Microeconomics Factors: Apple i-Tunes - Assignment Example

MICROECONOMIC FACTORS AND THE FIRM of the Company: Apple Corporation (focused on Apple i-tunes) TASK Describe the industrial structure of your chosen industry and considering economic theory, discuss the extent to which the industry operates in a competitive manner. What implications does this have for the operation and strategy decisions of your company? (50) 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. 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 (www.apple/tunes.com). Apple i-tunes digital music company is in an oligopoly market with limited number of competitors including Sony, Warner, BMG and so on. Oligopoly is a market form where there are a few number of suppliers with similar identical products. Thus 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. 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. The popularity of iPod and Apple Mac are subject to demand. If economies are negatively affected the demand for these products would fall. However 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. In fact Apple i-tunes Company as in the oligopoly market requires strategic thinking unlike other market forms in the market such as perfect competition, monopoly and monopolistic competition. In fact oligopolistic competition can provide different range of outcomes. In some cases firm may employ trade practices that are restrictive. In other situations, competition between sellers in an oligopoly market can be relatively low prices and high production. 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 (Presswire, 2007). 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. Thus this could lead to an efficient outcome approaching perfect competition. However the competition in an oligopoly industry can be higher when there are more firms in an industry if, for instance, the firms were only regionally based and did not compete directly with each other. According to the behavior of the oligopolistic market, firm has to face a kinked demand curve at the existing market price for its widgets (products). In this scenario suppliers do not have the tendency to increase the price, because other competitors in the industry would not follow the same pricing strategy. Therefore if one supplier decreases the price, others would follow suit. This is because of the fact that below the kink demand curve is inelastic while above the kink is elastic. This is shown by the following diagram. PRICE Kink D MR O Q QTY Kinked demand curves are similar to traditional demand curve and it is sloping downwardly and the firms marginal revenue curve is discontinuous, since it has a gap at the kink. The gap in the marginal revenue curve means that marginal costs can fluctuate without changing equilibrium price and quantity. A price above the prevailing price the curve is relatively elastic and prices below the point the curve is relatively inelastic. Oligopoly industry dominated by small number of large firms and most of the firms lead the industry such as Apple i-tunes, Sony etc. Thus price plays a pivotal role in determining the equilibrium demand and supply. In the first instance equilibrium demand for widgets climbs is determined by a number of factors such as the price of the product, consumers’ incomes, the availability of substitutes, prices of those substitutes, the geographical proximity to the place where substitutes are available, the impact of weather patterns, interstate tax variabilities, supply constraints such as resource-mobility and consumers’ preferences for variety (Blaug, 1997). Equilibrium price is determined more or less by some of the same above factors in addition to the level of supply and the elasticity of supply. In other words the supply of online digital music climbs is relatively inelastic. Number of factors would have to be considered by the firm in determining the market price for each segment. For example the Apple i-tunes has a virtually oligopoly position in the industry right now though its ability to act as the ‘price maker’ is limited by a number of factors such as the difficult with which competitors can enter the market and supply constraints. The near oligopoly power of the firm 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 by the possibility of other firms responding to the unfolding market developments there. When adequate infrastructure develops in the market newcomers would not have a tendency to enter with ease and not to leave even in the face of rising costs (Schmalensee, 1987). Further supply constraints as in the case of natural oligopolies like power supply can be taken into consideration in determining the price. In oligopoly market it has a high degree of market concentration and it indicates that larger portion of the oligopoly market is owned by the leading business firms of the particular country. Thus Apple i-tunes can be regarded as a market leader in the digital music market industry with serving online digital music to the worldwide customers (Hickman, 2009). 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. 