Development and Future of the Apple iPod

The iPod is perhaps the most talked about technological product in recent times. It has set sales records that have lave literally destroyed the predictions of all analysts by superseding everyone’s expectations. The interesting issues concerning this topic is how the iPod impacted not only the digital music electronics industry, but was also responsible for the turnaround of a company on the brink of bankruptcy.

It is this very fact that makes the growth and life cycle of iPod an experience in itself and one that creates a sense of wonder at its success. But how did all this come about and just why did the iPod do so well? These are questions that we look to find answers towards whilst shedding light on the internal pressures faced by the parent company Apple.

The paper takes the reader through the history of the parent company Apple and its declining fortunes until the introduction of the iPod. This revolutionary innovation then dictated the pace at which the organisation was able to turn itself around to become one of the more successful computer companies in the world today. The report also looks at how Apple as a company defines itself with the onset of the iPod boom – can it still call itself a computer company in the literal sense of the word or does it now see itself entering a diversified phase of business operations and hence, would need to re-think it’s overall business strategy and core competencies.

The views of different writers expressed through the paper help in building an understanding of the pressures the company has undergone over the last decade and why it has taken the decisions that it has. The paper revolves around the growth of the iPod as the key driving force for all major business and technical decisions, it understand how it had to be re-modelled and adapted to the market needs and demands. The paper also paints the competitive landscape at different stages of the growth cycle and how this impacted or did not impact the iPod.

Finally, the paper looks at the varying consumer tastes, the positives drawn from the product itself and what lies in store for the future of the product and the company. The methods used to create a deeper understanding of the iPod environment were through a variety of primary and secondary sources. Some of this is discussed in greater detail in different section of the paper. However, for the purpose of this report, the researcher took great care in trying to put together different pieces of work by various writers so as to be able to provide more holistic and all-encompassing view of the real scenario that surrounded the iPod boom. On a more generic note, most writers and experts within the industry agreed that the success of this product was unrivalled by others of its kind in recent times.

Introduction

Background

Success stories always find their way to centre-stage. But what makes a journey even more interesting is when accompany that finds itself in some level of difficulty turns the tide and jump starts its engines to climb to the top of the success ladder. Apple’s is one such story. Whilst the problems that affect it lie in the background, the phenomenal success of its iPod has people fascinated. Marketing gurus swear by the growth of this innovative product that provided the perfect solution to a generation that was technologically familiar and defied competition to control every conceivable bit of the market that it entered – the digital music space, and made it its own. How and why is what we attempt to discover.

History

The history of the iPod dates back to the January of 2001. Apple had just introduced ‘iTunes’ – a programme that enabled Accusers to burn music off audio CD’s and convert them into music files on their computer systems as digital audio files. This provided users with the flexibility of creating libraries for their music files, clubbing favourite songs in order and in time to come, download them to portable devices.

This natural extension saw the introduction of the iPod in the month of October 2001. Unlike other portable devices in the same range, the iPod was the first of its kind to store music files on a hard disk similar to a computer. Other devices used flash cards and detachable storage devices that could not hold as many bytes of data as the iPod did. Infect, the first few iPods had a 5GB storage space, which equated to the storage of approximately a 1000 songs. The question to be asked at this stage was if the software for writing music to the computer was developed keeping the iPod in mind? However, sources within the company maintain that the iPod was only conceptualised 6 months before its release date. Whatever the truth might be, the two scenarios complemented each other beautifully giving consumers the best of both worlds and a logical extension to the process of listening to music.

In November 2001, the first iPods were shipped to waiting buyers and byte end of the year, 125,000 iPods had been sold for a price of $399.Within a year, other computer companies as well as large retailers were selling iPods as value-adds. Dell, Best Buy and Target were some of the more prominent names at this stage and had dedicated sites and sales teams pushing for iPod sales.

By June 2003, Apple had managed to sell 1 million iPods, which could download music from both Macs as well as PCs. Interestingly, by the end of 2003, one of its largest resellers Dell; had decided not to sell anymore iPods and instead launch its own version of the iPod called the DJ(Digital Jukebox). In order to download songs from the Internet, Dell partnered with a company called Music Match that offered that service.

