Taipanway’s Weblog

So will the iTunes phone be picked up by a carrier? For Apple’s sake I hope not! If a carrier picks up the phone then Apple is just another company fighting for market share and there are limits to what they can do on a global stage. Additionally, this does not effect their global position. Yes, it opens an additional product line but, how big can it REALLY be. A million units? 2 million units? 5 million units? There is a cap and with 720 million handsets predicted to be sold this year, it is a drop in the bucket. So if I am Apple, here is what I do:

I sell the iTunes phone direct to the consumer. I sell it through iTunes, on their site, in their stores, etc.. yes, the device will be pricey BUT Apple lovers are relatively price insensitive. They buy because it is Apple and they buy because it ‘works’. I believe going direct, Apple can see the same amount of units (maybe a little less) but significant numbers nonetheless. With a user base, a rabid user base I might add, Apple can back into an MVNO. An Apple MVNO that begins with the device and continues to a service- extends Apples reach and business model to a long term, profitable service business.

Virgin Mobile for example, has the highest ARPU in the industry as an MVNO and they are going like gangbusters. An MVNO can cost a lot of money to get started - Earthlink and SK Telecom have hooked up and contributed a reported 440 million dollars to get started. Apple, by having a user base in advance can get into this business at a fraction. They can get into a very profitable MVNO market, extend the brand and deliver long term value to both the customer and their shareholders.

I am one of the few who own an iRiver MP3 player rather than an iPod. I bought it because I did not want to be a PC user in Apple’s little world. Yes, iTunes is slick and yes, the iPod is great but I have multiple PCs. I will get the new X-Box, probably a different MP3 player at a later date, and most of my music is in WMA. Now, the dilemma for me, is that as much as I like the current crop of Apple products, I am not convinced they can stay dominant and I like flexibility. Apple has created a TREMENDOUS black box environment, however, in a white box world what is someone like me to do..

Much has been written about the Apple Store. It has been said that the Apple Store is the new record store. I call bullshit. I recently went to an Apple Store and it occurred to me that there is only so much a company can do to innovate its product line on a regular basis. Foot traffic is driven to see what is new and Apple can not keep it up. Yes, they can come out with a bigger monitor or another ‘new’ iPod but that is quarterly, not weekly.

Apple has sold a huge number of iPods on a relative basis, but on a global basis, as a consumer device, they have not made a dent. The iTunes store is BY FAR the market leader, but Yahoo - and the rest are putting tremendous pressure on the company and their margins going forward

And now the big one which Bill Gates pointed out recently: Apple is not licensing their Fairplay DRM. Apple is making a critical mistake in that they are not creating a value network where anyone gives a damn about their longer term viability. Microsoft on the other hand, has dozens of companies who are using their DRM, their servers, their Janus technology etc.. Now, it is irrelevant if the MS platform and technology is not up to snuff. What is relevant - is that Microsoft has created a network of companies that are insentivized for overall success. This is good!

There is much movement in the digital music space and the reality is that it continues to look bad for the record industry.  To be clear there is a fundamental difference between the record industry and the music industry.  The record industry revolves around the selling of music as CDs, vinyl, digital, ringtones – anything that works off the master recording.  This business, even with all of their problems, is run by the majors.  The music industry of course is based on the master recordings but also includes concerts, merchandising, branding, etc… With technology, the music industry is strong.  People listen to more music then ever before and there is every opportunity in the world for a garage band to get exposure.  A garage band of course is still not going to go platinum, but they can build a fan base and make a good living without the need for a major.  A number of recent announcements and one confidential bus. plan have come across my desk that have even further shaken my perspective of the record industry having any future.

