When the Tail Outgrows the Dog

Steven Spadt
Marketing 421-001
Suzanne Diamond
The Wharton School

April 3, 2006
 
 
 
 
 
 

BACKGROUND
Apple has clearly had their ups and downs. In the 1990s, they
grew success from embracing their status as the “alternative” to the
mainstream PC option, the so-called “Wintel” machine, by offering
the stylish, rebellious iMac. After a couple of years of success,
though, they started to lose their grip on their niche markets as their
big-money competitors swarmed to minimize their impact by
offering lower-priced, higher-powered options. In 2005, the tables
have turned and with their ubiquitous iPod portable music player,
Apple finds themselves in the position of dominant market leader,
seeking to maintain their dominance and build upon the iPod’s
success and put an end to their cyclical corporate strength. Apple
once again has a winner. The task before them now is to find a
way to simultaneously sustain their success in the portable
electronic device market while also leveraging it to gain ground in
their core marketplace, personal computing.

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SITUATIONAL ANALYSIS
Positioning the Apple Image

Since its early days on the personal computer (PC) scene, Apple
has embraced and capitalized on its rebellious image. Apple
created, controlled, and to the joy of their loyal following,
successfully marketed their alternative to the conglomerate of the
Microsoft™ Operating System, Intel processors, and big business
hardware manufacturer’s like IBM (the so-called “Wintel”
machines). The alternative that Apple offered—based on the
Macintosh Operating System (MacOS)—was a bundle of software
applications and hardware that was and continues to be
unparalleled in style and substance. While Wintel machines were
positioned as efficient, cost-effective tools, Apple’s were positioned
more as expressions of their creative owners’ personalities. While
the detailed technical differences in the PC systems were known
largely only to the application developers, consumers knew that a
purchase of an Apple product was a contribution to the
alternative—an investment in a company that did things the right
way, if only because they did things differently than the big
companies like IBM, Microsoft, and Intel.

The challenge in managing this image going forward is that, with

respect to personal music players, Apple is the big company.
Apple owns the market with the iPod device and the iTunes service.
There is a need to preserve their identity as the alternative to
Microsoft and the Wintel corporate machine in the personal
computing market while clearly defininig and embracing their
dominant position in the personal music player space. To exist as
both the alternative “underdog” in the PC market and the ubiquitous
champion in the personal music market will be challenging and will
require some unique approaches. However, as the line between
PCs and portable computing devices blurs, both positions may be
in need of some refreshing. Apple’s target segments remain:

ƒ Apple Loyalists – Apple customers who are firmly entrenched

and are not likely to consider non-Apple products
ƒ New Users – Consumers who will enter into a reasonably
unbiased assessment leading to a purchase decision
ƒ Windows Switchers – Wintel loyalists who make the leap to join
the community of Apple owners

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 The question is, what energies (resources) should be allocated to
each of these segments, and are they still relevant, given all of the
other changes in the consumer technology marketplace? Apple
must endeavor to leverage the success of iPod to gain additional
Mac customers and potentially lessen the Wintel stronghold on the
PC market by reducing the demand for the traditional PC, itself.
Product Definition

The iPod product is more than a portable music player. The iPod is
actually a bundle of product components that consist primarily of
the pocket-sized iPod player device, the iTunes digital music
delivery service, and the client player (software) that runs on the
“host” computer, allowing users to play back music on their PC as
well as facilitating transfer of
downloaded music to their iPod device.

A PC is truly a system consisting of

multiple components (system hardware,
peripheral hardware, Operating System
software, application software, and
bundled services). The iPod fits the
system model as well, with several
notable components that have no
parallels in the PC: the host PC, itself,
the iTunes service, and a wealth of
accessory opportunities. The current iPod devices are dependent
upon a host computer, running a specific software application
(iTunes) to get music files on and off the device. The following
table charts the comparisons between PC computer system
components and components of the iPod portable music system.

