firms and it has a very negative impact on the existing firms in the industry. Here what matters is the cost of production. Those firms whose costs are higher will be compelled to shut down. Apple iTune’s current efforts to cut costs would definitely be a positive factor in contributing to its long term survival. But nevertheless the existing level of competition is further exacerbated by the threat of new entrants. Already some of them are planning to merge. As the above diagram illustrates Porter’s Five Forces are used to show a series of probable developments in an industry or market concerning different strategic moves that the organization can make in its marketing operations. There is a persistent threat to existing digital music industry players coming from possible alliances and re-alliances within the industry rather than from outside (Porter, 2008). While the level of competition in the internet search engine market segment has been determined by the strategic regulatory environment in addition to other variables, the regulatory regime has done more to prevent easy entry than to enable healthy competition. In fact idle scale economies in the industry have forced authorities to reorient competition towards achieving price-service-value synergies at the expense of undesirable outcomes associated with free entry (Evers, 2006, www.cnet.com) Against this backdrop Porter’s (1998) Generic Value Chain analysis can be used to study Apple iTunes’ primary value chain activities and its supportive services. Apple iTunes has been placing emphasis on internal value creation thus passing the benefits to customers. This unique corporate proposition is more likely to sustain it in the long run in this market segment. The relative attractiveness of a market segment depends on profit margins. Apple iTunes so far has not incurred large scale losses that many of its rivals have suffered. This marketing cum financial outcome has helped the Apple iTunes search engine to overcome much of the competition against its current operations. 3. Apple iTunes’s PESTEL Analysis The PESTEL environment of Apple iTunes’s operations so far has been characterized by predominantly political, economic, social, technological, environmental and regulatory issues (Gay, 2009). Already the political environment of Apple iTunes is heavy with its organizational approach based on corporate sustainability design and planning activities. All this is intended to benefit the customer though. 3.1. Political Impact Apple iTunes has been exposed to a very high level of political outcomes in the world. Its strategic external environment of competition is subject to a series of ups and downs and global markets exerted a lot of political pressure on its management. Despite all this it was successfully operating in a politically super-charged environment of competition. Political developments that are more likely to impact on Apple iTunes’ operations in the UK market in particular and the rest of the world in general can be divided into events with an exclusively local impact; events with a much wider global significance; and events with far reaching political undertones. Those local events in the UK market would affect Apple iTunes in its strategic pre-orientation such as legislators disputing the claims of Apple iTunes that its services would not be exploited by third parties in placing immoral content on its delivery systems. On the other hand the global events would impact on its practice of targeting techno-savvy geeks in which technological supremacy plays a significant role. Already Apple i-Tunes’ efforts to outperform it rivals like Sony Ericsson and Nokia by digitizing the content deliverables at no cost to the customer have been much less successful though market dominance of screenin by Apple iTunes might help it to overcome resistance by competitors (Hickman, 2009). 3.2. Technological Impact However it is the technological environmental influences that impacted heavily on the organizational goals and outcomes of Apple iTunes. Particularly its operations need to be updated in keeping with competitors’ moves. Modern communication equipment cost dearly when innovative approaches are put in place. Apple iTunes has upgraded and installed highly sophisticated communication equipment with a view to launching full scale internet operations. Figure 3: Apple iTunes’s PESTEL Analysis Source: Writer’s own diagram 3.3. Environmental Impact Apple iTunes’s operational environment is also characterized by a greater degree of involvement in promoting corporate sustainability programs outside its day to day operations. For example Apple iTunes has been influenced by advertisers’ and bloggers’ interaction on environment related problems such as climate change and greenhouse effects. Apple iTunes has been careful to remain neutral between the two camps. It has so far successfully avoided controversy by focusing on environment related issues as one of its corporate sustainability programs. 3.4. Legal/Regulatory Impact Legal/regulatory environment has been perhaps one of the most significant factors that impacted on Apple iTunes’s strategic corporate environment – strategic competitive and strategic operational environments – to such an extent to bring about what could be described as “a virtual war of strategic response to regulatory regimes”. For example Digital Millennium Copyright Act requires Apple iTunes to comply with regulations on carrying third party content on its website. Regulatory environment has had a telling impact on Apple iTunes operations though such regulations often have the desirable effect of quality improvement and cost reduction too. Regulatory regimes sometimes act as catalysts of positive change. For example regulations related to the quality of service could be considered as one of the best opportunities to establish critical success factors. 4. Marketing Mix – Seven P’s This paper uses an extended marketing mix with 7ps (See Appendix) 4.1. Product- iTunes online music library has about 200,000 songs from a variety of artists and labels. In order to get iTunes, a software tool has to be downloaded from the Apple website. Users could then buy the songs through a search engine. iTunes consists of a user friendly interface and the very latest features. Apple is constantly in the process of improving and improvising its existing products to suit the needs of its customers and to stay ahead of its competitors. Apple iTunes are of high quality thus customers are enticed to buy them even by paying a higher price (Miller, 2009). 4.2. Price- From a price point of view the download of the interface is free of charge. Even though the profit margin for each song was only about 10%, the iTunes aim is to be the center of a user’s digital world. 4.3. Promotion- Most of the artists are more than glad to promote the idea of iTunes because Apple’s brand was compatible with their brand image. Without restricting themselves to advertising on the television and radio, a mobile based marketing drive such as sending of messages can be used. Viral marketing techniques such as the sending of multiple e-mails could be used. Viral marketing techniques are more cost effective than for example advertising on the television or radio. 4.4. Place- Since iTunes are available online; they are available anywhere and anytime. No distribution cost is involved. 