Environmental conditions: Apple iTunes in the UK

1. Introduction

The following report will carry out an assessment of the macro and micro environmental conditions that are likely to impact upon Apple iTunes within the United Kingdom. The analysis which will be carried out will include an assessment of the degree of the threat or the opportunities posed by the existing and potential competition.

iTunes is a digital media player application which is used for playing and organising digital and video files. iTunes also connects to the iTunes store via the internet to purchase and download music, music videos, television shows, applications, games, audio books and podcasts.

The Music industry has radically changed in the last couple of years, thanks to the increasing penetration of broadband, which has made it increasingly convenient for music lovers to buy via the web, this has the effect of promoting digital downloads. Content owners have been hit by the increasing problem of illegal downloading which has had the effect of devaluating the value of music for an entire generation of youth. (Mintel 2009) After its launch in 2002 Apple’s iTunes has come to dominate the music delivery business in many countries around the world, including the United Kingdom. Using a number of tools which look at both the micro and macro environment, and various analysis I will draw many conclusions whether there is a likelihood of continued success for Apple iTunes in the future.

2. What is Apple iTunes?

“iTunes is a free application for your Mac or PC it organises your digital music and video on your computer. It syncs all your media with you iPod, iPhone and Apple TV. It is also a store on your computer; it has everything you need to be entertained anywhere, anytime.” (Apple 2010) Apple iTunes was developed in early 2002 and has developed ever since in relation to Apple’s continued success with their portable media player the iPod. Ever since 2002 many new features have been added to iTunes such as in April 2003 when version 4.0 of Apple iTunes was released which added the feature of the iTunes Store, to make it the success of what it is today. (Apple 2004)

3. Apple iTunes Market Position

The music industry has witnessed a massive change over the last few years; this is due to many reasons. One fundamental change has been the increasing user usage of broadband technology, the increased speed and more people adopting the technology has led to consumers to view downloading music via the web to be convenient and simple. This development originally led many of the traditional high street retailers such as HMV to start selling music online in CD format. In more recent times music both single tracks and albums have become more and more easily accessible for the average consumer due to the continued popularity of services such as Apple iTunes.

3.1 Market Data on The Music Industry

In January 2009 the British Phonographic Industry (BPI) predicted that the UK will spend over £600 million on digital music in 2012 (Mintel 2009). As you can see from (Appendix 2) downloads are dominated by singles or the download of individual tracks. But iTunes and other digital competitors are looking at improving the way in which they are marketing to consumers hopping to persuade them to purchase more albums digitally. Also in (Appendix 2) using BPI figures it shows the demand for single downloads has increased by a massive 340% from 2004-2009, where by the sale of single music in physical format has decreased by 850%. The same trend can be seen for album sales as well.

As you can see from the table in (Appendix 1) pre-recorded music sales are continually moving from the traditional music stores, supermarkets etc to the internet to services such as iTunes. Over a period from 2007-2009 there was a 6% increase of sales of pre-recorded music on the internet, where as other means of selling/distributing pre-recorded music saw a considerable decrease year on year over the same period.

The music industry has seen revenue decrease by 4% in 2008 and it is predicted that this trend will likely continue. Although digital distribution of music will ensure the costs involved when selling music will be dramatically lower, this will lead to increased profit margins for legal music sales in the future. Mintel has forecasted that the music market will continue for the next few years until 2013 to continue to decline. The market will see a dramatic fall of 33% of current prices from 2008-2013, 2009 saw the biggest drop which was 16% (Appendix 3). This is all due to a number of contributing factors, the main being that economic conditions are poised to remain uncertain which hampers consumer confidence. (Mintel 2009)

3.2 Music Market Industry Key Points/Findings

The music industry has changed in recent years due to the major rise in downloadable content which is seen as more appropriate due to the rise of the portable media player as well as it being much easier for consumers to get hold of music, by simply downloading. The following will outline some key findings from the Music Industry which Apple iTunes operate within.

* The music market for digital download retailer’s market share will continue to grow with many new entrants looking to move into the market where Apple iTunes dominate by offering digital rights management (DRM) free tracks. (Mintel 2009)

* The Dominance of iTunes will remain until new entrants are established. (Mintel 2009)

Over recent years ever since the download revolution began there has been one major retailer, iTunes. They have been seen as a threat to major music labels, to counter this threat major labels have granter DRM free tracks to many other retailers to encourage completion in the market place. This move looks to have changed the market place in the future by allowing the consumer to have more choice where they choose to purchase/download there music. (Harvey 2009)

3.2 Competitors

It is vitally important when analysing the market which Apple iTunes operate within to outline their competitors. Many different competitors can affect Apples performance within the market, the competitors can be categorised into direct, close, substitute or indirect competitors. It is vitally important to analyse all of these competitors because they will all affect Apple iTunes in some aspect. As you can see from (Appendix 5) it shows all of the possible competitors within the industry, Apple in 2008 had a market share of 80% “Apple the market leader with an