By mid-2004, 6 months after it hit the 1 million mark, Apple crossed the 2 million mark in iPod sales but the peripheral market was just getting warmed up to the portable devices segment. In addition to thud by Dell, HP announced that it was repackaging the 4G iPod and selling it as a PC friendly device. Motorola launched its next generation phones that would be iTunes compatible. In one of the more recent statistics of the iPod wave collated in October 2004, there were some interesting findings. Apple held 82 per cent of the digital market across all music players and 92 per cent of all hard-disk based music players.

The nearest competitor to the iPod was the device launched by Creative. They had a 3.7 per cent market share. In addition, 2 million iPods are being sold every 3 months. The music industry too has gained immensely through these sales. The total number of downloads have been clocked at a 150 million which equates to 4 million per week. The latest iPod has a mechanism that enables the storage of digital photographs as well as music. Today, Apple figures have registered total of 6 million iPod sales. That’s a fascinating growth path, which would make any marketing professional envious of replicating that kind of success.

On careful consideration though, it took very long for iPod to really drive its sales figures to the kind that it was able to achieve in the years 2003 and 2004. Until then, the figures were good, but not something to write home about. The turning point for Apple came with the introduction of the third generation iPods. This is apparent since it took almost 2 years for iPod to register its first million in sales and soon after the launch of the 3G iPod in Tokyo less than 6months later; Apple was able to register its second million in iPod sales.

Interestingly, the sales figures recorded over the 3-year period were averse to any form of competition from companies such as Creative, Dell, river etc. They sold cheaper products but not for a moment, did they encroach upon the market share that was and is still monopolised by iPod. Apple has also utilised an aggressive marketing strategy towrope in different age groups by using the draw of celebrities and song choices. For instance, in late October 2004, Apple unveiled what was called the U2 iPod. Apple conducted a promotion exercise in sync with the release of U2’s song – Vertigo.

The new iPod was designed with black casing, a red wheel and a back cover that had the engravings ofU2 with the band signatures. It is little things such as these that have made the iPod such a role model for marketing strategists. The unique blend of having a great product and infusing the right level of awareness and visibility to sell it to the masses. In the chart below, the growth path of the iPod from its inception, to the end of 2004shows how sales surged in 2003 after the release of the 3G iPods as mentioned earlier.

Not to mention, as the iPod sales soared, so did the number of downloads for music. Initially, the software iTunes needed tube bought in order to write songs from audio CD’s to the computer, following which they could be downloaded to the iPod. In 2003, Apple introduced an online music store that enabled iPod users to download music directly from the Internet. This worked in 2 ways – it provided users with an increase in choice of music that they would like to have downloaded as well as simplified the procurement of iTunes. No more dada user have to buy a software, install it onto the computer and then use it to burn music off a CD and finally onto the hard disk of the iPod. Simplifying this process for millions of users had its positives as can be seen from the graph above.

The first big jump in sales was in October 2003 when the PC version of the music store went live. This enabled far more users to be able to download songs onto their computers and diluted the monopoly of Accusers. 2 months later, in December 2003, following a lot of media hype and attention being given to the iPod and a corresponding increase in Christmas sales, more and more people began downloading songs from iTunes. And in between July 2004 and October 2004, Apple registered growth of song sales from a 100 million to a 150 million.
(http://www.ipodlounge.com/articles_more.php?id=4280_0_8_0_M)

It must be noted that in many instances within the paper, the use of iPod and Apple is synonymous. After much deliberation, the researcher decided that it was important to approach the paper from the perspective of the parent company Apple. Any impact that the environment would have on Apple would be reflective in the iPod strategy. At the same time, in circumstances that would affect the company both positively and negatively, would subsequent effect the iPod and vice-versa.

