Key Factors Behind the Success of iTunes

In the Harvard Business School case, Apple Inc. in 2010, Yoffie and Kim provide an evolutionary account of Apple’s transformation from a PC manufacturer to a mobile device company.  Apple enjoyed success as the industry leader in the late 1970’s and early 1980’s with the Apple II, but IBM’s entrance into the PC market in 1981 and their “open” system strategy disrupted Apple’s proprietary approach.  Forced out in 1985, a profound chain of events led to Steve Jobs returning as Apple’s CEO in 1997 with a mission to change Apple from a tired, tarnished company to one of a cultural force.

In 2001, Steve Jobs presented a vision he called “digital hub,” which targeted consumers entrenched in a new digital lifestyle.  This vision generated game changing innovation.  For instance, a new Mac strategy positioned Apple as the fourth largest PC vendor in the U.S. market by the end of 2009.  Others included the iPod, which held over 70% of the U.S MP3 market by 2010; the iPhone, Time magazine’s “Invention of the Year” in 2007; and the iPad, which redefined the tablet industry with its launch in 2010.  Arguably, however, iTunes is the innovation spawned by the digital hub vision most responsible for Apple’s growth over the last decade.  Key success factors behind the iTunes platform strategy were Apple’s first-mover advantage, an unparalleled user experience, digital rights management, the presence of the network effect –the effect one consumer of a good or service has on the value of that product for another consumer- and consumer lock-in.

The iTunes Music Store launched in 2003, making it the first site to offer music downloads legally.  On the wake of Napster’s shutdown on 2002, Apple embraced the music industry concerns around copyright infringement and developed a proprietary digital rights management (DRM) system that limited the number of computers that could play a downloaded song.  Although a proprietary DRM meant that no competing MP3 player could play iTunes protected songs, consumers accepted the condition because of the differentiating experience iTunes provided.

Consistent with Apple’s style, the iTunes interface was sexy and intuitive, and the iTunes desktop seamlessly synchronized music between a user’s desktop, their iPod, and the iTunes Music Store.  The Apple experience far exceeded any competitive offering, fueling a multi-dimensional network effect.  The increased use of iTunes created an increase in value of the iPod and vice versa.  An increased usage in iTunes and the iPod increased the value of the Apple digital platform in general, specifically the complimentary Macintosh.  The network effect gave Jobs the leverage needed to coax music executives into supporting the proprietary DRM, which was the start of consumer lock-in.

Although Amazon, Napster “reborn”, and Walmart started to offer individual song downloads at competitive prices to iTunes and handset manufactures are bundling unlimited music service, Apple holds a strong competitive advantage –consumers cannot afford to switch.  Ironically, or brilliantly, the same horizontal growth strategy that nearly bankrupted the company in the early years is now a disrupter and competitive advantage for them today, guarding them from the innovator’s dilemma.