The iPod and iPhone

Group 9 Li Shuguo Song Tanda Liu Yazhuo Han Jie

 Being aware of the need to know the whole market situation particularly in the competition perspective, we decided to use Porter’s Five Force Model to do the analysis. And based on the analysis, we find out an interesting role of this competition, that is the mobile operators, which both act as the substitutes and the potential entrants, and even some of which has been in the market and served as the competitors. They are so strong depending on their powerful resource of mobile network.  And then, we sum up with the SWOT. And we concluded that the biggest advantage owned by iTunn is its integration with iPod, and the iPhone in the future, even at the cost of very low margin of iTune. In order to optimize the advantage, iTune should bare its risk with other online stores and still use the fairplay DMR, which is mainly due to its capability of attracting music label by its effective right protection and substantial integration with iPod.  We also found out that the biggest threats of Apple now is the its weakness in the field of mobile music field, which would give the chance to the competitors in the market to beat it. To avoid this, Apple has to seek someone who can offset its weakness. So we came to the mobile operators at last.  We make use of The Five Forces Analysis by to study the competitive situation and a value-creating constellation analysis to facilitate the observation of relationships. Then by analyzing the relationship between the five forces and the three generic strategies, the choice of strategy is both differentiation and focus, and some implementation is to build a platform to encourage users to generate and share content by themselves and open API interface to third developers.  To develop the brand, we consider iPod as brand salience and iPhone as brand differentiation to approach position. iPod position as the market leader, however, we suggest iPod consider offline issues. iPhone reinvent the phones. We suggest Apple could think of customers’ special needs and make perfect details to increase brand loyalty. The consistency of Apple communication makes good brand awareness. Consumer-Brand relationships are very important and more open source will create value for consumers.

Looking into the industry environment
With the emerging of the new market space of the digital music market, mobile music, nearly everyone within this relevant market (both the handset maker and the carrier) might be eager to both gain its own growth and shake Apple’s dominant position to some extent. Based on the position of Apple, we should look into the whole digital music industry by using Porter’s Five Forces model to do this analysis:

The suppliers mainly include the music labels. While the online music stores mostly cooperate with the major music label, but neglecting the huge resource of the other form of the suppliers, such as independent music producers. And because the essential role of providing the content to the digital industry, the bargaining power of suppliers is so strong that they actually take away more than 60% of the revenue,1 which get the most profit in this business.

Although exposed in many selections of online music stores and the low switch cost, the buyer still have relatively small bargaining power. It is mainly because of the high selling concentration of the industry which is mainly contributed by the iTune which integrated with iPod. It's a innovation way to stickiness with customers. However, some times buyers actually can still obtain what they want by not to pay at all.

Physical music stores and the carriers’ mobile music delivering service. We should pay a closer attention to the role of the carriers. From the functional perspective, we defined the carriers who provide the mobile music through cell phone as the substitutes, because they provide wireless distribution channel for transfer.

Seeing the growing opportunity of the industry and the barrier is not too high to enter, lots of firms are eager and prepare to enter into this industry. And the biggest threat comes from the carriers who have an advantage over the operating cost of the mobile music which can offset the cost of the online music store’s operating cost to some extent. Google might be another big role who want to get profit in this field, by its strong search engine background.

Darren Aftahi, 'RealNetworks Company Report, 2006'

We find some giant companies such as yahoo and Microsoft within this competition and Apple’s business model seems to be too simple comparing with others’ more complex price plans, Apple still lies on the leader position within the digital music industry by occupying nearly 70% share of the whole digital music retailing market, which primarily owes to the success of iTune.

