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the business model of Apple's itunes

Paper Type: Free Essay Subject: Business
Wordcount: 4244 words Published: 1st Jan 2015

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Evaluate the business model of Apple’s itunes. In particular you should address:-

1. To what extent can the itunes business model be described as an ecosystem and what is the role of IT in enabling the collaboration between Apple, its economic partners and consumers?

2. How does itunes compare with competitors?

3. What new technologies could disrupt the current market by enabling a new form of business model?


Business model in a basic sense deals with the method of doing business in order to generate revenues by which a company sustains itself in the competitive market place ( (Rappa, 2009).According to (Amberg & Manuela) analysis on music industries, there are lots of media websites and companies following different business models fallen prey to file sharing tools and peer-peer networks which allow consumers to illegally copy and share the content for free. As a consequence , companies like Apple iTunes and Sony Connect have come up with internet based business models based on pay-per-download and dependent on the technology of the supplier for whom long-term customer relations are very crucial and customers are allowed to use the digital media content particularly with regard to technology of the supplier thus getting advantage and benefitting from selling hardware components because the offer of digital media content advances it. These business models replace the traditional business models which are generally based on selling physical media.This paper shows the fair understanding of Apple iTunes business model for its dominance over the current music market and tries to describe the business model with respect to ecosystem and compares iTunes with its key competitors in the market. The biological term ecosystem in this paper refers to the IT ecosystem. (Iansiti & Richards, 2005) describes IT ecosystem as network of organizations that drives the creation, innovation and delivery of Information Technology products and services. According to (Cusumano, 2008) the term ‘Platform’, is defined as “ Foundation product or key technology in a system like the PC or a web enabled cell phone and should have relatively open technical interfaces and easily licensing terms in order to encourage other firms to contribute complementary product and services”. So this can be accounted to an ecosystem around the platform and the platform becomes more valuable when the external entities creative more innovations around it. This should cause more users to adopt the platform and more complementors to join the network.

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iTunes as an ecosystem

Online music hit a new milestone after Apple computer,Inc.(Apple) launched the iTunes application in January 2001 follwed by launch of 1st generation iPod and 2 years later online music store in April of 2003.The two businesses, the production of MP3 players and the online music shops were initially considered as different units and after the invention of new hardware iPod these two businesses were merged. iTunes is a software designed with an intuitive and user friendly interface and iPod is an hardware designed with an eye on fashion. These two together helped Apple to enter and succeed in the music player market infact actually cross promoting the iPod hardware device. Because of their service and innovation Apple retained to grow in the online music field in a better way when compared to its key competitors like Dell, Sony and Samsung( (Li & Chang). According to (Schonfeld, 2009) statistics, iTunes have now sold 6 billion songs and 10 million different tracks are now available on iTunes. iTunes is software and iPod is hardware as said by (Li & Chang) are two different business units and Apple conjucts these two different products into one new business model. Using ecology to analyze this model(iPod and iTunes) it has set a nice example for ecotone between two species to drive the music industry into new ecosystem. A strong platform is apparent from the combination of both the software and the hardware. The below ‘ shows the evolution of new ecosystem with combination of two stand-alone ecosystems.

