"English Business Programs"
"Assignment Writing"
"Second Semester"
"CiB_01/03"
"Marketing"
"The marketing-plan of Apple Computer"
"entering the digital music revolution"
"Course Lecturer: John F. Sykes"
"Author: Urs Gaudenz"
"Submitted: January 22nd 2004"
" CONTENTS"
"1 Introduction 4"
"2 Methodology 4"
"3 Digital Music Revolution 5"
"4 SWOT Analysis 6"
"4.1 Opportunities 6"
"4.2 Threats 6"
"4.3 Strengths 7"
"4.4 Weaknesses 7"
"5 The Market Entry 8"
"5.1 The Market for Portable Music Players 9"
"5.2 iPod the Product 9"
"5.3 The Market for Digital Music 10"
"5.4 iTunes Music Store the Service 10"
"5.5 Loss Leader 11"
"6 Brand extension 12"
"7 Conclusion 12"
"A-I Reference 13"
"A-II Bibliography 13"
"A-III Declaration of Original Content 14"
" FIGURES"
"Figure 1: Apple Vision, “The Digital Hub” 8"
"Figure 2: The iPod 9"
"Figures Copyright by Apple Computer Inc."
" ABSTRACT"
"At the beginning of the new century the music industry found itself in a desperate situation. New"
"digital music technologies emerged and opened whole new ways to distribute and listen to music. But"
"people in the industry were to slow to react and more and more music consumers used free file share"
"systems to illegally download songs via the Internet. Apple Computer saw this as an opportunity to"
"enter a new market and develop a new digital music product, the iPod MP3 player and a new service,"
"the iTunes Music Store. The success was overwhelming and further accelerated the digital music revolution. This paper analyses Apples excellent marketing for witch the company was named"
"“Marketer of the Year” by the advertising agency AdAge last year. The paper is structured according to a marketing-plan covering business and product level marketing."
"1 INTRODUCTION"
"Apple Computer, the Cupertino, California-based company ignited the personal computer revolution"
"in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh."
"Apple computer is one of Americas most inventive companies. It developed many of the features that computer users have come to take for granted, including the graphical user interface, the mouse, the"
"laser printer, and the color monitor. In the last 10 years alone, the company has issued more than 1000 patents."
"In the 90’s Apple made the momentous strategic decision not to license its technology and Microsoft"
"with its Windows operating system quickly dominated the market. Apples share of the worldwide market for PCs decreased continuously to the lowest level of just about 2%."
"Steve Jobs, one of the founders of Apple Computer, who left the company in 1985 to start his own"
"business with NeXT Computer and Pixar Animation Studios, returned to the company as CEO six"
"years ago. Since then Apple enjoys a renaissance. Jobs' company has surprised with the iMac,"
"introduced OS X a new Unix based operating system and rolled out the PowerMac G5, arguably the fastest desktop computer ever built."
"And now Apple makes a bold move. For the first time in his history Apple moves away from its core"
"business of computer into the music business and kicks of a revolution again. Apple introduces the"
"iPod, which soon after should become the most selling portable music player in the world and the"
"iTunes Music Store a revolutionary online service to buy digital music."
"What is the digital-music revolution? How can Apple the computer company convince the record"
"labels to cooperate? What are the biggest opportunities and threads in this new market? And why"
"should music lovers buy Apples new products and use the new “pay for music” service?"
"These questions on Apples extraordinary marketing plan will be analyzed in the following chapters."
"And finally the question on how this might change the brand and market situation for Apple Computer will be discussed."
"2 METHODOLOGY"
"The developments around digital music, that are part of the Internet evolution, are going on in a rapid"
"pace. As for many new technological and social phenomena there is scarce literature to be found and"
"actual information is unbalanced and often controversial. In addition to that the information policy of"
"Apple Computer is very restrictive and no forward-looking statements on products or services are"
"published to protect innovation against potential competitors. This is why this analysis is mainly based"
"on information drawn from recent publications, interviews, online forums and product descriptions."