1)  Yahoo going digital:  Yahoo makes money from advertisers.  The industry is booming and Yahoo is riding high with the about 384 million unique users a month.  They recently announced a focus on digital music sales (of course it was expected based on their launch.com property, the musicmatch acquisition, the recent expansion of their LA office and of course they go back and forth with AOL as the top music destination).  This would seem to be good for the record industry – it is the first major company to really push digital music.  HOWEVER, Yahoo is pushing the price for unlimited music consumption to $4.99 INCLUDING mobile transport (on a year pre-pay).  Without getting into the details, Yahoo is taking a loss because they pay out more in royalties then they take in for subscriber revenue.  This can have to outcomes: 1) Yahoo will get as many users as they can and then up the price to be competitive with others ($9.95+ a month PLUS mobile transport)  OR 2) they will supplement their income through community building and advertising.  Since Yahoo derives much of their revenue from advertising, option 2 is more likely the end goal. 

2)  X-Box: When I was at IDJ it was big news that EA started their ‘music label’ – EA Trax.  The concept was that gamers are music listeners and that you can catapult a games experience with great music.  The fact of the matter is that this has sort of worked – though true gamers get bored of a soundtrack very quickly because they play for hours and hours (See grand theft auto’s box set created with Interscope as an example).  Record companies made money for music royalties and utilized the free/paid promotion.  The X-Box 360 (though the original X-Box could do this in a limited way, though it was not touted) however is built with the concept that a user can rip their music to the hard drive, connect to an online service or stream music from their home network, displacing the value network of music inclusion in games. 

3) Xingtone – of course I am biased BUT, a ringtone is just another format of a digital piece of content.  With Xingtone (and others) a user can take their content and send it to their phone as a ringtone. 

4) Confidential plan:  Someone sent me a plan that basically and I need to be vague – allows a costumer to save music that they receive (for free/ part of their subscription) to cable or satellite TV to their set-top box (like Tivo for music) and then play it, move it to their computer or to a MP3 type device.

If you line up the above and you cross reference it where the industry believe to have growth in front of them – it spells disaster for the record industry.  Please do not think I am doomsayer.  My point is that the cards continue to get stacked against the majors and the recording industry at large.  For them to have a life beyond CDs someone better figure out that their current business has no chance of long term greatness and true change must happen soon.  But then again, if the people at the labels do not get it by now, will they ever?

The below (read first) is a major issue in the growth and the use of the mobile market. Never before has there been such an easy way to spend money without parental consent. Pay-per-view has codes that can be locked, prepaid cards can have limits set. In general, parents have some form of control. Of course, it is unfortunate that there are a number of companies that take advantage of this direct billing but the reality is that there are a couple of major issues that will emerge because of this. (if you have not read my last post, now is a good time to read the market analysis I prepared)

What this issue suggests to me, is that there must be a separation of church and state. Carriers provide access. Content owners provide media. Transaction companies provide billing (and yes the carriers can participate in this as well). These three categories of the business (bandwidth, billing, retail) are not linear and in the long run there will gray lines rather then black lines creating the delta. However, it is imperative that the market does not allow the carriers to create control mechanisms by inflating an issue that is ultimately created by the value network they built…. All the information is there, it is just a matter of how you draw conclusions.

{The ringtone rush could hit an unexpected roadblock, with annoyed parents finally making some noise. Blaring ringtones have always drawn complaints from co-workers, commuters, and others wary of noise pollution. But big bills are also causing concern, and more parents starting to reign in the spending habits of their teenagers while expressing concern over misleading charges. Most recently, two parents in California brought suit against Cingular Wireless, T-Mobile USA and Jamster, alleging that their child was deceived into buying an expensive monthly ringtone package. That has prompted several carriers to prepare codes of conduct of third-party mobile content suppliers, with Cingular already delivering a set of rules to its vendors. The new rulebook will help to clarify just what the consumer is purchasing online. With many teenagers racking up shockingly large monthly ringtone bills.– CL: This just doesn’t fit in For carriers, a code of conduct will also help to keep customer complaints at bay, while protecting the integrity of its billing infrastructure. But is a larger ringtone backlash brewing? That possibility seems distant at the moment, though one recent IDC study indicates that nearly 20% of mobile consumers are rejecting a growing list of extras, preferring to be "minimalists" while focusing on comfort, simplicity, and no frills.}

A little while ago I wrote a brief defining the drivers of the mobile market.  Rather then trying to cut it down to make it blogable; I have decided to post it in its unedited form. 

Enjoy!

Download market_analysis.doc