Ipod Case Study

When Apple first entered the mobile music market in September 2005 with their partnership announcement between Motorola and Cingular Wireless to produce the ROKR, Apple’s strategy was to tap into the potentially huge market for mobile music devices and services. Apple’s contribution to the partnership was to offer access to their highly successful iTunes music service, allowing Motorola to design and develop the physical handheld mobile device and Cingular to provide the wireless data services.

At this point in time, this was the best strategic approach to break into the market because it provided Apple with an opportunity for continued expansion of the iTunes user base. Though a loss leader for Apple, the widespread adoption of the proprietary platform opened the market for sale of the iPod where Apple enjoyed an average margin of 25%. The Motorola-Cingular partnership allowed Apple to gain some exposure and experience in the mobile aspect of the digital music ecosystem without cannibalizing the rapidly growing sales of iPod (a 600% increase between 2004 & 2005). Despite the failure of ROKR, their early entry gave Apple invaluable knowledge to plan for future design innovations ahead of their competitors.

Although 2006 projections indicated that iPod would continue as the leader in portable music devices (50% by 2010), the mobile device market was maturing and annual growth rates had slowed. Apple recognized the introduction of the iPhone as a key to maintaining sales volumes and sustaining their dominant position in the portable music device market. By handling the design of the iPhone in house, Apple was able to capitalize on the successful design of the iPod, already well received by their customer base, and to exercise their strength in innovation. Apple was now in a prime position to capitalize on the predicted rapid growth in the retail digital music space and mobile music market.

What are the benefits and risks of partnering with Cingular in an exclusive two-year deal?

There are a few apparent benefits of partnering with Cingular (now AT&T), for the ROKR and iPhone. First, since both the ROKR and the iPhone are bundled products offering music storage capabilities along with voice and data services, it makes sense to partner with a mobile network provider. AT&T is an ideal partner because they have the largest existing customer base along with significant sales growth from 2002 to 2005. In addition, AT&T has expertise and knowledge in the business of providing wireless data and voice services. This is not Apple’s business, which has conventionally been more product-driven, not service driven. The partnership made even more sense when Apple stepped out as the phone producer with the launch of the iPhone. CEO of Apple, Steven Jobs, was quoted in an interview saying, “Let AT&T be AT&T. They’ve forgotten more about running a network than we’ll ever know. And let Apple be Apple. We think we know how to design a great phone.”

Second, Apple could rely on AT&T to supply capital needed to upgrade wireless technology to allow for adequate coverage and data storage capabilities. CEO and Chairman of AT&T, Randall Stephenson, reported that his company spent over $16 billion of capital into the 3G network from 2005 to 2007 and thousands of hours of performance testing on the network. AT&T also co-developed technical innovations like Visual Voicemail and customer service innovations like user-driven activation. The most prominent risk associated with an exclusive two-year deal with AT&T is that ultimately the sales of the ROKR and the iPhone are directly tied to the customers who subscribe to AT&T. Although AT&T has the majority of the market, Apple is missing out on a large number of customers that would buy the iPhone or want a phone that is compatible with iTunes but are not willing to switch to AT&T service. Thus, they are dampening their potential sales growth.

What are the benefits and risks of announcing 6 months early?

Apple’s decision to promote the ROKR six month prior to product release aligns with Apple’s strategy to build customer demand through heavy marketing investment and PR exposure. This creates anticipation and an increased commitment in the consumer’s mind. In addition, Samsung executives admitted that the major ingredient in Apple’s success over Samsung was a marketing investment of $165M vs. Samsung’s $1M. To build awareness and market anticipation, more companies will follow Apple’s lead and pre-announce products to create market hype.

What do you expect will be the countermoves of you key rivals in the smartphone industry?

Apples key rivals will react with several different