"The analysis is structure according to a classical marketing planning process (D. Jobber, 2001) and"
"includes the following elements:"
"Marketing planning at the business level:"
"- Business mission (Chapter 1, Introduction): background of the company, competences, what are we, what do we want to be."
"- Marketing audit (Chapter 3, Digital Music Revolution): lifestyle changes, trends, market figures, distribution models."
"- SWOT analysis (Chapter 4): strength, weaknesses, opportunities and threats."
"Marketing planning at the product level:"
"- Strategic trust (Chapter 5, The Market Entry): Market development, the new products."
"- Competitive advantages (Chapter 5, iPod, iTMS): Target markets, competitor targets."
"- Market penetration strategy (Chapter 6, Brand Extension) -> Future for Apple, Market"
"expansion."
"3 DIGITAL MUSIC REVOLUTION"
"The music industry has established over many years and numerous big companies and a vast"
"distribution network are part of it. The total music market in the U.S. accounts for $80 billion"
"(Jupitermedia, 2003) and about €40 billion in Europe (European Music Office, 2003). The values that"
"the music labels create is selecting the most promising artists among thousands of candidates and"
"promote them to become successful music stars. This is an intuitive process and the best music"
"companies know how to do that with a reasonably high success rate. The distribution system consists"
"of traditional record stores like Virgin Megastore, retailers like Wal-Mart, and more recently the"
"online stores like Amazon.com that sell recorded music on compact disc (CD) over the Internet. Every year over 20 billion songs are sold on CD worldwide."
"Despite this huge market volume the music industry is rather traditional and has not changed a lot in"
"past years. The music recording made the transition from analog to digital and CDs replaced the"
"gramophone record. But most of the people in the music business are not technology people and thus"
"rather slow to react on new trends."
"The technologies on the other hand and consequently the early adopting consumers have changed a lot"
"in recent years. Almost every personal computer today is equipped with a CD burner. Music"
"customers quickly discovered the possibility to copy (rip) CDs and store them as digital files (MP3) on"
"their computer. Ingenious computer cracks found a way to share the digitalized music over so called"
"peer-to-peer networks over the Internet. A whole new culture grew around the most popular illegal file sharing networks like Napster or Kazaa."
"So the music freed itself from the compact disc and from the traditional distribution channels."
"Customers enjoy the easy way to search and instantly acquire music online. And even though music is"
"getting more popular with that, the music sales and the music industries are suffering. In their inability"
"to provide a legal alternative distribution method the record companies have to defend their intellectual property rights and sue network providers and in the end even their former customers."
"Some companies like Bertelsmann AG tried to get into the business but could not compete with the free systems."
"The music artists are quite lost in the new constellation. On one hand they are dependent on the record"
"labels and on the other hand they can see the possibility to get a more direct contact with their fans. Some independent artists tried to provide their music online by themselves."
"But people continue to profit from the free and amazingly efficient distribution system and at the"
"beginning of the new century the industry found itself in a very difficult situation."
"4 SWOT ANALYSIS"
"Steve Jobs once said: “If you get to solve a impossible problem it is often a good business”."
"This shows, that he realized in what an impossible situation the music industries were in and indeed many experts saw this market already as lost. But as a positive and forward-looking CEO he also made"
"out considerable opportunities and he knew about his companies strength and possibilities to overcome the threats and profit from these opportunities."
"4.1 Opportunities"
"The music revolution is taking place. The new technologies available to record, share and listen to"
"digital music offer such a compelling way to deal with music, that no one who ever experienced this"
"would want to go back to the traditional system of record stores and CD players. The Music can get"
"much faster from the artists to the consumers. The consumer can burn his songs on as many CDs as he"
"needs for his personal use and take the music with him on a mobile MP3 player. No CDs have to be"
"manufactured and shipped to the thousands of stores all over the world. The possibility to search for songs in a huge database or share your personal collection of titles with thousands of others offers"
"totally new opportunities."
"The Internet was made for music delivery. The text-based distribution of information over the Internet"
"ruled the world in no time. And in the course of Internet boom the infrastructure got improved and"
"expanded. Broadband penetration has reached the households and allows the download of an MP3 encoded song in a fraction of a minute. In the U.S., 42% of Internet users enjoy a high-speed"
"connection today (Nielsen//NetRating, 2003). This new distribution channel offers great opportunities that are only used by the illegal file-sharing networks so far."