PC/Desktop Computer iPod

System hardware (box) The device, itself
Peripherals (printer, Attachments
keyboard, mouse, etc.) (headphones/ear-plugs,
digital camera, etc.)
Application software Music/photo browse and
playback interfaces
Operating System System software,
software including music file
encoder/decoder, etc.
“Host” computer + iTunes
client application software
and desktop player

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 iTunes “service”
Accessories (cases, belt
clips, “skins,” etc.)

The definition of the iPod product, then, becomes increasingly

difficult as we attempt to define the roles played by each
component of the system. An iPod, itself, is a portable music
player (though an extraordinarily well designed one). Adding
iTunes, attachments and increased capabilities such as those
offered by the iPod Photo version, and then wrapping the entire
system in an Apple-branded package is an attempt to bundle the
services, software, and device into a single, coherent whole. And
the uniqueness of that whole---the “lure” of the Apple brand—is
built on a few key ingredients, shared by each component in the
system (iPod, iTunes, and the host computer):

1. Intuitive User Interface – Apple’s designers are legendary for

their design of intuitive user interfaces, from their creation of the
first “windows”-based computer interface to their innovative use
of the iPod “dial.”
2. Simplicity of Design – Often the antithesis of their main rivals,
Microsoft, Apple focuses on simplicity rather than complexity.
No machine should be more complicated than it needs to be.
3. Stylish Presentation – Sometimes accused of being too
concerned with the packaging, Apple never cuts corners
aesthetically. Every Apple product confirms that form need not
take a back seat to function, reflecting the creative personalities
of their owners.

Diffusion of Innovation – Making Waves

During the early portions of the iPod life cycle, Apple successfully
overlayed new benefits (some, legitimate innovations of their own)
to prolong the peaks and create opportunities for new adopters.
Offering new innovations increases the total potential market for the
new devices since both late adopters of the iPod who have not yet
adopted and early adopters (who will become early adopters of the
latest models) may be targeted. Especially considering that
adopters may be included on any number of the curves (innovators,
for example, may be on all of the curves), Apple has begun a
pattern of delivering cyclical innovations to maximize adoption
potential. As long as the new models continue to be true
innovations, rather than model tweaks like greater song capacity,
new colors, etc., this approach may be sustainable.

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 iPod Innovation(s) – Cyclical Life Cycles
% adopting

Original iPod iPod Photo U2 iPod iPod Shuffle ?

Mapping the models to benefits, we see:

Original iPod: Ability to listen to your favorite music

anywhere, all accessible via an incredibly intuitive device in
an expressive, stylish package
iPod Photo: Ability to store and show your favorite photos
from the same device you already carry for your music
U2 iPod: Unprecedented social status and connection of
users to popular, socially conscious icons
iPod Shuffle: Optimal portability (size of pack of gum),
available at entry-level prices

Changing Environment – Device Convergence

We only have so many pockets, but the number of devices we want

to carry with us continues to increase with each new offering in the
portable consumer electronics marketplace. Because of this
phenomenon, and the need for each of our portable devices to
work together, the lines between the primary categories, personal
digital assistants (PDAs), cell phones, and digital music players, is
blurring. Indeed, if a single device could provide all of the
funcitionality in a single, easy-to-use, powerful, compact, and
stylish package, it would likely garner significant attention. As
depicted below, the makers of each of the major device classes
have been moving to expand the benefits of their individual

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 offerings to achieve this. The PDA and cell phone markets,
however, are substantially more fragmented than the music player
market. No player in any of the other markets has achieved the
dominance that Apple has with the iPod.

PDA

Cell Music
Phone Player

In addition to the convergence of mobile devices, there is a

convergence of another sort taking place. Home entertainment
systems (also called media centers) are increasingly being
converted from dependence on CDs and other digital media to
utilizing digital music formats like those stored on portable music
devices. In fact, the iTunes service is not limited to serving songs
to mobile music listeners—the same file can be utilized by home
systems that are properly equipped, connected to PCs that serve
as the “hubs” in the home music system.

