How iPod changed everything

Apple just announced that it is finally ending production of the iPod. At 21 years of age, it outlived many of the dramatic changes it witnessed and triggered. In this age dominated by streaming (and a vinyl resurgence) the iPod did not really have a place anymore, other than with its ever diminishing base of super fans. It should probably have ceased production long ago, but the iPod holds a special place in Apple’s heart and sentimentalism likely played a role in allowing it to reach its 21^st birthday before it was finally put out to pasture. And there is no doubt that the iPod earned that special place, because it was the change catalyst that transformed Apple into the mega corporation that it is today. But the iPod did even more than that, it was the trailblazer that created the environment in which today’s digital entertainment world could exist.

Back in my early days as an analyst I went to my first ever Apple analyst briefing, for the launch of the second generation. I felt like a fish out of water, with the room full of dry tech analysts asking Apple about its education strategy, its server products, its enterprise computing strategy. Then little me in the corner, asked about the iPod, and the entire room turned to me with bemused faces, just like the pub scene in American Werewolf in London.

Every successive briefing session I went to, the iPod became an ever bigger deal and the other analysts in the room started asking questions about it too. The iPod shuffled along at a steady pace until the launch of the iTunes Music Store, at which point it suddenly had a purposes it previously lacked, and sales lifted off. Apple has never looked back.

It is no coincidence that it was music that propelled the iPod to tech immortality. Steve Jobs was a massive music fan and it was his passion that helped ensure the iPod continued to receive the support it needed, even when it was not yet showing signs of fulfilling its huge potential. Apple has always been a company that is as obsessed with content as it is hardware and this is why the iPod and subsequent Apple devices have been so central to the growth of digital entertainment.

As the iPod evolved from scroll wheel to touch screen it became the launchpad for something even bigger for Apple: the iPhone (the first gen iPhone was a direct evolution of the iPod touch, at a time when smart phones were all keys). With the iPhone came apps. Just in the same way that the iPod was not the first digital music player, so Apple was not the first to make mobile apps nor of course the first to make a smartphone. But in all three cases, Apple took a promising but struggling format and made it ready for primetime. This early follower strategy underpinned Apple’s success in the 2000s and the early 2010s.

Pandora was an early beneficiary of Apple’s app strategy, being natively installed on US iPhones. The result was another lift off, with Pandora soon becoming he most widely used streaming app on the planet, even though it was only available in the US. Just as with the iTiunes / iPod combination, Apple understood the cruciality of an integrated content / device experience and its App Store became the launch pad for today’s digital entertainment economy. It did so by allowing app developers across the world to find a global audience which did not need to worry about clumsy installations and fragmented billing. Everything happened in one place, seamlessly and effortlessly. Google soon followed with its own take on the app store. Now you will struggle to find a games, music, video, news, podcast or book provider that does not use the Apple App Store, nor indeed a consumer that does not use apps to consumer content. 

Apple’s subsequent launch of the iPad and Apple TV further accelerated the adoption of digital content, giving audiences and content companies more choice about where they could benefit from the app economy. Apple Music, Apple TV, Apple Books, Podcasts, News, Arcade and more followed, helping cement Apple not just as a catalyst for the digital entertainment economy, but also as a major content player in its own right.

None of this would have happened without the iPod. So even though many readers will be too young to have even owned an iPod, spare a thought for this now departed member of the digital ecosystem, because without it, the devices you use and the entertainment you consume would look very, very different.

Farewell iPod!

HomePod Mini: Apple’s pandemic-era product

Apple’s Tuesday product announcement showcased its 5G iPhones, but also included the launch of the new $99 HomePod Mini. Though it might have looked like a supporting act for the launch, its strategic importance should not be underestimated – especially in the context of how Apple competes with Amazon, the company that is arguably becoming Apple’s most important competitor among the Western Tech Majors (Apple, Alphabet, Amazon, Facebook). Amazon is emerging as a global scale hardware competitor, focused on the home rather than on personal devices.

HomePod Mini is a product for the era of pandemic

The home is becoming the new battleground for the tech majors and Amazon has a comfortable lead with more than 50% of the installed base of smart speakers, significantly ahead of Google and far ahead of Apple which currently sits at less than 10% market share. HomePod Mini is an affordable device that gives Apple the opportunity to quickly expand its role across the homes of iPhone owners, a beachhead for future content and services. HomePod Mini is also very much a pandemic-era product move; with more of us spending more time working and studying from home, we are more inclined to use specialised home devices such as smart speakers, rather than the convenient but not specialised phone. As the HomePod was always a premium, Apple afficionado device, HomePod Mini gives Apple a tool with which it can extend its footprint in the average day of its increasingly home-bound iPhone owners.

