In to use, significantly enhancing the user experience.

In 2001, Apple unveiled the iPod; an innovative audio player with the capacity of 1,000 songs. Portable music players were already available, but the iPod was about to revolutionise the industry and bring music-on-the-go, mainstream. We will investigate the iPod’s effect on the portable music player (PMP) industry, over the last two decades.Evolution through technology is inevitable, and the music industry was no exception. Sony first introduced consumers to the idea of portable audio playback with the cassette Walkman. Expecting demand to be around 5,000  units a month, Sony’s expectations were surpassed with over 50,000 sold in the first two months – signalling a massive growth opportunity for manufacturers. The 1990s saw digital audio players (DAP) entering the market, replacing traditional cassette players. SaeHan Information System’s MPMan was the first mass-produced DAP, priced at $250  and with 32MB of flash-based storage, the MPMan paved the way for portable listening. This was closely followed by Diamond Multimedia’s Rio PMP300 with similar specifications at $200. In 1998, Diamond Multimedia held nearly 65% of the market share, with SaeHan holding 30%. No other firms held a significant proportion thus, the market effectively resembled a Bertrand duopoly. This was soon about to change.Though they had no previous industry experience, Apple used their second-mover advantage to identify and solve problems with existing products and judge consumer preferences. Existing flash-based products had little storage, holding a CD’s worth of songs whereas hard drive based players were too bulky and difficult to use. Apple entered the market, releasing the iPod, combining hardware and software elegantly. With hard drive based storage, consumers could store more songs, whilst the unique operating system and click wheel navigation was simple and intuitive to use, significantly enhancing the user experience. Apple’s proprietary software, iTunes, integrated the iPod and Mac ecosystem, allowing users to sync their existing music libraries automatically, unlike competing products. Most devices relied on slow USB 1.1  technology to sync, which could take up to 5 minutes to transfer a CD’s worth of songs, but the iPod stood out with its speedy FireWire technology. Ease of use and innovative design differentiated the iPod and was key to Apple in establishing their new product.Though the starting price was $399, greater than other competing products, the iPod solve over 25,000 units in the first month, and by August 2004, the volumes reached over 3.7 million.  Consequently, Apple’s market share went from non-existent up to a massive 87.3% in the hard drive based PMP industry in 2004. At this point, iPods were only available using hard drive based storage and so looking at the combined industry (including flash and hard drive based devices), Apple held 58.6% of the market share.  SaeHan crumbled under competition due to lack of global brand recognition and weak marketing, ultimately withdrawing from the market in 2002. Diamond Multimedia persevered; though market share dropped from 65% in 1998 to 18.6% in the flash-based market. The PMP industry shifted towards an Apple monopoly, but with a fringe of smaller competing companies, it more closely resembled the dominant firm model, represented graphically in Figure 2.The model assumes smaller firms produce at full capacity but at a price less than the dominant firm. Apple then faces the residual demand curve, found by shifting the market demand curve left by the total output of the smaller firms. Apple then set their optimal price by maximising profits, similar to a monopolist.Pre-iPod, nearly 50 companies had already entered the market in the US, but Apple fought their way to the dominant position. As previously mentioned, product differentiation was important and continued to be a focus with regular enhancements to iPod product lines, but a key factor contributing to Apple’s success was their ability to implement vertical integration. Designing everything in-house, with their whole ecosystem in mind, allowed Apple to integrate the iPod, the Mac and the software connecting the two. No-one had done this before  – companies like Rio and Creative distributed products with external software for the consumer to use. This integration further differentiated the iPod, whilst reducing Apple’s long-term transaction costs by using iTunes rather than external software. Introducing the iTunes Store in 2003 was another example of how vertical integration added to the iPod’s success. Most audio players, including the initial iPod, relied on consumers buying physical albums and ripping the CD to listen to digitally; which proved time-consuming for consumers with many albums. Music was available online illegally, due to peer-to-peer sharing, but acquiring digital music legally online was less common. Apple saw this gap in the market; building the first mainstream digital marketplace directly into iTunes. Gone were the days of rummaging through shelves at a shop – in came the ability to browse and sample music from the comfort of your own home, easily and quickly. Consumers were indulged with the capability to buy single tracks or a whole album; a single song costing $0.99, tempting customers with sub-dollar psychological pricing.  A year later, Apple made the iTunes software available for Windows, boldly entering the rival’s territory – increasing the potential customer base for the iPod. Rather cleverly, Apple was discretely acquiring consumer loyalty through the prevalence of iTunes and the simplicity of the integrated ecosystem that made it difficult for consumers to move away from the Apple product range without having to start their media libraries from scratch.Two things helped contribute to the iPod maintaining its high market share; the bandwagon effect and high entry barriers. The iPod became a fashion statement with creative advertising, celebrity endorsements and iconic white earbuds – a symbol synonymous with style and quality. This lead to the bandwagon effect; a network externality where the preference for a product is proportional to the number of people purchasing it. Figure 4 shows an example of the effect – highlighting how the demand curve shifts rightwards depending on the belief of how many people purchased the product. Comparing the individual demand curves with the market demand curve, we see the bandwagon effect in play – a reduction in price increases the quantity to 80,000 rather than just 48,000.Many competitors were unsuccessful in the industry due to high entry barriers. Apple benefited from economies of scale – as demand increased so did production, lowering the fixed cost of each iPod produced. Most potential entrants would not have had this same cost advantage fortifying this entry barrier. Companies with similar economies of scale, including Microsoft and SanDisk, attempted entry, but the iPod’s differentiated design and consumer brand loyalty created an artificial barrier – allowing Apple to continue dominating the market.Pioneering yet disruptive, the iPod won the hearts of consumers, shifting the industry from a duopoly to effectively, a monopoly. Though still dominating, iPod sales have recently declined, leading to reductions in its product lines. With the rise of smartphones and streaming services, structural change has already begun; suggesting that the iPod’s days are numbered.