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Predicting Apple's fall

January 09, 2006

The iPod is toast. So says the Harvard Business School's Clayton Christensen in a Business Week interview posted today, the eve of Steve Jobs's Macworld keynote. Christensen, like many before him, believes that Apple's desire to keep the iPod a closed system, rather than allowing other manufacturers to use iTunes software in their devices, amounts to a replay of Apple's fateful decision not to license the Mac OS, which (the story goes) opened the way for Microsoft's dominance in PCs.

"I'd be very surprised," Christensen says, "if three years from now, the proprietary architecture [in music players] is as dominant as it is now. Think about the PC. Apple dominated the market in 1983, but by 1987, the industry-standard companies, such as IBM and Compaq, had begun to take over."

Hold on a second. Apple dominated the PC market in 1983? That was a year before the Macintosh was introduced, and at the time PC market shares looked like this:

Commodore: 41%
IBM PC/clones: 26%
Atari: 10%
Apple II: 9%
Other: 14%

Apple was hardly dominating the market in 1983. In fact, Apple never had a particularly big share of the PC market; it's basically been a niche player all along. The Macintosh's share peaked at 12% in 1992 - when IBM PCs and clones held the other 88% of the market.

By contrast, the iPod's current share of the market for portable digital music players is estimated at upwards of 70% (and its share of music downloads is probably even bigger). Controlling 70% of a market is a heck of a lot different than controlling 12%. In fact, it's completely different.

Apple today is in the driver's seat in the digital music business in a way that it never was in the PC business, and it will likely announce products and partnerships tomorrow that will extend its lead in video as well. If Apple's rivals are going to overtake it, they're going to have to come up with a better strategy than waiting for history to repeat itself.

Comments

Pretty simple. If Apple introduces a subscription music and video service it's total victory. I have no clue why Jobs is opposed to that model - they make all of their money selling hardware - not music.

Posted by: Andrew Schmitt at January 9, 2006 11:12 PM

History does have a funny way of repeating itself. The phones will take over/prevail. People want one device to carry around. Plus, Apple overprices its hardware too long.

Posted by: ordaj at January 9, 2006 11:36 PM

Andrew: It's on behalf of the hardware that they'll hold off on the subscription model as long as possible. Think of it this way: You have an iPod and you buy 200 songs from the iTunes Store. Sometime later, a new music player catches your eye. But the new player can't play songs from iTunes, so if you switch to the new player you lose those 200 songs (and the $200 you paid for them). That's a pretty big switching cost. If, instead, you were on a monthly iTunes subscription, switching to the new player would just mean switching to a new subscription service compatible with the new player. You wouldn't be losing your investment. So the download model pins you to the iPod in a way that a subscription model wouldn't.

Posted by: Nick at January 9, 2006 11:38 PM

I certainly hope Apple never open up their proprietary systems - it would spell disaster for Mac and iPod users!

The reason Apple products work so wonderfully well is that Apple have 100% control over them. Start adding in 3rd party products and all of a sudden you'll see driver problems, systems crashes, bugs ... a la Microsoft's problem.

Apple are in the position to create whatever they want and innovate software and hardware inter-operability like no one company in the world - purely because of their closed approach.

So if you only like one Apple product you're in trouble - but if you like the suite - great!

Posted by: Ed Byrne at January 10, 2006 04:27 AM

Clayton's point is sort-of correct. Don't forget that, at the time, the market was split between machines like the Commodore VIC-20 or Atari 400 (which were very cheap), and the IBM PC or Apple II which were "business priced". Although Commodore and Atari shifted a huge number of units, most of those machines were used simply for gaming - they were more like proto-consoles than true computers.

So in the "real" computer market, Apple was in fact the number two vendor. Prior to the PC's release in 1981, Apple was pretty much the de facto standard for low-cost personal computing in business, thanks to Visicalc. The problem, of course, is that the entire personal computer market then was tiny. Apple was a big fish in a small pond.

Christiansen's article, though, misses one important point: the music player market is not like the PC market, in that there's no software lock-in. If you have a player from Apple, it'll play MP3s, just as a player from Creative will. Until the day you can no longer rip MP3's from CD, which is still how the vast majority of music played on players arrives in digital form, the playing field will be level.