An enabler for audio strategy

Though Apple has much bigger ambitions for the home than music alone, music is the use case that is spearheading the product strategy. Apple TV continues to grow in importance for Apple, but as a screen plug-in, it lacks the capabilities of a standalone smart speaker. As Amazon has shown, smart speakers can become the digital hub around which smart home strategies can be built. HomePod Mini may also be the tool for a bolder, joined-up audio strategy for Apple. Alongside Apple Music, Apple continues to back its radio bet Apple Music 1 (previously Beats 1) and of course it is one of the leading destinations for podcasts. Apple can pull these three disparate strands together by creating in-home use cases via HomePod Mini. In this respect, Apple will need to, once again, do all of that and more – as not only has Amazon recently added podcasts to Amazon Music, but it also the home of Audible, an asset both Apple and Spotify lack.

Finally, what Apple did not announce on Tuesday was content bundles for its hardware. An Apple One / iPhone device lifetime bundle feels like an obvious move – competition authorities permitting, perhaps sometime over the coming 12 months. A $3.99 Apple Music Home Pod tier would make sense also.

The device may be mini, but the strategy is anything but.

Take Five (the big five stories and data you need to know) – September 16th 2019

Spotify – small step, big step: Spotify has announced that it is acquiring musician marketplace company Soundbetter. Back in July, Spotify halted its artist direct offering. Some quarters viewed that as the end of Spotify’s disruptive label-competitor strategy. We thought differently, and this acquisition confirms it. Being a next-gen label means being so much more than what labels used to do. Spotify is building it from the ground up, starting with artist collaboration.

Apple, half-bundle: While launching new hardware, Apple announced it will be bundling a year of Apple TV+ with new device sales.This feels like it is more about Apple not feeling that it has enough value to expect standalone subscribers yet, and that it expects to be in a stronger place 12-18 months from now. Nevertheless, Apple’s future is bundling. Two to three years from now, expect an all-in-one bundle of everything Apple has to offer, fully integrated into its devices. That’s how to drive up device average revenue per user (ARPU) in a saturated market with slowing replacement cycles.

Apple, SKU skew: Lots of announcements from Apple – including Arcade. The very fact that there were so many (e.g. three iPhones) points to one of Apple’s most important post-Jobs transformations: fragmentation. In the 2000s Apple had a far more concise product line-up than its traditional Consumer Electronic (CE) competitors. Now it has dozens of products and services and looks every bit the traditional CE company. Gone are the days of the simplicity of one iPhone, replaced by a suite of segmented, highly-targeted product SKUs (Stock Keeping Units). Clarity of single purpose is a luxury no longer afforded.

 

Peak tech, sort of: The title of Vox’s peak tech piece turned out to be much more promising than the piece itself(which focuses on what terms companies are using to describe themselves). But there is a bigger story here: we have now reached a stage where a) tech is a meaningless concept – everything is tech, and b) there is the realisation that companies that use tech to maintain networks of services and customers (Uber, WeWork etc.) are highly vulnerable with little in the way of actual assets. If the tech bubble bursts, investors will need somewhere else to put their money.

Space lift – yes, space lift: Years ago, sci-fi author Arthur C Clarke wrote of a tower that would act as an elevator for spacecraft to launch directly from the edge of the Earth’s atmosphere, thus saving the huge thrust energy required to leave the earth’s orbit. It turns out that no known materials would support such a vast structure. Now two astronomers have proposed an alternative – a 225,00 mile long,pencil-thin, zip wire hanging down from the surface of the moon…you couldn’t make it up.

 

Why Music and Video are Crucial to Apple’s Future

Apple’s downgraded earnings guidance represents its first profit warning in 10 years. This is clearly a big deal, and probably not as much to do with a weakening Chinese economy if Alibaba’s 2018 Singles’ Day annual growth of 23% is anything to go by. But it does not indicate Apple is about to do a Nokia and quickly become an also-ran in the smartphone business. Nokia’s downfall was triggered by a corporate rigidity, with the company unwilling to embrace — among many other things — touchscreens. Apple’s touchscreen approach, coupled with a superior user experience and its ability to deliver a vibrant, fully integrated App Store, saw it quickly become the leader in a nascent market. Apple’s disruptive early follower strategy is well documented across all its product lines and the iPhone was a masterclass in this approach. But the smartphone market is now mature and in mature markets, market fluctuations need only be small to have dramatic impact. That is where Apple is now, and music and video will be a big part of how Apple squares the circle.

Apple started its shift towards being a services-led business back in Q1 2016, issuing a set of supplemental investor information with detail on its services business and revenue. Fast forward to Q3 2018 and Apple reported quarterly services revenues of $10 billion—16% of its total quarterly revenue of $62.9 billion. So, services are already a big part of Apple’s business but the high-margin App Store is the lion’s share of that. App Store revenues will continue to grow, even in a saturated smartphone market, as users shift more of their spending to mobile. But it will not grow fast enough to offset slowing iPhone sales. Added to that, key content services are moving away from iTunes billing to avoid the 15% iTunes transaction fee. Netflix, the App Store’s top grossing app in 2018, recently announced it is phasing out iTunes billing, which is estimated to deliver Apple around a quarter of a billion dollars a year. That may only be c.1% of Apple’s services revenue but it is a sizeable dent. So Apple has to look elsewhere for services revenue. This is where music and video come in.