Aims and Objectives

The aim of this paper is to understand the growth of the iPod through the years. It all began in the year 2001 and it has been a short journey to success. But how long will this be able to continue, what is the future for the product, how will it fend off competition and how will it impact Apple in the longer run. We all know that it has been apathy-breaking journey for Apple as it picks itself up from the doldrums of declining computer sales with its innovative invention that saw it spring back into the limelight. It is also the endeavour of this paper to highlight how important an impact the iPod has had on Apple alone and why can’t other company’s model the same success story.

Literature Review

The Success of the iPod

According to Haddad, Charles (2002),the iPod is one of the most revolutionary products to hit the computer and electronics market place. He believes that the only way forward for Apple is to diversify its product range and move from being a niche computer manufacturer to providing technology that understands the gap between technology and entertainment. He quotes how the market share for Apple in 2002 had remained at 3 per cent for a number of years. In order to move it from there, it was imperative that they looked beyond the computer industry since it was reaching a saturation point in most developed markets and the level of competition from across the globe was making it extremely difficult for large computer manufacturers to survive.

Digital handheld music players were a growing market in 2002. There were few players in the market place and industry experts such as ID Chad stated that demand would grow by 74 per cent over the next 3 years. In retrospect, they weren’t right – but only because the demand has recorded triple digit growth since 2002. In addition, the anticipated sales for 2002 were pegged at 12 million units of all kinds of portable digital music devices. Haddad brings up an important point about how the level of competition within the digital handheld music products industry was still at a minimalistic stage in comparison to other industries where companies such as Microsoft and Intel who had taken over the PC market.

He believed that the next generation of buyers were more interested in a product that was different, satisfied their requirements and at the same time, was ‘cool’ and suave to have. Especially in the case of handheld devices where consumers would cart it around with them, this need for trendy and sophisticated gadgets was of the utmost importance.

At the time of writing his article, Haddad had researched the iPod when music files were downloadable only from a Mac. The iPod sales were still consistent and looking positive during that stage but Apple had not introduced downloading files onto PC’s at that stage. Once that happened, iPod sales grew dramatically. The iPod was never intended to lift the flailing computer business of the parent company but overtime, Haddad statements would hold good, as the iPod would grow to become one of the most successful products ever launched by a computer company.
(Haddad, Charles, iPod, You Pod, Will We All Pod? Business Week Online; 7/3/2002)

Teething problems with Strategy?

With the degree of success that the iPod has seen over the years, there have been few instances that writers have been able to find a chink in the armour of this hugely successful product. One such writer is Salk ever, Alex (2004). In the first of his articles – ‘Apple’s slow boat to China’, he discusses how the Chinese economy is one of the most lucrative investment decisions for businesses the world over and how Apple has failed to take advantage of this huge opportunity. He begins by using the views of consultants who have worked within the Chinese market place for decades now and seen it evolve over the years.

He quotes Merrill Weingrod who works with a marketing consultancy – China Strategies. When Salk ever asks Weingrod how lucrative the Chinese market is for product such as the iPod, he answers saying that the market potential for men’s electric shavers is $300 million annually. Weingrod believed that the Chinese have the buying power to spend $200 to $250 on luxury shavers today which are not a necessity by any standing. This was just an indication of their mind-sets and how much they were willing to spend and for what. He reiterates this by stating that the Chinese population measures 300 million in terms of the number of cell phone subscribers across the country. They pay an average of $200 for their handsets and connectivity.

In addition, the average Chinese employee earns far less than his / her American counterpart and yet, he / she is willing to pay larger proportion of their salary towards buying luxury goods. This equates to the buying potential and eagerness amongst the population and above all – a prospective consumer. One who is constantly on the lookout for the infusion of luxury goods into the market so that he /she can go ahead and purchase it, provided there is a need of course.

In addition, the Chinese economy is the fastest growing economy in the world with its GDP growth rate pegged at 9 per cent annually. It has one of the largest middle-class societies in the world with disposable income that is growing as fast as their growth rate. With every factor in the book of marketing pointing towards the Chinese market, Salk ever is dismayed at Apple’s strategy to stay out of this market and not undertake an aggressive marketing strategy that would tap it’s he potential.

