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Sunday, November 14, 2004iPod Success and Microsoft Entertainment Industry Strategy -Part IIIn Part 1 of this article in this blog on this topic, we saw NYTimes has come out with a very detailed article titled Gates vs. Jobs: The Rematch , the future of entertainment industry at stake. The article talks about the incredible ipod success and how microsoft is preparing and aligning with other players to compete in the home/individual user entertainment industry. In this concludng part, we shall see the challenges that lay ahead of Apple in maintaining leadership and the likely scenarios that Apple and Microsoft and other players may have to confront.Excerpts -Part II:Geoff Moore, who articulated the platform strategy in his 1999 book "Crossing the Chasm" , argues that Apple is the rare company that should not follow his advice. Mr. Jobs, he said, has built the company around idiosyncratic, premium-priced products that gain appeal in part from their splendid isolation.It's a risky strategy, Mr. Moore contends. "You are only as good as your latest hit," he said. "You know at some point you will miss a step." But he says Apple is better off rolling the dice than trying to try to emulate Microsoft. "It is hard to change the DNA of a company, even if you have a great hand," he said. "There are some times that you say, 'there is a great opportunity here, but it is not for us.' " There is no question that Apple has played the music business like a virtuoso, after ignoring the first several years of the online music boom. When Apple became interested in music players in 2001, it rejected the most common technology in the market, flash memory chips, which can make inexpensive players that can hold a few dozen songs. Rather, it latched onto an emerging design based on a hard drive that could hold thousands of songs. A few hard-drive players already existed, but they were bulky. For the iPod's introduction, Apple bought the entire inventory of a new generation of smaller drives from Toshiba , making the iPod the sleekest hard-drive player in the market. This prevented rivals from offering the smaller players for months. Since then, Apple has been quick to add new features. In the spring, it introduced the iPod Mini, based on 1-inch drives, and last month it introduced iPoargues that Apple is the rare company that should not follow his advice. Mr. Jobs, he said, has built the company around idiosyncratic, premium-priced products that gain appeal in part from their splendid isolation.It's a risky strategy, Mr. Moore contends. "You are only as good as your latest hit," he said. "You know at some point you will miss a step." But he says Apple is better off rolling the dice than trying to try to emulate Microsoft. "It is hard to change the DNA of a company, even if you have a great hand," he said. "There are some times that you say, 'there is a great opportunity here, but it is not for us. When apple launched IPhoto, with the ability to bore your friends with thousands of snapshots of your latest vacation on its small color screen. Each innovation was matched quickly by rivals, but Apple was able to cement its position in the minds of its consumers as the leader in online music. It was helped even more by competitors' missteps. Sony, in theory, would have been the strongest rival, but it tripped over its own conflicting agendas. Sony's biggest bet in digital music was the MiniDisc, a popular format in Japan that never took off in the United States. And because it owned a major record label, Sony manufactured players that made it difficult to play MP3 files, the sort that were traded freely on file-sharing services. The pioneers in the market were Rio (born as Diamond Multimedia) and Creative Technology, both makers of add-on sound cards for PC's. Neither had Apple's marketing savvy or budget. Samsung, for its part, chose to focus on the more lucrative cellphone and flat-panel television businesses, letting its MP3 business flounder. Indeed, Apple has been able to keep its leading share even though its products are priced above similar models from rivals. Judging by its latest crop of products, Apple seems to believe that its profit margins can grow. The U2 iPod, for example, is priced at $349, or $50 more than an identical model with a white case. Adding the photo features to an iPod costs less than $20, competitors say, but Apple has been able to charge $100 extra for iPod Photo, over the $399 price of the comparable, music-only player. "The iPod is an affordable luxury," said Michael Gartenberg, the research director of Jupiter Research. "It's not the cheapest player on the market, but you don't spend thousands of dollars extra to own one." While Apple has not opened the iPod to other music stores, it did make an important decision to go after the broader market by building a version for Windows computers. And it reached an agreement with Hewlett-Packard for H-P to resell iPods and install iTunes software on its computers. Microsoft has been developing the Windows Audio formats for nearly a decade as part of the media player built into Windows. It has long licensed these formats for use in portable players, and it recently added features for so-called digital rights management, which allow music labels to control who plays a song and under what circumstances. (Apple developed its own digital rights plan, called FairPlay, that also is intended to thwart digital piracy.) As the underdog in audio technology, Microsoft has marshaled its formidable resources to get others behind its standard. For example, the fee that electronics companies pay to license the Windows Media format is about half of what the owners of MP3 charge. And Microsoft has offered all sorts of engineering help and marketing muscle to electronics companies and music service purveyors in return for their adopting the Windows formats. Microsoft also raised hackles recently when it started its MSN Music Store to compete with companies like Napster that it had been courting for years. That isn't so unusual for Microsoft, its executives say. The company often finds itself both competing and cooperating, they say, with companies in the software business.For the most part, though, the music world, from the electronics companies to the music labels, has embraced Microsoft. "I never would have believed I would say this, but Microsoft has been easy to work with," said Ted Cohen, a senior vice president at EMI Recorded Music. One reason that Microsoft can be so accommodating is that it does not need to make money on media software, as RealNetworks does. It does sell operating systems for telephones, personal digital assistants and television set-top boxes. But all of these are meant first and foremost to encourage people to buy more and more powerful PC's, each with Windows."The key to all this is that in the end, the consumer gets a great experience with digital entertainment that the PC makes better," says Microsoft..Many other PC makers, like H-P, Dell and Gateway, see their futures in consumer electronics and have started making devices like cameras, flat-screen televisions and music players. They also hope to sell more computers, based on Microsoft's Media Center software, to power home entertainment systems. Apple's leading position with the iPod, marketing experts say, could give it a leg up in these other markets. That is why some analysts are puzzled that Apple's sleek new iMac, a computer built into a flat-panel display, does not record and play television shows the way a Media Center PC does.Mr. Jobs declines to discuss his product plans. He has been openly contemptuous of attempts to add video playback to hard-drive music players, as Microsoft has with its new design called Portable Media Center. And other Apple executives pointed out that the Media Center PC had not been a success in the market until recently, and that Apple tried to sell computers with TV tuners in them a few years ago, with disappointing results. Longtime Apple watchers say they recognize a pattern. In the past, they say, Mr. Jobs has often dismissed a market as irrelevant before introducing just such a product, with a great flourish. He then explains that he has solved the problems his lesser competitors couldn't. It worked stunningly well with music. And many expect that he will try again, with some products related to television. Microsoft, however, cares far less about music than it does about television, a much bigger market. It has attacked it from many sides - not only with the Media Center PC and Portable Media Center, but with software for cable boxes, WebTV and the Xbox video game system. None of these have left Microsoft with a position in television that is even slightly similar to its chokehold on computers. (And it's not clear that Hollywood and the cable companies would like that to happen.) But the company has patience that is almost as deep as its pocketbooks. So it is easy to imagine, a few years from now, that an elegant, hip Apple digital television product will be battling for the home entertainment market against a much larger army of rivals using various forms of Microsoft software. "It's a classic one," Mr. Gates said. "Apple has always been a hardware company. I think Apple will do things the Apple way, and Microsoft will do things the Microsoft way. I'd say the long-term factors all favor our approach." An excellent article giving a view about the way the SOHO/HOME entertainment industry is headed towards and the strengths and approach of the key players in this space. | |
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