SWOT of iTune
After analysis the whole industry of online music stores, we think it is necessary to further analyze the success factors of iTune. We decided to use the SWOT model to sum up briefly. And we mainly compare with RealNetworks, Yahoo! and Microsoft. Strengths: Integrated with iPod which interact each other Well established brand image The dominant position in the market and big economic scale FairPlay DRM, build up well relationships with record label Weakness: The limitation of the source of the content The saturation of iTune' s capability The capability of the mobile music field Relationships with the competitors are intense rather than reciprocal Opportunities: Fast growth of the digital music market globe trends of iPod, new markets Threats: Low switch cost of the product and service Illegal download websites And the conclusion we draw from this module is that Apple should enable other online music stores to sell music with FairPlay DRM. The main reasons can be stated as follow:

Why enable others?
Facing the fast growing market, Apple has to response quickly to occupy the market share, and the most effective way is to enlarge the scale of product or service to attract the consumers by delivering more value to them. And it is indeed necessary for Apple to extend its product category despite of the advantage of music library’s size owned by it, because it is still not big enough to meet all the demands of various consumers. Apple needs more detailed segmentation of the customers. However, iTune has established very well brand image in the consumer’s minds. And from the prospective of brand control, it is not wise to change it a lot especially adding the elements which are similar to the competitors’, because it may not only affect the loyalty of original customer and also confuse the new ones. What we suggest is to enable other online music store with some other brands maybe to sell the complementary products of iTune’s, which means something do not exits in iTune but with demands, such as some independent music producer’s works or the music merely produced by the customers themselves. In addition, as we known, the margin of the iTune is not that much considerable. The main propose of this online store aims more at the promotion of iPod’s sale, so it is no need to increase the risk of losing more by making iTune more complex. Moreover, the de-integration can to some extend lower the cost of operation2, which is also a kind of way to bare the risk. Based on the analysis above, we the value curve can be a perfect tool to help us find out the answers.

Apple did a good job in most of the factors, while didn’t perform very well in the convenience and interactive part, which could be the room to improvement. By looking across the substitute, carriers win out in the convenience value it can provide to the customers. Considering the mobile music market, carriers indeed can operate this service more efficient and better due to the resource they had. So Apple should really think about how to improve this value. By looking across the complementary product and service offerings, we can also find out there are lots of music in the market while not enough complementary product such as the text and accompaniment And in the time of web 2.0, interactive can not be neglected at all. So this will absolute be the add value to the customers. So we thought all the services add to iTunes must spend too much operate cost, while enable other online music store is a better solution. At the same time we should strictly control the FairPlay DRM, because those standards make the integration with iPod. Our companies get profit from iPod instead of the online music store. While online music stores create more value for iPod users, which means the user have more music resources to choose. On the other hand, we must control the other online music stores content. We don't want to introduce new competitors in the field, so we should negotiate with the co-operator. It must mainly provide the differentiate music compare with iTune, such as the differentiation of language and genre.

With Mobile operator
With the trends of mobile music, mobile operators have tremendous advantage to leverage. Owning the mobile network, Mobile operators are so born with the ability of delivering music to the end consumers at any time and any place. In addition, the operation cost can be lowed by avoiding the transmission fee charged by bank. Either of them can be the reason for choosing it as the one Apple is looking for. We can see the chart clearly below, we thought it's easy to co-operate with mobile operator. While the also want to enter this market.

Apple’s decision for the future
Key observation and analysis
To shape strategy for the next step of iPod/iPhone, we make use of The Five Forces Analysis by Michael Porter to study the competitive situation of the company and the product. However, the weakness of The Five Forces Analysis is that it neglects the relationship and bonds between actors in the market; as a result, a value-creating constellation analysis is also leveraged to facilitate the observation of relationships.

The Five Competitive Forces New Entrants: Google Music Station

Rivalry in the market iPod / iPhone Suppliers Content supplier: Record labels Product supplier: Vendors, OEMS  Service supplier: Carriers Microsoft Carriers Other smart phones Other mobile music services Buyers Customers

