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Q&A: In what type of market does the iPod operate in?

Sunday, February 22, 2009
by Geoff Riley

Q&A: iPod and Market Structure: In what type of market does the iPod operate in?

In this answer I will assume that we are discussing the market for personal digital audio and video media players. Keep in mind that music can be downloaded (legally and illegally) in numerous ways such as the iPod, smart phones and standard laptops.

Apple’s iPod was launched in 2001 and in that time Apple has sold more than 180 million units. Quarterly sales worldwide continue to nudge between 9 and 10 million. Despite the entry of Microsoft’s Zune digital media player (launched in 2006, manufactured by Japan’s Toshiba and pictured below) and existing players produced by the likes of Sony, Creative and Samsung, the Apple iPod continues to enjoy a market share of more than eighty per cent. In this sense, the iPod can be said to have a monopoly position in the market and well established market dominance.

An important point is that the early generations of the iPod largely created a new market rather than displacing an existing one. And Apple’s strategy since then has been to innovate and deliver new products to the market that appeal to a new group of consumers.

Indeed there are those who claim that Apple has built up a vertical monopoly in this market based around the success of the iPod, iPod Shuffle, iTouch, iPod Nano with Apples iTunes software, the iTunes Music Store platform, and the FairPlay digital rights management system (DRM). Until recently, DRM acted as a barrier to entry in the market because it prevented consumers who had purchased songs through iTunes from using them on digital players other than Apple’s own products.

In January 2009 Apple has finally made agreements with the big music labels to offer music free of DRM protection. As the Times reported in January 2009 “DRM-protected songs prevent music being copied — an option insisted on by recording studios — meaning that iTunes tracks could be played only on Apple products such as iPods.” iPod’s market position has been further reinforced by a mini-economy of accessories that have been released onto the market - from docking stations to headphones.

Oligopoly

Another view is that the different versions of the iPod compete within an oligopoly.

An oligopoly is a market dominated by a few producers, each of which has some control over the market. However, oligopoly is best defined by the conduct (or behaviour) of firms within a market rather than its market structure. In an oligopoly we frequently see many of these aspects:

1/ Periods of intense price competition between rival brands

2/ Heavy investment in research and development to speed up product and process innovation

3/ An emphasis on non-price competition as a way of gaining and protecting market share

4/ The existence of entry and exit barriers which limit the number of businesses that can operate profitably in the market

The iPod fits fairly neatly into this type of market structure

(i) The use of patented technologies such as digital rights management to protect Apple’s position

(ii) Encouraging developers to bring out new applications for products such as the iTouch

(iii) Exploitation of large economies of scale which brings down the unit costs of production

(iv) Occasional price wars as the main suppliers compete for market share

(v) Strong focus on the brand and on new generations of digital media players with new features / extra functionality / stronger design and improved portability

The success of the iPhone raises questions about the future of the iPod! Is there still a distinct need for a personal digital media player when all of its features are offered by the iPhone? The fiercest battle is now in the smart phone market where Apple faces tough competition from Nokia and Research in Motion, the manufacturer of the Blackberry.

Will the iPod still be around in ten years time?

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