"The Recording Industry Association of America's aggressive prosecution activity against illegal file"
"downloads will put more and more pressure on these services. Customers get afraid and are open for legal alternatives. Public consultations have shown, that eighty percent of the people stealing music"
"online don't really want to be thieves (Vivendi Universal Net USA Group). Jupiter Research says digital music sales will grow from $80 million, or 1% of the total music market this year, to $1.5 billion, or 12% in 2008 in the U.S. and from €24 million in 2003 to €1 billion-plus by 2007 in Europe."
"4.2 Threats"
"The biggest threat for the Apple online music store lies clearly in the competition and in particular in"
"the existing free but illegal file sharing networks. The question is: “Is it possible to compete with a"
"free service on the market?” It is probably impossible to beat the free services but by creating a better,"
"legal service it is possible to gain a part of the market and this might already be a quite good business. The situation may be compared with the market for bottled water. Everyone can get free water from"
"the tap, but people by bottled water because it is better in quality, safer, easy to get and, above all, cheap."
"But of course there is also legal competition coming into the market. None of the big computer or IT"
"companies attacked this market before Apple did so. Maybe because everyone thought it is up to the music companies to find a working business model and they in turn couldn’t, because a big part of the"
"solution lies in the technology behind the service. But once the iTunes Music Store proved the concept many companies followed. Roxio was first to launch a similar service under the brand of Napster (which is the former name of an illegal service) followed by Real Networks with its Rhapsody service. Others include BuyMusic.com, MusicMatch and MusicNow. In addition to those specialized technology companies also big players like Microsoft or Sony announced their own music download"
"services to be started this year and Dell Computer is partnering with MusicMatch. And last but not"
"least also the traditional retailers want to defend their market share in music sales and so Virgin"
"Entertainment, Amazon and Wal-Mart present their plans. Apple has to face this competition and"
"profit from it’s leading position."
"An important thread might also pose the copyright protection of the files download through the"
"service. The music industries fear the loss of control over the intellectual property of their artists. In"
"reaction to the bad experiences they made with the illegal services they started investing in technical"
"copy protections, but these solutions are never absolutely save. The solution to music piracy is not a"
"technological one but behavioral – create better, legal service."
"And finally it must not be underestimated, that the online business as well as the digital-music market"
"is a new and quickly changing field of action. The habits of the customers, ranging from eighteen-"
"year-olds college Students to demanding music lovers, have to be observed and satisfied. The Internet"
"as well as the portable music player technology evolves continuously and only the products and"
"services that are up to date can survive."
"4.3 Strengths"
"To overcome the awkward situation of record labels fighting against consumers that illegally"
"download music over the Internet someone had to fill the gap and provide a persuasive legal service."
"But people in the music industry were very dismissive in interactions with technology companies because they could not trust them."
"The strength of Apple Computer is, that people working with music know their products and perceive"
"it as a creative technology company. Almost every song is recorded and mixed on a Macintosh"
"computer. And that Steve Job, the front man of the company, is a music lover himself is quite obvious"
"when he chats with Mick Jagger, U2's Bono or Sarah McLauchlan on stage during his Keynote speeches. This strength certainly helped Apple Computer to convince the big 5 music companies"
"BGM, Sony, Emi, Universal and Warner to sign a breakthrough deal last year, that allows Apple to offer online music downloads with generous user-rights to its customers. Jobs explains in an interview with the Rolling Stone Magazine (Jeff Goodell, 2003) that the negotiations were very tough. “At first, they kicked us out”, he says “but we kept going back again and again”."
"The leadership in negotiating digital-rights agreements is a clear advantage of Apple against it’s"
"competitors and also helps to later on convince independent labels to allow their music to be"
"distributed over the iTunes Music Store."
