When iPhone was released, thousands of customers slept outside the stores just to be one of the first to buy an iPhone which ultimately showed that Apple enjoys fanatical brand loyalty. Not only iPhone, Apple's other products like iPods and iTunes are economically a huge success across the world. This essay speaks about the business model of iTunes and the strategy it follows. The essay begins by giving an overview of iTunes, how iTunes came into existence and its current market position. The topic business model of iTunes elaborates on how iTunes sells music to its customers and the strategy it follows. The next topic evaluates to what extent the business model of iTunes can be referred to an ecosystem followed by the role played by IT in establishing collaboration between Apple, its economic partners and consumers. The penultimate topic speaks how iTunes competes with its competitors leading to the last part of the essay which predicts what new technologies in the future could disrupt the current market by enabling a new form of business model.
Apple was the first major company to enter the online music market. Apple wanted to launch a product that could play as well as sell music and manage the music collection of customers in a user friendly way, hence iTunes was launched. Apple iTunes was officially launched in April 2003 for MAC users. Windows version of iTunes was released in October 2003. When iTunes was initially launched it had a music catalog of 200,000 tracks only. Today iTunes had 10 million songs to offer for its customers (Lettice, 2009). Since its launch iTunes has sold 6 billion songs with a customer base of 50 million (Schonfeld, 2009). As per the recent statistics available iTunes has a market share of 70% in online music market (Goonan, 2008) and is the largest music retailer in United States overtaking supermarket giant Wal - Mart (Bangerman, 2008).
Business Model of iTunes:
According to Pateli and Giaglis (2003), "a business model is a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm" (Osterwalder et al, 2005).
The Business model followed by Apple iTunes is pay - per - download where a user can purchase music from the iTunes Music Store. Users can download an individual track for 99 cents or the whole album for $9.99. The songs are in AAC (Advanced Audio Coding) format and are encrypted in digital locks that determines on how many computer the song can be played to prevent from mass sharing (Dubosson-Torbay et al, 2004).
"Apple has done what Apple does best — make complex applications easy, and make them even more powerful in the process," said Steve Jobs, Apple's CEO (Awbrey, 2001).
iTunes as an ecosystem.
Generally speaking ecosystem can be defined as group of systems that interact with each other and are interdependent on each other for their functionalities and existence. Keeping this context as background the essay explores to what extent iTunes business model can be described as an ecosystem.
The business model of Apple iTunes can be defined as an ecosystem to a greater extent. The main reason behind this statement is because of the interdependencies of Apple products. The components of iTunes ecosystem are iPod, iPhone and Apple TV. The DRM Fairplay technology tightly connects all these components of the ecosystem together. The music sold through iTunes Music Store is in AAC (Advanced Audio Coding) format 128kbps encrypted in DRM Fairplay technology. Since it is DRM encrypted, the songs can only be played in an iPod, iPhone or Apple TV. A customer can buy music from iTunes Music Store only if he/she owns an iPod, iPhone or Apple TV. So this forms a close chain of network resulting in iTunes ecosystem.
Music downloaded on iTunes can be enjoyed on multiple devices like iPod, iPhone and Apple TV. A customer can download a movie through iTunes and begin watching it on his/her computer. Later he/she can pass it on to iPod or iPhone and continue seeing it later elsewhere. Though the data here is centralized it can still be enjoyed in various locations (Edgedesign, 2008).
From the above graph it can be illustrated that the increase in sales of iTunes songs has also increased the sales of iPod as well. This fact stands as evidence to prove the interdependencies of systems in iTunes ecosystem. However due to this success of iTunes ecosystem the other entities that get benefitted are
Apple customers tend to buy various customization tools for their iPods and iPhones. Every year they spend hundreds of dollars in buying portable speakers, iPod covers and wireless headphone for iPods. This has resulted in the formation of a billion dollar industry that produces accessories and goods for iPods and iPhones.
Suppliers also have their share of benefit from Apple iTunes ecosystem. Apple buys 19% of NAND Flash memory chips that is produced throughout the world. They are used in iPods and iPhones. Thousands of software developers create new programs and regularly update the version of iTunes in order to cope with rapid growth of technology (Macoffers, n.d.).
The iTunes ecosystem is good news for content providers because of the amount of sales of entertainment goods through iTunes. Apart from music sales the various features supported by iTunes are movies, TV shows, podcasts and radio. As on January 2009 iTunes Music Store has sold 6 billion songs. It has 75 million user accounts on iTunes Music Store (Schonfeld, 2009). When it comes to entertainment iTunes has sold 7 million HD movies (Hesseldaha, 2009) and 200 million TV episodes (Preshit, 2008) via its Music Store. So, iTunes has become a medium for entertainment companies to sell their products to people.
