It’s hard not to notice that the players that were dominant in the cell phone market a few years ago have been marginalized by players such as Apple and Blackberry. It’s easy to attribute this to technology saying that the iPhone was so technologically superior to the phones of the time that it was inevitable, or that iPhone redefined the cell phone industry. However, it is important to note, I think, that the iPhone wasn’t mainly a technological innovation, in fact the technology to do most of what the iPhone does had been available for years, what happened was non-technology based disruption that largely was due to the incumbent industries inability to meet a very complex user need. Let’s look at the case of the iPhone to see what really happened.
Consumers were screaming for increased use of their cell phones, yet there was no solution in sight, but let’s for the purpose of limiting this post look at music as an example, keep in mind though that music is just one example and that you can replace “music” with “content” or “applications” in most places where I use the word. So, the consumers were screaming to use their cell phones for music, yet there was no good solution in sight. There were three parts of the infrastructure that needed to come into place, the content, the device and the network capacity, these were controlled by three types of actors with differing interests that would have to come together to put music on phones in a user friendly way: cell phone manufacturers, record labels (content providers) and phone carriers.
The manufacturers was happy with the way things were, incremental innovation, mostly in design, lowered the product life cycle so that new phones was bought all the time, they didn’t have to spend much on marketing, because consumers often bought what they were recommended in the (carrier owned) stores, so the best marketing was to have good relations with carriers, making sure both players made good money on selling that particular phone. The market mechanisms seemed to have stabilized, leaving no reason to think there was any change around the next corner. The manufacturers were largely dependent on the carriers. Since the stores where cell phones were bought generally belonged to the carriers, people chose their phone on the basis of what carriers offered them, the best thing a manufacturer could do was to be present in as many stores as possible, and just make sure they didn’t fall behind the other brands in innovation. Indeed a comfortable place to be for a large firm.
The record labels viewed cell phones as a treat, this seems to be their strategy with most new technology, so consumers were pirating music and putting it on their phones, with little revenue finding its way to labels. The labels would have preferred a pipeline of music that went through carriers, for example you would by a song for a few dollars through SMS or WAP. For consumers this took too long and was too expensive, for them it was easier to just use their pirated/ripped media library on their computer and use a cable or whatnot to transfer the songs to their cell phones. The phones didn’t have any storage capacity anyway to support buying a media library that would just work on your phone. In an effort to limit pirating, the music industry didn’t even make an effort to expand their market by finding a viable business model in cell phones or mp3-players.
The carriers on their part had a wholly different agenda, music didn’t really interest them. When a carrier imagined a future where wireless high speed internet access, together with technologies such as Skype was dominant, they got sick to their stomach, because that was a world where they were redundant. The carriers have been selling subscriptions that has a monthly fee and fixed prices on for example calls and texts, by adding free or cheap cell phones to the mix they could confuse buyers into buying subscriptions with crazy margins. If phones become internet based (with for example Skype as the carrier), they will at most be able to maintain the monthly fees, a prospect that will allow consumers to better understand what they are paying in relation to other carriers, this will lead to a lowering of the carriers margins, and force them to compete on price.
Needless to say, the phone carriers wanted to postpone the introduction of high-speed internet to phones and thus didn’t want music consumption to go through the high-speed connectivity that the consumers needed to effectively use their phones for music, because this connectivity could also facilitate other uses. For them the “pirate music on your computer then transfer to phone” model was sufficient, and no one bought a lot of music from the crappy stores they had anyway, why go into a market that clearly can’t be solved in their best interest? This stifled the innovation among the manufacturers, because, as noted above, they didn’t want to upset the carriers that they were so dependent on. And besides, they didn’t own any content that could be sold anyway, how would they make more money from adding functionality which someone else would get the revenue from (if anyone would get any revenue at all), and that their most important partners didn’t even want or push for? They settled for having the capacity to play music, in their crappy homemade players, and consumers would have to take it or leave it.
Enter Apple. Apple had three resources that allowed them to enter, they already had a deal with the record labels; the labels acting on their fear of becoming obsolete had agreed to sell music through iTunes for use in mp3-players, given that all effort would be made to limit the ability to copy the music, which suited Apple well. Apple also had the expertise to create ways for consumers to interact with the technology, this is really the only expertise Apple had that separated them, the technology, which is the third resource, was widely available, and Apple had a large engineering division that could make the phone. What happens is that Apple enters as a cell phone manufacturer and has a deal with the record labels. The high speed connectivity that carriers didn’t want and that the other manufacturers didn’t see any point in providing was pivotal to Apples plan, they wanted to make money not only on their phones, but on the extras as well, like iTunes. Apple also had a plan to sell other content, but let’s keep with the music for this post.
Apple had an advantage over the other manufacturers; they had a congregation that would buy their product no matter what. The iPhone was also perceived as an iPod with phone capability; to consumers this was just as good as phone with mp3 capability would have been. In addition consumers already knew how to consume music on mp3-players, they didn’t to the same degree know how to do this on their phones. Thus the iPhone was perceived as a better music player than the other phones, but not as inferior when it came to the phone capability. The incumbents in their infinite wisdom had their core competency in making phones, however this wasn’t perceived as important, because any technology company can make the phone part of a phone. These reasons add up to the fact that consumers wanted the iPhone, whether their carrier recommended them or not, this represented a shift in power, from the carrier’s power over the manufacturers, to Apples power over carriers. Even if the smart phone, here exemplified as the iPhone, likely will be the death of the carriers current business model (as noted above) in the not so distant future, the carriers needed to scramble to make sure they would be the one that had a monopoly on marketing the iPhone, because now the consumers would buy the carrier that had the iPhone, not the phone that carrier recommended.
Though I limited this post to apply to music it could just as easily apply to other content, such as movies or games. The point is that Apple sees an opening where the increasing needs of consumers are not reflected in the market offerings, and where the players that are necessary to fulfill this market need are looking the other way. If the three types of actors above had put their heads together, they likely would have seen this path to profit, and would have acted on it, but they were busy following different agendas. The genius of Apple lies in realizing that more sophisticated phones wasn’t the need at all, the actual need was made up of at least two different needs, the need for better phones and the need for some way to use the better phones. Apple set about to provide both at the same time, and it was this that gave them the ability to enter the market for cell phones with such a success.
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