"While the negotiations with the record labels were still going on Apple pushed the Internet Streaming"
"Media Alliance (ISMA) to add digital rights management (DRM) and encryption technology to the"
"MPEG-4 music compression standard. Apple then built MPEG-4 into his products and services and"
"gained a strong argument to clear out concerns about security."
"Once the deals with the record companies are complete Apple also has to provide the online download"
"service that for it self is not an easy task. But here also, the niche-player computer company has some"
"important strength: Apple has a long tradition in developing truly user-friendly computer software and knows how to make even complex processes seam easy. Several hard and software products have been"
"rewarded with design awards in the past few years."
"Further Apple has acquired lots of experience with massive data streaming by operating a large movie"
"trailer site and has know-how in the fields of online transactions from their online product store and"
".mac email and internet service."
"4.4 Weaknesses"
"Of course Apple faces also some weaknesses that must be well thought-out."
"Despite Apples good contacts to the creative industries the music business represents a new market for"
"the company. Many Macintosh computers are sold in the consumer area where synergies may be"
"found but the challenge is to reach also non-regular computer users and convince them to use the new"
"products and services. In particular the users of Windows machines have to be considered. The two"
"rival operating systems, MacOS and Windows, represent two different worlds that have to be served"
"both to gain a substantial part of the market. Up to now Apple was very reluctant to the Windows"
"world but this time the company has to go all the way. But as detailed in the chapter “Brand"
"Extension” this weakness might well turn into a huge opportunity."
"Then there is one other quite particular weakness of Apple Computer that shows well how difficult it"
"might be to enter completely new markets:"
"Over a decade ago, when Apple Computer first built audio speakers into its computers, Apple Records"
"a company owned by the Beatles and their heirs sued over trademark infringement. In conclusion the two companies signed an agreement which specified the rights each company would have to use the"
"“Apple' trademark”. But at present with Apple Computers decision to sell music and promote Apple as a music provider Apple Records sued again. As a first consequence Apple had to remove the ""Music"" tab from its corporate website and the writing “Apple Music” had to be replaced by “Apple iTunes”."
"5 THE MARKET ENTRY"
"Apples entry into the music market is based on new products and services incorporating technical and"
"business-model innovation. As the example of successful companies like Dell show, only products"
"that integrate into a successful business-model can be successful and create revenue in the long run."
"The business-model is to provide an end-to-end digital-music system that covers the way consumers"
"buy, manage and listen to music. This model integrates well in Apples “Digital Hub” strategy where"
"the computer operates as a hub to complement a range of devices. The iPod, a small digital MP3"
"player, iTunes a music jukebox software and the iTunes Music Store a online download service"
"seamlessly integrate. The user can search for his favorite songs in the store, download them onto his computer, organize the music on the computer and then automatically transfer the music to on his"
"music player and listen to it wherever he goes."
"Back in 2001 Apple Computer started to implement this strategy."
"Figure 1: Apple Vision, “The Digital Hub”"
"5.1 The Market for Portable Music Players"
"“Innovation begins with an epiphany, a sudden vision of the future.” (Rob Walker, 2003)"
"The products on the portable music player market may be divided in the following categories with its"
"corresponding pros and cons:"
"Cassette-tape Walkmans and CD-Players:"
"Pro: Mature technology, easy to use"
"Con: Saturated market, few features, difficult to integrate into “Digital Hub” strategy"
"MP3-CD-Players (play MP3-encoded music files from CD):"
"Pro: large number of songs"
"Con: large physical dimensions, CD-burning required (no direct synchronization with PC)"
"Flash MP3 Players (music stored on so called flash memory)"
"Pro: small physical dimensions, songs can be quickly transferred form PC"
"Con: number of songs limited by flash memory size."
"Apple crated a completely new category of digital music player that lets you put your entire music"
"collection in your pocket. The crucial equation is ''largest number of songs'' divided by ''smallest physical space,” combined with “seamless integration”. The iPod is a really small digital music player"
"with a high-speed interface to transfer data from the PC to the player and a small hard drive that can store several thousand songs."
