Competition in the mp3 Player Industry in 2005, Case Study Example
Words: 3258Case Study
As technology continues to advance at a hectic rate, consumers have grown accustomed to many products being revised, updated, and merchandised at a dizzying pace. There are few products that have had a bigger impact over the past decade than the MP3 Player. We are all familiar with the extreme popularity of the iPod, and creator Apple enjoys a dominant position within the industry. It was not always this way, as many other companies have competed in the past, and continue to compete in the present. It is the future that concerns Apple, as any company in this industry understands how quickly things can change if the right product comes along that strikes a chord with consumers. 2005 proved to be a pivotal year for MP3 Players, as companies entered and exited the hyper-competitive environment of that time. The purpose of this paper is to evaluate that environment with a macro and micro analysis, define competitive advantages, analyze differing development directions, and define both future options and implications.
Apple: as the undisputed leader in this product category, special attention is warranted for Apple, who enjoys many business strengths and has well defined strategies. It also has one major threat that the other products do not encounter, which is the danger of losing market share and a need to maintain their current position within the marketplace. Others have an equally daunting task of trying to gain market share versus Apple, and to find a niche against the formidable advantages of the leading company.
Based on Porter’s five forces, we can ascertain that MP3 Players represent a high degree of competitive rivalry. Although new entrants were a potential threat in 2005, they were not a significant danger due to the competitive environment that already exists. According to the article “Competition in the MP3 Player Industry,” the seven competitors already in the market had the money and technology to drive a new company out of business if they attempted a serious effort to compete. Buyer support has been a huge advantage for Apple throughout most of its history, and this advantage was cleverly exploited as they entered the MP3 market and expanded their market share. The article “Innovation Lessons from Apple – Competing with Yourself” describes how Apple avoided a direct confrontation with other MP3 companies when they entered the market by going after a niche, which was Apple users. This provided them with a foothold that they were then able to expand more broadly through product innovations, and a fashion-forward approach that generated tremendous appeal and popularity among consumers. The bargaining power of suppliers is a common threat to any company in the MP3 market due to volatility and pace of innovation. All companies seek to create increasingly lighter and smaller players. This was certainly the case in 2005, and each company wished to do business with the manufacturers who was able to produce a superior product. Apple was no exception, but did have an additional advantage that insulated them from the other competitors. According to Nabeem Hashem’s article, Apple is a company that creates its own innovations, and passionately protects them from use by other companies. This results in a more proprietary landscapes that is difficult for competitors to access or emulate. For suppliers, Apple is simply less dependent on them, as they are more self-sufficient in this arena. As Apple’s competitors are frequently vying for similar innovations from these third party manufacturers, Apple has a distinct advantage.
In a value chain analysis of Apple, their strength of a proprietary, innovative company again stands out. Apple runs an extensive network of stores, providing notable infrastructure, operations, logistics, service and sales advantages. Marketing is a strong proficiency, as noted in Lynn Wooten’s article. She notes that Apple tells a story in their marketing, and this story is a component of what creates a “wow” factor around their products. The way Apple markets goes well beyond advertising, including components such as fashion in how they build their products, and also merchandising that relates to their many stores and how they created an entire environment custom designed to display and promote their products.
Everybody else: Dennis Lloyd’s article relates as of Winter 2004, iPod sales represented 82% of all digital music players and 92% of all hard drive based players. With such a small amount of market share remaining to be split among six primary competitors, the open ended question in 2005 was which company is capable of taking on Apple and growing market share. Upon review through Porter’s five forces model, we can determine some potential advantages from select rivals. Given the intensive nature of rivalry within the MP3 product field, we know that the companies competing with Apple are large and well resourced. Two of these companies had decided to leave the market by the end of 2005. The second MP3 product maker in the United States, Rio, decided to exit the market due to cost and competition, while Dell was in process of exiting the market. An article by Hill explains that Dell was discontinuing its hard drive based product due to poor sales, and their flash based player would follow in the next year.
