Umair Haque / Bubblegeneration

Friday, July 30, 2004

Got this comment on the Apple vs Real thread:

"Umair, you're wrong!

Apple's strategy is to provide value in the quality of the user's music experience. This includes ease-of-use, aesthetics, etc. This quality also comes from the integration of the iPod platform - the iPod player, the iTunes jukebox, and the iTMS (for digital music) and iTunes ripping (for CDs)."

It's a good comment. I appreciate this argument. First, let's put it more succinctly: Apple's locking up it's platform because it's positioning itself as *the* highest-quality provider of digital music. That is, potential complementors might impose quality costs beyond any benefits in market growth they create.

There's a big problem with this strategy, and it's the same old problem Apple's always faced: only a very small percentage of the market is willing to pay a premium for quality. iPod penetration is 5%. If the highest-quality media experience is all Apple ever offers, the market is going to grow slowly, and hit a ceiling - just like it has with all of Apple's products.

But if Apple opens up a platform, a multitude of complementors can create a multitude of products at various price points and quality levels. This will grow a bigger market faster. Not only that, but Apple can continue to offer the highest-quality experience within this spectrum. That way it leverages it's platform to generate a bigger market faster, charges for access to it, and maintains it's quality advantage.

But the biggest advantage is that a platform strategy for Apple is a virtuous circle: the rents it captures from platform and market access can subsidize development of even more cool toys like the iPod mini, Airport, etc, than it could otherwise make. It can then use these to exert innovation pressure to grow the market more - and keep it's complementors in line - and back again.

Now, of course, you may not agree with me that the market can sort out good products from bad efficiently - so Apple must keep it's platform closed, to save consumers from themselves. But then we fundamentally disagree on whether consumers are stupid or not.

So Apple's role as platform leader would be that of any platform leader: to balance the costs potential complementors might impose (quality costs, brand disadvantages, interface costs, coordination costs) against the benefits they bring (market growth, access to new markets, technological advantages, inimitable resources) . Can Apple/Jobs do an effective jobs of this? I don't know - it's a risky undertaking. But what's clear is that this is the role that Apple's seemed almost fearful to grow into time and time again.

Finally, I don't at all agree that iPod mini, Airport express, iPod car kit are radical innovations. They're almost textbook definitions of incremental innovation which extend the fundamental iPod concept. The much vaunted video iPod, a games iPod, etc would be radical innovation. These would exert the kind of innovation pressure that would make an Apple platform very difficult to challenge.

Look, the problem isn't that Apple doesn't innovate. Of course it does - more so than most, in fact. But it's hazard rate of new innovations is also incredibly high - historically, it's had a tough time getting the market to accept it's the cool stuff it makes. It's not that Apple's stuff sucks; it's that it's business models often don't make sense. Maybe the lack of novelty in it's strategy - closed access and high quality - has more than a little to do with that.

Thanks to everyone for the comments. I promise not to write more about this unless you make me.

-- umair // 7:04 PM // 9 comments

Comments:

"...only a very small percentage of the market is willing to pay a premium for quality. iPod penetration is 5%."

Nonsense. 5% of what?

The combo of iPod/iTMS has BY FAR the best market/mind/revenue share of any other player/store combo on the planet. It started out at a premium, everybody and his brother jumped into the ring and over two years later iPod/iTMS is still the market leader. It didn't get there by lowering quality (it keeps upping it) or by cut-throath price cutting (a la Dell DJ). It seems people do pay enough to get the best. Not everyone, of course. But then again Apple will never be a two-bit box pusher like Dell. It's not in their genes.

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Anonymous // 9:27 PM

Apple may have a video device beyond its 12" laptops; just not this year because the price/content/tech feasibility/demand is not there yet to provide a satisfying user experience. Apple doesn't do technology for technology's sake. Remember they've only said that people on-the-go don't watch high-quality movies on 3" screens.

Issues with video that will be addressed in the next year:
1. wireless streaming needs something better than 802.11g - something like UWB which is stuck in the standardization process.
2. miniaturization (large volume hard drives) and cost (7-10" LCD screens)
3. Hi-Definition and compression - waiting for H.264.

It's just not ready, and unlike MS, Apple can't afford to take three tries to get it right.

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Anonymous // 9:57 PM

If Real's Harmony is available ONLY for Windows users, then I have no problem with Apple's thrashing of Real. I find RealPlayer to be a marginally useful tool as it stands. My money is reserved for well integrated hardware and software. This is a concept which seems to be foreign to Real.

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Anonymous // 9:59 PM

I also don't understand then why you said Intel had radical innovation. Their innovation has been almost continuously incremental since 8086, even in the area of reducing cost.

Others have had much more radical innovation in processors (CISC to RISC, etc) but didn't have Windows OS support, or were more expensive.

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Anonymous // 10:02 PM

Who has tried more radical innovations than Apple?
Apple II
Macintosh GUI
400K 3.5" floppy disk drive
SCSI
Newton PDA
eBook/iBook (clam shell)
iMac
iPod

USB standard first
Deleting floppy disk for CD first
Firewire first
DVD standard first
WiFi standard first
And I'm probably missing a whole bunch!

If none of those are radical - or does radical means it needs to alter the economic landscape - anyway, can you define it better?

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Anonymous // 10:08 PM

Where are you getting the 5% figure?

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Anonymous // 10:28 PM

Now that there is an iPod (which improved on the flash players), it seems that a games iPod or a video iPod would be incremental. The games iPod adds a hard drive to a Gameboy. The video iPod adds a hard drive to a portable DVD player. Where's the big deal about that!

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Anonymous // 12:59 AM

No Mp3 player on the market is really open. They all have their own OS and you can't use any other OS on them. Prior to Harmony, they all used their own brand of DRMed music and you couldn't use any other brand of DRMed music on them. One player doesn't even play real Mp3's. Singleing out the iPod system is BS.

The iPod buyer chose the iPod, iTunes, iTMS combo. They picked that combo over the other available combos. That was their choice. If you want to purchase DRMed music digitally there are only 4 different systems, each having several different Mp3 players available.

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Anonymous // 4:47 AM

There is a big problem in comparing the iPod strategy to what happened in the PC world. While the PC economics are driven by demand side economies of scale (also known as network externalities or multiplier effect) where the demand is dependent on the number of users already using the system, the Music market does not have such effects.

In the PC world the demand side economies come from 1. number of software programs available on a platform and 2. the interoperability with dominant install base.

The Mac failed on both counts. When it was introduced in 84 it did not have much of a software base to speak off (versus either the IBM PC or the Apple II which were available for 4+ years before the Mac), in addition, it was not compatible with the dominant install base (PC and Apple II).

In the music world, the multiplier effects are much milder (if they exist at all). First, a song is a song is a song. Unlike a software program which is tied to an underlying architecture, a tune can be easily translated from one media to another unlike a software program. Second, the iPod is compatible with the dominant install base-- the CD and the P2P darknet.

Considering the digital music markets are barely over a year old, and there is a supply side lag (in terms of the mini hard drives) the best strategy for Apple is to skim the market and start establishing lock-ins.

Whatever said and done, the iPod and iTunes are competing against the CD and the P2P darknet. Until the sales of digital music reach at least 10% of traded volume on the P2P darknet the game remains wide open. If Apple can do this then they will have significant benefits due to format lock-in.

There is no point in Apple letting anyone else into the game. Napster, Loudeye and Real are operating at a real disadvantage. These guys are going to lose out to Microsoft when they enter the game.

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Anonymous // 1:14 PM