Environmental conditions: Apple iTunes in the UK

1. Introduction

The following report will carry out an assessment of the macro and micro environmental conditions that are likely to impact upon Apple iTunes within the United Kingdom. The analysis which will be carried out will include an assessment of the degree of the threat or the opportunities posed by the existing and potential competition.

iTunes is a digital media player application which is used for playing and organising digital and video files. iTunes also connects to the iTunes store via the internet to purchase and download music, music videos, television shows, applications, games, audio books and podcasts.

The Music industry has radically changed in the last couple of years, thanks to the increasing penetration of broadband, which has made it increasingly convenient for music lovers to buy via the web, this has the effect of promoting digital downloads. Content owners have been hit by the increasing problem of illegal downloading which has had the effect of devaluating the value of music for an entire generation of youth. (Mintel 2009) After its launch in 2002 Apple’s iTunes has come to dominate the music delivery business in many countries around the world, including the United Kingdom. Using a number of tools which look at both the micro and macro environment, and various analysis I will draw many conclusions whether there is a likelihood of continued success for Apple iTunes in the future.

2. What is Apple iTunes?

“iTunes is a free application for your Mac or PC it organises your digital music and video on your computer. It syncs all your media with you iPod, iPhone and Apple TV. It is also a store on your computer; it has everything you need to be entertained anywhere, anytime.” (Apple 2010) Apple iTunes was developed in early 2002 and has developed ever since in relation to Apple’s continued success with their portable media player the iPod. Ever since 2002 many new features have been added to iTunes such as in April 2003 when version 4.0 of Apple iTunes was released which added the feature of the iTunes Store, to make it the success of what it is today. (Apple 2004)

3. Apple iTunes Market Position

The music industry has witnessed a massive change over the last few years; this is due to many reasons. One fundamental change has been the increasing user usage of broadband technology, the increased speed and more people adopting the technology has led to consumers to view downloading music via the web to be convenient and simple. This development originally led many of the traditional high street retailers such as HMV to start selling music online in CD format. In more recent times music both single tracks and albums have become more and more easily accessible for the average consumer due to the continued popularity of services such as Apple iTunes.

3.1 Market Data on The Music Industry

In January 2009 the British Phonographic Industry (BPI) predicted that the UK will spend over £600 million on digital music in 2012 (Mintel 2009). As you can see from (Appendix 2) downloads are dominated by singles or the download of individual tracks. But iTunes and other digital competitors are looking at improving the way in which they are marketing to consumers hopping to persuade them to purchase more albums digitally. Also in (Appendix 2) using BPI figures it shows the demand for single downloads has increased by a massive 340% from 2004-2009, where by the sale of single music in physical format has decreased by 850%. The same trend can be seen for album sales as well.

As you can see from the table in (Appendix 1) pre-recorded music sales are continually moving from the traditional music stores, supermarkets etc to the internet to services such as iTunes. Over a period from 2007-2009 there was a 6% increase of sales of pre-recorded music on the internet, where as other means of selling/distributing pre-recorded music saw a considerable decrease year on year over the same period.

The music industry has seen revenue decrease by 4% in 2008 and it is predicted that this trend will likely continue. Although digital distribution of music will ensure the costs involved when selling music will be dramatically lower, this will lead to increased profit margins for legal music sales in the future. Mintel has forecasted that the music market will continue for the next few years until 2013 to continue to decline. The market will see a dramatic fall of 33% of current prices from 2008-2013, 2009 saw the biggest drop which was 16% (Appendix 3). This is all due to a number of contributing factors, the main being that economic conditions are poised to remain uncertain which hampers consumer confidence. (Mintel 2009)

3.2 Music Market Industry Key Points/Findings

The music industry has changed in recent years due to the major rise in downloadable content which is seen as more appropriate due to the rise of the portable media player as well as it being much easier for consumers to get hold of music, by simply downloading. The following will outline some key findings from the Music Industry which Apple iTunes operate within.

* The music market for digital download retailer’s market share will continue to grow with many new entrants looking to move into the market where Apple iTunes dominate by offering digital rights management (DRM) free tracks. (Mintel 2009)

* The Dominance of iTunes will remain until new entrants are established. (Mintel 2009)

Over recent years ever since the download revolution began there has been one major retailer, iTunes. They have been seen as a threat to major music labels, to counter this threat major labels have granter DRM free tracks to many other retailers to encourage completion in the market place. This move looks to have changed the market place in the future by allowing the consumer to have more choice where they choose to purchase/download there music. (Harvey 2009)

3.2 Competitors

It is vitally important when analysing the market which Apple iTunes operate within to outline their competitors. Many different competitors can affect Apples performance within the market, the competitors can be categorised into direct, close, substitute or indirect competitors. It is vitally important to analyse all of these competitors because they will all affect Apple iTunes in some aspect. As you can see from (Appendix 5) it shows all of the possible competitors within the industry, Apple in 2008 had a market share of 80% “Apple the market leader with an

