This paper examines the information systems strategies of Apple, Inc., with a particular focus on the company's ICT and e-commerce infrastructure built around iTunes and the iPod. Beginning with Apple's broader business strategy — including its pivot away from direct PC competition — the paper traces how Steve Jobs leveraged design simplicity, digital rights management, and music industry partnerships to redefine the multimedia market. The analysis covers operational implications of the iPod/iTunes ecosystem, Apple's server farm architecture, security measures, and pre-approval e-commerce systems, concluding with an assessment of how Apple's end-to-end control over hardware and software created durable competitive advantages over rivals such as Microsoft and Walmart.
Apple's success can be demonstrated in its improved market share, strengthened financial condition, and stellar growth over the ten years since Steve Jobs returned and took the helm. An important indicator of Apple's transformation is that Jobs dropped "Computer" from the company's name with the introduction of the iPhone.
Apple's control over the entire customer experience — including hardware, software, and e-commerce — had previously been viewed as a detriment during the period when Apple competed head-on against the WinTel near-monopoly. Now, with the merging of video, audio, and other media with the personal computer, and the opportunities for ubiquitous access afforded by iPods, phones, and other devices, Apple's tight control over hardware and software has become a competitive advantage.
This paper explores the sources of Apple's competitive advantage, with particular concentration on Apple's efforts with the iPod and iTunes. Apple's IT infrastructure, largely built over the preceding five years, had itself become an additional source of competitive advantage. The paper begins with an overall summary of Apple's recent business strategies and analyses how Apple changed its tactics to correspond to new and evolving market conditions.
This paper was written at a crossroads for Apple — one of many. A clear signal of the company's strategic shift was its name change from "Apple Computer" to "Apple, Inc.," marking its move from the classical personal computer market to a multimedia entertainment concern (Engadget 2007). This name change represents a logical conclusion to the changes put in place since the introduction of iTunes, followed by the ubiquitous iPod.
Apple can be said to have lost the PC-Macintosh battle in the mid-1990s. At that time, the Macintosh accounted for less than 8% of the overall PC market (Polson 2007), and by 2001 that share had declined to less than 3%. Steve Jobs, who had rejoined Apple in 1996 and assumed the CEO position in 1997, embarked on a plan to redefine Apple's market in a way that took the company out of head-to-head competition with the "Wintel" (Windows + Intel) platform and would redefine what computers were and how they would be used. The first steps were to update the Macintosh platform to make it more media-friendly and to differentiate it from the relatively disjointed structure of existing Wintel offerings.
The second major move was to introduce iTunes in 2003. At the time, iTunes appeared to be yet another music jukebox — albeit with its own digital rights management system called "Fairplay" — and offered a novel way to buy music (Borland 2003). Competitors in the Wintel universe included Walmart, Rhapsody, and Microsoft itself. The iTunes system differentiated itself in four key ways:
First, it offered a much broader library than any other legal MP3 music download service. Second, it provided a seamless interface with the computer — initially the Mac, then the PC, and then the iPod. Third, it introduced a new music player, the iPod, which proved enormously attractive to the market and proceeded to capture approximately 80% of the total music download business worldwide. Fourth, by offering music downloads for 99 cents (U.S.) per song and giving most of the proceeds to the music industry, Jobs was able to offer lower-cost music while redefining the business model to focus on player profitability rather than download profitability.
Apple's new iMac (2000) did not include CD-burning software, nor did it have a jukebox software package comparable to the MP3 players available on WinTel computers. Apple had at that time reasonably bet on DVD playing and recording for home movies. The growing success of MP3 players, however, required a response. By January 2001, Apple introduced the first version of iTunes — primarily as a catch-up to the already-existing MP3 player phenomenon (Wilcox 2003).
It was this initial — perhaps passive — response to competitive moves that later resulted in the expansion of iTunes and the introduction of the iPod. The combined introduction of both products in 2003 cemented Apple's new multimedia direction. As one analysis noted:
"Apple used no fewer than seven types of innovation. They included networking (a novel agreement among music companies to sell their songs online), business model (songs sold for a buck each online), and branding (how cool are those white ear buds and wires?). Consumers love the ease and feel of the iPod, but it is the simplicity of the iTunes software platform that turned a great MP3 player into a revenue-gushing phenomenon" (BusinessWeek 2006).
At the time, the recorded music industry was dominated by five major record labels. These labels felt threatened by the loss of revenue through "illegal" downloads via global peer-to-peer sites such as Kazaa and Limewire. Jobs's offer of a DRM software system that could protect their copyrights and monetize downloads appeared to be a lifeline for an industry in trouble.