The only real steps that Apple has taken towards entering this economy is to ensure that iTunes Music software is downloaded onto every Manufactured by China’s second largest computer manufacturer – Founder Technology. It is an ironical decision considering the consumer who would purchase the machine would have little access to the iPod on which he could have downloaded his / her music. Besides this decision with the Chinese industry, Apple hasn’t taken any more steps towards making any investment decisions in this region. There was one instance when they almost toyed with the idea of opening an iTunes Music Store but then retracted any steps made in that direction.

The figures that Salk ever quotes are astounding to the reader. According to him, at least .3 present of the population of China has disposable income that equates to that of an individual in the US who would earn approximately $25000 to $30000 annually. That figure translates to approximately 60 million people today and will grow to 3to 4 times that number over the next decade. With the increasing middleclass and the ability to buy products that others around the world can afford, very soon the Chinese middle class would equal the entire population of the United States.

So what do the Chinese see these new gadgets in the market place as? According to market analysts Bryan Mama company that tracks the buying of cell phones in Asia, but based in Singapore, the number of cell phones that are replaced are astounding. The Chinese people like to replace their cell phones 6 to 12 months earlier than consumers in North America and Western Europe. Gadgets are seen as a status symbol of sorts. Owning the latest models makes individuals feel like they are popular and wanted, according to the company.

Chinese consumers also tend to go for gadgets that are sleek, suave and trendy. According to Salk ever those are the kinds of words that would define the iPod but they don’t find any place in the market. He tries to look at the picture from Apple’s perspective. As a company, Apple’s strategy is to consolidate and preserve its position in the markets that it is strong in. In the bargain, it would not look to invest in new markets such as China. In fact, Apple has a miniscule presence across the entire length and breadth of Asia. If Japan is taken out of the equation, Apple draws less than 10 per cent of total sales from this region.

Naturally, it is not an area of too much interest for the moment. Whilst Apple takes a back seat to proceedings in this region, competition in the form of Sony, Motorola and Creative have made inroads into the Chinese market. As an example, Motorola entered the Chinese handset market early and in the first quarter of2004, it was proud to declare that it has achieved a market share of 40per cent. It had the first mover’s advantage introducing a technology that few others were brave enough to take into this country many years back and today it has paid off. The Chinese market is known for its penetration problems. The researcher agrees with the insights that Salk ever has provided into this untapped region and understand the problems that Apple faces in the future lest it not take steps in this direction. The level of investment required at a later date where the market is abuzz with competition would be significantly higher. It makes completes sense for companies to invest in China at this stage and there is no reason why Apple should not be one of them.
(Salk ever, Alex, Business Week Online; 7/22/2004)

In another article by Salk ever albeit on a different issue, he adopts similar stand on the problems that will plague Apple. In his article, ‘iPod: Leader, but Not Ruler’, he states that the sales figures by Apple are either over-exaggerated or are inaccurate since there isn’t enough evidence that the data being collated is validated. Apparently, data in countries in Latin America, India, South Korea, Eastern European Taiwan are difficult to validate and not easy to obtain. There are also other areas across Asia, including China where data retrieval and collation is not as accurate as it is made out to be. So when Apple boasts of global sales and achieving market shares across the world in excess of 50 per cent across the electronic market (MP3 players), they may very well be over the top.

To evidence his findings, Salk ever looks at the various methods that companies use to collate market data that can be passed onto consumers and other business prospects. On one hand, they can utilise the services of US market research companies such as the NPD group that solely dedicates its efforts to the US retail economy. On the other hand, companies such as Apple can resort to asking OEM (Original Equipment Manufacturers) and component manufacturers how many pieces they are taking to the market place. Whatever may the case be, according to Salk ever, Apple doesn’t quite have accurate information omits global market share.

He confirms that Apple is certainly a global leader but not dominant. This could have been a very interesting report but the only flaw with his research is that he fails to document enough evidence either through statistics or through credible sources that can allow him to judge with some level of certainty that Apple’s iPods are infect facing tough times ahead.