‘’Most companies today inhabit ecosystems–loose networks of suppliers, distributors, and outsourcers; makers of related products or services; providers of relevant technology; and other organizations that affect, and are affected by, the creation and delivery of a company’s own offering…..’ as said by (Iansiti & Levien, 2004) shows how business industry can be closely compared to biological ecosystem. Like every individual in the biological ecosystem every organization in the business ecosystem shares the fate of the network as a whole regardless of that member’s apparent strengths. Comparing this with the Apple business, iPod is not really an innovative technology by itself but the company creates a new ecotone for digital music where all the hardware(iPods) and software(iTunes) are related to it enhances its platform. According to (Koster, 2007) There is a continuous decline in the traditional sale of music sources like retail music stores and the on-going music industries are restructuring themselves by merging with other partners to face the loss of revenues and to adopt with the new business strategies and models in the music industry to compete with the counterparts. Even in the digital music world today, legitimate music downloading is continuously changing. Initial music sites have very strong limitations on access catalogs of music, on what could be done with the downloaded music, number of copies, time limits, where to copy. Though Apple iTunes works on this model, it is successful in negotiating a very large music catalog from the four labels from its music site. He says that one large advantage and success for Apple is because of its hardware device iPod where normally music is stored and playback. The revenues from iPods sales continue to grow after the introduction of iTunes. Though Apple had gotten permission from four majors to store their music on its website for consumers to download by promising the copyright protection authority DRM, it is now planning to get away with DRM because they make the downloaded or recorded music very cumbersome for the consumer. This is evident from (Johnson, 2009) article on web which says “By the end of the quarter all 10 million songs will be DRM free in iTunes and iTunes plus,” said Phil Schiller, Apple’s senior vice president of worldwide product marketing. The blog witten by (Vitalari, 2009) clearly examines at the 21st century business model adopted by Apple to become successful in the market. He believes that business platforms are the root cause for cumulative business performance. Apple’s competitive business platforms is the main drive for innovations like community formation, mass collaboration, social networking, ecosystems, real time analytics, transparency etc. The iPhone App store was launched in July 2008 and today iTunes store is a total set of all forms of the digital media including music, games, software application, podcasts and video assets . As his explanation, the driving factors for Apple success and points out that the effective business platforms have few key ingredients:

· iPods, iphones are not just products instead they represent individual business platforms and they create an ecosystem surrounding the product which means they create a common understanding for business transactions, technical specifications, interface standards and requirements. With the iPhone this includes all of the sub-contracted manufacturers, but more importantly it includes iTunes, the app store and app developers.This results in creating a transparency which enables and facilitates hundreds of participants to collaborate asynchronously and independently.

· This leads directly to the second point, which is that the business platform then helps to generate untold business analytics for the platform’s owner.This is because of the elements of the business platform are networked and generates valuable information about the product, ecosystem and participants. Apple used this analytics to fix, improve and enhance the product and finally delighting the customers.

· This in turn creates a community of practice surrounding the business platform, as the collaborators learn how to make better things.

IT in enabling collaboration with partners and consumers

As a cofounder of Apple, Steve Jobs’s vision was to create new and different products to consumers and his notion of “one person-one computer’ became visionary responsible for Apple’s reputation for innovation and mission became changing the world by bringing the computers to masses (Richard D & Vohr, 1998).Apple came back with reinvention of personal computer with Macintosh in 1980 after igniting the computer industry revolution with inventing Apple II and it is commited to bring the best computing experience to all the fields starting from students, educators, professionals and consumers all around the globe with its innovative software hardware and internet offerings. This Apple’s mission statements indicates it focuses on innovation and personal computing experience( (Pearlson & Saunders, 2009). Apple From 1987-1997 the company suffered due to some major internal problems which affected the strategic leadership and its operations but after Steve Jobs’s second turn as CEO, company fixed operational problems and regains its innovative leadership dramatically. Few changes like manufacturing outsourcing and improving inventory became straight forward matching Dell, the industry leader.It moved to open industry standards rather than proprietary hardware interfaces that it had maintained for 15 years and thus in a minor way Apple’s product strategy became more open( (West & Mace, 2007).As per ( (Apple Computer, 2006) Apple derives its competitive advantage again by its innovation giving iPod as an example. Apple entered the market with iPod in 2001and by end of fourth quarter of fiscal year 2005, iPods sales gained 33% of the total revenues. The factors which are accountable to their success and uniqueness are its computers based on its own operating system, which enabled further area of innovation.Its Mac OS operating system focuses on more simplicity and seen as graphically sophisticated. (West & Mace, 2007)Recent trends have seen increasing strategy convergence between Apple and Microsoft .For its video game business, similar to its rivals Sony and Nintendo Microsoft buys the processor but designs its own hardware and software without licensing them to others.Meanwhile ‘Zune’, Microsoft’s music players try to compete successfully to attain equality with Apple’s iPod. This shows Apple pursued a vertically integrated strategy in its music business. Vertical strategy is single firms controlling the entire platform. Apple leveraging its Macintosh installed base to establish iTunes music store and building iPod business on top of that and now iPhone business shows its expansion into adjacent markets and this loyal installed base makes any company easier to branch into a related market and this becomes a lesson for the other companies and Apple aims at satisfying the costumer not just upgrading the costumers what they have today like the other companies do. When AT&T decided to make offer to iTunes many other mobile industries criticized it for making too many concessions to Apple. Due to this offer AT&T gets benefit from Apple in two ways , one is Apple increases the average monthly bills for the customers who switch from AT&T to iPhone and the second one is it causes existing people to switch from existing carriers to AT&T as it’s the exclusive carrier for iPhone( (The Apple iPhone:Successes and Challenges for the Mobile Industry, 2008). Digital Record Management systems are uses to encrypt the data does not allow illegal or non authorization download of music and currently there are two main formats used for protect downloading of music. One is fairplay and the other is WMA. Fairplay is Apple’s proprietary technology where it secure the data encrypted in AAC( Advanced Audi Coding) format. WMA is Microsoft’s Window’s media audio video encoding platform. iPods can play only those stuff which are secured through fairplay format and Apple has refuse to lincense this fairplay to other retailers and so it is difficult for iPod users to download music from other retailers other than iTunes music store. But recently Realnetworks in US came up with a package which allows iPod users resident in US to play secures music from Realnetworks’s music store Rhapsody. Apple got furious with this and accused Realnetworks of ‘Hacker tactics and Ethics’ and reported to investigating on that for violating the intellectual rights. If apple is capable of putting an end to such violations then the indispensability of fairplay could be established( (The iTunes music store: does competition law hold the key to closed shop?, 2004)