Streaming will drive revenue but not margin

Streaming is booming across both music and video. Apple has benefited doubly by ‘taxing’ third-party services like Spotify and Netflix, while enjoying success with Apple Music. With third-party apps driving external billing, Apple needs its own streaming revenue to grow. A video service should finally launch this year to drive the charge. However, the problem with both music and video streaming is that neither is a high-margin business. Apple’s residual investor value lies in being a premium, high-margin business. So it has a quandary: grow streaming revenues to boost services revenue but at a lower margin. This means Apple cannot simply build its streaming business as a standalone entity, but instead must integrate it into its core devices business.

Nokia might just have drawn Apple’s next blueprint

During its race to the bottom, Nokia launched the first 100% bundled music handset proposition Comes With Music (CWM). It was way ahead of its time, and now might be the time for Apple to execute another early (well, sort of early) follower move. CWM was built in the download era but the concept of device lifetime, unlimited music included in the price of the phone works even better in a streaming context. I first suggested Apple should do this in 2014. Back then Apple didn’t need to do it. Now it does. But rather than music alone, it would make sense for Apple to execute a multi-content play with music, video, newsand perhaps even monthly App Store credits. Think of it as Apple’s answer to Amazon Prime. To be clear, the reason for this is not so much to drive streaming revenue but to drive iPhone and iPad margins and in doing so, not saddle its balance sheet with low streaming margins. Here’s how it would work.

Streaming as a margin driver for hardware

Apple weathered much of the smartphone slowdown in 2018 by selling higher priced devices such as the iPhone X. This revenue over volume approach proved its worth. The latest earnings guidance shows that even more is needed. Apple could retail super premium editions of iPhones and iPads with lifetime content bundles included. By factoring in these bundled content costs into iPhone and iPad profits and losses, Apple can transform low margin streaming revenue into margin contributors for hardware. Done right, Apple can increase both hardware and services revenue without having a major margin hit. Add in Apple potentially flicking the switch on the currently mothballed strategy of becoming mobile operator, and the strategy goes one step further.

Free streaming without the ads

If reports that Apple is buying a stake in iHeart Media are true, then it will have another plank in the strategy. Radio is an advertising business, but Tim Cook hates ads so the likelihood is that any streaming radio content would be ad free. Given that consumers are unlikely to want to pay for a linear radio offering, Apple would need to wrap the content costs into hardware margins. This could either be part of the core content bundle, or could even be a lower priced content bundle, with Apple Music being available as a bolt-on, or as part of a higher priced bundle or, more likely, both. Ad-supported streaming becoming ad free would of course scare the hell out of Spotify.

Music to the rescue, again

2019 will probably be too soon for this strategy to finds its way into market, but do expect the first elements of it coming into place. Music saved Apple’s business once already thanks to the iTunes Music Store boosting flagging iPod sales. This paved the way for the greatest ever period in Apple’s history. Now we are approaching a similar junction and music, along with video and maybe games, are poised to do the same once again.

What Frank Ocean’s Bombastic Blond Moment Tells Us About The Future Of Artists And Labels

When Frank Ocean’s latest album ‘Blond’ dropped, it did so like a nuclear bomb, sending shockwaves throughout the music industry. In one of the audacious release strategies of recent years Ocean and his team at 360 fulfilled the final album contractual commitment to Universal Music by ushering his breaking-the-mold visual album ‘Endless’ onto Apple Music.  Featuring collaborations from the likes of Sampha and James Blake and set as a loose soundtrack to art house visuals, ‘Endless’ looked like the sort of digitally native, creative masterstroke that would win plaudits and awards in equal measure. But no sooner had Universal executives started daydreaming about Grammys then along came what turned out to be the ‘actual’ album ‘Blonde’, self released by Ocean (Universal contractual commitments now of course conveniently fulfilled) and, for now at least, exclusively available on Apple Music. You can just imagine seeing the blood drain from (Universal CEO) Lucian Grainge’s face as the full magnitude of what had just happened came into focus. In truth ‘audacious’ doesn’t even come close to explaining what Ocean pulled off, but where it gets really interesting is what this means for the future of artist careers.

Artist-Label Relationships Are Changing

Quickly sensing the potential implications, Grainge swiftly sent out a memo to Universal staff outlawing streaming exclusives…though voices from within Universal suggest that this diktat had been in the works for some time . A cynic might even argue that it was politically useful for Universal to be seen to be taking a strong stand ahead of the impending Vivendi earnings call. As the ever excellent Tim Ingham points out, in practice Universal could put a streaming exclusives moratorium in place and still have a good number of its front line artists put out streaming exclusives. This is because many of the deals these artists have are not traditional label deals where Universal owns all the rights. And that itself is as telling as Ocean’s bombastic blond moment. Not so much that Universal is probably the major with the highest amount of its revenue accounted for by licensed and distributed works, but that any label’s roster is now a complex and diverse mix of deal types. Artists are more empowered than ever before, and thanks to the innovation of label services companies and next generation music companies like Kobalt, labels have been forced to steal the disruptors’ clothing in order to remain competitive.

