BOSTONUNIVERSITY

Strategic Marketing of Music Players

MET AD 739 - Marketing Management Professor Professor Jung Wan Lee Ph.D. "Group 3 Team A" February 17, 2010 Louis Guglielmo Matthew Hogan Anthony Romano

Introduction
While listening to music via an AM/FM radio and/or CD are still considered well-liked activities there is an ever-growing consumer demand for a portable digital music players as illustrated in Figure 1. This demand has captured the interests of companies such as Apple, Microsoft and Sony. It is expected that revenue generated from music players such will reach approximately $16.9 Billion in 2010. Thus, today's companies are trying to gain a competitive advantage by providing a new era of portable music players to meet the needs of the individual consumer. To enable these companies to successfully develop and market their music players a clear understanding of the opportunity, an organized team and a quality product must be delivered to satisfy customer requirements and achieve the business objectives.

Figure 1: How People Listen to Music (nytimes.com)

As companies compete with each other for market share three leaders have emerged. These leaders are Apple with the iPod, Microsoft with its Zune and lastly, Sony with its Walkman. As shown in figure 2, the dominate leader of the three with 73% of the market share is Apple. Thus, for Microsoft and Sony to achieve a successful infiltration into the music player market as well as for Apple to maintain its current market share this research paper will be addressing the following questions:

Does being first to market provide a competitive advantage? Does product innovation drive market share? How do you compete with the Apple brand and popularity?

Figure 2: MP3 Market Share (watchmojo.com)

Literature Review
When a new product has been developed an appropriate marketing strategy must be implemented in order to effectively deliver the product to targeted customers. Marketing strategy is the set of integrated decisions and actions by which a business expects to achieve its marking objectives (Slater, 2001). Effective Brand Strategy, a subset of marketing strategy, is critical to the success of any product (Carpenter, 1989). Specifically, brand strategy considers product elements such as pricing, positioning, perception and development (Carpenter, 1989).

Consumer markets are highly competitive making brand equity and loyalty assets to firms (Rao, 2004). Brand Equity is created when firms deliver quality products and [create] strong brand associations through appropriate communications and advertising strategies (Rao, 2004). Firms must consider their brand equity when developing new products, though perhaps more important firms must consider the brand equity of their competitors when considering launching a competing product. Additionally to developing new products firms often develop extensions of existing product lines (Curewitz, 2009). The Sony Walkman has been a branded product for many years; however, the originally product has been extended to incorporate mp3 technology. It is important to note that when firms execute line extensions, i.e. building from existing brands, the cannibalization of existing market share can occur and the ultimate results are not always positive (Curewitz, 2009).

When contemplating the development of new products firms must ensure the product provides an appropriate level of integration with existing businesses (Chao, 2008). With new products firms seek to create value as new products generate returns to the firm on the capital outlays for product development (Rindova, 2007). Microsoft had traditionally been a software developer when it launched the Zune media player in 2006. With the exception of the xbox Microsoft generally had not engaged in the mass production and marketing of hardware prior to the Zune. Apple on the other hand has a long tradition of developing new computer hardware at times to the detriment of Microsoft. Therefore, Microsoft made a strategic decision to engage in a product type which it had traditionally avoided.

It is imperative that marketing and brand strategy be fully integrated within the overall business strategy of the firm (Slater, 2001). Furthermore, firms must understand how their products are perceived in the market place (Carpenter, 1989). In a survey of marketing managers 85% considered new product development as a growth engine for their firms, with 24% indicating new products were vital to the firms overall success (Curewitz, 2009).

As firm allocate scarce resources to new products trade-offs between short-term benefits accrued through incremental improvements versus long-term benefits achieved through radical or new-to-the-world products and services become evident (Chao, 2008). Therefore, firms must carefully consider product market entry, especially when a dominant product already exists, e.g. the iPod (source about iPod dominating).

Brand strategists generally view innovation as the primary means by which additional value can be created for a firm (Rindova, 2007). A products value is the measure of a products worth in a particular social context. Innovation allows firms to disrupt the competitive status quo in markets and displace entrenched competitors (Rindova, 2007). Product innovation can directly create the difference between gaining market share and losing it (Rindova, 2007). In addition, innovation can justify a premium price for a new product (Slater, 2001). Therefore as a firm contemplates competition with a dominant product like the iPod innovation must be paramount in design and execution. Products generally fail due to lack of differentiation with existing products (Curewitz, 2009). Firms are well advised against the manufacture of met too products which resemble or otherwise copy products already on the market (Curewitz, 2009). The Microsoft Zune resembles the iPod in many ways though it is not particularly innovative in its design or technology and can be characterized as a me too product. Innovative firms are rewarded as they are able to make symbolic design decisions which can increase the perceived value of a product (Rindova, 2007). Such design traits allow a firm the opportunity to further differentiate their product from competitors (Rindova, 2007).

