How to Be a Player Making Money As a Portable Music Device Manufacturer
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How to be a Player Making Money as a Portable Music Device Manufacturer Final Paper 15.912 Technology Strategy Spring 2005 Professor Rebecca Henderson Geoffrey Coco Justin Cook Robert Stevens Adrian Tompsett Introduction For millennia, music has provided a powerful accompaniment to the events in our lives, such as weddings, funerals, and myriad celebrations. Historically, this music only took place in a relatively fixed location (e.g. where the band was standing). While there were some early advances such as the semi-portable record player, starting in the 1950s, the handheld transistor radio truly gave us the ability to add music to almost any aspect of life. Suddenly such mundane activities as riding the bus, washing the dishes, and walking down the street could be set to our own personalized soundtrack. The idea of portable music is no longer new, but the enabling technologies and the accompanying industry dynamics are still in rapid flux today. For the companies involved in this industry there are several challenges to both creating and capturing value. We explore some of these challenges and provide our assessments of the best approaches to competition. Portable Music Player Industry Market Definition Many kinds of businesses relate to the music industry, and depend on its health for their success. Portable Music Value Chain From this point of view, the music industry is the Technol ogy center of a confluence of several niche-industries, Arti sts IP Owners Recordi ng & Electron ic of which portable music device manufacturing is Dupli cat i on Suppli ers Devi ce one. It is therefore important to note that the focus Record Labels Manufacturers of our study, the device manufacturer, is a subset of Internet Servi ce a much richer ecosystem. This ecosystem Provi ders Content Aggregators Consumer El ectron i c Reta il ers encompasses a variety of critical players from (Rad i o, Tower, iTunes ) (BestBuy, Amazon) music artists to retailers as show in the value chain Portabl e Mus i c Consumers chart. Companies we are calling “Device Manufacturers” have two separate functions – manufacturing/assembly (often outsourced) and design /marketing/ distribution (the core functions of this level). We are further limiting our analysis to MP3 type device manufacturers. 1 The other important distinction in the portable music industry is between enabling technologies and music publishing (the two relatively separate value chains above). Although our analysis will focus primarily on the enabling technology of portable devices, we will see that strategic ties to the music industry can be employed to varying effect. Market Evolution How and why have MP3 players come to be the dominant format in portable music? Let us examine the history of portable music’s evolution. Portable music encompasses three main categories: broadcast radio, pre-recorded media, and digital media. Broadcast radio refers to the industry where federally-regulated channels of content are transmitted into the air; this also includes modern advances such as digital radio, and premium satellite radio. Pre-recorded media refers to tapes, CDs, mini-disks, etc. where content is bought and sold in physical packages. Digital media refers to the recent development in which content is encoded in a purely digital (non-physical) form that can be stored and copied using a computer and the internet. To understand how this industry evolved to its current state its important to look at performance along what we believe are the three most relevant dimensions: music fidelity, selection, and robustness. Fidelity The portable radio listening experience began tinny, and gradually improved, due to improvements in broadcast technology and in the radio handset itself. Recently, radio has enjoyed a bump in clarity from the incremental advent of Digital Radio and Satellite Radio. In Pre-recorded Media, tape began almost as good sounding as radio, but quickly improved. CDs, however, were a huge incremental leap in clarity, thus the common descriptor, “CD-quality sound.” When MP3s were first introduced they were streamed through a modem and sounded inferior, but fidelity quickly exceeded anything in broadcast and now approaches CD quality. As evidenced by the growing dominance of MP3 players, the fidelity of 2 MP3 is now “good enough” for most users who now look to other performance dimensions in their purchase decision. Selection Anywhere, anytime, custom selection may be the new driving force behind device purchase. On this dimension MP3 is clearly superior. Radio listeners can access any of a handful of available stations. Much as cable increased the menu for TV viewers, Satellite Radio expanded the set of available channels for radio listeners but the broadcaster still picks the specific content. The selection of Pre-recorded Media is within a person’s own