Wake-Up Call for the iPod
Apple's Hot Digital PlayerFaces Holiday CompetitionFrom New Wave of Handsets
By LI YUANWSJ, WSJ, November 30, 2006; Page B1

In our last blog posting, we talked about the challenge of a new comer—Microsoft’s Zune—to penetrate against a strong incumbent—Apple’s iPod. Here is another twist to this fabulous story that is evolving right in front of us. Apple’s iPod, clearly the category leader of digital, portable music, is confronting a new competitor that offers potential advantage that they will have to meet.

The following is an expert from the WSJ that describes the potential power of “Integration Innovation” – integrating digital music with the cell phone. We talked about this form of innovation in our November Exec Ed class that can lead to a fundamental shift in any industry when the integrated parts have significant new value vs. the components taken separately (examples we used were SAP and Microsoft’ Windows Operating System). We discussed the importance of categorizing different types of innovation (we defined 10) as a way of generating new ideas or concepts. The fundamental driver is creating competitive separation.

Now the article...

Wireless carriers are offering a huge array of gadgets that combine both functions, with a variety of shapes and sizes and growing music libraries. The new dual-function handsets are often low-priced, and sometimes free, with a two-year service contract.

Tim Woolsey, a home-schooled 10th-grade student in Katy, Texas, for example, renewed his contract with Cingular so he could get a Sony Ericsson Walkman phone at the reduced price of $100. He's planning on transferring about 400 of his favorite songs to it from the iPod he got last Christmas. "I carry my phone with me wherever I go," he says. "But I don't always have my iPod with me." (ENHANCING THE CUSTOMER EXPERIENCE – CONVENIENCE)

Indeed, the rollout of the new phones sets the stage for an epic showdown between handset manufacturers and Apple Computer Inc., whose iPod dominates the digital-music player market. Apple is rumored to be working on a combination music player and phone to compete with such devices. Earlier this month, a report in The Commercial Times in Taipei said that Apple has ordered 12 million iPod phones from Hon Hai Precision Industry Co., a Taiwan-based manufacturer that makes iPods. An Apple spokesman says the company doesn't comment on rumors and speculation.

In any case, the growth potential of the music phone market makes it hard for Apple to ignore. While Apple has sold more than 60 million iPods globally, there are over two billion cell phone users in the world, and analysts believe that close to one billion cell phones will be shipped in 2006 alone.

"The growth rate of music phones will be much faster than iPod mainly because consumers will always need a phone, and it only takes them a short period of time to explore the features," says Suzanne Cross, head of product marketing in North America for Sony Ericsson.

Cellphones that double as music players are already posting strong sales around the world. Sony Ericsson, a joint venture between Telefon AB L.M. Ericsson and Sony Corp., says that it has sold 15.5 million Walkman music phones in a 14-month period ended in September. Motorola Inc. said in its third quarter earnings call that it shipped 15 million high-quality music phones in the past year. Nokia Corp., the world's largest handset maker, says that it is aiming to sell 80 million music phones in 2006, making the company the world's largest manufacturer of digital music-players.

Some phones, such as the three Cingular phones from Motorola, can tap into the iTunes music store, which features 3.5 million tracks (BUILDING THE PLATFORM). Phone companies are bulking up their offerings as well. Sprint Music Store offers one million songs and Verizon's proprietary music service called V Cast Music has 1.5 million songs. Cingular has partnerships with some of the biggest online music services, including Napster Inc., Yahoo Inc.'s Yahoo Music and eMusic, which have 1.4 million to more than two million songs each. Cingular's customers can subscribe to those services and use them on their phones. Sprint Nextel Corp. says that it has sold more than eight million songs from Sprint Music Store since November 2005; at $2.50 per download, users get one copy on the phone, another on PC. Verizon Wireless charges $1.99 a song for dual delivery to both phones and PCs. Its customers can also pay 99 cents a song online, and then load them to their phones for free. ……….

Verizon Wireless and Cingular even offer a feature that will let a user hold his or her phone up to a speaker playing a song and then match the song against their music database. If the song is available, it will offer the user the option to buy the song by clicking on a link. (ENHANCING THE CUSTOMER EXPERIENCE).

You can see the challenge Apples has even from their position of strength. Consider the challenge Microsoft faces as a new comer with no fundamental difference vs. the iPod. Consider the strength of a platform that can bring consumers access to phones, e-mails, the internet, music, video, etc. all in one device!