According to insights into IDC’s lifesciences by (Swenson & Golden, 2005) Apple products are getting attracted by the life science researchers who actually migrated from linux and unix platforms because of the dual nature of Mac OS and its estimated historically that the life scientists have been twice or thrice more likely than the average computer user to Apple’s Mac platform as client computer thus representing attractive market for Apple. It has announced about its collaboration with airlines which includes Air France, Continental, Delta, United and KLM to integrate the in flight entertainment systems with iPod and taking the current entertainment provided in these airlines to a next level for better travel experience( (Apple_Partners_with_Airlines_for_iPod_Integration, 2006). Sets Apple as an interesting example for not being an open source model in its business strategies but is thought b of being a highly proprietary company from its earlier years. Now it has jumped into open source and have started projects both inside and outside its corporate firewalls. Apple’s OS X was a open source because it was based on Darwin. Its developer website said that Apple’s open source projects let key developers to customize and enhance Apple software and through this open source models it allows Apple engineers to collaborate with open source community to come up with better and more reliable products (Goldman & Gabriel, 2005). On September 2007, Apple and Starbucks announced their collaboration on Apple letting costumers at Starbucks wirelessly browsing, previewing, buying and downloading music from iTunes music stores at Starbucks on their iPods enhancing Starbuck’s retail coffee experience by helping customers with discovering new music instantly (Rothman, 2007). These examples shows how Apple is spreading the digital media revolution with its technologically profound products. Apple believes in fully integrated and completely digital learning environment which makes contents to move from from application to another and easy to collaborate and share ideas. Integration even reduces the burden of technology challenge. So Apple’s IT team rather than spending time and money on how to get things working feels it worthwhile to dedicate the same on providing capabilities, innovations and resources for its institution (Everything Apple means everything just works).

iTunes and Competitors:

The majors competitors for Apple are Google and Microsoft Corporation and other competitors include Dell, Hewlett-Packard, Fujitsu, Samsung Electronics, Sony and Toshiba. Apple is designing software and hardware systems that delivers a greater user experience. Google is giving away operating systems to companies that license windows mobile today. Microsoft needs to think about their business models to compete in such a race where it probably has to decide whether it wants to compete in devices or operating systems and doing both is again at a risk which requires business models that are outside its core competencies( (The Apple iPhone:Successes and Challenges for the Mobile Industry, 2008). There is a partial collision between Apple and RIM in smartphone business in which Apple’s device is a entertainment centric whereas RIM’s product is a communication centric.Though each company is growing into each other’s space Apple is got the advantage because infrastructure establishment would be too large for RIM and beside that RIM’s image is all wrong for that instead it is much better to defend and grow its market by adding more features and types of business communications to Blackberry. Comparing it with Nokia, Nokia’s challenges are more about challenges. They sell hundred of millions handsets every year at low costs. But without it, Nokia will be really hard pressed to match with the iPhone’s user experiences. Competitors such as Diamond multimedia, with its Rio brand portable media players were successful in the market until Apple displaced them and all the credits for such a domination goes to the business model of the company by offerings users a seamless music experience by combining its iPod devices with iTunes and online iTunes store. Users were taken away by its value proposition and Apple had to negotiate deals with the major record companies to establish the world’s largest online music library, there giving the twist for the company to earn most of its revenues by selling iPods while using the integration with the on online music store to protect itself from the competitors( (Osterwalder & Yves, 2009).Smartphone users are going to increase in number in the next few years increasing in the PC functionalities supporting data services and voice and this is going to drive smartphone markets and Apple launching the iPhone which meets most of the required functionalities made it to third position in the global smartphone market in the third quarter of 2008. As there is rapid change in the technology there is introduction of new products with competitive prices, features and performance characteristics by all the competitors and out of all, mobile communication industry highly competitive with well funded and experienced competitors. For example in 2009, Nokia launched a new online media store in competition to Apple and this has resulted in price erosion which is now threatening to lessen the market share of the company( (DATAMONITOR, 2009).

What new technologies could disrupt the current market by enabling a new form of business model.

Apple has become the leader in the music world revolution and it justifies for its closed source system, keeping its digital music platform proprietary making it incompatible by other system by saying that it was the main reason in convincing its music labels and artists allowing them to sell their songs through iTunes assuring that those would not be pirated. But many analysts claim that that closed system was the reason for its previous failure in the computer business and Microsoft gained the masses with their open systems and now that is being seen as a gamble in this highly cometetive technology world (Williard, 2005). According to survey done by Rubicon Consulting Inc on the Apple iPhone users shows that about 43 percent of the iPhone users feels that the device would be more elegant if there is a physical change to the iPhone by adding adding a keyboard or a keypad either by making the device smaller or larger and about 40 percent of the users complain about the browser problems and the notably with those using Adobe flash and this shows that mobile data devices has always been segmented and its impossible for any single hardware design to please everyone. This could be an opportunity to Apple to increase its share by serving those customers by giving more importance to value propositions for their products which is again a part of business model and at the same time its an opportunity for its competitors to steal that share by addressing segments Apple failed in( (The Apple iPhone:Successes and Challenges for the Mobile Industry, 2008). Apple corporation itself has many problems but loss of competitive differentiation due to its Enterprise sytem is not counted in that because of its strong brand and its distinct operating system. For many of the other computer manufacturers cost and service are more vital for their differentiation than their products but for Apple this seems to be a unusual case says (Davenport, 1998). ‘’Disruptive Business Models are emblematic of our generation. Yet they remain poorly understood, even as they transform competitive landscapes across industries” (Osterwalder & Yves, 2009).


According to Sankar Dhinu, Apple’s senior manager of Emerging Technology, to be competitive in world’s high tech industry, one should make use of the facilities like available economic advantage of the manufacturing and distribution and Apple success goes with its interaction with dozens of trading partners , starting from resellers to distributors and OEM manufacturers which in turn helped it to form a global supply chain. Due to increased competition Apple is also facing many pressures and already working towards less limitation and freer access of digital music. Thus majors themselves are getting involved in those changes and Apple’s CEO Steve Jobs has called for an end to DRM because they make use of downloaded and recorded music very inconvenient and cumbersome for the consumer.( (Koster, 2007)



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