iPod vs. Cell Phone: A Mobile Music Revolution? 1. Has the digital music market irreversibly tipped in Apple’s favor? With the invention of the mp3 file format in the early 1990s the music revolution begun. After a long time of illegal downloading, a turning point in the history of the digital music market was the shutdown of Napster in 2001. It symbolized the aggressive legal actions against free file sharing. In contrast to that, Apple, as one of the early movers, could offer the frightened customers easy and affordable access to digital music through the iTunes store.

But that was only one part of the reason for Apples success in the digital music market. The other part was the iPod, a hip portable music player with an easy user interface and a long battery life. Apple understood to bundle this elements to a solution for people that want to hear digital music at home or on their portable player. With a market share in US between 70% and 80% for digital music and a more than 50% for digital music devices (e. g. the iPod), Apple was by far the market leader in 2006. Apple offered security to the music labels by using a tightly closed digital rights management standard called fairplay.

The disunity between the competitors in terms of a common digital rights management standard or common codecs made it difficult to threaten Apple. Another barrier for the competitors to Apple was that the prices in the iTunes store were very low. Thus Apple reached only a break even with iTunes. Nevertheless a margin of about 25% for the iPod compensated this. So it was very difficult to compete with Apple in pricing. The only way to do so was to save royalties (for record labels & publishing) and operational costs like credit card transaction fees by offering subscription services.

Subscription services allowed users to stream music for a monthly fee. However, users did not like to rent music because they were used to own music if they pay for it. In summary the digital music market had tipped in Apple’s favor and it would be very hard for competitors to take market share from Apple in near future. 2. What should mobile carriers do now, with respect to mobile music? Should they invest heavily, moderately, or not at all in this new market? Put yourself in the shoes of Sprint and Verizon: What strategy would you adopt?

The average revenue per user (ARPU) for the U. S. mobile operators shrank from 2004 to 2005 about 2. 6%. Despite the data ARPU had fantastic growth rates of about nearly 60% it could, because of its still small amount (4. 22$), not compensate the decline in voice ARPU of 5. 8%. So the mobile carriers had to find a strategy to compensate this revenue shrinks. One option could be to invest in the mobile music market by setting up own music services to attract new customers and rise revenues from existing subscribers.

Although the carriers had modest success with various online music services there are some potential advantages like the ability to purchase over the air nearly everywhere and thus a huge potential market. Another advantage is that the carriers could save credit card transaction costs because of their billing infrastructure. Also was assumed that consumers rather take one device that two what means that a mobile phone that plays mp3 can cannibalize digital music devices like the iPod. However, the offer of subscription services that allowed to stream music on the mobile, paid in a monthly fee included a high risk.

If customers stream a lot, the data costs for the carrier would explode. Only the single track download over the air seemed to allow a positive carrier net margin in short-term. Another problem is that customers would hesitate to change from iTunes to a new Verizon online shop for example, because they could have problems to use their already bought songs. So to invest heavily in the competitive digital or mobile music business is not recommendable. Cooperation with an existing music platform like iTunes, to add some mobile music features on an existing digital music service, would be a cheaper and better solution.

Nevertheless the mobile carriers should expand their 2 3G net. Not only to build the infrastructure for mobile music, also to benefit from the growing customer needs of sending data like emails via the mobile phone. 3. Cingular Wireless signed a two-year exclusive distribution for the Apple iPhone, which gave Apple extensive control over distribution, pricing, and product definition. Verizon passed on the opportunity. Who made the right decision? Why? Both mobile network operators had launch subscription services that work with minor success. Now the market leader in distributing igital music and digital music devices (Apple) plans to offer a mobile phone on the market. A mobile phone that includes the features of an iPod combined with the possibility to surf on the internet and send emails. So not only the industry experts assume that this product is getting a “category killer”. It is very likely that consumers substitute two devices (mobile phone and iPod) by one (the iPod). The iPhone would cannibalize the iPod but also have good sales figures. If a mobile network operator could distribute the iPhone exclusively, it can attract a lot of customers and therefore increase the ARPU.

But what are the disadvantages for the mobile network operators in such a deal. Of course it would cannibalize their subscription services. This is not so important, because they are not very profitable anyway. Cingular already cooperated with Apple and Motorola to launch the ROKR a phone that is compatible with iTunes, but sales fell far below expectations. What could Cingular learn from that? The ROKR was criticized because of high price, the low memory capacity and its incompatibility with noniTunes services.

Some of these limitations grew out of Apple’s fear of iPod cannibalization. If now Apple takes over control of distribution, pricing, and product definition in the new cooperation, the mobile carrier have not to fear any iPod protection actions from Apple. They can trust on Apple’s competences to engineer easy and hip mobile devices and concentrate on their core competence by providing the mobile network. So Verizon passed the chance to attract new 3 customers for their fully deployed 3G network easily and Cingular made probably the right decision. 4 i