DIGITAL AUDIO PRODUCT

MARKETING SITUATION REPORT

Fundamentals of Marketing - MARK 1012

School of Marketing

Australian School of Business

The University of New South Wales

Group members:

Thi Thao Linh Nguyen (3283869)

Bo Dong (3215041)

HongCo Tran (3284036)

Zhitian Shu (3284082)

Yue Xiao Chen (3284740)

TABLE OF CONTENTS

Introduction.. 1

Macro-environment.. 1

Demographic environment.

Economic environment ..

Technological environment

Socio-cutural environement

Micro-environment .. 2

Market size .

Market growth.

Geographic distribution...

Market segments.

Market 4

Product category overview.. 5

Marketing mix.. 5

Product ..

Price ...

Place

Promotion .8

Conclusion 9

Reference list. 10

Appendices. 15

EXECUTIVE SUMMARY

Digital audio product could be described as a tool which can load and play sound stored in digital format. The purpose of this report is to examine the MP3 player product category and current marketing situation for a detailed marketing strategy to be developed in the future. The major findings include different micro and macro-environments, insights of market analysis and marketing mix adopted by three dominant brands in the market, namely Apple iPod, Creative Zen and Sony Walkman. Within the macro-environment, main points include demographic trend with two worth noticed age groups of under 18 and 18-44, possible impact of economic hardship, opportunities provided by technological development and potential demand derived from long passion of music. The market also experienced the rapid growth with total sales predicted to nearly double in only 4 years. The extensive distribution with numerous stores

across Australia along with the development of two main segments of hard drive and flash based players, also contribute to the growth of the whole industry. However, MP3 players are currently in early maturity stage. Through further comparative analysis in marketing mix, it is noted that the most typical strategies consist of line extension, branding and skimming strategy. Both direct and indirect marketing channels are employed and promotion is no longer shaped in traditional strategies. It is unlikely that there would be many opportunities for the MP3 player product category in the future since the market is in early maturity stage, which often results in a slowdown in sales. In addition, music phone could also be a new substitute. New MP3 player producers will probably not be able to enter the market due to high barriers to entry built by existing firms as well.

INTRODUCTION

Over the last decade, the digital audio market has been one of the fastest growing consumer electronic sectors as a result of consumer preferences and demand often changing with the introduction of new technology. In this report, the MP3 player market will be taken as the objective of observation asait can be seen as the most typical category within the broad digital audio products category.

The MP3 player is one of the most common digital audio devices that converse digital signals for sound reproduction. In 1998, MP3 players became popular under the name "MPMan" after SaeHan Information Systems had a great success with sales exceeding expectations (Buskirk 2005). This has led to the existence of other rivals who have become race leader in this field. Thus, it is necessary for businesses to understand current marketing situations of the products to monitor business plans and respond quickly to the changes.

MACRO-ENVIRONMENT

DEMOGRAPHIC ENVIRONMENT

Age 0-17: Children under 18 make up about 1/5 of Australias total population (Australian Bureau of Statistics 2008a). This group is more likely to purchase new product within the market since they tend to adopt new ideas early. As illustrated in table 1, it is found that in the year of 2008, 67.7% of the students below year 12 had personal MP3 player (ABS 2008b). Age 18-44: Based on the ABS statistics (2008b) in figure 1, this group has the biggest population in Australia. Hence, it cannot be denied that their decisions will largely effect the market situation.

Age 45-65 and over 65: It is believed that baby boomers are not likely to be innovators because of their traditional mindsets. Moreover, the proportion (13.3%) of Australias

population aged over 65 continued to grow, as does the demand for retirement communities (ABS 2008a). Thus, these two age groups are unlikely to be the target market for MP3 player producers.