The iPod is an example of a product with innovative and distinguishing design characteristics (Rindova, 2007). While other MP3 players were on the market, the iPod incorporated specific features which were perceived as cool and exciting and not present with competing mp3 players (Rindova, 2007). Therefore, would be competitors with the iPod would need to be able to distinguish their own music player via design innovation. Otherwise, market entry to compete directly with the iPod would be difficult.

Firms attempt market to products to specific target markets with the implication that their product will meet some need of the consumer (Slater, 2001). However, filling a perceived customer need does not guarantee success. A firm must understand how its product will be perceived in the market place (Slater, 2001).

Case Analysis
Sony Walkman
The Sony Walkman was first introduced into the market place on July 1st 1979 and at that time was considered a pivotal leap forward in defining how consumers listened to music. Sony's Walkman "was created with the ingenious foresight of Sony Founder and Chief Advisor, the late Masaru Ibuka, and Sony Founder and Honorary Chairman Akio Morita" (Investor.about.com) and in the first eight years 20 million Walkmans were sold. Roll the clock forward 32 years to today and Sony struggle's to compete against Apple's iPod. In 2006, Sony's market share in music players was reported to be approximately 10% as compared to Apple's 75% market share (www.Businessweek.com). For Sony to begin effectively competing with

Apple's iPod in an attempt to gain market share we will turn our focus to the price of a Walkman. Sony's overall strategy to gain market share and lastly, what innovative capabilities will Sony build into its Walkman to differentiate itself from other music players.

Original Version

Latest Versions

(Images Retrieved from www.google.com)

Sony's 16GB and 32GB Walkman models have a price tag somewhere between $300 and $400 US dollars. These models are comparably priced to the Apple iPod. For Sony to gain By reducing the price per unit

market share a reduction in price may spur consumer interest.

Sony may stimulate the number of units sold. However, the additional sales may not be able to satisfy the product's targeted overall profit margin. To make matters worse, Sony is "headed for its second-straight annual loss, shed jobs, closed plants and sold non-core assets this year to improve its cost structure" (www.reuters.com). Thus, reducing the cost of the Walkman is not a viable option at this point in time and would only contribute to the company's monetary issues.

Sony's strategy is to double the Walkman's market share to 20%, understands that this may be a tall order to fill. Based on the dominance of Apple's iPod in the market, Sony must look to not only attract new customers in this market but also entice existing customers of the Apple iPod to switch over to a Walkman. Sony will need to differentiate itself from the iPod and other music players in the market by focusing on innovation and streaming different types of media such as video. An essential component of the Sony strategy will be to enabling iPod users to switch there music collection to the Walkman. This process must be simple and bullet proof for the Walkman to succeed and begin gaining back market share it held decades ago (www.Businessweek.com).

Innovation is a key component to any high-tech company any Sony was once considered a leader in product innovation. To differentiate the Walkman from its competitors Sony is

targeting the Video market. The intent is to enable users of the Walkman to connect to the internet and download everything from radio, to TV shows. Furthermore, users of the Walkman will, in time be able to integrate with Playstation suite of products, thus, building off an existing brand and drawing in the video gaming community. As illustrated in Figure 3, according to NPD the Playstation brands holds 18% of the video gaming market, selling 7.5 million units per year. By providing this type of mobility and integration Sony has can differentiate itself in the music player industry.

Microsoft Zune

The Microsoft Zune was launched with much fanfare and corporate bravado in November 2006 (PR Newswire, 2006). Bryan Lee, Vice President of the Entertainment Business at Microsoft described Zune as follows: "Zune is all about changing the game to make music more

social, and at launch we are just scratching the surface of how wireless technology is going to enable social interaction in the future." Upon its launch a variety of Microsoft sponsored concerts and events were staged to market the Zune.

The Zune is manufactured at the same place as the Microsoft Xbox, and represented a substantial strategic shift for Microsoft in that it controlled the entire production life cycle for Zune (Mossberg, 2006). Traditionally Microsoft creates software platforms and allows other vendors to develop whatever hardware can utilize the software.