4.5. People- Apple iTunes has to establish meaningful people’s relations such as with customers, employees and others. 4.6. Process- It refers to paraphernalia that assist in the marketing efforts of the products. Chatters on social network sites like u-tube have become effective promoters. Physical environment- iTunes have a highly substantial physical environment related set of services, including technological superiority, for example on the mobile phone digital music file sharing were never so sophisticated before the launch of digital iTunes by Apple. 4.7. Physical environment- This refers to comfort and facilities. 5. The possibility of price discrimination by Apple iTunes The supplier sets different prices knowing very well the position of its near monopoly power to segment the market according to consumer demographics. For instance the prices were higher in UK than in North America due to the higher prices charged by the network service providers for the service. In the UK apple iTunes would have to provide some extra services in order to charge that extra price. In other words there should be a process of incremental customer value creation. This approach in placing the product at the center of the marketing campaign to capture the most economically viable consumer segment would pay off well (Holecek, 1987). This is shown by the following diagram which segments the market into three according to the supplier’s ability to price discriminate among his customers. The second segment of UK Market enables the supplier to sell a varied product to those who less able to afford it at the higher price (Miller & Vandome, 2009). Finally the supplier reduces the price further for the North American Market. This segment is almost catching up with much more revenue promise in the future. This aggregation of market segments and their revenues will only be successful only if the good in question cannot be resold by those who buy it at the lower price. Secondly it becomes successful only if the cost incurred in the lowest price segment is covered with gains made in other segments partially or wholly. In fact labor costs might rise too fast even in the high income segment thus leading to a loss in that segment (Presswire, 2007). Figure 4: Price discrimination on the basis of market segment Price ($) D P3 P2 P1 D Quantity Number of factors would have to be considered by the firm in determining the market price for each segment. For example the firm has a virtually monopoly position in Brisbane right now though its ability to act as the ‘price maker’ is limited by a number of factors such as the ease with which competitors can enter the market and supply constraints. The near monopoly power of Apple i-Tunes is virtually there though it cannot be taken for granted in deciding on the price. Thus the price determination process gives less freedom to the supplier. For instance the price is determined in London by the possibility of other firms responding to the unfolding market developments there. When adequate infrastructure develops in the market newcomers would have a tendency to enter with ease and not to leave even in the face of rising costs. Further supply constraints as in the case of natural monopolies like power supply can be taken into consideration in determining the price. In the case of the Apple iTunes such circumstances don’t exist (Marshall, 2009, www.twitter.com). Figure 5: Monopoly power and monopolist’s equilibrium price and output Price ($) P2 X MC AC P1 Y E AR = D Q Quantity MR As the above diagram illustrates the supplier here acts like a monopolist because of his capacity and capability in price discriminating behavior. He sells the quantity Q at the price of P2 and makes a monopoly profit equal to the amount shown by the rectangle P1, P2, X and Y. This surplus profit would not last long if competitors are able to enter the market with ease (Mercury, 2003). He maximizes profits at the point E where Marginal Cost (MC) is equal to Marginal Revenue (MR). Thus he is a ‘price maker’. His Average Cost (AC) and Average Revenue (AR) remain at a point higher than the equilibrium point when he maximizes profits. In fact he can sell to the right of the point E but he doesn’t. However it’s obvious that depending on the nature of demand for Apple iTunes, the firm is able to price discriminate and therefore at least in the short run competitors are less likely to enter the market. Thus at least in the short run this firm acts as a ‘price maker’ and not a ‘price taker’ as in perfect competition. 6. Recommendations The following are the recommendations that can be drawn from this document. The UK market segment requires a diversified marketing strategy based on targeting a mass market and a number of niche markets. The latter are characterized by customer preference and sentiments. Apple iTunes need to be marketed by adopting a market penetration strategy. This means the introductory price must be kept to a minimum so that a sizable share of the market can be captured and maintained. The existing competitors in the digital music market segment in the UK basically rely on providing a core number of enabling services, especially to the 3G mobile phone user. Therefore Apple iTunes in the UK market must concentrate on providing a broader spectrum of services across seamless applications of both technology and user friendly operational parameters. Finally Apple iTunes must create customer value through the expanded marketing mix rather than restricting the marketing strategy to the 4P based mix in the UK market (Wireless News, 2009). 7. Findings The following are the findings that can be that were inferred from this study. Rivals such as Nokia tunes, Sony Ericson tunes have noticed the reliable efficacy of sensory marketing as a potent force in appealing to youth in the digital music market in the UK delivered on the mobile. Eg: visuals and audio quality. The UK has a large market for digital music. An innovative marketing strategy should be used to capture this market by concentrating on customer preferences and their taste. In order to capture a large segment of the market its vital that initial price of the products be kept to a minimum. In other words a market penetration pricing strategy is almost the foregone conclusion with rivals. Apple cannot afford to be complacent. They should continue to invest in experimenting with newer technologies in order to come up with novel inventions. Else they could be overwhelmed by other competitors. Apple could form new alliances with other companies informally and formally in order to share technology and thus further enhance the quality of their products. Conclusion From the above findings it can be safely inferred that Apple iTunes have already got almost a monopoly in the UK digital music industry. Since the demand for digital music is bound to increase it can be inferred that the market of Apple iTunes is bound to grow. Apple maintains a good brand image and a loyal customer base in the UK. It is vital that Apple continues to invest in developing new technologies as otherwise new innovations and inventions from other companies could capture the market (Stoup, 2006, www.computerweekely.com). It’s possible for Apple to form informal partnerships and formal legally binding partnerships with other companies in order to share knowledge and technology to help further enhance Apple iTunes’ deliverables as efficiently as possible. 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