When other companies evaluated Apple’s performance and customer satisfaction, there were some flaws that could potentially be exploited. Although Apple was given high marks for their products in general, their hard drive based iPod needed to be repaired often at nearly ten percent, by far the highest statistic in the industry. There was also cost, which in Winter 2004 ran $499 for a 40GB version and $599 for a 60GB version according to Dennis Lloyd’s article. These costs were the highest in the industry, and competitors such as Dell felt that this was a weakness that could be exploited to consumers who were value oriented and cost conscious.
From a legacy perspective, one would believe that Sony could find a way to compete. It was Sony products that led the industry from its infancy into the nineties, and according to an article by Jason Mick Sony is a company that Apple has emulated previously in order to obtain hit products, such as their earliest iPhone concept dating back to 2002. According to Meaghan Haire’s article, Sony created their first transistor radio in 1955, and created the first hit portable player that dominated the industry, the Sony Walkman. Unfortunately as it relates to MP3 Players, Sony failed to take advantage of its previous strong position with buyers by getting into the MP3 market late because they did not recognize how popular MP3 players would become. As a new entrant trying to compete against established products such as the iPod, Sony also struggled with marginal customer satisfaction ratings. Of particular concern to consumers was a difficult to use interface and its limited ability to read different types of music files.
For hard drive MP3 Players, both Creative and Archos seemed capable of competing. Creative was well resourced and had won numerous industry awards for its MP3 Players, but critics claimed they lacked the fashion and style of Apple, and did not enjoy the advantages that come when you have bargaining power with buyers. They did have a full lineup of products that were much less expensive than Apple. Like Creative, Archos was also well resourced, and had formed alliances with business partners to expand the offerings they could make to consumers. Archos was also adaptive to new technologies, focusing on consumer demands for integrating functionality into other products, such as incorporation of video, camera, and recording. It’s customer satisfaction ratings were marginal, and like Creative they lacked the advantage of bargaining power with buyers. As of 2005, their sales were in a double digit decline as a company, and they were searching for answers.
From a value chain analysis perspective, both companies lacked strong marketing and sales. Creative and Archos needed to establish an identity opposite from Apple, who enjoyed not only a strong brand reputation among consumers, but also proprietary technology advantages. Apple also had the infrastructure of their own chain of Apple stores to promote their products.
For the flash drive MP3 Player market, only iRiver appeared well positioned to compete with Apple. They did enjoy strong buyer support, at least in South Korea. Recognizing the need to expand and develop a brand beyond their home country, they embarked on an aggressive marketing campaign designed to strengthen their identity among a broader population. iRiver’s customer satisfaction scores approached Apple’s leading statistics, particularly in sound quality and reliability. iRiver had also responded to consumer’s desire to integrate other products and offerings, as they had forged alliances with companies such as Microsoft, Samsung, and Hitachi. They also showed they were adept at technological innovation, and at one point had the world’s thinnest MP3 compatible portable CD player. Where iRiver was challenged can be evaluated through a value chain analysis, where logistics and operations challenges included a miscalculation for profitability, causing them to underestimate costs to the company.
Strategic capabilities and sustainable advantage: Apple had done much by 2005 to solidify its dominant position within the field of MP3 Players. Nabeem Hashem’s article sums up these capabilities and advantages nicely, stating that Apple has always seen strategic product development differently from the competition. Instead of designing products meant to compete, Apple takes existing products, analyzes their flaws, and reinvents them in a way that consumers find appealing. Apple products are generally fashion forward, elegant, and proprietary. They are so strongly sought after that Apple is able to charge higher pricing as consumers have shown repeatedly that they are willing to pay a premium. According to Lynn Wooten’s article, Steve Jobs was a major factor behind Apple’s strategic architecture through organizational culture. Apple employees were encouraged to take risks, experiment, and conduct creative problem solving without the risk to employees of repercussions should a given project fail.