At launch Zune, contained 30gigs of memory and retailed for $249.99 (Mossberg, 2006). At the time Zune was launched Apple had an iPod on the market with 30 gigs of memory which retailed for $249.99. The Zune price point was a strategic choice for Microsoft; however, considering the iPods dominance Microsofts price for Zune may have actually represented a premium for a product which duplicated the existing functionalities of the iPod. In fact, after a comparison was made between the iPod Classic and the Microsoft Zune 80, by judges that were technically qualified, it was found that the Microsoft Zune, beat the iPod classic in 4 out of the five categories. (Bell) The Zune beat the iPod in Navigation, Sexiness, Sound and Science and Wallet Factor. The only area in which the iPod beat the Zune was Comparability. (Bell)

Zune (left) iPod (Right) Images Retrieved From www.google.com Like the iPod, though unlike many other digital players, Zune is run by proprietary software which continues to evolve to incorporate advances in media technology (Mossberg, 2006). Further Zune is similar to the iPod in that it has its own proprietary marketplace called Zune Market Place (Mossberg, 2006). The Zune did compare favorably against the iPod in several areas: a larger screen, the ability to exchange songs with other Zunes wirelessly and a built-in FM radio (Mossberg, 2006).

Despite some favorable characteristics the Zune was almost immediately dismissed as an inferior product as one commentator put it: Zune has too many compromises and missing features to be as good a choice as the iPod for most users (Mossberg, 2006). Specifically, at launch Zune was heavier in weight than the iPod, had less available music, a non-customer friendly music market place, poor battery life, and fewer accessories (Mossberg, 2006). Also the most innovative and talked about feature which gave users the ability to share music files and other media wirelessly with other Zune owners did not take off. Far too few people, purchased the player for such sharing to become a commonplace, and the function held little appeal because it was crippled by usage rules negotiated with the music industry. (Leeds, 2007) Shared songs expired within a few days, even if the recipient did not play them. And a file acquired from one Zune user could not be shared with a third user. (Leeds, 2007)

The Zunes success was limited, and as of late 2009 Microsoft was phasing out the original models in favor of the Zune HD (Taylor 2009). Perhaps not ironically, the newer Zune HD models were comparably priced with the iPod Touch (Taylor, 2009). Though to Microsofts

credit the new Zune HD does improve on the design issues of its predecessors, Zune HD is a stylish, super-slim device that features some technology firsts including a big, bright and bold OLED (organic light emitting diode) multi-touch enabled screen (Taylor, 2009). Despite its improvements the Zune still lacks the applications and peripherals of the iPod (Taylor, 2010).

Zune continues to struggle against the iPod as its relative market share has dwindled to 2% (Letting, 2009). The consumer reaction to Zune has been so poor that many retailers have stopped carrying the Zune altogether (Letting, 2009). Revenue attributed to Zune has also declined, off 42% the quarter ended June 2009 whereas the iPod revenue was off 11% for the same period of time (Letting, 2009). Experts at Wharton say that the Zune HD will need to be a big step forward in the eyes of consumers, because it faces the nearly impossible task of competing against Apple and its iPod player. The iPod is clearly the leader, and iPod has become the generic name for this type of product, like Xerox and Kleenex. (Knowledge@Wharton, 2009) Apple launched the iPod in 2001 (Taylor, 2010), and now controls over 75% of the market share for standalone digital media devices (Taylor, 2009). It remains unclear as to what strategic vision Microsoft had when it launched the Zune in 2006. Microsoft entered the market five years after Apple, and then attempted to compete with an inferior product. At launch there was virtually no viable reason for an iPod user to contemplate the conversion to Zune. Microsoft has routinely priced Zune to compete directly with the various iPod products, though offers no innovation to justify the price point. The recent launch of the Zune HD has been done with limited marketing effort and will likely have no impact on the Zune market share. Zune product line seems to consistently be one step behind iPod.