Substitutes PDA/ Palm  iPod touch Mp3 player

Rivalry between established competitors
Regarding the high strategic stakes and high fix and exit cost, the competition in the mobile music service market has become harder and harder. In addition, iPhone’s rivals all have their unique strengths. Firstly, Microsoft as the magnate can easily leverage other successful elements such as large user’s base for the MSN Music store and the accumulation of operation system and WMDRM codec for the Zune player. In another hand, wireless carriers had launched various music services by 2006. They have internet advantage and potential advantages including purchasing convenience, device singularity, margin opportunities and scalability. In addition, other smart phone, handset makers and mobile operators have collaborated and launched

several smart phones such as LG Prada, Samsung F700, Nokia N95, and Sony-Eriksson W960i which challenged iPhone mightily. Threat of new entrants We consider Google as a strong new entrant. Their successful experience from video distribution model will help them a lot in entering mobile digital music industry. They also attempt to fund ‘free download’ through advertisements. Omnifone has launched ‘Music station’ cooperate with nearly 30 carriers around the world and got support from handset makers such as Nokia, Motorola, Samsung, and Sony-Eriksson. Music station is much cheaper than iPhone and is the only one that supports OTA transfers by now. The sales number was predicted as 100 million in the next 12 months. 3 Bargaining power of buyers On 29th of June, hundreds people were waiting in front of Apple shops to buy the blockbuster iPhone. However, two months later, the slashing down of iPhone’s price suggested not only the increasing bargaining power of buyers but also its awkwardness in fulfilling users’ experience needs. Some of the most weakness can be listed: low storage capacity/ lack of memory expansibility/ non-replaceable battery/ failure to support flash (Adobe)/ not compatible to Microsoft office application. Bargaining power of suppliers There are two kinds of Suppliers: a) content supplier: Record labels and niche vendors; b) mobile operators in different countries. The large share they take from iPhone’s revenue suggests that the irrational of Apple’s pricing models. Threat of substitutes Existence of substitutes places ceiling on prices that can be charged. Some PDA/ Palm/ mp3 player provide similar functions and better price performance; it is not that hard for them to take the market share in the future.



Relationship within Value-creating constellation

Content producers: records labels, independent producers

Windows, Zune, WMDRM, Play for sure

Core technologies: DRM, codec, player

Cingular, Sprint-Nexel, VerizonWirel ess, Mobile Virtual Network Operators

Free music thru ads

Motorola, Nokia, Samsung

According to the charting, when looking into the three strategic of the new logic of value presented by Norman and Ramirez 4, three main problems related to Apple’s role and relationship could be considered closer: First, there actually is less efficacious bond which can be leveraged by Apple to mobilize customers to create value for themselves. On the contrary, the rivals such as Microsoft and some other actors such as handset makers do a better job. Second, as can be seen from the charting, the number of adverse power is more than the supportive one. Is the position of Apple a right one in the value constellation, or whether it is a right constellation for Apple to stay? Third, no more than half of the number of actors in the charting can be actually mobilized to co-produce value for customers, what change can be made to conceive the entire system and make it work?


From Value Chain to Value Constellation

Alternative solution
Michael Porter has argued that when struggling with five competitive forces with a firm’s strengths, three generic strategies result: cost leadership, differentiation and focus. To make a proper decision, we analyze the relationship between the five forces and the three generic strategies as below: the relationship between the five forces and the three generic strategies Five forces cost leadership New entrants As the entry barrier As the capability to offer low price Generic strategies differentiation As to built customers’ loyalty Weaken the bargaining power by narrowing option Transfer the cost to customers Customers stickiness low the threaten from substitute Customers loyalty keeps customers away from rivals focus As to built core capability Weaken the bargaining power by eliminating option Transfer the cost to customers Core capability help the competitive strength Rivals cannot fulfill customers’ special needs