ECONOMIC ENVIRONMENT

Australias GDP sustainably increased over the years between 1992 and 2007 at an annual average rate of approximately 3.3% (Managed Australian Retirement Fund 2007). However, during the financial crisis, the Australian economy seemed to weaken since the 2008 final quarters GDP decreased by 0.5% (Treasurer of the Commonwealth of Australia 2009). Thus, in the next period, this prolonged economic hardship could highly affect many industries both directly and indirectly, including the digital audio sector.

TECHNOLOGICAL ENVIRONMENT

Technological breakthroughs could be the main success factor for firms in the market. MP3 players have been developed rapidly in the past decade, not only its storage capacity, but also size and weight. It is also believed that nowadays the higher capacity/size ratio, the better the product.

SOCIO-CULTURAL ENVIRONMENT

Australia has been found to have a long passion and 60,000 long history of music (Culture & Recreation Portal 2008). Thus, this could influence many generations of Australians and contribute to the great demand for music, particularly MP3 music in modern society. According to the Australian Recording Industry Association Ltd cited in ABS (2008c), the

value of wholesale sales of sound recordings and music videos totaled $462.2 million in 2007. Therefore, there might be a great demand for MP3 players to load Australians favorite music.

MICRO-ENVIRONMENT

MARKET SIZE

The Australian digital audio market experienced a rapid growth resulted from strong consumer demand, competition in products design and innovation among producers. According to Fevre (2005), the total number of portable MP3 players sold in Australia was 1.3 million in 2005 and would reach almost 2.4 million by 2009. Consequently, the MP3 player market size has become bigger. However, in recent years, due to increasing income resulted from good economic growth and consumer preferences, there may be a shift to music

phones from the traditional music player, which could decrease the MP3 player market size (Richards & Computer Daily News 2007).

MARKET GROWTH

It is uncertain whether sales of MP3 players will grow because many competitors have already entered the market and becoming more competitive with the rapid development of technology. For instance, MP3 players could be replaced by music phones. Mass consumers could be attracted by the convenience that combined-technology gives, and new products such as iPhone are now highly accepted by consumers. As Richards & Computer Daily News predict, 84% of mobile users will use music phones by 2011 (2007). However, table 1 (ABS 2008b) also shows that sales growth of MP3 players exist. From 2006 to 2008, MP3 player had a total 6.4% in growth of use and a large 10.3% growth amongst females. Thus, this school survey result clearly shows that the MP3 market share has had actual growth in the

younger generation, particularly females. However, it really depends on the whole market environment (competitive products) and the economy.

GEOGRAPHIC DISTRIBUTION

The geographic distribution of MP3 player in Australia is intensive, which means customers can purchase MP3 players at many outlets. Table 2 shows the MP3 player stores in different states all over Australia. It can be seen that the number of stores is relative to the popularity and population. Queensland, for example, has a large population matched with the highest number of MP3 player stores. Moreover, MP3 players also can be purchased through eshopping nowadays. The above points demonstrate that the distribution of MP3 players in Australia uses intermediaries, which also indicates the use of indirect channels.

MARKET SEGMENTS

There are two major segments in the MP3 player market which are hard drives (HDD) and flash players (Lo 2005). HDD, which were traditionally used in most early generations portable MP3s, hold all files on their own hard disk. Flash players, on the other hand, store audio files on internal memory chips. As compared in table 3, flash based players seem to target commuters particularly students, businessmen or athletes due to their small size, durability and data security. Hard drives are more suitable for those who need large data storage and watch videos frequently (Xtatix 2005). It is noted that flash devices are still improving at a faster rate (Australian MP3 players Reviews n.d.). However, due to the limitation of data storage, high capacity HDD are still the king of the digital audio market for certain types of users (Bell 2009). The appearance of newer models such as Microsoft Zune, iPod Classic (120 GB) or latest Archos 705 Wi-Fi (160GB) might make the HDD market become more various and satisfy consumers wants (Top ten reviews Inc 2009). In brief, it

can be said that HDD and flash players are both experiencing a rapid growth and competing within the specific market segments.