Streaming Exclusives Represent Another Option For Artists

Just as labels had started to successfully co-opt the label services marketplace by launching their own – e.g. Universal’s Caroline – or by buying up the competition – e.g. Sony’s acquisition of Essential Music & Marketing – along come streaming services giving artists another non-label route to market. In truth, the threat has remained largely unrealised. Exclusives on Tidal have most often proved to be laced with caveats and get out clauses (e.g. Beyonce’s ‘Lemonade’ arriving on iTunes 24 hours after landing ‘exclusively’ on Tidal). Chance The Rapper’s (in name only) mixtape ‘Colouring Book’ and Ocean’s ‘Blond’ are exceptions rather than the rule. So all that’s about to change now right? Not necessarily…

Album Releases Require More Time Than Apple Probably Has

As anyone who works in a label will tell you, releasing an album is typically a long, carefully planned process with many moving parts. It’s not something you do in a couple of weeks (Ocean started building the hype and expectation for his latest opus a year ago). If, for example, Apple was going to start doing exclusives routinely, even if it just did 20, that’s still a new exclusive to push every 2 weeks. That might work, at a stretch, for music service retailing promotional pushes but is far short of a fully fledged album release cycle. Which means that even for just 20 exclusives Apple would have an intricate mesh of overlapping release campaigns. This is something that labels do with their eyes closed but would it require new organizational disciplines for Apple. Not impossible, but not wholly likely either.

In practice, exclusives are likely to be limited to being the crown jewels of streaming services, their most valuable players, creative playmakers if you like. Even for Netflix, that pioneering exemplar of the streaming originals strategy, only spends 15% of its $3 billion content budget on originals and probably won’t break 20% even by 2020. What Apple and Netflix have in common is that they are using exclusives as a customer acquisition strategy, achieving their aims by making a big noise about each one. But if you’re releasing exclusives every week or two the shine soon wears off. And suddenly the return on investment diminishes.

Streaming Exclusives Are Unlikely To Turn Into A Flood

None of this means that we won’t see more artists striking streaming exclusives. We will, regardless of what labels may actually want to happen. And most of those will probably be on Apple – the service with bottomless pits masquerading as pockets. But the trickle will not turn into a flood, a fast flowing stream perhaps (see what I did there) but not a torrent.

Although they might not realise it yet, Kobalt might find themselves hurting more than the majors from this latest twist in the Exclusives Wars. Kobalt has probably done more than any single other music company to drive change in the traditional music industry in the last 5 years, showing artists and songwriters that there is another way of doing things. But Frank Ocean has just shown that there is now new another option for established artists looking for options at the end of a label deal.

Most importantly of all though, is that streaming exclusives (and indeed label services deals) work best when an artist has already established a brand and an audience. Most often that means after an artist has had a record label recording career. Apple cannot be relied upon to build anything more than a handful of artist brands. One of the founding myths of the web was that it was going to do away with labels and other traditional ‘gatekeepers’. Now, decades later, labels still account for the vast, vast, vast majority of music listening. Make no mistake, a momentous value chain shift is taking place, with more power and autonomy shifting to the creators, but that is a long journey and ‘Blond’ is but one part of this much bigger shift.

How The iPhone 6 May Be The Start Of Apple’s ‘Back To Music’ Strategy

With the launch of its new iPhones just round the corner Apple could be forgiven for feeling rather more positive about its smartphone outlook than it has for a while. The sheen has worn off its number one competitor Samsung, with cheap Chinese and Indian competitors seriously eating into its market share and the investor community realising that the smartphone business is actually a lot like the music business: you are only as good as your last hit. But if Samsung is a major label, measured solely on market share and sales, then Apple has managed to partially maintain the role of big indie, where the quality of its output is just as important. Apple’s Eddie Cue believes that Apple are on the cusp of product strategy renaissance. Crucially, Apple’s CE product portfolio has become wide enough now, especially with the acquisition of Beats, to allow Apple some innovation freedom. I think this could translate into an iTunes phone before the end of 2015.

The Mainstreaming of Apple’s Customer Base

Apple’s customer base has changed from the vanguard of the tech savvy early adopters to a much broader group including large swathes of early followers, later adopters and even mass market laggards. The iPhone was primarily responsible for the transformation and while it has brought undoubted success has also caused Apple problems. As a company with a small product number of products in its portfolio, especially within the mobile category, Apple has never been able to play the ‘Hero Phone’ strategy of phone specialists like HTC and Samsung. So while those companies have been able to sway those all-important investors with small selling but super-specced uber phones, Apple has, until the launch of the 5C, had roll its entry and hero devices into one single new product. But even the combined strategy of the 5C and of targeting lower end consumers with older models still leaves Apple little room to be truly adventurous with its product strategy, for fear of alienating its mainstream users.