80 per cent market share” (Lynch 2009) which means there are at least 25 firms who are in (Appendix 5) and many other firms battling it out for the remaining 20% of the market. Apple have been able to gain such a large market share with little or no competition due the agreement they had with the major record labels such as Sony/BMG, Vivendi Universal, Warner and EMG up until 2007 Apple were the market leaders and were starting to begin to dictate prices to the record labels which began to make them worried that they had originally given away to much to Apple iTunes. “The record companies realised that Apple had gained dominance of the music on-line delivery industry and could dictate prices to the record companies. As a result, the record companies decided to drop DRM completely and encourage other delivery companies to enter the industry – they needed some competition for Apple.” (Lynch 2009)

Once DRM free music began to be readily available it enticed many new businesses into the market, in the table in (Appendix 5) you can see the many firms who have seen how successful iTunes has been and they would like to gain some of the success which Apple has created for itself with iTunes. Direct competitors are those who offer a very similar service to what iTunes offers firms such as Amazon, HMV Digital, and Tesco Digital are all looking to break the dominance of Apple by offering a similar service but by offering the tracks at much cheaper price, due to them wanting to break into the industry. “While Apple raised prices, competitors cut theirs. Amazon, the online retailer, cut the price of many of its top-selling music downloads on Monday to 29p as it competes for a larger share of the digital music market.” (Ahmed 2009)

Indirect competition, is a service which is completely different to what is offered by iTunes. Sony has started to promote and sell the e-book reader, which is a similar idea to the iPod but instead of music allows users to download books and read them on a screen. “It seems the traditional gift wrapped tome is being trumped by downloads, after Amazon customers bought more e-books than printed books for the first time on Christmas Day. The department store chain John Lewis highlighted the popularity of e-readers this Christmas, reporting a jump in sales of Sony’s eBook readers.” (Allen 2009) The music market when from physical music CD’s etc to digital downloads, now the book market looks to go a similar way by offering the user to read books in a digital format.

5. Micro Environmental Factors

The Micro Environment factors are that what affects an organisation’s immediate area of operations. It affects the decision making and the overall performance of the business; the factors which it looks at are customers, distribution channels and competitors. (Grant 2005)

In this section of the report I will look to adapt the porters five forces model which will then be applied to Apple iTunes, which will allow for analysing the five key forces that shape the industry.

5.1 Porters 5 Forces

Porters five forces analysis helps firms to analyse the strength of competitive threats and is particularly useful to Apple iTunes as it allows them to analyse the competitive environment. The model focuses on the competition and the bargaining power in the supply chain – suppliers through to customers. The model is made up of five forces they are threat of new entrants, bargaining power of buyers, threat of substitutes, bargaining power of suppliers and the industry competitors. (Masterson 2004)

Firstly threat of new entrants this looks at the activities of potential competitors as well as existing competitors within the market place. In 2007 the major record labels began to realise that they had given iTunes too much power over the digital music market and were able to dictate the price they wanted to pay to the major record labels, Apple iTunes was now the biggest firm in the industry with over 80% of the market. “As a result, the record companies decided to drop DRM completely and encourage other delivery companies to enter the industry – they needed some competition for Apple.” (Lynch 2009) DRM free tracks were introduced to create new entrants into the market, which it has succeeded in doing which has meant Apple iTunes now has many major competitors to its dominance. iTunes have the highest market share in the industry at present and due to the increased competition that has developed but they still have not taken away iTunes dominance, new firms who come into the market must be aware that the only way they are going to be successful is if they are innovative. Also to prevent new entrants into the market iTunes has the power to set a price for its downloads at whatever it sees fit due to how successful and respected the Apple brand is, this price may be lower than what new firms into the market may be able to afford which would prevent them from competing in the market.

Next is the bargaining power of Apple iTunes suppliers this will look at the relationships developed between the record labels and how these relationships have changed over time. iTunes suppliers are the record labels such as such as Universal, Sony, Warner Music and EMI, in 2009 they believed that they could make more money out of the industry by making iTunes charge more for the tracks which they sell in there iTunes store. Apple were made to charge 99p for their highest price track, the music labels insisted that it would be in Apple’s interest for future development of the industry as it would mean more revenue to be available to promote new artists and prevent piracy. “Apple iTunes caved in to pressure from the record companies and introduced variable pricing yesterday, raising the top price for a song to 99p.” (Ahmed 2009) Originally before the record industry decided to offer DRM free tracks, iTunes were the only business in the market and they had complete control over the record labels and could charge the prices they wanted. But now due to the increased competition the record labels want to create iTunes now have to listen to their suppliers more, and sometimes take on board what they recommend even if they don’t believe it will have a positive impact on their business.