MARKET

MP3 player market has been found to be in early maturity stage as illustrated in figure 2 (Scott 2007). The market has incurred a steady growth at below 10% after reaching the peak in sales in 2008 (In-Stat, cited in Azuri 2009). Also, most new models of MP3 player introduced offer some minor instead of major improvements, for example in the case of iPod Nano 4th generation (Frakes 2008).

As stated by Coco, consumers are concerned about three main dimensions of MP3 players performance when purchasing - music fidelity, selection and robustness (cited in Fabe 2009). Consumer behaviour is also influenced by a number of environmental factors, such as

economic situation and cultural influences. According to Treasurer of the Commonwealth of Australia (2009), the Australian economy could be impacted by a recession, eventually affecting an individuals economic situation. As MP3 players are generally perceived as expensive items with a high level of involvement, consumer behaviour in purchasing MP3 players is expected to change. Also, Australia has a long history of music (Culture & Recreation Portal 2008). Consequently, this could affect the general demand trend for the music market, increasing the impact on customers wants and buying behaviour of music storage, compared with other countries. Moreover, MP3 player purchasing appears to be a type of dissonance-reducing buying behaviour due to high involvement and few differences among brands. Since the options are similarly attractive to consumers, consumers could easily experience dissonance if performance of the purchased MP3 does not meet their expectations (Stone & Fernandez 2008, p.319). Marketers should take note of this to maintain and increase customer satisfactions.

PRODUCT CATEGORY OVERVIEW

Since the first MP3 was introduced, the digital audio market continues to grow with more technology advancement. The leader of this market is Apple with 72.7% market share (NPDs report, cited in RDM 2007). It was shown in figure 3 that 20 million iPods were sold during the 2008 first quarter (Dalrymple, Michaels & Cohen 2008). However, it could be seen that the iPods sales were growing at a decreasing rate. This may be because the existence of new firms such as SanDisk with 8.9% market share, Microsoft 3.2%, Creative 2.9%, Samsung 2.0% and others 10.3% (NPDs report, cited in RDM 2007). Especially, the battle for dominating digital music player market between Apple iPod, Creative Zen and Sony Walkman, who used to be the king of MP3 players, are becoming more drastic (Richards 2006). Hence, for the marketing mix analysis, Creative and Sony will be taken into

comparison against Apple as through the research, the strategies of these three firms seem to be the most typical which could represent the whole MP3 player market.

MARKETING MIX

PRODUCT

In recent years, iPods have become a fashion icon across socio-economic lines, especially among young generation (Dubecki 2006). Due to the evolution of iPods accompanied to the superior brand strategy, Apple has beaten other powerful rivals namely Sony Walkman or Creative Zen and sustained the leadership position. Table 4 compares four types of iPod with many versions in order to target different consumers demand (Apple n.d.). The newer iPod generations often bring more varying product design, high levels of quality, innovation, environmental friendliness as well as distinctive features. Additionally, Apple iPods success

is based on their branding strategy (Shea 2008). Their strong brand name could increase the value of iPod in the eyes of customers and through line extension strategy, the existing brand name extends to new forms of the existing product, iPod consumers might be willing to accept new models easily due to superior brand name (Shea 2008). However, with the appearance of other competitors such as Creative Zen or Sony Walkman, iPod does not seem to be the best selective MP3 player. For instance, Creative X-Fi has greater sound, newer technology with same storage and wireless capability as iPod Touch, which have made Creative X-Fi become the best MP3 in PC Worlds latest top ten MP3 players (Mies 2009). Moreover, Sony now competes with iPod Touch, releasing Sony Walkman X Series that not only has the same characteristics as iPod Touch, such as Wi-Fi and touch screen, but is also smaller and has more features, particularly noise cancelling (Sony n.d.). The winner of MP3 players belongs to Sony although Apple iPod is still scored high for reliability as shown in figure 4 (PC Authority 2008). Therefore, this is a challenge for Apple to use technological

advance and strategy to differentiate its products from those of other vendors.