"5.2 iPod the Product"
"With its new device Apple wanted to create a new way to listen to digital music and had a clear vision"
"of what the player should be and what it should look like. The company learned from its experiences"
"in 1993 with the Newton, the first pen-based personal digital assistant (PDAs), which was too clunky"
"and hard to use. The specifications for the device were as follows:"
"- Small"
"- Simple user interface"
"- FireWire moving data between digital devices -- in large quantities, very quickly"
"- Highest quality sound"
"- Huge storage capacity"
"- Elegantly designed in classic Apple fashion"
"- Cost"
"While the technological features of the iPod like storage capacity and data connection made it"
"competitive in the market, the exceptional design including small dimensions, the scroll wheel for easy"
"navigation and the white color was an important marketing factor."
"Jonathan Ive Apples chief designer on the design process: “I remember there was a discussion:"
"'Headphones can't be white; headphones are black, or dark gray.’ But uniform whiteness seemed too important to the product to break the"
"patter and make the iPod special”."
"The iPod was developed in an outside-in perspective where subsequent"
"design parameters were dictated by its appearance and form factor. To"
"reduce time to market and reduce risk Apple relied, which is rather unusual for the company, on a platform and reference designs created"
"by a third party and used standard components rather than application specific ICs (ASICs)."
"Since it was first introduced in October 2001, Apple has sold more than"
"1.5 million iPods, or about 300,000 per quarter today and holds 31% of the digital music players market (Apple Computer Inc. 2004)."
"Figure 2: The iPod"
"5.3 The Market for Digital Music"
"In April of last year Apple introduced its digital jukebox, the iTunes Music Store, and is since the"
"number one in songs and revenue with 70% market share and more than 30 million songs sold (Apple"
"Computer Inc. 2004). How was the market before the introduction and what are Apples success"
"factors?"
"There were actually two different services on the market before the groundbreaking deal of Apple with"
"the big five music companies:"
"Subscription Services"
"Music subscription services like MusicNet, Pressplay, Rhapsody, Musicmatch offered music on"
"demand for a monthly fee. Subscribers could search for music and listen to a unlimited number of"
"songs that were directly streamed to their computer. But the services did not allow burning of the"
"songs on CDs and once the subscription was canceled the customer lost all the right on the music. Steve Jobs was certain that this kind of service was going to fail because he believed that people don't"
"want to buy their music as a subscription, they want to own."
"Illegal File Sharing Networks"
"The file sharing networks, that allow people to download and share music over the Internet are illegal"
"as long as copyright material is distributed without permission. But these frequently used, free services represent the real competition on the digital music market."
"The solution Apple aspired was to build a new service, which could compete with the free services,"
"eliminated the down sides and offered added value to convince customers to pay for the downloads."
"Upsides of the file sharing networks:"
"- Vast collection"
"- Unlimited number of CDs"
"- Unlimited transfers on MP3 players"
"- Free"
"Downsides of the file sharing networks:"
"- Unreliable connection"
"- Erratic quality"
"- No previews"
"- No album cover art"
"- Stealing"
"5.4 iTunes Music Store the Service"
"Based on the market analysis and respecting the user rights negotiated with the music companies"
"Apple set the specifications of the iTunes Music Service as follows:"
"No Subscription Fees (not rent music)"
"To be competitive:"
"- 500,000 tracks and audio-books"
"- Unlimited CD burn for personal use"
"- Put your music on an unlimited number of iPods"
"- Play your music on up to 3 Macs."
"To be better than the file sharing networks:"
"- Fast reliable downloads"
"- 128 kpbs AAC quality, every song"
"- Previews (37secs)"
"- Album art included"
"- One Click Shopping (patented system, which Apple exclusively licensed from Amazon)"
"Additional Values:"
"- Exclusive Tracks - U2, Eninem, Bob Dylan etc..."
"- Music Store ordered by Genre, Artist etc."
"- Celebrities play lists and Top10 lists"
"- Gift certificate / Allowance"
"5.5 Loss Leader"
"Whit iTunes competitive advantages, Apple was in a good position to convince the customers."
"But there is one last important point: How much are the customers willing to pay?"
