Apple’s Business Model for Ipod and Itunes

The Ipod is it!  Unlike the PC, Smart phone, or tablet industries, to say there is a portable music player industry is more of a technicality, because in the grand scheme of things, there isn’t, especially in the mind of the average customer, there is just the Ipod! In my opinion by far the most successful product in this millennium with 315 million units sold, and it is one of the main reasons Apple became the largest company in the US.

Value Proposition

The biggest value the Ipod initially brought was its storage capacity, when others were playing around with 1GB or 2GB for twice the price.  Ipod comes out with 40GB, justifying its industry high price; it was and still is the most expensive mp3 player.  In addition Ipod came with Itunes, back then buying music online was all over the place, different sites had different catalogs, most mp3s were downloaded illegally (still are).  Itunes became the definitive one stop shop, for 99 cents a song, it is quick, it is safe, it is easy.

Customer Segment

Initially rolled out to Mac users, then released to the windows users, Ipod & Itunes took off, and is now for anyone who wants digital entertainment. There are even pre-loaded Ipods available for weird people who don’t have a computer.

Revenue Stream

As previously stated, Ipods were and have been able to maintain its premium pricing, customers recognize its quality and pay for it, no questions asked.  They make several hundred dollars per unit, empty, with no content.  Then they cough up a buck for every new song they want, some customers spend thousands of dollars on their collection.  Itunes is so popular, with millions of people using it for their Ipods, Iphones, Ipads, that millions of customers use it, Apple generates significant advertising revenue.

Ipod is an icon; everyone from kids living in slums to actual royalty has one. Having any other portable media player is like drinking store brand cola, it lacks the status. I own a android phone and a HP laptop, I don’t even know what are the other portable media players currently available, its Ipod or bust!

Porter’s Strategy and the Internet

Here are some of my thought on Porter’s Strategy and the Internet

“When seen with fresh eyes, it becomes clear that the Internet is not necessarily a blessing. It tends to alter industry structures in ways that dampen overall profitability, and it has a leveling effect on business practices, reducing the ability of any company to establish an operational advantage that can be sustained.” –Porter

Though not an all encompassing natural law as Porter presented it, the internet does shift the power in favor of the consumer reducing retailers to compete on price and price alone. Therefore it forces some small locals companies to compete with companies around the world.  A great example of this is text books, WPI has its campus bookstore that serves a niche clientele (WPI students) and charges a premium for their selection and convenience.  In the past, they had the supply channels with the distributor and the logistics to get the right book into the students hand faster and more cost effective.  The internet has completely wiped out this strategic advantage, a student is now able to find the exact book they need via the ISBN # and get a cheaper copy shipped directly to their home from some place in Malaysia, all for a better total price! Take away the internet, and the student would have never found their book in warehouse on the other side of the world.

“The Internet per se will rarely be a competitive advantage. Many of the companies that succeed will be ones that use the Internet as a complement to traditional ways of competing, not those that set their Internet initiatives apart from their established operations. That is particularly good news for established companies, which are often in the best position to meld Internet and traditional approaches in ways that buttress existing advantages.” –Porter

I immediately thought of Barnes & Noble and Southwest Airlines, these companies have been able to weave the internet into their competitive strategies and flourished.  B&N leveraged the internet into its existing relationship with college bookstores and did not allow its website to cannibalize its stores sales by under cutting price.  Southwest maintained its high margins via its exclusive reservations, in the past the only way to book a flight on southwest was to call or visit one of their sales people, with the internet, the only site you can book southwest is the official southwest one, thereby strengthening their strategy by making it more efficient and cost effective by reducing labor to man the phones and airport booths.

“Dot-coms multiplied so rapidly for one major reason: they were able to raise capital without having to demonstrate viability.” –Porter

During the Dot-com bubble, I was just a pre-teen but even I knew that these companies’s weren’t making any real money

“America Online, which has managed to maintain borders around its on-line community, is an exception, not the rule.” –Porter

Hindsight is 20/20, in the past AOL was the premier online community, that was really what differentiated them from the other ISPs.  But as the internet matured, and more content became available and more innovated free online communities developed people weren’t willing to pay $40 a month for broadband and an additional $20 for AOL.  Today there’s free e-mail, instant messaging, profiles, online photo albums, better communities such a FB, rending AOL obsolete.

“Once a company establishes a new best practice, its rivals tend to copy it quickly. Best practice competition eventually leads to competitive convergence, with many companies doing the same things in the same ways. Customers end up making decisions based on price, undermining industry profitability.”- Porter

I immediately think of Myspace, webshots, & AOL, all of which had features that were quickly adopted by orkut & facebook for free.  