PRICE

The main pricing strategy iPod uses is skimming strategy (Sorrell 2007). Take iPod Shuffle as an example, when it first entered the MP3 player market, it charged the highest price as it could, with showing its advantages of small size and weight over other MP3 players (Adam & Armstrong 2008, p.368). Thus, early adopters who are less price sensitive and believe iPod would give them more benefits are the target consumers. Originally, Apple merely aims at high markups, but later reduced prices to reach more consumers who are relatively more price sensitive, thus achieving high volume. As shown in table 5, price/storage ratio of iPod Shuffle decreased from $229 (1GB storage), $119 (1GB) to $149 (4GB) (Kim 2005, Eiby 2007 &

Apple Store n.d.). The same skimming strategy is also adopted by Creative Zen (Creative n.d.) iPod price ranges are from $65 to $549 (Apple Store n.d.). In comparison, Sonys prices are from $59 to $359 and Creatives are between $36.32 and $363.59 (Sony Style n.d. & Creative Online Store n.d.). Jobs points out that iPod has a variety of products suitable for every price levels (cited in Sorrell 2007). This could be another strategy to meet the needs of various social classes. It is worth noting that Apple iPod charges a higher price than its competitors. A 8G iPod Touch costs $329, while the similar product of Creative Zen X-Fi is only $254.5, and Sonys Bluetooth video MP3 is $279 (Apple Store n.d., Creative Online Store n.d & Sony Style n.d.). Nevertheless, Apple iPod was not disadvantaged by this. When mentioned iPod, most consumers associated it with Apples strong brand and its innovative designed products (Myatt 2007). Hence, consumers are likely to be willing to pay more at a premium price.

PLACE

It could be said that neither Apple iPod, Sony nor Creatives distribution channels fall specifically into direct or indirect marketing. However, the difference in initial choice of channel strategy has helped Apple differentiate itself from other two competitors. As indicated by Menta (1999) & Creative (n.d.), both Sony Walkman and Creative Zen have chosen to establish an extensive distribution network in order to gain advantages in the market. Thus, it could be a real challenge to Apple if it decided to use this approach again. However, through the use of selective distribution and tightening the channels at first, Apple iPod could ensure that consumers can get better quality advice, avoid uncontrolled discounting and help support the high quality products image (Ivan 2008). As the demand for iPod increases, Apple has also broadened its retail channels to expand the market. Since 2004, by distributing iPod through a wider range of merchandisers such as Myer, David Jones or Target, this allows Apple to reach new customers and be more able to coordinate mass demand and supply

(Stokely 2004). Moreover, direct marketing through online stores and retail outlets own by those three MP3 player rivals are still being used, in which the degree of distribution competition is obviously reflected through store location across Australia. For example, in New South Wales, Sony Centre stores and Apple Stores are both located on George StreetSydney and Chatswood (Sony Centre n.d. & Carroll 2009). Although competing closely in distribution could help Apple iPod easily keep track of its competitors, this turns out not always to be effective in changing the current market. Therefore, to maintain the current level of competition in the long term, not only should Apple watch the distribution actions of existing vendors but broad and sufficient channel network should also be focused to block other prospective entrants.

PROMOTION

It is noted that Apple iPod has an effective integrated marketing communication utilising various tools. Within advertising, varieties of mediums are used such as television, newspapers and outdoor (Turow 2008, p.609). Moreover, iPod advertising is no longer bound in product marketing but has been used in cause marketing to increase commuters awareness of traffic accident while using iPod (Caolo, 2008). Although themes vary between different advertisements, a common and distinctive feature is the image of the white iPod against a coloured background (Business Lord 2007). By using this unifying image, it could help Apples iPod become a universally recognisable icon amongst a plethora of advertisements from other competitors. However, Sony also has such competitive advertisement as shown in figure 5 with Walkman earphones in the shape of Sydney train network (Saatchi & Saatchi 2008). As stated by Bibby (2009), Sydneysiders are moving toward the use of public transport with 22 million more train and bus journeys were undertaken compared with 2007. By

