The iPod and iPhone

Group 9

Li Shuguo

Song Tanda

Liu Yazhuo

Han Jie
Summary
 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:

SUPPLIERS:
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.

BUYER:
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.

SUBSTITUEDS:
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.

POTENTIAL ENTRANTS:
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.

1
Darren Aftahi, 'RealNetworks Company Report, 2006'
INDUSTRY COMPETITION:
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
Microsoft Buyers
Content supplier:
Record labels Carriers Customers

Product supplier:
Other smart phones
Vendors, OEMS
Other mobile music
 Service supplier:
services
Carriers

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.

3
科技政策研究與資訊中心（STPI）2007
Relationship within Value-creating constellation

Content
producers:
records
labels,
independent
producers

Windows, Core
Zune, technologies:
WMDRM, DRM, codec,
Play for sure player

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

Free
music Motorola,
thru ads 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?

4
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 Generic strategies

cost leadership differentiation focus
New entrants As the entry As to built customers’ As to built core
barrier loyalty capability

Buyer power As the capability Weaken the Weaken the

to offer low price bargaining power by bargaining power
narrowing option by eliminating
option
Supplier power Restrain Transfer the cost to Transfer the cost
bargaining power customers to customers
Substitute Resist substitutes Customers stickiness Core capability
by low price low the threaten from help the
substitute competitive
strength
Rivalry Price war Customers loyalty Rivals cannot fulfill
keeps customers away customers’ special
from rivals needs

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 Bastion brand Flanker brand

Apple TV Mac(mini/Pro) iTunes

MacBook (air/ Pro)

iMac
Fighter brand

iphone

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.

5
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 smart

iPhone phone
touch

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.