For the other companies competing in the MP3 player market, each had its own subset of strategic capabilities, but what each lacked was a sustainable advantage over Apple. In order for one of them to succeed, they would require an advantage that Apple lacked. Although difficult, some may have hit on the right idea but it was not executed properly. For example, when Dell unveiled the DJ it appeared to do many things right. Prior to release, the company conducted extensive research to determine what flaws they could find and they did find some. Consumers did not like how existing players showed fingerprints too easily, and cost was an issue with Apple products. Dell addressed both of these issues in their release, which was generally considered a worthy competitor with other MP3 players. What Dell lacked in the DJ was versatility. According to the article “Can Dell Challenge Apple in MP3’s,” Dell later suggested that if they created an open distribution system to encourage better sales among vendors, that this would allow them to better sell what was by all accounts a good product. Dell had previously been a direct seller that did not used retail outlets, so the thinking is that this improvement would have made the products more accessible.
Two development directions and financial strategy: strategic directions of MP3 players have typically evolved around two principles: make products lighter and smaller, and integrate capabilities that were found previously in other devices. Coupled with the latter is keeping things simple, as consumers cherish products that are easy to use.
One development strategy would be for each company to quickly integrate new technologies. This has been done in the past, as each company has formed different alliances in order to obtain better content. However, alliances such as what iRiver has formed is more focused on a specific business, and not a new, unique technology. This is where Apple has had an advantage in the past with their approach on strategic product development. One possibility is a partnership with an internet streaming service. Netflix has been a pioneer in providing entertainment directly to consumers without going through a channel medium by taking advantage of advancements in internet technology. The article “Competition in the MP3 Player Industry” reinforces this opportunity as it relates to gaming as well, citing how a company such as Apple could partner with Nintendo Wii to achieve a similar strategic advantage.
A strategic financial analysis could begin with a comparison to a similar type of partnership that yielded results to determine the potential of a new partnership. If it were to become a similar partnership to what Chris Britcher’s article describes between Apple and Nike, it would be exclusive. The shared products and services should work to the advantage of both companies while minimizing risk and costs. It would provide a competitive advantage as it would be a service that could only be matched by another company if they found a company similar to Netflix that was willing to be a partner. The products described in the article were sports themed electronics, which was a new market entry as a line extension of existing products. This offered consumers another choice, but also familiarity with existing Nike and Apple products. Such a situation could also develop with an offering provided by a joint Netflix/MP3 product initiative. Profitability potential was being realized almost immediately for Nike and Apple, with Nike’s revenue increasing ten percent while stock value shot up to twelve percent in the quarter immediately after the product launches that the two companies produced. This would indicate that such an effort with Netflix would also have significant potential to increase sales. The potential risks that need to be considered is not having full control of the products that are produced, as the partner company may not necessarily agree with the direction that is being proposed. It would be important that companies understand the shared relationship of the products and services that are offered. The goals that are to be achieved, position in the marketplace and expected profitability and growth are all factors that would need to be in agreement. Another consideration is potential of new entries into the market, as if another company formed a service similar to Netflix that garnered better results for consumers then the other company may be tied to the wrong partner.
Another development strategy is for a MP3 player company to attempt to match some of Apple’s strongest advantages, such as developing store infrastructure. Although the costs would be substantial and there would be fundamental risks, the advantages afforded to Apple and more recently Microsoft for taking this approach is significant. The biggest challenge for the other companies in the MP3 player market is as much related to marketing and branding as it is to coming up with a competitive product. The infrastructure and image that could be developed through a proprietary chain of retail outlets could assist in chipping away at Apple’s comprehensive advantage in the marketing and branding of its products.