Given Apple's lead, Fader a marketing professor at warton says that Microsoft's best move with the Zune would be to scrap the name and start over. Microsoft has to "design a strategy that centers around the Zune HD's key benefits over the iPod. (Knowledge@Wharton, 2009)" Those benefits appear to be the ability to play high-definition video and capture HD Radio signals, the next-generation technology for broadcasting. Microsoft will likely have to adopt a niche approach, given its lack of market share. It will need to position the Zune as strong in one area -- say, as a player focused on music and video -- and then make consumers advocates for the product. (Knowledge@Wharton, 2009)

The Apple iPod

At the start of the millennium Apple Inc. had serious problems. Sales of its most popular brand, the Macintosh, were slumping and its stock price was declining at an alarming rate. The companys stock price went from a high of $35 in April of 2000 to a low of $7 in December of 2000. (Yahoo Finance) The company needed a comeback and a new look, and it came in the form of a small hand held digital music player.

On January of 2001 at the Macworld Expo, Steve Jobs, the founder and CEO of Apple, introduced the iPod. (Kahney, 2006) While it was not the first digital music or MP3 on the market, it came at time when music lovers all over the world were downloading thousands of free songs off the internet from websites like Napster. The initial iPod held about 1,000 songs and weighed 6.5 ounces which at the time equated to the smallest digital music player which could hold the most songs (Walker, 2003).

The First Generation iPod

Introduced on October 23, 2001 Price: $400 Lacked Windows Capability Hard Drive 5 10 GB

The introduction of the iPod offered many mixed emotions to analysts, because of the steep price tag and Apple entering into a new market of electronics, which typically have lower profit margins than what Apple was used to with its sale of computers (Fried, 2001). Some initial skeptics referred to the iPod as an acronym for idiots perform our pricing based on its high price tag (Walker, 2003). However, Analysts also felt the iPod could serve as an important function by convincing people to buy a Mac instead of a PC, and also start using Apples iTunes software which was used for playing music and burning CDs. (Fried, 2001)

From a design perspective the iPod was unique and unlike any other mp3 player on the market. The touch wheel allowed users to scroll between songs, and the entire feel of the product was sleek and seamless (Walker, 2003). Furthermore, Apple introduced iTunes a way for users to legally purchase music without the worry of music industry legal harassment. Individual iTunes songs were priced at well positioned $.99 per song, which seemed reasonable to consumers. Even though the iPod represented dramatic innovation in digital music players, the underlying them of its design was simplicity. The iPod seamlessly loaded music and allowed users easy and quick access to it (Walker, 2003).

Despite not being the first to enter the digital music player market, Apple was able to capture market share through iPods innovative design and gradual ascension as an iconic product (Walker, 2003). Furthermore, Apple shrewdly made the iPod and related software available to Windows based computers, which meant a customer could use the iPod without also owning an Apple computer (Walker, 2003). Certainly, the iPods success can be at least partially attributed to the fact that it works with virtually any home computer. If Apple had limited the access to the iPod to only MAC users, then the iPod would have remained a highly niche product.

Apple has continued to evolve the iPod seemingly one step ahead of its competition. While innovators are often copied and overtaken by competitors Apple has remained dominate in the personal music player market(Walker, 2003). Apple has captured roughly 73% of the digital music market share. (watchmojo.com)

Results and Findings

Does Being First to Market Provide a Competitive Advantage?

Apple was not the first company to market a digital music player. There were small MP3 players around at the time, and there were players that could hold a lot of music. (Walker, 2003) However, if you've have a superior product, it doesn't make any difference whether you're first or eighth. For firms looking to enter a market with a second-in-line product, that means evaluating the product for safety and efficacy and superiority before forging ahead. (Carlson, 2010) This is

exactly what Apple has done. Steve Jobs, when creating the iPod demanded his engineers create an improvement to the current capabilities of digital players like the Nomad Jukebox, which also held 10GB of songs. The Nomad Jukebox was a small digital music device that came to market before the iPod and held the same capacity of songs, and which cost $45 less than the iPod. However, it had some terrible flaws such as a battery that lasted only 45 minutes and buttons that were difficult to navigate, especially if the user was searching through thousands of songs. (ZD NET, 2002) The iPod filled the gap of the previous devices, and people became amazed that so much music could be stuffed into a little device and so easy navigate. A few months after the windows plug-in allowed users to use a PC with the iPod, Apple claimed the number one spot of digital music devices. (Walker, 2003)

Does Product Innovation Drive Market Share?