To be fair to Salk ever though, he does introduce the subject of the growing competition of iPods outside the borders of the US from Asian electronics companies. In the coming years, cheaper labour costs of the Asian companies will allow them to create inexpensive models of the iPod and compete on price aggressively. In addition, Salk ever states that the Asian consumers who are growing to the largest consumers of entertainment products, prefer smaller sized iPods. This is not in sync with Apple’s strategy since they plan to introduce larger and heavier models of the iPod in the coming few months. And even if iPod does take the cue and invests in smaller models in time, it would have lost outing comparison to other digital music manufacturers. But Salk ever does summarise his studies by admitting the dominance of iPod within the digital market place, yet cautions against rising competition and price sensitive market in the near future.
(Salk ever, Alex (2004) Business Week Online; 5/27/2004)

Curzon (2005) has an equally interesting point of view. He believes that the iPod boom would not be able to sustain the success that it has experienced for much longer. His rationale is based around stock prices and other statistics that he discovers about Apple which point towards changing tide in the coming years. Curzon promotes the concept that Apple as a company is on the decline once again and encourages people to sell their shares now since they would lose money in the coming few months lest they hang onto them. He begins by mentioning the usual success stories of the company – the last 2 years have seen iPod sales rise more than twenty times from 219,000 units towards the end of 2002 to over 4 million units at the end of last year. In fact, Lehman Brothers had initially projected iPod sales to be approximately 3million units at the end of 2004.

They had to revise their figures closer to the end of the year and pegged it again at 4 million units for the year 2004. Apple on the other hand clocked 4.5 million units for the year ending 2004, ahead of anybody’s expectations. Another indication of the progressive rate of success is how the number of downloads from the iTunes rose from 50 million to 200 million. Finally, the biggest turnaround statistic lies in how the company almost went bankrupt after the dotcom era a decade ago and last year, recorded sales figures in excess of $3 billion with no debt on their financial statements.

What makes very interesting reading is how Ken Curzon describes the decline in the demand of iPods and correspondingly, with the parent company as well. He states that after the Christmas rush for buying iPods, in all probability consumers will not be willing to spend as much money on it. As he puts it – “Holiday shoppers are more enthusiastic about higher prices, but once the holiday season ends, they usually don’t like to spend money on products that are priced at a premium”. In keeping with the same, Curzon predicts that in the first few months of 2005, the rate at which consumers buy iPods would drop gradually at first and then, more drastically later in the year. Lehman Brothers too have declared that they expect a 14 per cent drop in sales figures over the course of the year.

In another case, Curzon talks about how on one hand, the sales of iPods have certainly been increasing in conjunction with an increase in market share, but the parent company Apple has seen a decline in its market share from 2 per cent to 1.9 per cent. The ‘Apple Stores’ are an over-riding success because of the iPod and its driving consumers tithe stores. But although the number of footfalls across these stores has doubled, the number of consumers buying Apple PC’s has remained constant. Additionally, Apple’s revenue figures in comparison to other computer companies are very average. For a company that is on the biggest ride of its business life, it records a growth rate of 33 present in comparison to HP’s 29 per cent. And what makes this look more dismal according to Curzon is that the operating margins for the previous year were declared at 3.94 per cent. This was far lower in comparison to HP’s 5.2 per cent and Dell’s 8.56 per cent.
(Curzon, Ken, Esquire; Mar 2005, Vol. 143 Issue 3, p112)

Somehow, Curzon does shed light on certain statistics that project Apple’s performance in a questionable light but on closer observation, it appears that the facts have been manipulated to project a negative perspective to the progress of Apple. The researcher believes this tube the case since there are many individuals who constantly try and influence the market forces through published writing such as this to ultimately try and manipulate the performance of the stocks. For every negative statement that Curzon was able to highlight, there appears tube an equally positive explanation for the same.

For instance, decline in market share by .1 per cent is not necessarily a negative impact on the company. It depends on the marketing strategy of the company – is it trying to move out of certain markets and invest in others. Additionally, in saturated market places such as the US, any form of product diversification would have an impact on the market share as well. So there are considerations that need to be taken before any conclusions can be made. At the same time, the researcher believed it important to include Curzon’s work since it was one of the most recent articles on the iPod that sounded warning bells and tries to get the reader to see the success story from a different perspective.