80 per cent market share” (Lynch 2009) which means there are at least 25 firms who are in (Appendix 5) and many other firms battling it out for the remaining 20% of the market. Apple have been able to gain such a large market share with little or no competition due the agreement they had with the major record labels such as Sony/BMG, Vivendi Universal, Warner and EMG up until 2007 Apple were the market leaders and were starting to begin to dictate prices to the record labels which began to make them worried that they had originally given away to much to Apple iTunes. “The record companies realised that Apple had gained dominance of the music on-line delivery industry and could dictate prices to the record companies. As a result, the record companies decided to drop DRM completely and encourage other delivery companies to enter the industry – they needed some competition for Apple.” (Lynch 2009)

Once DRM free music began to be readily available it enticed many new businesses into the market, in the table in (Appendix 5) you can see the many firms who have seen how successful iTunes has been and they would like to gain some of the success which Apple has created for itself with iTunes. Direct competitors are those who offer a very similar service to what iTunes offers firms such as Amazon, HMV Digital, and Tesco Digital are all looking to break the dominance of Apple by offering a similar service but by offering the tracks at much cheaper price, due to them wanting to break into the industry. “While Apple raised prices, competitors cut theirs. Amazon, the online retailer, cut the price of many of its top-selling music downloads on Monday to 29p as it competes for a larger share of the digital music market.” (Ahmed 2009)

Close competition are businesses which offer a similar service to what iTunes offers but are not in direct completion, these are firms such as subscription based services of Napster, Sky Songs and eMusic as well as bundled download services run by both Nokia and Omnifone which are Comes With Music and Music Station respectively as well as services run by the major mobile networks within the UK such as O2 and Orange.

Competition which is classed as substitutes to the service which iTunes offers are firms which offer a different service to iTunes but could be used instead by potential customers. These are businesses such as Spotify and We7 who offer free music for users but the service contains many adverts which make the service free, the revenue is all advertisement driven. Also substitute services are business which use the latest web technology which is ‘streaming’, firms such as YouTube, MySpace Music and Last.fm are all services which are free and legal allow users to listen to music online but not actually download and put onto a portable media player, such as the iPod. “New services like Spotify give us hope for the future, but physical sales continue to fall and even digital services struggle to compete with free illegal music.” (Mostrous 2010) Substitute services such as Spotify which are free to the consumer may the future of music as they offer a service which costs nothing and is legal.

Indirect competition, is a service which is completely different to what is offered by iTunes. Sony has started to promote and sell the e-book reader, which is a similar idea to the iPod but instead of music allows users to download books and read them on a screen. “It seems the traditional gift wrapped tome is being trumped by downloads, after Amazon customers bought more e-books than printed books for the first time on Christmas Day. The department store chain John Lewis highlighted the popularity of e-readers this Christmas, reporting a jump in sales of Sony’s eBook readers.” (Allen 2009) The music market when from physical music CD’s etc to digital downloads, now the book market looks to go a similar way by offering the user to read books in a digital format.

4. Macro Environmental Factors

Environmental is the fifth factor of the PESTEL framework this looks at the how the performance of Apple iTunes effects the environment which they operate within. Apple is aware of the environmental factors within the industry and is trying to offset the damages they cause, “We account for everything, including out products. Apple reports environmental impact comprehensively, we do this by focusing on our products what when we design them, what happens when we make them and what happens when you take them home and use them.” (Apple Environment 2010) Apple seems to be very aware about that negative impacts of production and of consumers using their products, they are aware of the need for themselves to be socially responsible.

Finally legal, this is a massive aspect for a firm such as Apple iTunes as there are many legal aspects to how they operate within the market place. Also it is important they are aware of the illegal actions potential customers carry out within the market. Illegal downloads is continuing to grow despite the many actions carried out across the industry, “The issue of illegal downloading remains a problem that is set to persist. Although various efforts are being made by those in the sector to minimise the problem there is no easy solution.” (Mintel 2007) Below are two key findings for the UK market which Apple iTunes need to be aware of as it shows that UK consumers are attracted to the prospect of illegal downloads.

* Consumers favour illegal downloads due to their lack of cost.

* Heavy downloader’s are further encourages to continue by the lack of legislation against file sharing from the authorities. (Mintel 2007)

4.2 Industry Life Cycle

The industry life cycle is the supply-side equivalent of the product life cycle; it is made up of four key phases, Introduction (Emergence), Growth, Maturity and Decline. There are two main factors which are fundamental which lead to industry evolution; they are demand growth and the creation and diffusion of knowledge. Demand growth is when the life cycle and the changes with in it are defined primarily by changes in an industries growth rate over time. The second major driving force of the industry life cycle is knowledge. New knowledge in the form of production innovation is responsible for an industry’s creation. The dual process of both knowledge creation and knowledge diffusion is to exert a major influence on industry evolution. (Grant 2005)

Apple iTunes are positioned on the industry life cycle on the maturity stage, (Appendix 4) they have just entered the maturity stage from experiencing rapid growth to be the market leaders in digital music distribution. They show many of the characteristics of the maturity stage, they are dealing with the mass market having many millions of customers although they need to be aware that potential customers now are begging to become more sensitive to price due to the current economic climate but more so due to the ever increasing competition of price within the market place. “The omnipresent iTunes has triumphed over its digital-market competition, providing three-quarters of the online sales in the market. But it isn’t the only show in town: there is a huge amount of competition, not just on the service offered but mainly on the price which music is sold for.” (Robin 2008) Other characteristics which show that Apple iTunes are in the maturity stage are that they are introducing new products that are continually being innovative by adapting the iTunes service, such as adding additions to the iTunes Store and extra features.