Buyer power

Supplier power Substitute

Restrain bargaining power Resist substitutes by low price


Price war

Decision and implementation
Choice of generic strategies Firstly, cost leadership should not be considered as a solution. The slash down of iPhone’s price that happened in the September of 2007 has not brought any comfort to upset customers or sales growth but severe harm to the Apple brand which has been perceived as a noble, fashionable and unique one. Secondly, product differentiation is always one of the most important resources of competitive strength. Apple tried to facilitate iPhone with all the PC function, which is the reason why it was successful at first. However, differentiation usually brings weakness, the afterward failure suggest that it is so urgent for Apple to make up its disadvantages. Thirdly, centralization is also another essential thing for future strategy, because even iPhone is much better, it still cannot cover all the segmentation of market. One proof could

be the multi-touch screen user interface which has been treating one of the most salient features of iPhone. However, according to a report, many of customers from Japan market prefer physical keyboard, which suggests that Apple should pay more attention on positioning right customer to deliver value. As a result, our choice of strategy is both differentiation and focus. Choice of value-creating methods In the other hand, to achieve the new logic of value- creating, there are also three implications: The first one is mobilizing customers to create value for themselves. To achieving this, Apple could built a platform to encourage users to generate and share content by themselves, in this way, in addition to increasing the users stickiness, the expense for paying music labels will also be greatly reduced. The second one is to reconfigure its relationship and business systems. Nowadays, the mobile music market is still influenced most by mobile operators, to change this; Apple could firstly strength its own core capability to built new business models from where it can gain more profits. However, it’s a long run to achieve so here we do not recommend it. The third one is to conceive the whole network and make it work. To accomplish this, Apple should build an open mind to collaborate with other company to improve capability and reach resources. Opening API interface to third developer could exemplify this well.

Building and Measuring Brand Equity and Value
Talking about Apple, people will recognize it as an innovative brand. Apple competes on style. Apple not only sells a simple product but also plus something else. Apple Store gives customer brand experience which is not-replaceable and we see Apple manage and sell the brand at the same time. Detail design succeeding in giving customer deep impression and cultivate extremely faithful fans, which helps their word-of-mouth strategy. Due to the success of their computer and iPod music player, consumers’ goodwill has sufficiently emboldened Apple to launch at a mobile phone. As consumer, we haven’t imagined posing a device integrating telecommunication, entertainment and internet along with apple’s innovation use-interface. And this is exactly what Apple wants to do: give customer surprise and create value. iPhone made apple brand into telecommunication and entertainment industry.

Managing and Leveraging Brand Value
Brand portfolio Prestige brand iPod ( Nano /Shuffle/ classic/touch)

Flanker brand Apple TV

Bastion brand Mac(mini/Pro) MacBook (air/ Pro) iMac Fighter brand iphone

Flanker brand iTunes

Brand salience & differentiation to approach brand positioning iPod: salience Salience is more effective on mature markets5 .The market of mp3 player is a comparatively mature. ipod position as the market leader which ensure that consumers have the brand top-of-mind regardless of the association that activates the category. ipod has registered many patents and receives support from iTune. Apple‘s leader position keep many companies away from this industry and benefit from out-sourcing. However we suggest ipod consider offline issues. iPhone: Differentiation Differentiation has to do with something unique in the category since consumers are expected to seek brands with clearly distinct product or non-product attributes. iPhone reinvent the phones. The target group is unique, especially fashionable young people. But as we see Apple is too closed, Apple could think of customers’ special needs and create value to them. Still iPhone has some imperfect aspects such as battery life and

incompatible with flash, making details even better will ensure customer and increase brand loyal.


Carpenter & Nakamoto, Golder & Tellis

Brand extension iPod touch Advantage of brand extension: Facilitate new product acceptance and Provide feedback benefits to the parent brand and company. iPod touch facilitate the iPod acceptance but sharing some market share with iPhone. Integrate networks (TV, internet, telecommunication) is a trend. Assume iPod touch is a hint for Apple’s next step for integrating, we suggest launching a new brand of smart phone to gain market share of other smart phone.

Other IPod touch iPhone touch smart phone

Effective Use of Marketing Communications
The consistency of Apple communication makes good brand awareness. Consumer-Brand relationships are very important in communication.

Customer Value: The Next Source for competitive Advantage, Woodruff

Apple changes from product category to customer need category which made consumer communicate better with Apple brand. We propose to let customers to share their own songs in iTunes. Thinking of consumers’ special needs such as surfing on website based on

flash, more open to source and have some rights of choosing carriers , Apple could gain more user-friendliness and create value for customers.

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