Jobs's negotiating skills and industry credibility came at a critical moment. By locking in the music libraries of the top recording companies, Jobs ensured that the "tipping point" (Gladwell 2000) had been achieved — assembling enough music catalog to meet marketplace demand.
The relative openness of the WinTel platform was also the source of much of its complexity. Music downloads — whether legal or illegal — proved manageable for relatively sophisticated computer users, but did not work well for the large, untapped market of less-technical customers who simply wanted to choose and listen to music on easy-to-use players. Apple's end-to-end solution made all operations straightforward and transparent, even for non-computer users.
Jobs was intimately involved in the design of both iTunes and the iPod. He insisted on making the products intuitive and easy for non-computer users — an all-in-one package. This design philosophy had been a hallmark of Apple since the introduction of the Macintosh:
"First and foremost, the product was elegantly designed in classic Apple fashion. They did product design from the outside in." — David Carey, president of Portelligent (Sherman 2002).
Central to Apple's strategy was control over the entire process. This principle extended throughout the company's marketing and transaction strategies, including its ICT and e-commerce approaches.
iTunes and iPod are joined in a seamless whole. The iTunes experience is free, intuitive, and easy to use even for the novice computer user. As with the design of the iPod, the iTunes interface was developed "from the outside in" — meaning the consumer experience was defined first, and the software and user interfaces were designed to support it.
The key elements of iTunes' appeal included a series of capabilities that were absent or poorly implemented in Windows Media Player (WMP) and comparable products. First, because Apple's DRM software was closely controlled by Apple itself, it rarely intruded on the download or playback experience. The WMP environment, by contrast, frequently interrupted users during both download and subsequent playback. This difference can be attributed in part to less hardware-software integration in the WinTel environment, and in part to a less consumer-friendly DRM design.
Although iTunes' first iteration was heavily criticized for its proprietary nature, that proprietary approach produced operational simplicity in Apple's subsequent product rollouts:
"The M4P strategy allowed Apple to combine DRM and proprietary playback in a way that made it possible to reduce bothersome after-download DRM checks, which still plague WMP-based MP3 players" (Best 2005).
The iPod is automatically recognized by the iTunes software, and vice versa. Once the iPod is inserted into its docking station, a new icon opens in iTunes and the handshake and sync are handled in the background, transparent to the user. Similarly, the iPod downloads music as well as any software updates automatically. Note that the iPod is linked to only one iTunes installation at a time — part of the DRM architecture that ensures the device is not used to distribute music to multiple users.
iTunes must function as an internet-based application. When the customer is online, the iTunes software is automatically connected to the iTunes Store in a way that ensures the user is kept up-to-date. The store's cover page ensures that any special promotions are immediately visible to the user.
From an operational standpoint, this requires back-end intelligent customer recognition software — similar to that pioneered by Amazon.com (Moser 2007). The customer's choices, demographics, and other data are gathered and used to suggest additional purchases the customer may enjoy.
Jobs insisted that the entire customer experience be stylish, easy, and transparent. This extended to iPod packaging: simple, elegant, and ready to use. While an instruction manual is included, everything is handled on the iPod itself, with only a one-page quick-start card needed to get even the most inexperienced users downloading music.
From an operational standpoint, every element of the iPod must pass a consumer usability test, and the device's inner workings must remain hidden behind three functional principles: the iPod software automatically connects with iTunes on the PC or Mac; the software automatically updates without customer interaction; and iTunes automatically updates the iPod in a way that is transparent to the user.
Record industry managers would not have agreed to the iTunes/iPod strategy without solid assurances that Apple would control all elements of the consumer purchase and download processes. Apple notifies the digital rights issuer every time a transaction takes place, in addition to providing periodic royalty statements. While this architecture is more operationally demanding than simply mailing monthly statements and a royalties check, it appeals to the recording industry, which has always been concerned about prompt payment for use of its copyrighted material.
"Profit model and Jobs's simplicity philosophy"
"Server farms, security, and purchase workflows"
"End-to-end control as durable market advantage"
Sherman, E. "Inside the Apple iPod Design Triumph." Electronics Design Chain, Summer 2002.
Toth, P.B. "Digital Rights Management." Indicare Monitor, 2004.
Warrene, B. "Apple's Whole-Earth iPod Movement." MacNews World, May 21, 2004.
Wilcox, J. "The iTunes-iPod Phenomenon." MacNews World, June 10, 2003.
Wingfield, N. "Hit the Button: Steve Jobs has his Finger on it." Wall Street Journal, July 15, 2007.
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