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iPod vs Cellphone: A Mobile Music Revolution

Digital audio technology has created a multi-billion dollar industry that has put forth new growth avenues for leading software companies, mobile virtual network operators, internet portals and also handset manufacturers. The US digital music market accounted for around 17% of total music revenues in 2006 to hit 25% by 2008, as per projection. The popularity of portable digital music players worldwide has fueled the unlimited demand for digital music and its retail.

While PC-based download of digital music to portable players was the accepted means of delivery for a while, the key players of the mobile phone industry also looked favorably into this market to introduce OTA transmission of digital music. This gave rise to the convergence of communication and music player functions in mobile handsets and the integration of digital music services as part of the regular services of carriers; the speedy transmission of which is made possible through modern 3G technology. Despite the emergence of the mobile music segment, Apple retains its dominant position in the digital music industry.

The iPod is undoubtedly the catalyst of growth for this industry. Given early mover advantages and an ultra hip, user-friendly design for a portable music player, the iPod has since then become a global icon. Apple leads the industry in terms of revenues with the sale of over 50 million iPod digital players. Moreover, using innovative marketing strategies, Apple was also able to gain a controlling share in the retail market for digital music through a loss leader strategy, using iTunes as a loss leader for the iPod plus a pricing scheme of 99 cents per download that has become a standard in the market.

On top of its marketability, music labels also find favor in Apple’s simple and powerful business model, with a DMR and codec system that provides top notch security against illegal transfers and sharing of downloaded digital audio. The downturn in Average Revenue Per User of ARPU compelled mobile phone operators such as Cingular, Sprint-Nextel and Verizon Wireless to tap into the digital music market. Despite the launch of OTA transfer services for digital music in 2005, said carriers did not pose as a serious threat to Apple.

OTA downloading, while providing mobile benefits to handheld users in the form of purchasing convenience, device singularity, margin opportunities and scalability, cannot sustain the demand for this type of service due to high streaming costs. Sprint and Verizon also introduced dual delivery services via PC and handheld phone and even created an internet-based music store. However, the pricey download charges and monthly subscription fees discouraged re-availment of said mobile services. To capture market share, Cingular even took a shot at partnering with Motorola and Apple for the Motorola ROKR but to no avail.

These developments call for the evaluation and realignment of corporate strategies for both Apple, Inc. and the 3 carriers. Cingular, Sprint and Verizon need to redefine their objectives whether to pursue iPod’s market and gain significant market share or set up a new segment that is the mobile music category. Moreover, they need to address key platform issues ranging from the security of existing audio file formats, upgrade of wireless networks and other related costs. For Steve Jobs and the rest at Apple, Inc.

the persistent attempts of carriers and also rival Microsoft to shave off its market share puts forth a strategical question whether to maintain status quo and instead focus on fortifying its position in the digital music segment through innovations or further diversify its product line with the introduction of an iPhone in order to tap as well the mobile music segment. So should carriers even try to beat Apple at its game or should Apple meet them head on otherwise? We might as well, for the moment, consider this strategy issue as our own.

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