As I wrote about previously, the acquisition of Beats presents Apple with the opportunity to innovate with more freedom in the Beats product ranges and then take the innovations that work best there back into the Apple product portfolio. Even if Apple more tightly harmonizes its two divisions’ product ranges, Apple will still be left with a larger and more segmented product portfolio, giving it more ability to super-serve important niches. This is where Apple’s music device strategy renaissance can come into play.

 

Music Changed Apple

When Apple launched the iPod in 2001 it was the start of a musical journey for Apple. I remember attending Apple analyst briefing sessions in those early iPod days and being the only one there interested in this small little side project. Of course over the following years the iPod, with music at the core, took Apple’s product strategy in an entirely new direction. You might say that music changed Apple. But even by 2004 the winds of change were stirring: the launch of the iPod Photo with its colour screen was the first tentative step towards turning Apple’s portable device strategy from music to something much bigger. The iPhone and iPad are the current culmination of that shift, multimedia devices that do many things for many groups of people. Not one thing for one group of people in the way the iPod did.

The strategy has been inarguably successful but just as music stopped looking like it mattered so much, it started biting Apple in the behind. Spotify and other streaming subscription services started stealing Apple’s best iTunes music customers, turning them from downloaders into streamers. That in itself should have been an irritation rather than a problem. But these most valuable of customers now have much less reason to stay with Apple when the buy their next phone because their Spotify playlists will work just as well on Android as they will on iPhones.

Apple’s New Music Strategy

Apple needs a stand out music value proposition to win them back. A subscription service built around Beats Music and iTunes Radio will be the fuel in the engine but will not do enough on its own quickly enough. While Beats Music may have different features from Spotify the fundamentals are essentially the same (millions of songs, c $10 a month). So iPhone owning Spotify customers are unlikely to switch straight away just because it’s there.

Apple needs more. That ‘more’ can be delivered in two ways:

1. Price
2. Device

Apple has always been in the business of loss leading with music to sell hardware. Once that was a growth strategy now it assumes the urgency of defence strategy. That should persuade Apple to heavily subsidize the price of a subscription. In the near term this could be 3 month Beats Music trial plus a discounted $5 subscription offer at the end of the trial free with one of the forthcoming iPhone 6 models. Longer term it should translate into something much more ambitious.

 

The iTunes Phone or The Beats Phone?

Before the end of 2015 I expect Apple to launch a music specialist phone. Whether that is branded as an iTunes Phone or a Beats Phone will depend on who wins the internal branding wars at Apple, but expect it to be one of those labels. The device will be squarely targeted at the music aficionado and will crucially combine the music subscription and device into a single purchase by hard bundling a music subscription into the device cost. It will likely also be squarely focused on pushing Beats hardware sales so it may be both bundled with a Beats Bluetooth headphones and also be the first iPhone without a 3.5mm stereo jack, instead offering Bluetooth only.

The broad feature set could look something like this:

• Hard bundled Beats Music subscription
• Unlimited iCloud access
• Ad free iTunes Radio
• Top level UI music apps
• Bundled Beats Headphones
• Bluetooth only headphone support

This strategy is Apple’s best shot at reclaiming its wavering aficionado fan base but be in no doubt, it would also be a game changer for the digital music space by once again tying the importance of music experiences to device not just app.

Got Milk?

Poor Samsung launched their latest punt at digital music success just as Spotify was stealing all the media oxygen with its acquisition of the Echo Nest.  Samsung’s latest venture, curiously called ‘Milk Music’, is another attempt from the smartphone giant to carve out some mindshare and consumer traction in the digital music space.  Like all but one smartphone manufacturer – you know, that one from Cupertino – Samsung does not have the best of track records when it comes to digital music, having recently culled its previous Hub service.  Milk is a Pandora-like mobile radio app and while it certainly suffers from ‘me-too syndrome’ it is not actually a terrible strategic fit.

With 200 stations and a catalogue of 13 million tracks, Milk Music has some muscle but it is hard not to see it as a thinly veiled attempt to ‘do an iTunes Radio’.  However there is not necessarily that much wrong in doing exactly that.  iTunes Radio is a very neat service that is well geared towards the mainstream, less engaged music fan.  That is exactly Samsung’s addressable audience.  Samsung has been at the vanguard of the mainstreaming of smartphone adoption, so much so that many of its devices are smartphones with dumb users.  Milk Music is however limited to the Galaxy range of handsets, which will to some degree filter its audience towards Samsung’s more engaged users.

No smartphone manufacturer has been able to make music work like Apple has.  In fact no smartphone manufacturer has been able to make content and services as a whole work like Apple has.  Apple’s ecosystem is a fascist state compared to Android’s federated democracy, but at least the trains ran on time in Mussolini’s Italy.  That absolute control of the user experience enables Apple to deliver on the single most important part of digital music product strategy: the service-to-device journey.  It just happens, and seamlessly so.  So many other phone companies have failed to understand the importance of this ineffable magic.

Samsung might be able to get it right with Milk Music, but because they are part of the federated states of Android, they will also have to tolerate a bunch of pre-installed incursions from fellow Android states, not least Google’s Play Store.  Apple meanwhile ensures there is just one place for music on its devices.

