Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Wednesday, May 25, 2005

Apple vs Apple, Part 37812

I hate to say I told you so, but Apple's worst enemy is...Apple. If you ask me, now that iTunes has been cloned, Apple's future dominance of the Media 2.0 value chain is under fairly serious threat. This is because the complementarity between the iPod and iTunes has effectively been destroyed.

The problem, at the risk of repeating myself, is that heavily protecting your goods is a fatal error in a Media 2.0 world. Value flows from complementarity - letting other folks do and make cool stuff with your goods.

Why? Two reasons. First, in a Media 1.0 (a mass media) world, media goods weren't plastic - no one could do much with them. Technology to remix, tweak, comment, splice, etc, was expensive to learn and buy. Second, in a Media 1.0 world, the supply of media was artificially fixed - by spectrum scarcity, regulation, etc.

So in this case, there was no point to opening up your goods - the only people who would do anything with them were your competitors, who would simply imitate you, and kill your margins.

But in a Media 2.0 world, media is plastic, and the supply of media has exploded. So, there are two huge reasons to open up your goods and platforms. First, it's not just competitors who can do bad things with your goods anymore - it's also fans, consumers, and complementors who can do cool things with your goods. Second, conversely, competition for attention is much more intense now that supply has exploded - protecting your goods makes it much more difficult to gain a share of attention, because you can't leverage anything but your own marketing.

These two factors mean that barriers to imitation - formal or informal property rights protecting your goods - effectively become barriers to value creation in a Media 2.0 world.

This is a lot to chew on, so here's an easier way to think about it. In a sense, this dynamic is really the media industry's eventual, but inevitable, shift from goods to services - from inert bits of data that can only be consumed, to open platforms which can be built upon.

So by closing off it's platform - by tying iTunes to the iPod - Apple effectively blocked huge amounts of value creation. Much more than the value it might have lost due to imitation. It killed what might have been a vibrant market for complements - plugins, mods, skins, etc - before it even began.

In fact, by closing off it's platform, Apple effectively created the incentive for rivals to break it, in order to grab a piece of the pie. Much better to have opened up and co-opted rivals, using the licensing cash to subsidize newer, better ways to extend your platform dominance. Discussed here and here in nauseating detail.

Now, this sounds like small beans to marketing driven Apple dudes. But strategically, it's a disaster. The severing of the economic link between iTunes and the iPod is the hole in the dike - it's a huge threat to all the future value Apple stood to realize from dominating the Media 2.0 value chain, because this dominance depended critically on iTunes being the Media 2.0 aggregator...which, of course, is now no longer a sure thing.

-- umair // 12:36 PM // 9 comments


It is basically the same problem Apple has when competing with Microsoft in the OS world. Apple makes vertically integrated solutions that works very well for versions 1.0 and 2.0 but Microsoft's platform approach pays dividends when it is time for version 3.0. Apple doesn't seem to have the DNA for being a platform company, in my very humble opinion.

I think it is Clayton Christensen that points out that the reason for vertical solutions doing well early in the life of a market is that the connections between horizontal layers don't work good enough for users until version 3.0 (or so).
// Blogger Henrik // 5:51 PM

I think you underestimate Apple. Not strategically, but tactically. While this plug-in is very handy, I don't expect it to work for long. Apple will change the firmware of it's iPods, make a new version of iTunes that requires the new firmware, and all of a sudden, Winamp no worky with iPods anymore.

But I doubt this is completely by their own choice. The media companies that Apple licenses content from have mandated these sorts of controls, which forces Apple's hand. That being said, though, while Apple's corporate culture is different from, say, Microsoft's, they're still a public company that wants to stay in business. The iPod has been a goldmine for them, so why shouldn't they guard it?

In addition, while the law *is* wrong, imho, the DMCA does prohibit things like this, regardless of whether or not the author feels it is right. Hopefully, the DMCA will be used to prosecute him/her, and he/she will have the wherewithal to challenge it in court. And I hope to God they get one of those "activist judges" we keep hearing about.
// Anonymous macjeff // 7:04 PM

You don't get it. But I think Apple does.

iTunes is so widely used not just because of the iPod but because it is a great music organizer. The iPods are so popular not because of iTMS but because they are great MP3 players. The fact that these work together just means if you fall in love with one, you are more likely to use the other as well. The bottom line is "excellent buying experience".

Sure the hackers and the geeks are annoyed by limitations of DRM, iTunes and the iTMS but they are not the masses and it looks unlikely that they will ever be. DRM is here to stay because Apple made it palitable.

I know, I know but Apple will loose to Microsoft just like they did back in the 80's. Maybe? But things are different in this market. Apple in the 80's only had 10% market share and never grew much over 15%. Today they have 70%+ on both sides so why give up control when you are that far ahead?

Apple needs to be aware of it's competition and make strategic alliances where they make sense as they did with Motorola and HP. My guess is that Sony is in the wings if MS starts to bully. The biggest threat is that someone develops a better model at a price that is more attractive. Yahoo comes to mind and if they can sustain these prices Apple has some issues to deal with. Because at $15/month I think iTMS makes good sense but at $5/month they could get people to move.
// Anonymous Anonymous // 7:36 PM

This fits in very nicely with all the theories flying around out there about why Apple is destined to lose market share in the MP3 player business. So let's take a look at the numbers. What, you don't want to? That's because the numbers don't support your theory. Apple has such a lock on the market that you can smack it with theories all day. The reality is that Apple has the market sewn up tight and there is nothing that bitter CEOs from rival companies can point to that substantiates their Economics 101 theories.

