It’s been over a decade since the first Apple iPod emerged on the scene, disrupting the music industry and prompting the inevitable shift towards digital. It was a great debut for the almost out-of-business comapny, Apple computer, to turn around in its history. When it was first introduced, this pocket-sized music player went head-to-head against the now legacy playback formats that previously dominated the recording industry, including CDs and vinyl records. While the sound quality of an mp3 file will never match the fidelity of a record due to file compression, the added convenience of being to carry one’s entire music library in his pocket has forced the hands of music execs and fueled the development of new music business models for the transmission and playback of our favorite beats.
And since that, iTune/iPad hardware-software co-design has evolved as the MP3 industry's dominant design model, while motivating other competitors to understand and mimic its eco-system. Through endless efforts by designers in the industry, the process innovation eventually brings up the new type of business model, the online streaming music services, provided by companies, such as Spotify and Pandora.
Without too much surprise, Google announced at its I/O developer conference that its service would allow users to combine their existing music libraries with Google's millions of available tracks to create their own playlists. That puts the new streaming product in direct competition with on-demand products like Spotify and Grooveshark. But the product also features radio stations, which could pit it against other internet radio services like Pandora. Many on-demand services also provide radio options.
The disruption model by Prof. Christensen allows us to explain the MP3 player market as a new disruptive innovation that needed an integrated platform due to the complexity and initial disaggregation of music on the Internet.
As described in Christensen’s context, when the functionality and reliability of a product are not good enough to meet customers’ needs, then the companies that will enjoy significant competitive advantage are those whose product architecture is proprietary and integrated across the performance-limiting interfaces in the value chain. The initial MP3 player industry had characteristics similar to a traditional PC, such as a hard disk interface and a processor to convert digitized music into analog sound. These MP3 players seemed ready-made for modularization. As the case points out, the technical hardware had all of the key ingredients that Baldwin and Clark highlighted as necessary properties for modularization including module partitioning and hidden module capability in hard drive disks, an interface specification based on PC interfaces for things such as hard disks, and system compliance and testing specifications based on minimum performance requirements for hard disks. All of these ingredients would allow for a market based on modularity. However, the music industry and the MP3 files, that had become the standard digitized music file format, were not easily integrated into these those assembled devices. For example, before Apple launched its iTunes store there was a low appropriability regime in the digital music space and it wasn’t clear what platform users would use to pay for music. Other questions remained unknown to both suppliers and customers, such as: What is the appropriate approach for customers to store their music? What kind of software platform should be used on portable MP3 players, which allowed customers to play and share their music? How can the music copyright be protected in the MP3-based music industry? There were many unknown interdependencies. MP3 makers only provided module-based hardware but the MP3 music industry itself was still at a stage where the interfaces and integration of music on the devices was unclear and unsettled. Similar to the Japan phone network example pointed out in Christensen’s framework, a seamless customer experience model was needed and Apple was able to provide this integrated, seamless experience, with a revenue model, an easy-to-use user interface and integration with the music industry itself in the form of digital rights contracts. Therefore, an integrated and proprietary solution, as offered by Apple’s iPod/iTunes ecosystem, that vertically spanned across those interdependent interfaces in the value chain could emerge with a competitive advantage.
Clearly, the MP3 player’s disruption and the initial quality of the entire package (or lack thereof) meant that the industry had moved to the left side of Christensen’s disruption diagram and there was a performance gap that needed to be bridged by an integrated product such as the iPod/iTunes. SanDisk and other MP3 player makers seemed to see this market as ready for modularization, with the PC interfaces as a template, but they missed the fact that while technical interfaces were easy to modularize, the full architecture of the music distribution system was not ready for modularization.
In the context of Christensen’s framework, at the beginning of a wave of new-market disruption, the companies that initially will be the most successful will be integrated firms whose architectures are proprietary because the metrics required by customers are not yet good enough. Apple benefited from its integration process to provide customers with a seamless hardware-software codesign with the iPod/iTunes ecosystem, allowing customers to manage their MP3 music efficiently with a portable device and a centralized music digital rights management (DRM). Apple has dominated this integration process because functionality and reliability were initial concerns of the customers. After several years of market evolution, those disruptive pioneers themselves become susceptible to hybrid disruption by a faster and more flexible population of nonintegrated/modularized companies whose focus gives them lower overhead costs. Now that customers of the digital music market have been relatively well served, they have many mature options to choose to access and manage their favorite music. Furthermore, the architecture within the digital music industry has been quite stable and well defined. Both customers and content providers know which attributes of the digital music player ecosystem are crucial to the operation of the product systems. They can also verify whether those attributes offer clear guidelines. For example, customers can verify whether the software provided will allow them to download and store MP3 music easily and conveniently and whether the device can provide enough storage volume and enough processing power for entertainment. Also, there are not many poorly understood interdependencies across the customer-supplier interface. Customers can predict how the subsystem changes will interact with other subsystems in an integrated digital music solution, as provided by Apple, Microsoft or Amazon. As we can see, these three elements follow what is described in Christensen’s framework, indicating the industry will shift to modularization.
The re-emergence of streaming music services reflects this underlying trend in the following ways: \item Streaming music services can be seen as a modular architecture because customers don't need to worry about the hardware and all of the bells and whistles - they can simply configure their songs and stream the music from anywhere. It provides great flexibility for customers to control their music content without a centralized service system and proprietary hardware.
\item Streaming music services eliminate the limitation on hardware storage and the dependency on the hardware platform. Now that the interfaces with the music industry are relatively well defined, you can listen to music on any portable electronic device, such as, an iPod, iPhone or smartphone, as well as a PC.
\item Streaming music services offer a lower cost structure, which allows them to compete in this industry as the market evolves.
Apple will need to compete by opening up its architecture (relying less on hardware) and perhaps allowing an iTunes streaming service with competitive pricing - this will eat into its high margins.