Samsung desperately wants to make music work and to its credit continues to throw money at trying to fix the problem.  Free radio might just be the best first step.  Especially considering that just 1% of Android consumers state they intend to start paying for a music subscription service and that a quarter of them say they have no need to pay for music because they get so much for free.  Milk Music might be feeding that free music habit, but it could also be the foundation for something bigger and better.  In the meantime, if you can’t beat them…

The Smartphone Innovator’s Dilemma

The recent rumours concerning Amazon’s possible flirtation with launching a smartphone, whether baseless or not, on the eve of Apple’s new product launch, shine an interesting light on a challenge that faces all smartphone manufacturers: where to innovate next?

In the mid 2000’s I oversaw the launch of JupiterResearch’s European mobile research practice and also at Jupiter led countless mobile data and research projects as well as working closely with the leading handset manufacturers.  Throughout that time I saw the early days of the emergence of the smartphone sector up close, and the rate of innovation was both often startling and manifested itself in highly tangible ways. Screen sizes got bigger, handsets got smaller, camera megapixel counts grew, and a whole host of new features arrived including video, email and calendar synching, true tones, 3.5mm headphone sockets, MP3 sideloading, PC-synching etc.

Then in June 2007 Apple came along with the iPhone and transformed the mobile phone market forever.  Apple had characteristically waited until the smartphone market was ready for primetime before launching the iPhone and then pursuing an equally characteristically disruptive strategy.  The last few years of the 2000’s saw successive innovation step changes, with meaningful new marquee features for each new generation of devices. Now though, on the eve of Apple’s next smartphone announcement we are at an unusual place.  There is not that much more that a smartphone can really deliver at its core.  Smartphones were all about disruptive innovation, now they have become sustaining innovation. Thus the new features that are used to distinguish one product from the next are either evolutionary improvements (e.g. better screen resolution, better camera, better battery life), or bleeding edge gimmicks that are not yet ready for primetime (e.g. Siri, Eye Tracking).  The smartphone has hit upon its optimum product construct and thus product changes from here-on-in will predominately be iterative, sustaining innovations rather than disruptive ones.

That in itself is not an inherently bad thing.  Indeed it is typical of a mature market, but it also makes the market right for disruption, and if there is less scope for that disruption to be product focused, it is more likely to be strategy focused.  Hence we have started to see the emergence of strategies such as Mozilla’s Firefox OS devices aimed at driving open web standards and the rumoured Amazon phone strategy aimed at driving e-commerce and digital content revenues. So the established incumbent players face an innovation dilemma for their flagship devices: do they continue to focus their efforts on packaging sustaining innovations with occasional product gimmick, do they try something dramatically different, or do they try the third way of a disruptive strategy instead?

For a company like Samsung with a plethora of product SKUs it is possible to experiment with bleeding edge innovation on niche devices but it is the flagship devices where marketplace impact is measured.   Go too fast on a flagship device and you will alienate your mainstream customers, go too slow and you will be positioned as an innovation laggard.  The irony of course being that it is the less-headline-grabbing sustaining innovations that generally deliver the most discernable user benefits.

A perhaps even greater irony is that it is the software that really delivers the differentiation to most consumers.  With standard smartphone hardware functionality (cameras excepted) being broadly comparable in the eyes and ears of most mainstream consumers, it is what the software enables that people truly notice.  The apps, the content, the features.  Thus iOS 7 will transform how iPhones behave yet Apple will still need a marquee feature to sell the next iPhone, even if that is a bleeding edge gimmick. Against this backdrop the third way of disruptive strategy becomes ever more appealing for smartphone companies.  Hence Apple’s rumoured intensified push towards lower price segment consumers with a scaled down version of the iPhone.

The likelihood is that whatever phone product Apple launches tomorrow it will probably leave many observers disappointed because it will not be seen to be a dramatic innovation step change.  Apple might surprise us and pull a rabbit out of the hat but it is more likely not to because the simple fact is that it is harder than ever to dramatically innovate smartphone products. Though we may not yet have seen the end of the age of disruptive innovation in smartphones, we are certainly in a lull cycle.  Which is why Samsung, and quite possibly Apple, are looking to adjacent markets such as smart watches, as opportunities to innovate aggressively in wild west technology frontiers in order to re-earn their innovation stripes.

iTunes Radio: Another Chapter in Apple’s Cautious Cloud Music Strategy

As expected Apple today announced the launch of the music industry’s worst kept secret iTunes Radio, a Pandora-like personalized radio service.  iTunes Radio is integrated into the new iOS7, is free with ads to all, free without ads to Tunes Match subscribers. There’s enough different and new in iTunes Radio to make it stand out from the pack and to ensure it has a typically high quality Apple touch.  But the prevailing narrative will be that Apple has taken the conservative me-too strategic option rather than bringing new transformative innovation to the marketplace.  In many respects that analysis rings true but the complete picture is far more nuanced.

