Well, I have to admit it. I was wrong, so wrong. As the father of five, and someone married to the same Eileen Marie Harvey for 25 and 1/2 years, you would think I would be used to being wrong. And yes, I don’t get that, Lord of the Manor feeling when I arrive home, but I’m usually pretty right in my professional predictions.
But, I wrote an article this past summer for Fast Company magazine in which I said that the iPod was doomed because it was not part of an open ecosystem of innovation. The closed architecture of the iPod, I reasoned, was going to mean that the cluster of potential innovations was going to surpass it. Well, I missed the point that the real innovation ecosystem is a two sided information market, in which Apple allows for creation of a highly subsidized market for music, podcasts, and new forms while they extract value from their beautiful devices, from the Shuffle to the iPods.
As others have pointed out, the key to robust information markets is to subsidize one “side” of the market to generate value for another “side” and then have a strong business model which can extract value clearly from one side. By creating a player that allows the playing of illegal music easily, along side legal music, Apple made the music on their devices “subsidized,” and got the combined traffic of those who wanted stuff for free, and those willing to play. I would bet, for example, the majority of music on most iPods is illegal, but some of it is paid for, and that is good news to the music industry for they are getting value. When there is a rampant illegal market, it is in the best interests of the “property owners” to somehow integrate the traffic of the illegal market with the legal, for over time you can begin to extract value and cooption is cheaper, and more effective than prosecution.
Apple does not make much, if any, money on the early downloads at 99 cents a piece, the real margins are in the players; again, subsidy, of the legal stuff. Now, over time, they may be able to have higher margins, and I don’t know what they make on the new TV video offers, but the market was established with subsidy on the content side.
Add to this the fact that they have the only designers in the space that actually design anything, as opposed to simply putting function in a device, and letting the user figure it out, and you have the industry dominant player that has a vast market share and traffic.
Other two sided markets that dominate include: Window’s willingness to subsidize developers and charge end users; Thomas Dolby did not charge component manufacturers, nor end users for using Dolby Sound. He charged the electronics manufacturers. Google gives us all lots of functionality and charges advertisers who want to get to us: again a two sided market.
So, I hate to be wrong, but I love the two sided market thing. In the information world, there are just so many that win, and so many to be born.
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{ 8 comments… read them below or add one }
I think it is a bit of an overstatement to label the mp3s on my iPod as illegal. I suppose the RIAA might think so, but I’ve ripped them from my own CD collection.
I do agree that I prefer to keep the vast majority of my music collection as mp3s and go out of my way to avoid purchasing from the iTunes music store. On the gray areas of legality front, I have been looking into ways to remove the digital restrictions management from the music that I have bought from Apple. It’s not hard, but finding time is.
I am still thinking about the implications of the two-sided information markets theory on Apple’s competitive advantage. Wouldn’t this theory “favor” any MP3 player, such as Dell’s Jukebox, just as well? That device, too, will allow you to play MP3s ripped from your CDs.
How different is the battle for MP3 players from the battle for the pocket tape player where Walkman was the leader? How long did Sony retain its leadership in that product category (was it for as long as it mattered?)? What drove that position?
Jim & Jayanth,
Jim, I did not mean to imply that every mp3 on your player is illegal, all I am saying is that if you do have illegal copies of anything, or even legal copies not recognized by WMA (of which there seem to be many things) I could not figure out how to play them on my Dell DJ. They would simply not transfer. (Of course, that may just be operator error…)
Jayanth, even if the others are as facile — which I don’t think they are — at incorporating non-standard, non-rights protected materials, the ecosystem is now established with iTunes as the leader, so there is no reason for any content creator to want to go to another platform — just as everyone builds now for windows first — unless a participant in the market gives huge, new incentives to content creators.
All best,
j
Thomas Dolby?! That’s the musician – Ray Dolby is the audio genius/Dolby company founder. See http://www.dolby.com/about/who_we_are/history_1.html
This is great discussion,John. Thanks!
The one point I believe is that content providers do see a value in embracing Microsoft’s Janus/DRM 10 standard for protecting their music. A lot of value, I would think. If we look at the parallel ecosystem that is developing around the mobile handset becoming a music player, we increasingly find DRM 10 a dominant choice among content providers. Likewise if you look at alternatives such as a mobile satellite radio player from Sirius or XM which actually do a nice job of integrating the live radio and time-shifted music download experiences, DRM 10 again is dominant.
IMHO, Apple’s victory, as you rightly put it in your posting is primarily grounded in superb design and intense focus on the customer experience for the “hands on” music listener, coupled with a brand image that resonates well with consumers who pay for the brand.
At the end of the day, the digital, mobile music consumption life-cycle is still quite a bit hands-on in the effort involved to move music from a CD to a player…not as easy as “put the tape/CD in and hit play” that the Walkman experience stood for. For those of us for whom storing music on the PC, organizing music as play lists etc. is fun, the iPOD makes things a breeze. However, my hypothesis is that there is a much bigger segment of music listeners who don’t want to take the effort of moving music from their CD to a mobile music player. I believe that a product that can, with limited user intervention and not explicitly involving the PC, move “interesting” content to a mobile device while keeping the Man-machine interface of the player itself simple has a reasonable chance at competing with current players. Play lists, sorting by album etc. are all great…but for a lot of music lovers the term “mp3″ itself is geek enough !
John,
Instead of trying to create a big ol’ academic/economic abstraction to understand the success of iPod, try this perspective: The iPod beat out the free markets because it understood that most people aren’t tech geeks and need a service that is easier to use than TiVo. iTunes is just damn easy. Add to that fact that Jobs made it look slick, and BAM! you’ve got one hot “solution” for the mass market. Don’t get caught up on information assymetries and what not; just create insanely great products.
When there is a rampant illegal market, it is in the best interests of the property owners to somehow integrate the traffic of the illegal market with the legal, for over time you can begin to extract value and cooption is cheaper, and more effective than prosecution.
Where do you stand on the narcotics industry?
Imagine if Apple decided to go all the way – legally give the music away for free to all iPod buyers !
It’s not as far fetched as it may seem. Say Apple gave away 1 billion songs a year to its customers and paid the labels (and artists) 65 cents per song. That’s $650 mill. – only 3.7 % of Apple’s annual revenues. Assuming a gross margin of 60% on a $400 iPod it would only take incremental sales of 2.7 million iPods to break-even, about 5% of all iPods sold so far…
Even if the assumptions are off by a factor of 10, the potential for Steve Jobs to corner the market for recorded music is a commercially attractive possibility. Anyone at One Infinite Loop read this blog?