Case Study: iTunes Strategic Innovation

iTunes is a media player computer program used for playing, downloading, saving, and organizing digital music and video files on desktop or laptop personal computers. It can also manage contents on iPod, iPhone, iPod Touch and iPad devices.

iTunes can connect to the iTunes Store to purchase and download music, music videos, television shows, iPod games, audiobooks, podcasts, movies and movie rentals , and ringtones. It is also used to download application software from the App Store for the iPhone, iPad and iPod Touch. iTunes has been criticized for not being able to transfer music from one portable device to another.

iTunes was introduced by Apple Inc. on January 9, 2001.

Case Study: iTunes Strategic Innovation

The Strategic Innovation Behind iTunes

Over the past decade, Apple Inc. has been extremely successful in formulating and implementing a coherent and focused strategic vision. Its success is evident not just in the company’s bottom line results but also in it’s attractiveness to investors. Innovation has continued to keep Apple on the cutting edge of the consumer electronics market. One of Apple’s key innovative successes was the integration of its iTunes platform strategy with its overall vision of the company as a “digital convergence company”.

Apple observed the flood of illegal music file sharing that began in the late 1990s. Music file sharing programs such as Napster, Kazaa, and LimeWire had created a network of Internet savvy music lovers freely, yet illegally, sharing music across the globe. By 2003 more than two billion illegal music files were being traded every month. While the recording industry fought to stop the cannibalization of physical CDs, illegal digital music downloading continued to grow.

With the technology out there for anyone to digitally download music free instead of paying $19 for an average CD, the trend toward digital music was clear. This trend was underscored by the fast growing demand for MP3 players that played mobile digital music, such as Apple’s hit iPod. Apple capitalized on this decisive trend with a clear trajectory by launching the iTunes online music store in 2003.

In agreement with five major music companies-BMG, EMI Group, Sony, Universal Music Group, and Warner Brothers Records-iTunes offered legal, easy-to-use, and flexible à la carte song downloads. iTunes allowed buyers to freely browse two hundred thousand songs, listen to thirty-second samples, and download an individual song for 99 cents or an entire album for $9.99. By allowing people to buy individual songs and strategically pricing them far more reasonably, iTunes broke a key customer annoyance factor: the need to purchase an entire CD when they wanted only one or two songs on it.

iTunes also leapt past free downloading services, providing sound quality as well as intuitive navigating, searching, and browsing functions. To illegally download music you must first search for the song, album, or artist. If you are looking for a complete album you must know the names of all the songs and their order. It is rare to find a complete album to download in one location. The sound quality is consistently poor because most people burn CDs at a low bit rate to save space. And most of the tracks available reflect the tastes of sixteen-year-olds, so although theoretically there are billions of tracks available, the scope is limited.

In contrast, Apple’s search and browsing functions are considered the best in the business. Moreover, iTunes music editors include a number of added features usually found in the record shops, including iTunes essentials such as Best Hair Bands or Best Love Songs, staff favorites, celebrity play lists, and Billboard charts. And the iTunes sound quality is the highest because iTunes encodes songs in a format called AAC, which offers sound quality superior to MP3s, even those burned at a very high data rate.

Customers have been flocking to iTunes, and recording companies and artists are also winning. Under iTunes they receive 65 percent of the purchase price of digitally downloaded songs, at last financially benefiting from the digital downloading craze. In addition, Apple further protected recording companies by devising copyright protection that would not inconvenience users-who had grown accustomed to the freedom of digital music in the post- Napster world-but would satisfy the music industry. The iTunes Music Store allows users to burn songs onto iPods and CDs up to seven times, enough to easily satisfy music lovers but far too few times to make professional piracy an issue.

Today the iTunes Music Store offers more than 8 million songs. iTunes is the largest music retailer in the US with sales exceeding 5 billion songs. Apple’s iTunes has unlocked a blue ocean in digital music, with the added advantage of increasing the attractiveness of its highly successful iPod player and other Apple products like iPhone and iTab.

By entering the market early and firmly entrenching its brand name, Apple was able to leverage a first mover’s advantage with its iTunes Music Store. By 2010, the iTunes store had grown into the world’s largest music store. Apple was able to further exploit this advantage by creating a proprietary technology for the iPod which protected songs downloaded from the iTunes store against piracy. An additional element of this Digital Rights Management System was that no competing MP3 player could play songs protected by it. Hence, Apple was able to gain an important advantage over existing competitors and potential new entrants into the MP3 arena.

Apple also was able to take advantage of its economies of scale in controlling the pricing of digital music content made available through its iTunes store. Music labels were very concerned about the impact of this new a la carte pricing model on their CD sales, but there was little that they could do to stand in Apple’s way in light of its enormous market share of MP3 players. By 2010, Apple held more than 70% of the U.S. MP3 market.

Apple has also utilized this controlled open platform strategy to develop content for its iPhone and iPad product lines. The App Store was introduced to the world as a part of iTunes which already was a hit amongst consumers. Apple once again gained first mover advantage in this smartphone arena by being the first smartphone app outlet that made it simple to distribute, access, and download content directly to its iPhone. In addition, third party developers flocked to have their content distributed via the App Store despite Apple’s strict control over content. Apple reserved the right to refuse content and received 30% of all sales made through its distribution channel. Apple continued to follow the model that made it successful with iTunes and the iPod, by using its market dominance to keep app prices low. Many of the apps distributed via the App Store were free or priced at a mere ninety-nine cents. Once again Apple’s competitors were left to play catch-up. In 2009, Apple pulled in nearly $1 billion dollars in app sales alone.

Apple’s true success lies in its ability to innovate and create new experiences for the customer based upon its ever burgeoning content base. Some would argue that Apple could gain an even greater competitive advantage in the marketplace by removing restrictions on developer access to its platform. The continuing restriction on compatibility with Adobe products is an obvious example. However, Apple has for at least a decade now been able to stave off the introduction of disruptive innovations by adhering to its strategy. As the market leader in consumer electronics, Apple’s future course may be rocky since competitors are vigorously working to create the “magic bullet” which will unseat iTunes dominance as the essential platform for distributing digital music, books, movies, TV shows, and other content. If Apple remains true to its platform strategy, this will be difficult for competitors to accomplish.

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