In the technology business, in where there is constant pressure to upgrade products and reduce costs as products mature, there is a need for R&D investment to create, develop and sustain multiple new products. A company may require a high rate of new product return to remain competitive and grow profitably. (Miles, Sakkab, & Jonash 2006) Apple has done exactly that: Time Table for Apple Products

(Chart information retrieved from: Wikipedia Apple Press Release)

The iPod has developed significantly over the last 10 years. There have been six generations of the iPod classic and the product has broken off into different models, which included the iPod Nano, iPod Shuffle, and the iPod Touch. By combining technical knowhow with a new concept for how to sell music online, Apple's iPod music player has become the most influential new technology product in years. (Burrows, 2004) The new iPod releases in the form of generations have not only improved the iPod, but added new features which have played a major role in increasing the market share. Physically, the iPod has gotten smaller, thinner, uses LCD screens, and now comes in many different sleek colors. The iPod, through increased storage capabilities and LCD screens, now plays movies in high definition. The product has also developed to include a camera, pedometer, AM/FM radio, WiFi, and applications that range from games to business software. There is an application for just about anything anyone can think of. (Taylor, 2010) While there are a lot of MP3 players on the market that sell for a lot cheaper than the iPod, many would say there is no next best alternative; the iPod stands alone with its functionality. Competitors still cannot touch the iPod, no matter what products they develop. The next best alternative to the iPod has yet to be

released because of all the innovation Apple has put into its products. It has set a high standard for MP3 players.

The Apple Brand and Popularity

The Apple brand name has played a major role in the strategy of Apple, because customers understand and trust its products. For a product to succeed, customers must understand why they are paying more or less for a particular product. Consumers are willing to pay extra for an iPod, iPhone and iTunes because Apple has combined its products and services into one simple and easy to use solution. This hybrid one stop solution differentiates Apples iPhone from competitors. Hybrid solutions can help companies attract new customers and increase demand among existing ones by offering them superior value. (Shankar, Berry & Dotzel, 2009) Consumers are willing to pay the premium Apple charges because they understand the difference in value Apple products offer versus its competitors. This premium is reflected in the total cost for the full life cycle of a 30G 3rd generation Apple iPod in 2005, in which the retail sales price was $299:

(Chart information retrieved from Linden, Kraemer & Dedrick, 2007)

By the time the product has reached the consumer, Apple has made $80, or 50% profit on the total cost. This clearly shows that people are willing to pay for the ability to be part of the Apple total experience, because the electronics industry typically does not have these gross profit margins. (Fried, 2001) Also, the most important part is that the consumer is happy with his/her $299 purchase and is willing to continue to pay for the large premiums. This allows Apple to continue to earn large profits.

The iPod skyrocketed in only a few short years from being a "why would anyone pay that much for a music player?" product to a market dominating, must-have device. Apple has been able to maintain that 70 percent-plus market control for the past few years by continuing to update and innovate, and by maintaining an easy to use and slick looking product lineup.

Conclusion
As Microsoft, Apple and Sony continue to focus on delivering customer value, sustaining and possibly gaining market share in the Music Player market a strategic marketing plan coupled with an efficient and effective delivery process will be fundamental to success. The first music player was introduced into the market place in 1979 which was the Sony Walkman. At that time the Walkman was considered a pivotal leap forward in defining how consumers listened to music. Thirty years later the Apple iPod dominates the music player industry with 75% of the market. Thus, being first to market does not necessarily provide a competitive advantage. In the music player market the competitive advantage is driven by providing a product which is superior to its competitors. Innovation also plays a major role in market share. A key part of

the iPod's success was due to its size and capabilities it provided. For example, the iPod

provides capabilities such as a camera, pedometer, AM/FM radio, WiFi, and other applications. The iPod also has also become smaller while being able to increase its storage capacity.

For Microsoft and Sony to compete with the Apple iPod they must not only look to attract new customers in this market but also entice the iPod's existing customer base to switch. An essential component for the Sony and Microsoft strategy will be to enable iPod users to switch there music collections over to the Walkman or Zune. This process must be simple and bullet proof since it will directly impact the customer's perception of the product. Microsoft and Sony must also try to leverage their existing products in trying to gain market share. This can be done by integrating the Sony Walkman with Playstation 3 and the Microsoft Zume with the Xbox. By building off their existing brand they will be able to potentially draw in the video gaming community. Overall, the company with the most effective vision and innovative brand will be the dominant player in the Music Player market. Customers need to relate and identify with the product and the capabilities it delivers. A well structured promotional plan will be the vehicle used to proactively market to customers. By following this paradigm the probability of a successful investment in the music player market by Sony, Microsoft or Apple is likely.

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