On this:

"So the download model pins you to the iPod in a way that a subscription model wouldn't."

No, that's not correct. There's no reason why Apple couldn't produce a version of FairPlay that supports subscriptions, yet isn't compatible with Windows Media's "Plays for Sure" system (which drives all the other subscription services). That would still lock you into the iPod, while having the features of the other suscription services.

Posted by: Ian Betteridge at January 10, 2006 09:36 AM

Ian: Thanks. It does help to distinguish between the two prevailing PC types at the start of the 80s. But the IBM PC was already well ahead of the Apple II by 83 and far ahead by the time the Mac debuted in 84.

The no-software-lock-in point is a good one in distinguishing the PC and music player markets. Related to that is the fact that the economics of software-application creation are completely different from those of music-file creation. Software makers often had to choose one platform for their applications, as it was too expensive to create versions for more than one platform. There's no such economic constraint on creating versions of music files for different platforms.

But I don't agree with you regarding the subscription point - or else I'm missing something. If you're paying a monthly fee for a subscription service, then switching to a different subscription service doesn't entail a "loss." You just pay your monthly fee to a different company. Therefore, the subscription model doesn't impose an economic switching cost to shifting to a different music player. Whereas if you've purchased a bunch of songs - and own them - you would lose that investment if you switched to a different player that couldn't play those songs.

Posted by: Nick at January 10, 2006 09:55 AM

I think the good doctor needs to check his old textbooks about why the entrepreneur innovates in the first place, at least from an economic point-of-view. In Christiensen's BW interview, there is not a single instance of the term *profit* anywhere to be seen (I pasted the doc into WORD and ran a check). It's all about market share and revenue. Years back, I worked for a Japanese electronics company that utterly dominated market share in its category while hemmorraging red ink all the way.

Screw the dilemma part, the Innovator's REASON for entering a market is to make inordinate profits based upon an unfair advantage. Of course, market share is an important aspect but my bet right now is that Steve Jobs might have copped a clue that there is going to be eventual commoditization of digital music hardware. And by the time that happens, Apple will have gathered by far most of the available cream to be had. Once commoditization happens, the nexus of innovation will move to production and distribution economies. That's not Apple's value engine and if we look at Jobs record, he'll move the company into another consumer area where product design and user experience allow him to skim off the lion's share of extraordinary profit before commoditization sets in.

Call me biased but last time I checked, profitable companies outlast companies with strong market share (go back to your 1983 list, as well as 93 and 2003). I'm not saying that you can't have both and that there aren't examples of both. I'm simply saying so long as Apple can grow the digital music market in aggregate, maintain Apple's general share, and keep its margins, Jobs would be an idiot to open up iPod any more than he absolutely has to. And once he does, you can bet that all the fat and easy profits have been made.

Posted by: John Gauntt at January 10, 2006 11:01 AM

I think the argument is that the switching cost of a subscription that is, say, $9.99 per month, is a lot less (or, perhaps more correctly, *appears* to be less in the eyes of most computers) than say, $200 of sunk costs in downloaded songs that cannot be transferred. there is a greater psychological switching cost from the download model.

i think clayton christensen is right on, though. apple refuses to let the ipod become a platform/communication medium. this strategy is doomed big time. apple may own the digital music market, but they have stiffer competition on the digital video front -- sony PSP, google video -- as well as on the mobile hardware front -- treo, cell phones, PSP, and all the other gadgets. one of those competitors will want apple's lucrative market, and so they'll commoditize the hardware. in the end, apple will fail.

Posted by: kid mercury at January 10, 2006 03:49 PM

Nick says...

"But I don't agree with you regarding the subscription point - or else I'm missing something. If you're paying a monthly fee for a subscription service, then switching to a different subscription service doesn't entail a "loss." You just pay your monthly fee to a different company."

Yes, I think you're missing something :)

It would be easy for Apple to add a subscription service to the iTunes Music Store that wasn't compatible with any player except the iPod. And, more importantly, because it retains complete control over the platform it can prevent any other subscription service from being compatible with the iPod too. This is probably why Apple has effectively prevented developers from creating third-party applications for the iPod (the only way to do it is to load Linux on the iPod, which isn't an easy solution) - if it opened the platform, it would open the way for a company like, say, Real to add support for its subscription services to the iPod directly.