Market share is reality. Do you think Apple's share is going to fall during the graduation giving season? Do you see seniors scrambling for iRIvers or Yahoo subscription services? Reality check. It isn't happening. I don't claim Apple won't evetually lose market share. What I do claim is that you don't have anything more than hyperbole to support your argument. The market is much more complicated than your explanation of why Apple will lose. Making a complicated service easy while meeting the needs of copyright owners isn't something trival and no other company has created a comparable product yet. Apples iPods and ITMS are a single product, not something that can be separated and still provide ease of use. So Apple has a killer MP3 player and a killer song buying service and they are one product. Consumers know this. That's why Apple has the market sewn up for the foreseeable future.
// Anonymous Anonymous // 7:42 PM

Some markets stay vertical. There's no "horizontal" market in the automotive sector where one company provides the engine, another the transmission, another the body, another the interior, another the heating/cooling system, etc. etc.

Traditionally, consumer markets are vertical. There's no separation between hardware and software for: TVs, stereo equipment, refrigerators, and on and on. Why? It's too hard for consumers to piece the various elements together and trouble shoot things, plus you get the "blame game" where when something goes wrong, it's always the "fault" of someone else supplying one of the puzzle pieces.

iPods/iTunes/music stores - a consumer product. I think users just don't want a "platform" that they have to piece together. They want a functional solution.
// Anonymous Anonymous // 8:37 PM

Really cool, but I'd like to point out a fallacy in your argument. It's a common one, though, so you can be forgiven. But it's always nice to let people know.

"So by closing off it's platform - by tying iTunes to the iPod - Apple effectively blocked huge amounts of value creation. Much more than the value it might have lost due to imitation. It killed what might have been a vibrant market for complements - plugins, mods, skins, etc - before it even began."

Let's start with the simple theme: That iTunes is tied to the iPod.

This may be a terminology thing, I'll admit. If you're saying that iTunes can only transfer music to the iPod, however, I'd point out that iTunes supports many different players.

Now, don't get me wrong--Apple does not promote this because they would far rather you buy an iPod. But it certainly is possible.

If you meant that music purchased at the iTunes Music Store is incompatible with anything but the iPod, I'd also point out that music can be burned to CD. At which point, it can be used in any commercial CD player or re-imported in whatever format you would like (although--for example--re-encoding them as 128Kbps MP3 will cause it sound worse because the AAC encoding that Apple uses produces better sound than MP3 at the same bitrate.)

As for the aftermarket, well, there seem to be plenty of iPod accessories. iTunes can also be accessorized with visualizers and can support different audio formats through QuickTime plug-ins. (Yes, you can play your Ogg Vorbis music in iTunes) As for skins for iTunes, well, no. But that's sort of an Apple thing anyway.

In short, Apple is plenty open. You're just buying into Apple's competition spouting the evil buzzwords, "Closed" and "Proprietary."
// Anonymous Peter // 9:10 PM

Let's review a little history. Apple came out with iTunes before the iPod. It was a software music player that they bought from a small company that made SoundJam. They had a advertising campaign called, "Mix, Rip, Burn" that angered the RIAA and the music industry. Apple had no interest in keeping iTunes closed--just the opposite. But something happened on the way to creating the best music player in world, no one was willing to sell online content for Macs.

So, at this point, Apple and Macs are about to be marginalized again by the Windows monopoly. But this time, and from all accounts it was mostly luck, Apple had a weapon called the iPod. Even Apple didn't know what they had, but they did what they always do and created a superb product. It sells beyond expectations and even Windows users want one. Immediately there are third-party tools to load music on your iPod from both Windows and Linux. Apple's only DRM at this point is a sticker that comes on the iPod that says simply, "Don't steal music."

Even at this next milestone, Apple has no DRM and iTunes only plays MP3s. The iPod is a Mac only product (officially.) But guess what, no one is still going to make any online music purchases compatible with Macs or iPods. There is unsurprisingly no public outcry about this. Most people don't like DRM anyway but there is no outrage about Microsoft's closed systems.

Then the other shoe drops. Apple is in negotiations with all US music labels to ship an online Music store. How does Apple manage this? Because no one at the point has any idea what is about to happen. Apple is merely trying to insure that content is available to Mac users and the iPod. The iTunes Music Store is out, and again it is only for Mac users. And it almost immediately does something that no other online music store has been able to accomplish, it makes DRM nearly invisible and allows you to actually listen to your music anywhere with either an iPod or an audio CD. It works and few people even notice the DRM.

But now something odd happens. Apple announces that they are going to do a version of iTunes for Windows users. And iPods are going to be compatible (officially) with Windows. And the iTunes Music Store will work with both Macs and Windows. What is the Windows industry response to this development? At first nothing--they aren't worried. But then they discover that Apple is not a niche player as usual. Instead, the iPod, iTunes and iTMS completely dominate the market.

Now it is time to start throwing FUD. Apple is closed. Apple is proprietary. Apple is not your friend like Microsoft is. Apple isn't playing fair. Funny thing though, at this point Apple isn't listening. Why should they?
// Anonymous Anonymous // 1:01 AM

"The problem, at the risk of repeating myself, is that heavily protecting your goods is a fatal error in a Media 2.0 world."

Your understanding of various issues on this is shockingly pedestrian. I'd love to see you go up to the labels and mouth off that silly stuff above *and* get 1.5 MM songs licensed. Apple doesn't "protect its own goods," it provides a hw/sw service selling other peoples' goods. Surely the difference doesn't escape you?
// Anonymous Anonymous // 8:07 AM

Traditionally consumer markets are not vertically integrated when it comes to hardware<->software. I can watch all channels on my standard tv, I can watch any movie on my dvd (within stupid geographical restrictons) and I can listen to all cd:s on my cd-player.
// Blogger Henrik // 9:01 AM

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