Apple is not in the business of creating markets or being a first mover.  Apple is the archetypal early-follower.  That applies even more to digital music than to hardware for Apple.  The iTunes Music Store was far from the first download store, but it was, and arguably still is, the best.  Apple is in the business of selling hardware and its music strategy is dictated by its ability to help it sell hardware.  Rather than balance itself precariously on the bleeding edge of digital music innovation Apple waits for music technology to become ready for prime time.

Two Reasons Why Apple Has to Go Slow With the Cloud

All of that has rung true for a decade+ at Apple.  But now there are new factors in the mix which play determining roles in Apple’s music strategy:

• Apple has become a mainstream company: Apple’s nineties and noughties heritage was that of the early adopter tech aficionado.  Now Apple is a mainstream consumer product company.  Since the start of 2011 Apple has sold 468 million iPods and iPads. In doing so it has brought swathes of mass market consumers into the iTunes ecosystem, resulting in 575 million credit card linked iTunes accounts.  But all this means that Apple now has to move more carefully, innovating at a pace that is appropriate for a majority of its customer base not just the highly engaged top end.  Spotify’s 6 million paying subscribers is a fantastic achievement but pales compared to Apple’s iTunes user count. The simple fact is that Apple does not think that $9.99 subscriptions are yet ready for primetime for mainstream consumers.
• The shift to the cloud will impact device pricing strategy: currently Apple’s device pricing strategy is dictated by storage capacity.  The bigger the hard drive the higher the price. But once/if everything shifts to the cloud bigger memory capacities matter much less.  This is why Apple has to go slow with the cloud.  If it goes too quickly it could accelerate the transition at a rate it cannot manage and end up wreaking havoc in its core device business all for the sake of keeping digital music fans happy.  A personalized radio service is a neat complement to downloads.  It won’t win any awards for innovation but it will give mainstream Apple customers enough extra value without disrupting device sales, or indeed music sales.  iTunes Radio buys Apple crucial time as it plans its cloud-era device and pricing strategy.

What Apple Could (and Should) Do

The shift to the cloud is of course inevitable and for all that iTunes Radio may buy Apple some time, the challenges must be faced. The answer to Apple’s problems may lie in the problem itself.  If consumers increasingly shy away from higher memory devices – and therefore more expensive devices – content may prove to be the way in which Apple maintains premium price points across its device portfolio.

Content is the core reason people use iPads and iPods and one of the core reasons people use iPhones.  A smart move would be to take that importance and bake it into the value proposition.  Instead of charging a premium based on memory size alone, Apple could additional sell content-device bundles (and longer term phase out memory size pricing entirely).  For example pricing tiers for iPads could look something like this:

• Price point 1: 16GB, no content
• Price point 2: 32GB $/€/£10 a month of iTunes content
• Price point 3: 32GB $/€/£10 a month of iTunes content and on demand music streaming

The reputation of content-device bundles got somewhat tarnished by the Comes With Music experience, but the model remains fundamentally sound.  Apple could just be the company to make it work. If it does, iTunes Radio will have proved to be a crucial first step on that journey.

In the meantime iTunes Radio is another important, incremental step in Apple’s cautious cloud music strategy.  Cautious because Apple is intent on innovating at a pace that matches the appetite of its mainstream customers.  Cautious because a hasty move could turn iTunes Music sales upside down with direct cannibalisation. And most importantly of all, cautious because Apple knows that if it gets it wrong it could disrupt device pricing strategy, with major repercussions right across Apple’s business.

In short there are many reasons for Apple to go slow with its cloud music strategy.  That might not make for the most exciting of music product roadmaps, but it does mean that Apple is building for long term sustainability and viability.  That in itself is of crucial importance for the music industry and should help ensure Apple remains a music industry partner of true scale for years to come.

iTunes @ 10

On Sunday 28^th April Apple’s iTunes Store will celebrate its 10^th birthday.  It is arguably the single most important milestone in the digital music market to date.  In these days of cloud and streaming dominated industry discourse it easy to forget just how important Apple has been in the history of digital music and how equally important it remains today.  In 2012, iTunes generated approximately $3 billion in trade revenues for the recorded music industry, equivalent to around  55% of all digital trade income and close to a fifth of all global recorded music trade revenue.  By comparison Spotify was closer to 10% of digital trade revenues and 4% of all global trade revenue.  Spotify is clearly at a much earlier stage of growth and represents the future, but iTunes is far, far from being a historical footnote.