Thirdly is the bargaining power of the buyers these are customers who use the Apple iTunes service; this will look at what power the customers have over iTunes. iTunes is the largest service online which offers users the ability to download digital music, but customers within the UK are extremely price sensitive especially in this current economic climate where currently the UK is in recession (BBC Business News 2009) When services such as Amazon are offering users the chance to download identical digital music tracks which are DRM free for 29p compared to iTunes 99p consumers may wish to use Amazons service rather than iTunes. “Amazon, the online retailer, cut the price of many of its top-selling music downloads on Monday to 29p as it competes for a larger share of the digital music market.” (Ahmed 2009)

Opportunities are developments in the external environment which iTunes could look to adapt into their business to improve the service which they offer to their customers. Technology is ever developing and Apple iTunes continually need to be aware of the developments so they are early adopters and can implement the changes into the services they offer their customers. Recently iTunes has developed new features such as television episodes, video and applications which have been added to the iTunes service. But the next opportunity which they could look to adopt is the potential to read books, magazines and newspapers on say for example the latest iPod. Apple is believed to be looking into this, following the market leaders Sony into this market. “There are electronic reading devices in existence already, such as Sony’s e-Reader and Amazon’s Kindle. But, publishers hope the unquestioned design talents of Apple will ensure that its latest product is the vehicle that enables them to transform their business models. After all, the iPod has converted millions to the idea of paying to download songs and, to a degree, has revived the music industry, becoming the world’s largest music retailer in the process.” (Burrell 2010)

Threats are something that is going on in Apple iTunes external environment which is likely to cause them potential future problems. Apple iTunes have been hit by the increasing problem of illegal downloading, which had the effect of devaluing the music for an entire generation of youth. It is estimated that over 95% of all music downloaded is done via illegal methods, which means the music industry and services such as iTunes lose out on the revenue gained by these potential extra sales. “Despite strong growth in digital music sales, the industry body for world music estimated that more than 95% of downloaded music was not paid for.” (Mostrous 2010)

7. Future Success for Apple iTunes

There are many factors involved when discussing if there is potential for future success for Apple iTunes, the report above has look at the industry/market which Apple iTunes operate within and then used that analysis to look at both the micro and macro environment using various models to analyse the prospect of future success for Apple iTunes.

There are many factors involved when discussing if there is potential for future success for Apple iTunes, in January 2009 the BPI predicted that the UK spend over £600 million on digital music in 2012. (Mintel 2009) This should allow Apple iTunes to see that there is still some potential growth within the market even though Apple are worried that they may be close to saturation within the market, due to the sales of the iPod not increasing from 2008 to 2009. Continually there seems to be growth within the industry from 2004-2009 at a massive rate of 340%, (Appendix 2) this rate increase over that period is not going to be sustainable into the future in the current market place due the increased competition and the increased level of illegal downloading activity. iTunes should be aware of this, but if there are more and more successful artists being introduced into the industry there is still potential for more growth in the market for Apple iTunes.

DRM free tracks introduced into the market in 2007 meant that Apple had gone from being the only major player in the market, to an industry which now has hundreds of competitors. This meant consumers had much more choice of where they should purchase there digital music from. “The record companies realised that Apple had gained dominance of the music on-line delivery industry and could dictate prices to the record companies. As a result, the record companies decided to drop DRM completely and encourage other delivery companies to enter the industry – they needed some competition for Apple.” (Lynch 2009) this meant more and more firms entered the market making the industry very competitive with many firms deciding they want similar success to Apple iTunes by making the price they offered considerably less than iTunes to gain a bigger market share much quickly in the case of Amazon who are now the second most competitive player in the digital download market. “While Apple raised prices, competitors cut theirs. Amazon, the online retailer, cut the price of many of its top-selling music downloads on Monday to 29p as it competes for a larger share of the digital music market.” (Ahmed 2009) Companies such as Amazon are now gaining a larger market share due to price which is what UK consumers look for generally.

Macro economic factors such as the UK being in a recession has led to many customers within the UK not being able to afford to download music at all, so services such as Spotify have become more popular they are a free service which is funded by advertisements within the product they offer to customers. “New services like Spotify give us hope for the future, but physical sales continue to fall and even digital services struggle to compete with free illegal music.” (Mostrous 2010) But still the biggest factor which is effecting the future of iTunes is not its competitors but the process of Illegal downloading of music, 95% of music downloaded is illegal and consumers within the UK favour illegal downloads due to the lack of legislation that is in place within the UK. “Despite strong growth in digital music sales, the industry body for world music estimated that more than 95% of downloaded music was not paid for.” (Mostrous 2010)

Considering all of the above points and analysis covered in the report I believe there is still future success for Apple iTunes, as they are the market leaders and continue to have a successful brand which customers within the UK trust and see a successful. For Apple iTunes to be successful they continually need to be innovative which they are well renowned for being in the industry, they need to introduce new products and continue to develop iTunes in line with what competitors are doing. Although there are many factors currently in the industry that make the prospect for Apple iTunes not very good such as the continued growth of illegal downloads and also competitors such as Spotify who are continually growing offering a free service to many UK customers, I still believe that there is a future for Apple iTunes within the UK market for digital downloads.

References/ Bibliography

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Appendices

Appendix 1: Music market sales and percentage share, by distribution channel: 07-09 (Mintel 2009)

Appendix 2: Music market sales, by music format: 2004-09 (Mintel 2009)

Appendix 3: Music market, at current and constant 2003 prices: 03-13. (Mintel 2009)

Appendix 4: Industry Life Cycle for Apple iTunes

Appendix 5: iTunes Competition – Direct, Close, Substitute and Indirect