collection. No matter whether a tape or CD user, a person’s collection grows over time, creating an ever-expanding selection. However, the “collection,” at any given point in time, is limited to only those CDs a person has with them. The MP3s encompass people’s entire collection, and more. Because the MP3 user culture co-evolved with a pattern file-sharing, personal collections of MP3s often dwarf their pre-recorded media collections, thus creating the ultimate music menu. With large capacity MP3 players, this music is with you at all times (like a large collections of CDs) and easily accessible through innovative interfaces. Robustness The transistor radio was a solid state marvel. Not long after its introduction, the handheld radio was light, rugged, and had decent battery life. But even today, radio cannot be received underground or in a thunderstorm. The portable tape player (Walkman) was a hit for its style and control, but all those moving parts made for a fragile device. Just about the time the walkman had matured, portable CD players came onto the scene. However, the Discman was a step backward in terms of reliable music at your fingertips. Most notably, they skipped rather 2 easily. The portable CD player got more robust, but the design could never escape the necessity of precision moving parts. In this dimension, the portable MP3 player was immediately superior and decisively so. With no moving parts to wear out (at least in flash based versions), and no risk of skipping, it was clearly superior to the previous technologies. Market Size The portable digital music player market is large and growing rapidly, both domestically and abroad. The U.S. market in 2004 was 12.5M units shipped growing at a CAGR of 20%. Using the projections for units shipped and assuming an average price point of $175, and 3% inflation, the US will be home to a $5 billion market in 2005. MP3 Player Market Size U.S. $10,000 $8,000 $6,000 $4,000 $2,000 S ale s ( $ m illio n s)illiom n $ s ale( S $- 6 2002 2003 2004 2005 200 2007 2008 2009 2010 1 As shown in the next projection, the installed base is expected to plateau around 70 million. However, sales could potentially remain strong, as with televisions, because of a frequent replacement rate. None the less, since this product is at least semi-durable there is a chance for a period of overshoot and collapse. This is not reflected in the Jupiter research shown here. 1 Jupiter Research, “US Portable Device Forecast”, April 12, 2005 3 Market share statistics for portable music device makers are difficult to pinpoint. Apple appears to have between 58 and 65% market share, with no other player greater than 10%. It is also reasonable to assume that C5 (concentration of the top 5 players) is around 85%, as suggested by the chart above. One reason for the difficulty in obtaining accurate share information is that it changes rapidly. For example, SanDisk clocked in at 6.7% share of February US sales3, second only to Apple, while they were not even in the top 10 five months earlier. Profitability Current Industry Profitability The makers of portable music players do not sit in a highly attractive industry. The retailers of their products wield significant power. The suppliers (who sell them crucial inputs) capture substantial portions of the value pie. New players (like SanDisk) faced few barriers to entry. There are also several competing mobile entertainment substitutes. Finally, rivalry in the industry is high, albeit not always in terms of prices. Buyer Medium Lots of big retailers to deal with but some direct/ web sales Power Supplier Medium The value from hard drives, processors and other key technologies 2 Jupiter Research, “US Portable Device Forecast”, April 12, 2005 3 “SanDisk quickly climbs up music charts”, San Francisco Chronicle, April 25, 2005 4 Power pass largely to suppliers Entry Low Brand to some degree; Access to distribution channel barriers are Barriers limited (especially given the rise of the Internet) although more difficult within the “big box” retail outlets Substitutes Medium FM Radio, CD players, cell phone games, books, portable TV Rivalry High Not all price based but heavy feature-based competition Underlying Industry Dynamics What are the underlying realities that lead to the creation of this relatively unattractive industry? The table below lists the key dynamics underlying the industry’s structure. While the heterogeneity of demand (which on the one hand allows for more competition via differentiation while on the other lowers the barriers to entry) and the high touch nature of the product create some levers for profit generation, on the whole things are grim. Heterogeneity of High Consumers have very different uses from sports to Demand commuting to fashion all of which can potentially be best served by purpose built devices. Consumer High Consumer wears the device on their body Emotional Involvement Product Spillovers High Easy to reverse engineer.