The Four Ages of iTunes

The history of iTunes falls into four key chapters:

• Baby Steps: On January 9^th 2001 Apple launched its iTunes music management software, and later that year in November came the first ever iPod.  Back then there was no iTunes Store and Apple made it very clear how they expected their customers to acquire digital music with their ad campaign slogan: ‘Rip Mix Burn’.  Revolutionary as it was though, the iPod got off to a modest start: despite multiple product updates, by the end of 2002 Apple had still only shifted 600,000 iPods. iTunes wasn’t changing the world, not yet.
• Changing the Tune: In April 2003 Apple launched the iTunes Music Store in the US, and then in 2004 in the UK, Germany, France and Canada, as well as an EU Store.  There were plenty of download stores already of course – Apple is always an early follower not a first mover – but they were crippled by restrictive DRM, cumbersome technology and lack of interoperability.  Most stores didn’t even allow buyers to transfer to MP3 players or burn to CD. And if you were lucky enough to be allowed to transfer to an MP3 player, your device probably didn’t even support the store’s DRM it probably also relied on incompatible 3^rd party music management software.  Apple changed all of that in an instant, delivering an end-to-end integrated experience.  Steve Jobs, through a combination of sheer force of personality and a commitment to spend big on marketing (really big) managed to persuade the big labels to support unlimited iPods, CD burning and multiple PCs.  Digital music hadn’t so much been stuck in the starting blocks as having its feet nailed to them.  Jobs set digital music free.  By July 2004 the iTunes Music Store had hit 100 million downloads, but more significantly by the end of 2005 Apple had sold 42.2 million iPods. iTunes was now selling iPods, and fast.
• Beyond Music: When Apple was in the business of selling monochrome screen iPods, music was the killer app and iTunes was the marketing tool. But that changed on June 29 2007 with the launch of the iPhone.  Apple soon needed more than music to market its multimedia, touch screen, accelerometer enabled devices. Movies were proving difficult to license and TV shows faced free competition from Hulu, iPlayer, ABC.com et al. The solution of course was the App Store.  The App Store took just 3 months to hit 100 million downloads – it had taken the iTunes Music Store 15 months to hit the same milestone.  Apple remained, and remains, firmly committed to music but its attention is inherently diluted by all of the other content types that iPhones and iPads cater for.  When Apple launches a new device it is EA Games you see demonstrating a new game to showcase the device’s capabilities, not a new music track.  (And of course the word ‘music’ got dropped from the iTunes Store name long ago.)
• The Platform Challenge: The App Store turned the iTunes Store into a platform, albeit it a highly controlled one.  This created an unprecedented window of opportunity for competing digital music services, suddenly they could break into the previously impenetrable iTunes ecosystem.  Pandora was an early mover and within a year of launching its iPhone app had acquired 6 million iPhone users, 60% of its then 10 million active users.  Shazam was another beneficiary, with the iPhone app finally giving Shazam relevancy and context it had long lacked.  And now of course we have Spotify, Deezer, Rhapsody, Rdio et al all hugely dependent on the iPhone, using it as the central reason subscribers pay 9.99.

Responding to Streaming

Many commentators suggest Apple is being left behind in the streaming era.  It echoes comments that Apple was getting left behind by the social age, and its responses then (Ping! and Genius) are not the most compelling of evidence for Apple jumping on the latest digital music bandwagon.  Apple will of course have to eventually move towards a more consumption and access based model but it will wait, as it always does, until streaming and is ready for primetime.  (A radio service is a logical interim step). Spotify’s 6 million paying subscribers are impressive but pale compared to Apple’s 450 million credit card linked iTunes account.  And besides, iTunes is enjoying its most successful period ever (see figure).  For all the need of interactive multimedia products to market iPhones and iPads, music remains one of the key use cases and the iTunes Store has seen an unprecedented surge in music downloads as millions of new music fans enter the iTunes ecosystem as iPad and iPhone buyers.

Interestingly Apple’s music download growth appears to be strongly outpacing the overall digital music market (see figure).  According to the IFPI total global digital trade revenue grew by 8% in 2012 but Apple’s iTunes downloads grew by about 50% during the same period, culminating in 25 billion cumulative downloads in Q4 2012.  Multiple factors are at play: iTunes has rolled out to new territories and a portion of the downloads will also be free.  Nonetheless, iTunes remains the beating heart of digital music.

The Next Chapter

Apple’s next big digital music move will have major strategic ramifications that will go far beyond the iTunes Store.  Currently Apple’s device pricing model is driven by storage capacity.  And of course in a streaming age consumers will store less and less content on their devices, so the ability to charge a premium for extra storage capacity will diminish.  This is a key reason why Apple has to go slow with the cloud.  Music however also presents an opportunity to safeguard price premiums.  Apple has shied away from subscriptions (Steve Jobs famously baited then-Rhapsody owner Rob Glaser that subscriptions were mere rentals) but device-bundled-subscriptions are now an opportunity that Apple simply has to take seriously.  Instead of charging a monthly fee for subscriptions Apple could create ‘iTunes-Unlimited’ editions’ of iPads and iPhones that would include ‘device lifetime’ access to either unlimited music streams or a monthly allowance of iTunes credits (for use on all forms of iTunes content).  The latter probably sits most comfortably with Apple as it presents the opportunity for tiers of access (e.g. $5 of monthly iTunes credit, $10 of monthly credit etc.) and so would enable Apple to support multiple product price tiers.

Whatever Apple decides to do with iTunes in the next 10 years, it will remain a key player and do not bet against it still being the preeminent force a decade from now.