Thus, it's not the download model that keeps the iPod and iTunes Store pinned together - it's the "closedness" of the platform to developers.

Posted by: Ian Betteridge at January 11, 2006 07:32 AM

Ian: We're talking about two different things. I'm talking about the switching costs involved in moving from an iPod to a different player. You're talking about the switching costs involved in moving from the iTunes Music Store to another commercial provider of music. As Apple makes a lot more money selling iPods than selling songs, its strategy is driven more by iPod switching costs than iTunes switching costs (not that the latter are unimportant).

Posted by: Nick at January 11, 2006 08:56 AM

Let me put it another way. When you switch from an iPod with iTMS and bought songs to (say) Napster To Go with a Zen Micro, are there any songs that you can no longer hear?

The answer, perhaps surprisingly, is no: not because you can play protected AAC's on the Zen Micro, but because the songs are highly likely to be on the subscription service too. Just download them in protected WMA, and play.

(Of course, there's some exceptions - iTMS still, I think, has the biggest catalogue of songs. But the exceptions tend to be non-mainstream, for the most part.)

I've actually made exactly this switch. Having bought around $1000 of music from iTMS since its launch, and still having a 40GB iPod, I've moved to using Napster on subscription and a Zen Micro. There's no music that I no longer have access to: I've simply replaced listening to them on 128kb AAC's to superior 192kb WMA. Of course, I still have the files I bought - but I no longer use them, rather like I no longer use vinyl records.

The important thing isn't the digital object, but the music.

Posted by: Ian Betteridge at January 11, 2006 10:52 AM

Ian: OK, I finally see the light. You're right, of course, though it's always good to remember the (irrational) influence that sunk costs have over people's decisions.

Posted by: Nick at January 11, 2006 10:59 AM

Another insightful post Nick. One thing that pops out at me is the idea of songs as possessions. I'm not the type of person who thinks about songs as objects to owned and possessed. I think of them more as 'experience enhancers' that magnify, deepen or replace a particular experience I'm having at any point in time. While old songs certainly are great because they can bring back old feelings in new settings, I'm not too terribly disappointed if I don't have them around at any point in time.
The reason I bring this up is because I think that if I don't have an old song, I usually turn to new ones and hope that I find something that will provide the effect I was looking for but maybe in a new way.
With this type of attitude, I'd be sort of pissed if I lost my iTunes, but I'd get over it because I'll just move on to new stuff. I know I'm in the minority of the early adopters and obsessives when it comes to music, but maybe there are other people like me who see music to be a bit more disposable...
Is that too sacreligious in this charged debate?

Posted by: Jake at January 12, 2006 09:20 PM

ordaj: Am I the only one that thinks that's a horrible idea? I have no interest in a single do-it-all portable device. I'd much prefer lower cost individual devices that can talk to each other via a PAN. Like it'd be great if my cell phone and iPod can talk to each other so that when a call comes through, I can switch to the phone using the same headphones. I'm not terribly enamoured of things like MP3 or camera phones- my can do both, but I only use the camera, and only very rarely.

Everyone else:
I prefer an ownership model to a subscription model, as a consumer. Of course, I also prefer to avoid vendor lock in which is why I remove all of the DRM on any music I purchase. Why should I continue to pay a fee every month for a song? I much prefer a collection that I've paid for once.

Again, this is what I'd like to see in the market. I'm not predicting the market should go that way, but I'll probably drop out of the digital music market otherwise.

Posted by: t3knomanser at January 13, 2006 09:34 PM

Here's another point to consider: The notion that I have to keep paying a company ad infinitum to hear the music on my mp3 player is unappealing. If I have an iPod, on the other hand, I can (a) burn songs to MP3 format from CDs I've purchased, (b) buy songs from iTunes, or (c) listen to tunes the radio (with an add-on attachment). The point is, I don't have to spend a nickel (or .99 for that matter) in any given month if I don't want, and yet, I have tons of music to listen to. That's a model the subscription services can't match. If I stop paying them, all I've got is the radio. Subscription will never beat ownership as long as I can gain access to MP3s from CDs, etc. That's why the iPod will continue to dominate. That, and the fact, that iPod + iTunes is far better than the competition.

Posted by: Roger Wyse at January 14, 2006 10:12 PM

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