So where exactly is Apple headed towards now? According to Murphy(2004), a significant contribution of Apple’s success can be attributed to the iPod and hence, any future success parameters would also be defined by the iPod. The competition amongst the computer industry is very intense with players such as Microsoft for software, Dell, HP undim for hardware and a host of other system integrators and competitive channel partners. Due to a diminishing market share as mentioned earlier of under 2 per cent, the total business worth of the company has fallen to half that of its sales revenue.

The only light in this dark tunnel is the fact that the stock price at Apple has almost doubled over the past 2 years. But can the parent company depend on single product offering and expect to piggyback ride it all the way tithe bank? It’s not possible says Murphy. There will come a time in the near future when sales of iPods begin to decline, competitive forces take over with lower priced products and existing markets begin to get saturated.

Some of these products would come from companies such as HP,Dell, Sony, Creative, Gateway and Rio, each offering a product that is significantly cheaper and has greater memory storage in comparison tithe iPod. For instance, Creative has launched a new product that also has a longer battery life and also has white earplugs similar to those of Apple, taking a leaf out of Apple’s trendy design. At the same time, it has been seen that consumers have complained about the lack of availability of iPods in the stores. And to make matters worse, Apple hasn’t been able to confirm a deadline by when they would be made available.

Times will change gradually. As Murphy mentions – the pricing of the iPods over time will fall significantly and Apple would need to sell more and more iPods just to maintain the revenue figures. For instance, there is an assumption based on pricing that Apple would need to sell at least 20 per cent more iPods in the coming year to be able to sustain the same level of growth over the year. This should not be a problem currently considering growth is predicted to rise to 70 per cent but in time, this could certainly become an issue. If looked at differently, Murphy argues that falling prices of products are fine as long as business efficiencies were rising. 4 years ago, when the sales figures of Apple were 4 per cent higher than they are today, the operating profits of the company were at 9 per cent of total sales. Today, that figure has come down to 3 per cent. In addition, the number of employees added over the past 4 years has gone up by 32 per cent and the sale per employee has significantly decreased from $930,000 to$674,000.

For apple to be able to sustain its growth and maintain a leading position in the market place, it cannot depend wholly on the iPod revolution. Its notebooks and desktop products account for 64 per cent of its current sales as a company. But except for the month of June that recorded a 14 per cent increase in revenues, the rest of the year remained much the same in terms of sales. This is worrying for Apple since it doesn’t have too many back up measures to fall on should they land in trouble. To tackle some of this problem, Apple had introduced a series of Apple stores across the US, UK and parts of Western Europe.

These stores hosted the latest introductions by the company including all models of the iPod and its peripherals. The rationale lay in ensuring that consumers would walk into these stores with the excuse of looking at the iPods and at the same time, browse around and take look at the range of other Apple products as well. Unfortunately though, this move didn’t bring in the kind of sales that Apple management had predicted. When Apple was asked about this stagnancy that was creeping into their product lines, they said that 50 per cent of all buyers at their new stores that they have introduced are new consumers and they propose to build relationships through their product quality and peripherals and increase their market share of repeat buyers.

Interestingly, Murphy is one of the only writers on this subject who believes that the main fault of Apple’s moderate performance lies with its CEO Steve Jobs. Over the course of its business history, Apple has always ensured that its software configures only with its hardware and no others. For instance, the Mac operating system can only be run on Mac computers. In comparison, the Windows Operating systems can be used on a variety of different hardware systems making it a more universally accepted operating system. The time for niche solutions in not the way forward. Apple must realise that the money lies in the numbers and they can in no way get to those numbers by limiting access to their software.

It really is a Catch-22 situation for them. In much the same way, the iPod can only play music that has been downloaded from iTunes. What happens when the iTunes faces intense competition from other music download software companies in the near future? Are we saying that the iPod would only have limited access to music and perhaps, not the entire range of mus