5. Micro Environmental Factors

The Micro Environment factors are that what affects an organisation’s immediate area of operations. It affects the decision making and the overall performance of the business; the factors which it looks at are customers, distribution channels and competitors. (Grant 2005)

In this section of the report I will look to adapt the porters five forces model which will then be applied to Apple iTunes, which will allow for analysing the five key forces that shape the industry.

5.1 Porters 5 Forces

Porters five forces analysis helps firms to analyse the strength of competitive threats and is particularly useful to Apple iTunes as it allows them to analyse the competitive environment. The model focuses on the competition and the bargaining power in the supply chain – suppliers through to customers. The model is made up of five forces they are threat of new entrants, bargaining power of buyers, threat of substitutes, bargaining power of suppliers and the industry competitors. (Masterson 2004)

Firstly threat of new entrants this looks at the activities of potential competitors as well as existing competitors within the market place. In 2007 the major record labels began to realise that they had given iTunes too much power over the digital music market and were able to dictate the price they wanted to pay to the major record labels, Apple iTunes was now the biggest firm in the industry with over 80% of the market. “As a result, the record companies decided to drop DRM completely and encourage other delivery companies to enter the industry – they needed some competition for Apple.” (Lynch 2009) DRM free tracks were introduced to create new entrants into the market, which it has succeeded in doing which has meant Apple iTunes now has many major competitors to its dominance. iTunes have the highest market share in the industry at present and due to the increased competition that has developed but they still have not taken away iTunes dominance, new firms who come into the market must be aware that the only way they are going to be successful is if they are innovative. Also to prevent new entrants into the market iTunes has the power to set a price for its downloads at whatever it sees fit due to how successful and respected the Apple brand is, this price may be lower than what new firms into the market may be able to afford which would prevent them from competing in the market.

Next is the bargaining power of Apple iTunes suppliers this will look at the relationships developed between the record labels and how these relationships have changed over time. iTunes suppliers are the record labels such as such as Universal, Sony, Warner Music and EMI, in 2009 they believed that they could make more money out of the industry by making iTunes charge more for the tracks which they sell in there iTunes store. Apple were made to charge 99p for their highest price track, the music labels insisted that it would be in Apple’s interest for future development of the industry as it would mean more revenue to be available to promote new artists and prevent piracy. “Apple iTunes caved in to pressure from the record companies and introduced variable pricing yesterday, raising the top price for a song to 99p.” (Ahmed 2009) Originally before the record industry decided to offer DRM free tracks, iTunes were the only business in the market and they had complete control over the record labels and could charge the prices they wanted. But now due to the increased competition the record labels want to create iTunes now have to listen to their suppliers more, and sometimes take on board what they recommend even if they don’t believe it will have a positive impact on their business.

Thirdly is the bargaining power of the buyers these are customers who use the Apple iTunes service; this will look at what power the customers have over iTunes. iTunes is the largest service online which offers users the ability to download digital music, but customers within the UK are extremely price sensitive especially in this current economic climate where currently the UK is in recession (BBC Business News 2009) When services such as Amazon are offering users the chance to download identical digital music tracks which are DRM free for 29p compared to iTunes 99p consumers may wish to use Amazons service rather than iTunes. “Amazon, the online retailer, cut the price of many of its top-selling music downloads on Monday to 29p as it competes for a larger share of the digital music market.” (Ahmed 2009)

The next force which the model looks at is the threat of substitutes within the market, the market is full of competitors but the majority are very similar to the service which iTunes offers its customers. The threat of substitutes though is great, due to the industry which iTunes operates within. Technology is ever developing, if a new firm was to enter the market and adapt new technology which no other firm had looked at, they would be an innovative service which may be looked upon by consumers as something different and one which they may want to try and use on a regular basis. It is vitally important that Apple iTunes continues to innovate by introducing new ideas and features to its products so that they continue to be the market leaders. As with Amazon in the Ahmed 2009 article, iTunes were persuaded to increase their prices even though Amazon who are trying to gain a foothold into the market continued to have their prices 70p cheaper per track, which could lead Amazon becoming a substitute to the service which iTunes offers. (Ahmed 2009)

Finally the inter rivalry of competitors this looks at various factors such as competitive edge, price wars and the market growth rate etc. The digital music market is highly competitive; the market is growing very rapidly. The main aspect of the market is that every business within the market are selling the same digital music to which iTunes are offering all at different prices, this is due the record labels introducing DRM free tracks to create competition for iTunes within the music download market. iTunes are not the cheapest within the market place but have been able to develop a brand image which has led them to major success, they are the market leaders and continue to innovate new successful products.

6. SWOT Analysis