iPod Jumps the Shark: Why Apple Will Loose Dominance in Digital Music

Even Great Products Can't Beat an Eco-System The iPod is doomed; not this month, not this year, maybe not even the next year.  But soon enough, Apple will lose its hold on the marketplace for both audio players and digital songs.  This is inevitable.  Why?  Because Apple has failed to create an ecosystem. 

Each of the product features in iPod are being copied and improved upon by Samsung, Dell, RCA, iRiver, Sony and others.  When you look at the iPod, it has not changed much since its inception four years ago.  The next innovation, the Shuffle, has met limited success.  Meanwhile, the competitors who are adding tuners, cameras, phone, gaming, and all added to the digital music device, and a host of music services.  The competitors will win.  How? -- by allowing the market to foster useful innovations.

The problem is that Apple is afraid to open up their product to allow others to easily improve it.  They keep it "closed".  You can't switch out old memory for new.  You can't add new hard disks to the iPod.  You can't move your Yahoo! music to your iPod because Apple does not support Microsoft's WMA file format.  The closed mentality forces you to buy non-Apple technology.  If you buy Yahoo! Music Unlimited, for less than $60 per year, you get access to millions of songs.  If you like an artist like Bob Dylan, you can push a button that says "give me like artists".  It generates a list of songs such as City of New Orleans by Arlo Guthrie, Almost Cut My Hair by Crosby, Stills, Nash & Young, and fifty other songs that remind me of my unkempt youth.  With a mouse click, I can drag them onto my WMA licensed player - from any number of different manufacturers.  You can't do that on iTunes.  You need to only use an iPod and buy the songs first.  Sure, the other machines are not as cool today as the iPod, but the PC was not as cool as the Mac, either.  The IBM PC won because hundreds of suppliers could add core functionality to the PC, hooking to a standard interface.  IBM even left space for others to add.  The iPod has no such configuration capability. 

By economic eco-system, I mean a cooperating and competing set of companies that provide different components that due to open standards can together in a product or service. The difference between a product and an ecosystem is that in an eco system more than one company can provide features of functions to the product.  The product is "open". 

An ecosystem is superior to a product because the collection of competing  companies can conduct more real-life market experiments in a month than Apple can field in a year, and the experimental capacity of the eco-system in music is increasing rapidly.  The eco-system can explore and invest many more ideas, funded on the backs of leading-edge consumers, providing more R&D than any single company can muster.  For example, linking a portable music device to satellite radio may be a feature that many people say they would like to have, and RCA might add this.  If it fails, RCA bears the cost.  If it succeeds, other will copy it.  Simultaneously, Sony may push the ability to add more memory to the flash memory players, and this may turn out to be a big hit.  Apple, by itself, cannot afford all the different experimentations that the group of competing companies can create.   This is an ecosystem and not just a set of separate products when they can share some key components.  Those devices that can read the Windows version of music: WMA, all share the song base and can almost all can use subscription services like Napster and Yahoo Music Unlimited.  No non-Apple devices can use iTunes, and iPods do not use WMA.  Apple is trying to keep their system closed, and that makes sense during the launch phase, but the ecosystem is about to catch up and if they don't open up now, it is just a matter of time before they lose.

Just like the ecosystem of the PC can use utilize any application written for Windows.  Once the ecosystem has a much larger experimentation capacity it becomes  impossible for even the most innovative company to continue to lead.  In Job's case, it will be innovation, not just price, which will knock Apple out of first place. 

Throughout industrial history, when things are open and standardized, customers win, productivity zooms, and enduring eco-systems are born.  Standards have been with us for a long time.  The Egyptians first developed the 365-day calendar, recording 4236 BCE as the first "year."  The Springfield Armory in Springfield, Mass. had enormous influence in all aspects of American industrialization after 1819 by using the brilliant invention of Thomas Blanchard: the Blanchard Lathe, and Blanchard made a fortune from his patent fees.  This new machine enabled even an unskilled operator to create identical parts.  The standard parts from Blanchard's invention overtook other forms of manufacture due to their low cost and the fact that the US Army liked the part's interchangeability.  From this one lathe many standards evolved that drove productivity in all sectors of the economy: from rail to cereal.  The internet, with its open, standard set of tools for communication and presentation, provides standard parts for knowledge work.  The internet eco-system enabled massive value creation, both for the incumbents like Microsoft and IBM, and for new entrants like Cisco, Amazon, and eBay.  It was the eco-system - not the incumbent leaders -- that radically grew the market.

What does it take to launch a sustainable eco-system instead of just a great product?  It takes a belief that sustained experimentation is more valuable than control.  Apple believes that both are possible, but history shows they are wrong.  It takes a belief that innovation can create new growth faster than you can extract proprietary value from existing innovations.  Apple believes they can do both, but they can't.  It takes a belief that the market is a better judge of innovation than any one company.  Who should care?  Any industry facing slow growth.  Look at automobiles and cell phones.

Auto makers design their cars to accept the proprietary parts and sub assemblies designed by their captive suppliers.  If, instead the car companies provided an open interface to power and communications an entire new cluster of providers would create electronics for your car.  Like what?  Start with an easy interface to the iPod, currently only available through a proprietary hook up on some cars.  The car could be a WiFi hot spot both at home, and on the road.  Cars, with their efficient, self-sustained, power plants, should become part of the telecommunications network.  A traffic jam on a Los Angeles freeway is a natural telecommunications network just waiting to be born.  Such an eco-system would create a host of new providers of automobile electronics that would rival the auto-after market.   Imagine being able to walk into Best Buy and purchase wireless internet that could hook easily into your car.  Imagine being able to upgrade the size and quality of the screen of the in-car VCR you have in your mini-van for your kids.  Imagine being able to swap out your old radio and install a new one, as easily as you change a computer monitor from 15 inches to 20.  GM and the other incumbents could invest in them, buy them, and create complimentary services with them.  For most cars, there is more profit on the cell phone calls made in a car than there is in the car itself, so the creation of an eco-system can create new value both for shareholders and customers.  Today, GM has little access to that money.  Tomorrow they could. 

The cell phone should be open, too.  We should be able to add or remove features like a camera, fingerprint reader (for security), or a radar detector for your rental car.  We can't add or remove these features today because the cell phone providers don't want to open up their proprietary system.  And its worse in this country where carriers subsidize the phones and tell manufacturers what they can and cannot put into their phones.  Every major cell phone company in the developed world is facing slowing growth because innovation is stagnant. The first brave phone company that opens up will find new primary demand, even in mature markets, created by an eco-system of complimentary providers. 

So, if your product or service dominates a market, but is slow growing, ask yourself: Is it time to open up?  Can we create an eco-system of innovation that could grow our market?  If your product or service can serve as the "base," you should make it easy for others to innovate on top of it.  This type of thinking is not comfortable.  Executives like Steve Jobs have been taught to protect any advantage, at almost any cost, But sometimes it is in the letting go that we find whole new sources of innovation and growth.

Apple needs to open up its device, and license its music store to others so that they can build out the ecosystem, and let the market decide what innovations it needs.  If they don't do this they will loose eventually, for no one company can out-innovate the market.  More generally, any closed system needs to open over time, to keep its innovation edge. 

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