Competition in the Mp3 Player Industry

Competition in the MP3 Player Industry

How will Apple fare after its fantastic success with the iPod?

Case Analysts

Robert Carter

Mike D’Attoma

Introduction

The Apple iPod has changed the face of the portable music player industry over the last few years. It has been so successful that it is thought to be as influential as the Sony Walkman was in the 1980’s.1 In fact, over one-hundred ten million iPods (110,000,000) have been sold over the last six years.2 The highly popular digital music store and library, iTunes, also plays a big role in iPod’s success by making digital music cheap and easy-to-access. The big question is: How will Apple continue to be an industry leader in the increasingly competitive MP3 player market? In this paper we will analyze Apple’s financial position, current strategies, strengths, weaknesses, and competition in the MP3 player industry. We will then use this analysis to recommend a strategic plan for Apple to follow for the next five to ten years.

Financial Analysis

We will be looking at financial ratios for Apple as a company to rate their overall financial health. First, however, let’s look at how much iPod sales accounted for total sales at Apple. In 2005, the iPod accounted for 32.3% ($4.5 billion) of Apple’s total sales.3 On October 22, 2007, Apple reported quarterly earnings of $6.22 billion, of which 26% ($1.61 billion) came from iPod sales. In comparison, big-name competitors Dell and Sony only receive around 5-8% of their total sales from MP3 players. This has a lot to do with Apple’s market share in the MP3 industry as well. iPod accounts for a whopping 70% market share in the MP3 player industry, while its closest competitor, Microsoft’s Zune, hovers around 8-10%.4 iPod has held this commanding market share lead for almost 5 years now. Figure 1 below shows iPod sales per fiscal quarter for the last 5 years.

Figure 1

iPod Sales per Fiscal Quarter

You can see a very steady upward trend in the amount of iPods sold, with 2 quarters standing out, taking place in the holiday seasons of 2006 and 2007.

In Figure 2 below we compare some of the key financial ratios of Apple with those of their top competitors in the MP3 player industry. Though all 4 of these companies create MP3 players, we must keep in mind that the majority of each company’s sales come from other products, such as computers and comsumer electronics.

The overall financial health of a company is a strong indicator of how they may fare in the MP3 player market, however.

Figure 2

Key Financial Ratios (June 07’ end of quarter)5

Apple Microsoft Sandisk Sony

Gross Profit Margin 38.1% 81.9% 41.9% 37.1%

Current Ratio 2.7 1.7 6.4 1.3

Quick Ratio 2.2 1.5 5.1 0.6

Inventory Turnover 64.1 7.1 4.5 5.1

Debt-to-Equity Ratio 0.00 0.00 0.25 0.60

Price/Earnings Ratio 47.3 21.2 147.3 35.5

EBIT Margin 18.7% 39.3% 7.3% 4.6%

Return on Equity 26.1% 45.2% 1.6% 4.7%

Return on Assets 16.2% 22.3% 1.1% 1.4%

Net Profit Margin (5-yr avg) 10% 28% 11.8% 1.6%

Current Stock Price (10/27/07) $184.70 $35.03 $41.02 $49.22

(Industry Best in Bold)

In comparison