Finally the sole reason behind the existence of iTunes ecosystem is the business model followed by iTunes. Due to the presence of DRM Fairplay methodology adopted by Apple to sell protected music online; the components of iTunes ecosystem are interdependent on each other.
Role of Information Technology :
Information Technology has been the backbone of iTunes in developing a healthy relationship with its partners as well as with the consumers. Apple iTunes has adopted DRM Fairplay technique to sell protected music which has helped its business partners to deal with the illegal sharing of music in peer - to - peer networks. In case of consumers Apple had made use of innovative technology like Rendezvous and iTunes U to satisfy the needs of its consumers.
DRM Fairplay is the technology created by Apple iTunes to sell protected music online. This technology is incorporated in Quick time and is used in iTunes, iPod and iPhone. DRM Fairplay protects the music sold through iTunes Music Store. DRM Fairplay is compatible in MAC OS as well as in windows. Apple used this technology to protect the music files from playing on unauthorized systems. Music files downloaded can be used in five different computers where each system has to be registered. When a song is downloaded through iTunes Music Store, it is digitally encrypted where the decryption key is also encoded along the file. When the file has to be played, iTunes requests Apple for the license to play the file. Now the music file along with the license and the already encoded decryption key is ready to be played.
When the music has to be transferred to some external device like iPod or any other music player, it can be done only through the means of iTunes. Fairplay works only on Apple products hence all other music players are excluded. This process prevents sharing of songs on a large scale putting an end to illegal sharing on peer - to - peer networks. This technique has helped the music industry to recover from the impact created by illegal downloading of music tracks. The price of each song downloaded through iTunes Music Store is 99 cent where a certain amount goes to the music companies (Fretland et al, 2008)
Moving on to the next section let us see the role played by Information Technology in enabling collaboration between Apple and its consumers. Apart from selling protected music at a nominal price, Apple has also used technological innovations to the core in order to attract customers. One such technology used is called Rendezvous. By using this new feature people were able to share their playlist to others who were on the same subnetwork. Subnet also known as subnetwork is a small group of network formed by the admin where the members of subnet can interact among other members of the group.
Customers can share their whole library or select playlists which they want to share. Here music is not transferred over the internet but it is streamed to the other computer where as the original file stays in the host's computer. With the help of this feature users can listen as well as analyze other people's playlist (Voida et al, 2005).
Another new technology launched by iTunes is the new iTunes U (iTunes University). The new iTunes U is the customization of iTunes Music Store. This service makes use of the new podcast technology. Podcasting is a process where in the publisher produces and distributes the data which is downloaded by the subscriber through internet. The word Podcast was coined from the world Broadcast and Apple's famous music player called iPod.
The most suitable podcast client is the Apple's iTunes software. The main reason behind this is because of the variety of audio and video format supported by iTunes. The audio and video formats supported by iTunes are MP3, AAC, AIFF, WAV, MPEG4 and 3GP. Using Apple's iTunes lectures, discussions, audio or video materials can be hosted by the university which is made available for their students. Universities like Michigan, Duke, Missouri and Stanford have already started using this Technology. All these universities have collaborated with Apple Computers to post their university related content (lectures, discussion and other data) in the internet which can be accessed using Apple iTunes Music Store. Every student is provided with a username and password using which they can access various audio and video contents like lectures, announcements, debate, speeches and so on. Due to this technology iTunesU has become an interesting medium to share content in an easy and secure manner (Ketterl et al, 2006).
By effectively making use of latest technology Apple pulls customers towards iTunes which results in more music downloads. Hence the economic partners are also being benefitted by this as the music sales increases. Thus Apple acts as an interface between its economic partners and customers.
iTunes and competitors :
At the present moment direct competitors to iTunes in the online music market are Virgin, Yahoo's MusicMatch, Real Networks' Rhapsody, Microsoft's MSN, Napster and Sony Connect. Though Apple faces stiff competition from its competitors, iTunes Music Store (iTMS) is still the market leader in selling online music. Apple holds 70% percent of the market share. The rest 30% percent is shared by other music providers. This domination of Apple over the entire music market can be well explained by the selling strategy it follows. In the current market there are two types of strategies that are being followed. First, the market leader Apple sells songs at 99 cents per download or $ 9.99 per album. Second, most other firms have adopted the renting strategy in which the user can listen to any number of tracks on paying a subscription fee. Once the user stops paying the fee they are not able to listen to the previously downloaded songs. The interesting fact here is that companies in this market are not only competing with each other but they are also competing with the pirate market (peer - to - peer networks).