Looking beyond music to home entertainment as a whole, digital

video continues to gain ground, but bandwidth limitations limit the
amount of video that can be stored on a portable device to several
hours at a time. The other factor effecting potential adoption of
portable video is that, while portable music suffers no loss in the
quality of the experience, the enjoyment of video content is directly
related to screen size, something obviously lacking on a portable
device. Portable video is a market that will likely increase in the
coming years, but unlike with music, the separation between home
video playback and portable video playback is distinct. The two

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 markets are inherently separate, so if Apple seeks to embrace one
or the other, they’ll need to do so with separate efforts.

On the personal computing side, the Mac Mini hits the right price
point ($499) and is targeted directly and unabashedly at the
coveted “Windows switchers.” The idea is to allow Wintel users to
keep their existing displays, keyboards, and mouse devices while
converting to the MacOS platform for almost half the cost of
upgrading to the latest Wintel system. The missing ingredient in
the Mac Mini, though, despite its miniature size, is portability. Even
though the box itself can fit in the palm of a hand, when the display,
keyboard, and mouse devices are added, the result is a decidedly
non-portable system. So the Mac Mini, despite its name and size,
is firmly entrenched as an alternative desktop solution, not a
solution to increase the mobility of personal computing consumers.

Going Mobile

Whether consumers are more on-the-go than in the past or whether

they simply want to take more with them, consumers seem to be
demanding more functionality when they are away from home.
Comparing the merged sales of laptops (PowerBooks and the
newer iBook models) with traditional desktop computers
(PowerMacs and the newer iMacs), 2004 saw a remarkable
occurrence. Mobile computers from Apple actually outsold Apple
desktop machines. This certainly appears to indicate that mobility
is a benefit in which personal computing consumers are placing an
increasing value.

Sales of Apple Products (2002 – 2004)

2900

2700

2500 Mobile
(PowerBook/iBook)
2300
Desktops
2100 (PowerMac/iMac)

1900

1700

1500
2002 2003 2004

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 Within the target consumer electronics sector, mobility is playing no
less of a role in purchase decisions. Clearly, with iPods achieving
ubiquity status in the music device market and mobile computing
system adoption outpacing that of traditional desktop-tethered
systems, the value placed on mobility by today’s consumer appears
stronger than ever, and does not appear limited to the domain of
music, but is applied broadly to personal computing, as a whole.

CONCLUSIONS
Apple competes in several different markets, dominating in one,
and playing a financially minor, though market-significant, niche
role in another. The challenge before them is to effectively
lengthen their iPod tail and use its strength to wag the rest of the
Apple dog. The answer is to connect iPod’s benefits (brilliant user
interface, simplicity of design, stylish and expressive presentation)
to the host machine and embrace today’s cult following of the iPod
as tomorrow’s Apple customer base.

As Steve Jobs himself acknowledged, it is difficult to make

substantial profits from an online music service, itself. While the
iTunes service is a crucial component in the iPod system, it can not
preserve Apple’s current levels of profitability, alone. The service
needs to remain central to the system, in which lies the profits,
through sales of devices, accessories, and it is hoped, host
computers made by Apple—all delivering the core Apple benefits.
The sustainability of the strength of the iPod system, itself, will
depend on the continued introduction of dynamically continuous
innovations. New innovations can take the form of next-generation
iPod devices (offering new benefits like portable photo
management/display), next-generation iTunes and related services,
or the connection of either of these to the host computer. The iPod
is a system, and innovations must focus on all the components to
be successfully diffused.