"An Ipsos-Insight study (Ipsos-Insight, 2002) suggests that consumers find that paying between $10"
"and $15 for a full-length album on CD from a tradition store is acceptable. But when it comes to"
"downloading albums online, they expect to pay less, in the range of $5 - $10."
"Apple must have been aware of the fact that the price must be as low as possible, and that customers"
"would not accept to pay more than what they believe is justified. Apple set the price of an album to"
"$9.99 and the price for a single song to $0.99."
"This price is quite low considering, that under existing licensing deals, 65 to 75 cents of each 99-cent"
"download goes to the labels (Apple Compter Inc, 2003) and that Apple has to cover the editing of the songs, the infrastructure and the micropayments credit card transactions. And suggesting there's some"
"price pressure ahead the breakeven point for this service will soon be under attack. But here Apple business-model approach may pay out: the downloading service is a huge opportunity to sell iPod music player which in turn have a quite good profit margin. Apple has doubled the monthly iPod sales since the introduction of the music store and has never lowered the prices for the iPods so far."
"6 BRAND EXTENSION"
"With the two new and astonishing products, the iPod MP3 player and the iTunes music store Apple"
"successfully entered the music market. The questions remains what advantages this move will have for"
"Apple as a computer company, considering that the biggest part of Apples revenue is still being"
"generated by the computer business."
"During the transition to its new operating system OSX in 2002, Apple started the “Switch” marketing"
"campaign witch was intended to lure PC customers to the Apple platform. But switchers were rare."
"Obviously Microsoft customers still viewed Apple as a niche player and could not entirely trust in its products even though the Apple brand was well known and stood for innovation."
"With the entry into the music market Apple went for a new strategy. The purpose is to extend the"
"Apple brand from the difficult business of computer to the more open and emotional topic of music."
"Promoting the Mac as the ""hub of a digital lifestyle"" and profiting from its customer focus Apple"
"moves away from its roots as a PC company and closer to a new role as a consumer-electronics and entertainment company. With people buying the iPod music player they become customers of Apple"
"and get the chance to experience its products. To synchronize the iPod or to download music they will have to use Apple software and in the end will probably be more open to consider buying an Apple Macintosh computer. The iPod as well as the music store run under the Windows platform like a “trojan horse” promoting the Apple brand. Hewlett Packard just recently signed a contract with Apple to sell iPods over its distribution channels and to preinstall the Apple iTunes software on all of its"
"consumer Windows PCs."
"7 CONCLUSION"
"The analysis of the different elements of a marketing plan outline the various aspects involved in the"
"penetration of a new market and the successful launch of a new product or service. Being aware of its"
"own position and capabilities, and seeing opportunities in a new trend a company can enter a new"
"market and develop. On its way, the company has to use its strength, respect its internal weaknesses"
"and consider the outer world with its opportunities and threads. The product or service development"
"must be based on a analysis of the market and the competition. Competitive advantage can only be"
"achieved with a clear and differentiating specification. Apple Computer showed us this in an"
"impressive way with its resent move into the music business. And this move was not only a turnaround"
"for Apple but was also a revolution for the whole music industry."
"A-I REFERENCE"
"Jobber D. (2001). Principles & Practice of Marketing, UK, MacGraw-Hill"
"European Music Office (2003). “The recording industry in numbers”, London"
"Jupitermedia (2003). “Jupiter Market Research and Forecast”, Darien, CT"
"Nielsen//NetRatings (2003). “The global standard for Internet audience measurement and analysis”,"
"Milpitas, CA"
"Jeff Goodell (2003). “Steve Jobs: The Rolling Stone Interview”, Rolling Stone Magazine, New York,"
"NY"
"Rob Walker (2003). “The Guts of a New Machine”, New York Times, New York, NY"
"Apple Computer Inc. (2003/2004). MacWorld Keynote speeches + Press releases"
"Ipsos-Insight (2002). “Consumer Products Fast Facts”, Chicago, IL"
"November 30, 2003"
"A-II BIBLIOGRAPHY"
"Linzmayer O. W. (1999). “Apple Confidential: The real story of Apple Computer, Inc.”, No Starch"
"Press, San Francisco, CA"