“The most successful dot-coms will focus on creating benefits that customers will pay for, rather than pursuing advertising and click- through revenues from third parties. To be competitive, they will often need to widen their value chains to encompass other activities besides those conducted over the Internet and to develop other assets, including physical ones.” -Porter

Defiantly Google & Facebook laugh at this statement, being two of the most successful dot-coms based on advertising and click-through revenue from third parties.

Overall he made some very great points about a having a clear value creating, profit generating strategy, but as every other economic expert he was only partly right.  

Milestone this week

“A period of introspection after each professional experience, whether it be good or bad, is valuable, if you have a bad experience, you need to learn from it” –Stan Lapidus

“Well you got your first failed business under you belt” –My brother

Sigh!!!!! Yes, yesterday after a year and a half of work and thousands of dollars invested, I finally pulled the plug on my startup in Brazil.  Similar to a bad romantic relationship, I stayed in it much longer than I should have for a number of reasons; knowing full well the economic principle of ignoring sunk costs, I should have cut my losses months ago.  And looking back, I probably should not have gotten into it in the first place!  My primary motivation was to help my family in Brazil, specifically my mother’s brother and sister; they had always been in a financial mess as long I could remember.  So instead of investing in an opportunity that I felt would give me the greatest return, I invested in something I felt best catered to their skill set.

Lesson # 1 -- Profitability should be the driving force behind investing.

I also over evaluated my aunt’s and uncle’s skill, I took them for their word, that they had exceptional talent in confection, and that this in turn would give us a superior product. Not the case.  In addition I assumed that since both of them were old enough to be my parents, that they would conduct themselves in a professional manner, didn’t happen!

Lesson # 2 – Talents and Skills must be evaluated using recordable metrics.

I assumed that my aunt and uncle were hard working people that were going to give it everything they got to the opportunity I was giving them, not the case!

Lesson # 3 – Build a team only with people who want to win.

Eventually I realized that we were in a highly competitive field with established major players, and that being based thousands of miles away made it impossible for me to make my employee accountable.  I simply did not have the proper talent needed to succeed, but I was too proud to amit my mistake, I kept pumping money into the business and praying that people who had been failures all their lives would suddenly change their ways solely by my weekly peptalks!

Lesson # 4 – Be honest with yourself and about the people around you.

Had I been more humble, I could have saved myself thousands of dollars and months of aggravation and disillusionment. Alas.

But I’ve caught the entrepreneur bug, I’m going to pay off my debts, regroup, and go at it again, this time humble and hungrier!

Also http://www.triz40.com I found it interesting, especially considering that when a problem really stumps you, the human mind tends to focus on it so much that its hard to think out of the box.  This tool will at least give some suggestions that one might have completely ignored.

Synergy

When I first read about Hirshberg's concepts, two things immediately came to mind, the saying “THE WHOLE BEING GREATER THAN THE SUM OF ITS PARTS” and that of my experiences working with a man that I’m honored to call friend. 

                It all started back in summer of 08, I was a hot shot analyst a year into my new position, with unlimited raw talent, but very limited experience.  My boss had mentored me and taught me everything she knew, but when she became the head of contract management, she needed support with respect to financial information that she couldn’t produce on her own, nor did she have the knowledge to teach me how to get it for her.  She hired a 50 year old financial analyst Ed, he was to provide us with the financials we needed.  Quirky would be a vast understatement in describing Ed; Louis Vuitton belt, wallet, and planner, giant gold rings and chains, Bruno Magli shoes, skin tight Italian shirts, this guy was something else, completely different from my reserved, mild manner, crew cut straight from mass maritime.  Ed was a brilliant accountant, he should have been a manager, but as he expressed to me a several occasions, the powers that be didn’t think he “fit the mold”. 

                Soon our department took on the role of planning and scheduling resources for the entire company.  There was tremendous pressure from the senior VP to get our hands around the 100 million dollar annual work plan, because no one did.  No one knew what work was actually on the plan, when it needed to be done by, nor how many workers were available to do it.  The company had data on hundreds (that I was aware of) spreadsheets, and a thousand-armed octopus of oracle data warehouse, with even thousands more Crystal reports.  It was “Data Paralysis” at its worse, Ed and I went at it full steam, he knew the business and what information we needed to present to paint an accurate picture.  My lack of formal analytical training proved to be my greatest asset in that I was always thinking out of the box, how could I not I didn’t know the standard practices.  The synergy Ed and I had as a team was unstoppable, we created a central database that tracked work orders, dates, hours, dollars, personnel, and you name it.  Working side by side our relationship had built in checks and balances; he would constantly push the envelope of innovation, I was the more thorough one, making sure everything was practical and feasible, dotting all the i’s per se.  Unfortunately my friend Ed passed away, leaving behind a wife and 2 kids, just 5 weeks after I left the department; but the time we shared was priceless, he influenced both professionally and personally.