observing the fact that many people often travel by train with their MP3 players on, this advertisement could bring Sony Walkman closer to their current and prospective consumers. Sales promotions are also used to communicate between consumers and iPod. Through the launch of the campaign Students, buy a Mac, save on iPod, Apple has created a win-win situation, driving up the sales of both iPod and MacBook (Keizer 2008). While Sony Walkman does not seem to have any specific promotion aimed at students in Australia market, Apple iPod could gain advantage over Sony as students are identified as a potential market with 67.7% owning MP3 players (ABS 2008b). Also, the aim of launching uniquely designed Apple Stores has been no longer rigidly shaped in the form of distribution and selling (Hutcheon 2008). Compared with Sony Center, Apple Stores are more of a new advertising tool, engraving the brand image into peoples mind. With traditional advertising tools not impacting on consumers in the current market, by

combining various and new tools, this allows Apple iPod to communicate more effectively and efficiently than its competitors.

CONCLUSION

Based on the aforementioned analysis, MP3 player market appears to be innovative but might be less profitable in the future. It is very unlikely that MP3 player pioneers could enter this market, mainly due to the well established brand names and distribution channels blocking entry. As reported by NPD, cited in RDM (2007), Apple iPod alone dominates the market with over 70% market share and no other competitors greater than 10%, new firms could hardly compete if they decided to enter. Slow down in sales and possible decline stage could

be unattractive to these new entrants when they evaluate between costs and benefits, as customer adoption process might lengthy. Besides that, potential threat posed by music phone could also make the MP3 market come to the decline stage faster.

While in the early maturity stage, Apple iPod should target two major segments of hard drive and flash based MP3 players with product modification. Two age groups of under 17 and 1844 should also be focused because of the rising trend in MP3 players among students and potentially great demand deriving from the largest age group of 18-44 (ABS 2008b). However, in the future, there could be more challenges on existing MP3 firms for great market shares in a smaller market when a small proportion of the current under 17 may not replace the 18-44 age group as they retire.

Basic strategy for Apple iPod to sustain its market share in the early mature market could be strong promotion to improve image. Consumer research should also be carried out to help building up new product lines and avoid decline stage. It is argued that aggressive discounting

could help compete against other competitors for a lessening demand. Apple iPod, however, is recommended to use this strategy carefully if need be as this could damage the brand image when Myatt (2007) has stated that Apple iPod is recognised as strong brand and innovative product associated with high prices.

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APPENDICES

Table 1: Percentage of students under 18 who use various technologies at home

Technology used at home

2006

2008

% Males %Females % Total % Males % Females % Total

Computer games

87.5

84.3

85.8

73.1

52.6

62.7

Mobile Phone

75.2

82.5

79.1

64.1

73.7

69.0

Personal MP3 player Radio

61.8

60.9

61.3

64.1

71.2

67.7

56.5

60.8

58.8

55.7

62.6

59.2

Television

93.7

96.1

95.0

92.8

95.1

94.0

ABS 2008b, Comparison between 2006 and 2008 results, Cat. No 4221.0, Australian Bureau of Statistics, Canberra, viewed 4 April 2009 <http://www.abs.gov.au/websitedbs/CasHome.nsf/4a256353001af3ed4b2562bb00121564/ 387ad78ac6c4a953ca25749b0013b843!OpenDocument#Table%209>

Table 2: Numbers of MP3 store in each state of Australia

States in Australia

Number of MP3 stores

New South Wales

1332

Victoria

1016

Queensland

1402

South Australia

455

Western Australia

111

Northern Territory

21

Tasmania

18

ACT

30

The data in table 2 is collected by using Google map as the relevant data of geographic distribution in Australia are not available at the time this report is done. Based on the result found for each state, the table was then constructed as above.