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. TASK 2: Discuss the factors of supply and demand facing your industry and show the issues which these raise for management. (30) Supply factors Supply factors are related to the industry background. In this instance a supply of digital music files online depends on a number of endogenous and exogenous variables. Digital music market is characterized by a higher level of concentration. This means there is a concentration ratio of 4 to 5 bigger firms such as Apple iTunes, Sony, Warner, Universal and BMG. The digital music market in the world is characterized by a higher level of competition directly related to music file sharing facility made available online by a multitude of providers with little known brand names. Technological factor perhaps place the most significant role by way of supply related constraints. For example many digital music service providers are constrained by a lack of speed essential for the delivery of music files online. Even the downloading speed can have a negative impact on supplier’s ability to capture niche markets such as college students and baseball fans. Digital music suppliers online have to carry out cost cutting measures to enable price decreases so that competitors can be kept away from capturing their market shares. Producers or suppliers might collude to fix prices and limit quantities. However regulatory authorities would not allow such anti competition behavior. Demand factors There are a number of demand factors affecting the digital music markets online. The following factors assume a great significance by way of their impact on the market price and the monopoly power of one or two suppliers such as Apple i-tunes (Fox, et al, 1992). The level of demand in the market is determined by the income variable of buyers. The price variable also plays a very significant role though huge variations in prices would not be tolerated by potential customers of digital music because online digital music stores cannot operate on a market skimming pricing strategy. Consumers of online digital music tend to look for alternative ways in downloading files that would enhance both quality and quantity. Though music file sharing online can be detected in North America by authorities and action taken against violators of laws in Europe such regulatory measures have to go a long way. Consumers of online digital music are bombarded with low cost alternatives by viral marketers who promise both free and very low priced digital music along with free software downloads to play them on. Consumers of online digital music tend to buy what their fellow chatters online would recommend to them. For example social networking sites like Twitter and YouTube serve as a forum for such experience sharing chatting. 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. 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 colour screen. A version of Apples 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 (Yang, X &Yew-Kwang 1993). Apple has revolutionized techniques and got in to alliances with other service providers that could offer more opportunities for Apple. 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. Informal and legally binding partnerships can be formed by Apple iTunes with other firms and suppliers to share market knowledge and technology. These links should be formed after much consideration over a considerable period of time and there must be a great degree of trust between the organizations involved (Varian, 1987). 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. TASK 3: Discuss ways in which an understanding of elasticity can help the management of this firm in planning its business strategy. (20) Demand for digital music online is determined by both price and income elasticities and therefore the management of Apple i-tunes in their European operations must concentrate on the niche market consumer rather than the mass market consumer. The business strategy of Apple i-tunes can be three-prone. First, the company should concentrate on rivals’ strategic strengths. For example Sony Corporation and even Warner Company are strategically well placed in the market place to exploit the niche market consumer’s individual preferences for low priced digital music products. Secondly, Apple i-tunes must be focused on the technology factor. For example its bigger rivals in the market are able to introduce highly sophisticated technology. Such capabilities can undercut Apple i-tunes’ market share because rivals would be able to reduce prices by taking in to consideration the different elasticities. Finally Apple i-tunes must be focused on customer value creation through the creation of positive application related synergies. Thus it would be able to compete against rivals by creating additional customer value at no cost to the customer. This would effectively enable the company to capture a sizable market share even in the lower income segment. Rivals such as Nokia tunes, Sony 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. Thus 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 (Whaples, 1995). In order to capture a large segment of the market its vital that initial price of the products be kept to a minimum. 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. The following are the business strategies that can be drawn in which by understanding its elasticity in the market. 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. REFERENCES 1. Apple Corporation Retrieved from, www.apple/tunes.com. 2. Blaug, M 1997, Economic Theory in Retrospect, pp, 24–29, 82–84. Cambridge. 3. Enigmax, 2010, Money Expert: Industry Should Compete With Music Piracy, Torrent Freak,Uk. 4. Fox, KA, Johnson, S, Sengupta, J & Thorbecke, E 1992, Demand Analysis, Econometrics, and Policy Models: Selected Writings, Iowa State Press, Iowa. 5. Hickman, M 2009, Music price comparison website to challenge iTunes dominance, The Independent Media, independent.co.uk 6. Presswire, 2007, Apple launches iTunes Music Store in the UK, France & Germany; Same innovative features & breakthrough price of Euro0.99 & GBP0.79 per song, Gale Group, Michigan. 7. Schmalensee, R 1987, ‘Industrial Organization’, The New Palgrave: A Dictionary of Economics, vol. 2, pp. 803–808. 8. Varian, HR 1987, ‘Microeconomics’, The New Palgrave: A Dictionary of Economics, v. 3, pp. 461–63. London and New York 9. Whaples, R 1995, ‘The Policy Views of American Economic Association Members: The Results of a New Survey’. Econ Journal Watch 6(3): 337-348 10. Yang, X &Yew-Kwang 1993. Specialization and Economic Organization. Amsterdam: North-Holland. Read More