For a strategic financial analysis, Horace Dediu’s article communicates that Apple spends about $8.5 to $10 million dollars per store, and store sales typically run in the tens of millions of annual sales volume. Considering that Apple has 220 stores, a company would have to spend two billion dollars to fully match Apple’s presence. This would serve to strengthen a company in multiple ways, such as better availability of products and customer services. These stores would provide an infrastructure that only Apple currently enjoys, which increases ability to compete. Stores could also assist with market entry of new products through promotional and sales efforts. All of these positive factors would contribute significantly to the growth and profit potential of the company. The negative aspect of this development strategy starts with cost, which even with larger companies represents a big risk. Such an investment makes potential losses far more considerable if the wrong choices are made and they fail to compete. Another factor is timing of implementation, as there are many complexities and issues to address if a company is considering a rapid expansion of stores. Such a move would be a long term endeavor, and would not be conducive to any short term new entries into the market or immediate competitive needs. Given how fast and volatile the MP3 market is, much can develop and change over the period of time it would take to implement this effort.
Future options and implications: just as the Sony Walkman was replaced with a new technology in MP3 players, it is likely in the future that there will be additional innovations that lead to new products that will revolutionize and transform the market. It is believed that Dell has continued to consider re-entering the MP3 market. According to “Can Dell Challenge Apple in MP3’s,” they believe that they have the necessary infrastructure and logistical plan to implement, and they have a history of returning to a product line more effectively after an initial botched attempt. This was the case with the laptop market, where their first attempt was not successful, but they learned and adapted for a successful second attempt.
The industry also needs to avoid the potential for government regulation, which was a serious concern in the years prior to 2005 when it became commonplace for music to be swapped during the era that included the website Napster. According to an article by Eric Harvey, Senate Judiciary Hearings were being held where much regulation was proposed and threatened in order to cease the unlawful use of music. As described in the article by Jacob Ganz and Joel Rose, this practice was rampant during the time period, and the creators of the MPEG coding system that facilitated this abuse never intended their technology to be used in this manner. Although sites such as iTunes have made this abuse less frequent, it remains a serious industry concern that needs to continue to be addressed.
If the previous seven years since 2005 are any indication, the level of advancements will continue to develop rapidly. Apple has been secure in its leading position in the marketplace, but other companies have persisted in the MP3 player field, continuing to press Apple to stay ahead. Lynn Wooten’s article describes how the Apple organizational culture views products as an extension of how the company seizes opportunities by a strategic, long range view of anticipating market trends. According to Jason Mick, Jobs has also kept a keen eye on competition, borrowing ideas and even once referring to how Apple is “shameless” about stealing great ideas. Other companies will have to be effective at protecting their intellectual property if they wish to avoid this fate in the future.
Britcher, Chris. “Sports brand giant Nike has reported its second quarter financial results – with revenue up 10 percent to $3.8bn.” Sportsbusiness.com. 22 Dec. 2006. Web.
“Can Dell Challenge Apple in MP3’s.” Geeknewscentral.com. 19 Aug. 2008. Web.
“Competition in the MP3 Player Industry.” 123Helpme.com. 8 Dec. 2012. Web.
Dediu, Horace. “How Much Does an Apple Store Cost?” Asymco.com 14 Oct. 2011. Web.
Ganz, Jacob and Rose, Joel. “The MP3: A History of Innovation and Betrayal.” NPR.org. 23 Mar. 2011. Web.
Haire, Meaghan. “A Brief History of the Walkman.” Time.com. 1 Jul. 2009. Web.
Harvey, Eric. “The Social History of the MP3.” Pitchfork.com. 24 Aug. 2009. Web.
Hashem, Nabeem. “Apple iPad: Innovation?” Yaleeconomicreview.com. 2011. Web.
Hill, Brandon. “Dell Exits MP3 Player Market.” Dailytech.com. 23 Aug. 2006. Web.
“Innovation Lessons from Apple – Competing with Yourself.” Product-arts.com. 2012. Web.
Lloyd, Dennis. “Instant Expert: a Brief History of iPod.” iLounge.com. 26 Jun. 2004. Web.
Mick, Jason. “Samsung: Apple’s iPhone Started as Sony Ripoff.” Dailytech.com. 27 Jul.
Wooten, Lynn. “Building a Company the Steve Jobs’ Way: A Positive Deviance Approach to Strategy.” Effective Executive. n. pag. Web. 2009.
Time is precious
don’t waste it!