Innovation Management in the Mp3 Audio Player Industry

INNOVATION MANAGEMENT IN THE MP3 AUDIO PLAYER INDUSTRY

8 August 2006

Erik Westerman

Question 1

I have chosen the personal stereo industry (home entertainment sector) as a sector of interest. Portable audio products, starting with the cassette tape Walkman, and finishing with the MP3 player involve major innovations as the main reason why there has been such radical change over the last ten years.

The main leaders of today hardly resemble the top competitors 10 years ago. The leader of today’s market holds a powerful dominance over the competitors. In fact, only one name prevails in the personal stereo industry from the last two decades: Sony.

Sony’s success has been waning over the past five years as a result of the combined service that Apple’s iPod provides with iTunes software as well as iTunes online music shop. The ubiquity of the “i-brand” has been a curse for the other players in the personal stereo industry.

Following the success of Sony’s Walkman cassette tape player, competition rose between electronics giants as portable CD players become economically feasible to the mass market in the early 1990s. Media content systems, from magnetic tape to plastic have created new markets as Digital Audio Players (DAPs) have dominated near the end of this decade.

In the late 1990s, I.T. enthusiasts began to use audio compression formats to store music on their personal computers. Customisation of play lists and storage were not issue thanks to the compression methodologies used by the MPEG group, and in particular, the MP3 stood the test as a favourite among these early innovators.

Diamond Inc released the first portable mass market MP3 player, the Rio in Q4 1999 . Its success was limited as was its storage, but fortunately it tipped the scales of justice in the favour of DAPs following the RIAA (Recording Industry Association of America) case that legalised digital audio players based on the case of Sony Corp. of America v. Universal City Studios, Inc, also known as the "Betamax case". This opened the floodgates to any major electronics industry to manufacture MP3 players. Miniaturization became a key factor for storage in the MP3 player as miniature hard disks surfaced on the market, followed shortly after by flash memory ICs.

The means of music distribution remained tightly controlled by the music industry’s “Big Five”: Universal Music Group, Sony Music Entertainment, EMI, Warner Music Group and BMG.

Strangely enough distribution of music was never considered as a determining factor by the industries of the Pacific-Rim who focused on technological product improvement as a driving factor to success instead of forecasting a digital revolution that was occurring right under their nose. It took a Western organisation to champion music distribution.

The Apple store had a successful existing e-commerce framework, and the addition of a music section would prove to be very easy. Apple’s CEO Steve Jobs persuaded the Big Five to create their own competitive digital music libraries in a persuasive plea to obtain the rights to their music stock at a price fixed at 99 cents per song. Apple store walked away from the deal to sell downloadable music from all five companies, including Sony.

None of these corporate giants had any experience in online digital music distribution, and set legal constraints between each other, leaving Apple out of the equation.

Apple sales within the first week proved that legal music downloads would be popular, and that music piracy consisted of a minority of users versus the mass market of legal purchasers.

Many imitators have followed on the iTunes music Store model with moderate success, including Amazon.

Three industry players stand out prominently today :

· Apple: owning between 68% and 70% of the MP3 player market

· Creative Labs: owning 6% of the market

· Sony: owning 2% of the market

The DAP industry is still in its infancy; if we are to follow to the Apple business model, we could describe as a dual product/service system, the first a technical innovation that revolved primarily on excellent design with good integrated circuitry, and the