Tutorial 2: iPod+iTunes case

1. Please identity iPod Business model

Razor-blade business model: a core product (the razor) is sold at a discount for a lower
margin of profit, but it requires buying another product (the blade) that brings a higher
margin to the maker. The real money is not in the razor but in the blade.
Apple: inverted razor + blade (make money on the razor [iPad] rather than on the blade
[music])

2. Where does Apple make money?

Product [iPad] is made with established and cheap technology and sold at premium. Music
revenues mostly go to the majors Labels

3. Where are Apple’s costs?

Not music: Apple does not own the music
Not product: is cheap to manufacture because it relies on established and cheap technology
Costs are on the service side (software) to keep the user experience smooth.

4. How do you think Apple managed to avoid the Not Invented Here Syndrome (NIHS)
Definition: Not invented here syndrome (NIHS) is a mindset or corporate culture that favors
internally-developed products over externally-developed products, even when the external solution is
superior.
Steve Jobs runs Apple as a virtual dictator, and is obsessed with market growth. His personal
obsession with quality of customers’ experience is never allowed to be constrained by the
fact that technologies, patents, and other innovations may have come from someplace else.
He forced the firm to focus on his personal ambitions/ vision and this helped in overcoming
the NIHS.

5. How did Apple use adaptive execution to develop the (iPod + iTunes) business?
The iPod business was an inadvertent extension of Apple’s digital hub strategy, which
intended to place iMacs at the center of a hub of consumer digital devices such as cameras,
video recorders, game consoles and MP3 players. The ‘i’ stood for ‘individual’ or
‘independence’ or other words that would complement Apple’s ‘Think different’ campaign.
Apple’s strategy assumed that the iMac connected to the WWW would serve as an exchange
network and storage entrepot for digital content which would keep consumer electronics
devices occupied, or would allow their content to be readily uploaded and shared with
others or displayed on websites. Instead, the iPod, by chance, turned out to be the popular
choice for Apple’s ‘hub’. Apple adapted, putting the {iPod+iTunes} product center-stage in
their marketing.

6. What firm competences does Apple possess that made it a successful competitor in the MP3
player market?
Software engineering: apple products are about user experience (which is managed by the
software/ human-machine user interaction)
7. What was innovative about the iPod versus other MP3 players?
The business model: which gave the majors important stream of revenues while giving a
outstanding revenue flow to apple itself.

8. What role does the WWW play in the success of the iPod business?
WWW gave rise to Napster, Kazaa, Pirate Bay which started destroying the old record label
business model. They were all illegal solution but made the customer familiar with digital
formats, downloading and listening to digital music.
iTunes capitalized on these elements by creating a legal market for digital music.

9. Challenge one of the fundamental assumptions of iPod's business model by reversing it. Then
define an 'anti-iPod' product and business model that satisfies your reversed assumptions
Example of hypothetical situation:
Instead of the high-priced iPod being a gateway to low-priced iTunes, let iTunes be
overpriced, and iPods cheap.

10. What are the commercially important attributes that make iPod's business model successful and
sustainable?
Nature of music: experiential good that people will consume more once. The same song,
contrary to a movie can be listened frequently.
Ubiquitous consumption: music is consumed in many occasions, often while doing
something else (studying, gym, on the train/bus etc.)
People like doing legal things

Apple made a successful business model by offering an easy to use shop and device bundle
that satisfies the demand for legal music for a reusable experiential good.