Convergence of devices goes beyond PDAs and handheld devices

to the convergence of computing technology, itself. Even traditional
PCs are at risk, at least within the home/consumer segment, as the
demand for mobility forces new form factors like TabletPCs and so-
called micro-notebooks to be introduced. Hybrids between
traditional laptop computers and handheld devices like cell phones
and PDAs are already starting to battle for space in the converging

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 markets. The challenge for Apple is to determine just where the
iPod and their iBook machines fit into the convergence mix. It is
possible, for example, that iPods could not only be provided with
basic PDA features, but with wireless connectivity as well. This
would effectively eliminate the host computer entirely from the loop,
as a smaller version of iTunes could run directly on the iPod.

The impact of portable digital music formats on home music

listening is increasing, as well. Because the capacity of iPod
devices continues to well outpace the size of most users’ music
collections, it is conceivable that users could store their entire
collection on their iPod and utilize it as the “hub” in a home music
system. A system that would allow a user to plug an iPod into an
amplifier/speaker setup could further carve out market position of
existing iPod users as well as drive non-iPod users to the Apple
platform. The iPod system could be re-positioned from simply a
portable music player to a personal music collection.

RECOMMENDATIONS
Recommendation 1:
Develop the mobile equivalent of the Mac Mini, priced low
enough to compete with other sub-notebooks, and bundle it
with the latest iPod device (see Recommendation 2 below),
iTunes service, and wireless connectivity. This product,
potentially called the “iMob,” (from iMobile) would be positioned as
the total solution for mobile computing. The machine itself would
compete directly with Wintel equivalents termed “sub-notebooks”
and small TabletPCs, but the all-in-one solution for portable
computing coupled with wireless Internet access would position the
product uniquely in the market, while capitalizing on the popularity
and usability advances of the iPod. More importantly, it could serve
as the trigger for transitioning iPod adoptees still on the Wintel
platform to adopt the MacOS for the benefits learned from their
iPod experience.

Recommendation 2:
Develop a premium iPod (iPod “UNO” – indicating an all-in-one
device) that meets the market’s demand for device and service
convergence. Follow the lead of PDA makers like Palm and RIM
and partner with wireless carriers to offer an iPod that offers basic
cell phone and basic PDA features, all in one iPod-branded
package. Keep the cell phone and PDA features very basic, to
avoid adding too much complexity, but position the product as an

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 alternative to carrying 3 different devices—the coveted converged
device. Design the device to synch only with MacOS hosts, such
as the iMob (see recommendation 1), at least initially, to skim the
innovators and early-adopters and drive Mac sales.

Recommendation 3:
As a lower priced alternative to the iPod “UNO”, consider
partnering with cell phone manufacturers and/or carriers to
enable local wireless communication between cell phones and
specially configured iPods to allow wireless downloads of
songs via cell phones. Local wireless networking technologies
like BlueTooth® enable devices to communicate with each other.
Utilizing this or a related technology, iPods could receive
downloaded songs from cell phones (that would be configured to
run a special mobile version of iTunes), eliminating the need to
connect the iPod to a host to receive new songs. Market the device
to Wintel users, who would not initially be able to synch the “UNO”
to their computers, and to more price-sensitive consumers.

Recommendation 4:
Continue to pace additional iPod innovations to lure late-
adopters and encourage existing iPod customers to additional
purchases at a wide variety of price points. Possible
innovations include:
- a digital camera add-on that would connect to the iPod Photo
edition and all subsequent iPod versions with color displays
- digital video playback capabilities
- additional partnerships with music artists (Iike the U2
partnership) to produce and deliver customized, branded
content

Recommendation 5:
Partner with one or more home music system manufacturers,
license the iTunes song format, and position the iPod as a
“personal music collection” hub for their home music
systems. Invite consumers to “carry their personal music
collection with them wherever they go, and plug it in when they get
home.” To further guard against Microsoft’s moves to position
competitive song file formats as cheaper alternatives, consider
bundling packages of iTunes song downloads with the home music
systems. Even if per song profits drop below zero, as long as
iTunes songs can only be played on Apple devices and partners’
home music systems, profits made on device sales would
overcome expenses.

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