Table 3: Comparison for two types of MP3 player

HDD

Flash

Long life expectancy

More durability

Size (Memory)

Sound quality

More security of data

Battery consumption

Advantage in price per unit of storage

Smaller size (Physical)

Xtatix 2005, MP3 Player Memory - HDD vs. Flash, weblog, accessed 4 April 2009, < http://www.xtatix.com/blog/?p=3>

Table 4: Types and versions of iPod

iPod Shuffle Types Storage Flash drive 4GB

iPod Nano Flash drive 8GB 16GB

iPod Classic Hard drive 120GB

iPod Touch Flash drive 8GB 16GB

Navigation

Apple earphones with remote +

Click wheel

Click wheel

Multi - Touch

Price (incl GST) No. of Battery life

$129

$199 $279

$339

$329 $419

2 10 hours of music

9 24 hours of music 4 hours of

2 36 hours of music 6 hours of movie

1 36 hours of music 6 hours of movie

Display

2-inch (diagonal) colour LCD

2.5-inch (diagonal) colour LCD with LED

3.5-inch (diagonal) widescreen Multi110 x 61.8 x 8.5

Size (mm)

45.2 x 17.5 x 7.8 90.7 x 38.7 x 6.2 103.5x61.8 x 10.5

Support Weight

10.7 grams Audio

Audio +grams + 36.8 Video Photo

Audio + Video + 140 grams Photo Nike + iPod support built in

Audio + Video + 115 grams Photo Wi-Fi (802.11b/g) Nike + iPod support built in Maps location-

Wireless Data

Apple 2009, Which iPod Are You?, Australia, accessed 15 May 2009 <http://www.apple.com/au/ipod/whichipod/>

Table 5: Price/storage ratio of iPod Shuffle over time

iPod Shuffle generation

Storage

Price($)

Year

Price/storage ratio

1st

1G

229

2005

229

2nd

1G

119

2007

119

3rd

4G

149

2009

37.25

This table was created based on the data collected from these sources below:

Apple Store n.d, Apple Inc, Australia, accessed 16 May 2009, <http://store.apple.com/au>

Eiby, S 2007, iPod Shuffle Generation 2, OCAU, accessed 13 May 2009, <http://www.overclockers.com.au/article.php?id=540817>

Kim, J 2005, First take: Apple iPod Shuffle, ZDNet Australia, accessed 13 May 2009, <http://www.zdnet.com.au/reviews/coolgear/audio/soa/First-Take-Apple-iPodShuffle/0,139023372,139177568,00.htm>

Figure 1: Population structure of Australia 1988 - 2008

ABS 2008a, Population by age and sex, Australian states and territories, Jun 2008, Cat. No. 3201.0, digital image, Australian Bureau of Statistics, Canberra, viewed 4 April 2009, < http://www.abs.gov.au/AUSSTATS/abs@.nsf/MF/3201.0>

MP3 player

Figure 2: Product life cycle of MP3 player in current Australian market

Scott, JS 2007 Product life cycle of MP3 player in current Australian market, digital image, Samuel J. Scott, accessed 2 April 2009, <http://samueljscott.wordpress.com/2007/09/11/philosophical-life-cycles/>

Figure 3: Sales of iPod

Dalrymple, J, Michaels, P & Cohen, P 2008, Apples First quarter profits, digital image, Australian Macworld, accessed 19 May 2009, <http://www.macworld.com.au/news/view/apple-s-first-quarter-profits-209>

Figure 4: Comparison between different brands of MP3 players

PC Authority 2008, Reliability and Service Awards 2008, digital image, PC Authority, accessed 14 May 2009, <http://www.pcauthority.com.au/Awards2008/mp3players.aspx>

Figure 5: Sony Walkman, Sydney

Saatchi & Saatchi 2008, Sony Walkman: Sydney, digital image, ADS OF THE WORLD, assessed 13 May 2009, <http://adsoftheworld.com/media/print/sony_walkman_sydney?size=_original>