iPod vs. Cell Phones

Has the digital music market irreversibly tipped in Apple’s favor?

Apple has never looked back from when it gained leading market position in the digital music industry in 2004. This lead was due to several factors: early-mover advantage, 99-cents-per-song pricing, iTunes software- which was free to download and offered proprietary DRM technology to ease the concerns of music labels, and the iPod. The iPod was the key to Apple’s dominance in the digital music market. It was the first portable device that combined ease of use, hip styling, and large memory. Coupled with iTunes, the iPod became the industry standard. Digital music formats have overtaken the CD as the format of choice. Digital sales and PC-based downloads have grown spectacularly as well. (PC downloads grew 167% between 2004 and 2005) Apple’s business model is simple and effective. The software is free and works on a Mac or PC. The $0.99 download fee has become the de facto industry standard. The key to the plan is the seamless integration of iTunes and an iPod. ITunes offers a huge selection of songs, but due to the Fairplay DRM, they can only be played on an iPod. Apple used iTunes as a loss leader for selling their iPods. While Apple barely breaks even on the sale of iTunes music, the profit margin for the iPod is around 25%. There was a threat to this dominant position- the evolution of more advanced smart cell phones which had the potential to become the mobile music platform of choice. Apple responded to this threat by preempting the industry yet again, with the introduction of the iPhone. The iPhone was as revolutionary to the cell phone market as the iPod was to the digital music player market. Apple will continue to dominate the digital music market as long as it remains innovative with its new technologies and products. The rest of the industry has been playing catch-up for years, and it does not look like that is going to change any time soon.