Among all the companies who sell music online, only Apple's iTunes Music Store (iTMS) and Sony's Connect follow a pure selling strategy. All the other companies follow renting strategy. The main reason why Apple chose to follow a pure selling strategy and not a renting strategy is because iTunes Music Store (iTMS) is dependent on a particular hardware player: the iPod. As per Apple's DRM Fairplay mechanism music brought through iTunes Music Store can only be played in an iPod. Protected music purchased from other online music stores cannot be played in an iPod. Apple has made iPod and iTunes as complements, in the sense that they both cannot operate effectively without each other.
Another interesting point to be noted here is that if a user wants to switch to another music player apart from iPod the cost incurred in switching is very high. It is because the music purchased from iTunes Music Store cannot be played in any other music player apart from an iPod. Likewise if a user having an iPod wants to switch over to other online music store, the protected music purchased won't be compatible with an iPod. By following this strategy, the customer is trapped inside the so called "Apple ecosystem" and moving out of it becomes very difficult.
In September 2004 Microsoft started its MSN online music service. Initially the strategy followed by Microsoft was selling only strategy. However MSN failed to acquire large market share. In spring 2005 Microsoft switched to renting strategy. The main reason behind this change was Microsoft not selling a complementary hardware to its MSN online service.
Thus Apple's iTunes is benefitting from the presence of switching costs due to the paired working model of iPod with iTunes which go hand in hand. Increase in sales of iPod naturally will increase the sales of music sold through iTunes Music Store. Hence apart from the selling strategy, the existence of switching costs and the complementarity of iPod briefly explains the dominance of Apple over the music industry. However since Apple's iTunes Music Store was the first major player to enter the online music market, it also has the first mover's advantage.
The firms which follow the renting strategy are not being benefitted due to the absence of complementary products. The music sold by them is compatible with all music players and hence does not produce switching costs. So customers are able to switch from one music store to another without any restrictions. Hence they are not able to strongly compete with Apple (Rayna, 2006).
Future threat to iTunes:
Throughout the essay we have been talking about the business model of iTunes and its domination over the online music industry for so many years. But the future of iTunes has already been written with lots of companies trying to come with an innovative technology to capture the online music market. The breakthrough was provided by a Swedish company when it released its music streaming player named Spotify on October 7 2008.
The company has 5 million subscribers despite being launched only in 6 countries. The recent catalog of Spotify has over 7 million files. Unlike iTunes which follows DRM Fairplay strategy to protect its songs, Spotify uses peer - to - peer online music streaming service. This is truly legal where users have to pay some amount depending on their usage. Users can listen to their favorite songs online removing the overhead of waiting till the song gets downloaded and the worrying about the space available in the hard disk. Users can create playlists which can be accessed online through any computer after you log into your Spotify account. One aspect where Spotify outplays iTunes is the quality of the sound offered by it when comparison with iTunes. Apple iTunes offers song downloads at 256kbps where as in Spotify the bit rate is 320 kbps. The best part is Spotify application is also supported in iPhone and iPod (Hattersley, 2009)
Apart from Spotify, Amazon is also posing a real threat to iTunes in terms of online music sales. When Apple made a revision of prices for its catalog of songs available, which means songs will be available for a price ranging from 59p and 99p, Amazon on the other hand launched plans for selling songs from its rapidly growing online MP3 store for just 29p. The factors in which Amazon has competitive advantage over Apple is that the music provided is DRM and is not platform oriented. As Apple wants to keep its customers tied to Apple products, Amazon is offering digital goods in universal format which can be played on a Computer irrespective of the operating systems and on any digital music player (Gregory, 2009).
Based on the discussions provided, the future success of iTunes seems to be very slim unless Apple comes out with some innovative strategy to remain on top of the online music market.
It is evident from this essay that iTunes has dominated the music industry since its launch. The reason behind this success is the business model followed by iTunes. Apple iTunes is the central entity to manage music collection in devices like iPhone and iPod which helped in acquiring the attention of the customers who already own an iPod or an iPhone in a very short span of time. Selling protected music through iTunes Music Store helped Apple to target customers easily as sharing of songs on a large scale was not possible.
How Information Technology has provided the competitive Advantage to Apple over its competitors has been discussed in this essay. To what extent business model of iTunes can be referred to an ecosystem has been clearly portrayed. The strategies and services implemented by iTunes in comparison to its competitors have also been explained. The future threat to iTunes has been discussed where Spotify and Amazon pose a serious threat to its business model.
From all the discussions and informations provided it can be concluded that Apple is losing its grip on the online sales market due to tough competition. Apple has to come up with a new innovative strategy to tackle its competitors.
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