HBS-iPod-vs-Cell-Phone-(9-707-419)

DoNotC[e-mail]617-783-7860.9-707-419AUGUST2,2006________________________________________________________________________________________________________________ProfessorDavidB.YoffieandTravisD.Merrill(MBA2006)preparedthiscasewithResearchAssociateMichaelSlind.Thiscasedrawsprimarilyfrompublishedsources,alongwithselectedconfidentialinterviews.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2006PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.DAVIDB.YOFFIETRAVISD.MERRILLiPodvs.CellPhone:AMobileMusicRevolution?PhonesareonthevergeofbecomingcomputersthatcandoanythingadesktopPCcan,onlyyougettocarryitinyourpocket.AllyouneedtodoisincreasethememorycapacityofmobilephonessotheycanholdasmanysongsasaniPodandthemobilewillbecomethedeviceofchoice.It’snotgoingtohappenovernight,andtheiPodandmobilewillco-existforawhile.Butwe’reatatippingpointwherewe’llstartseeingthemobiletakeover.—RalphSimon,PresidentofMobileEntertainmentForum,2005OnSeptember7,2005,Apple,Motorola,andCingularWirelessannouncedthelaunchoftheMotorolaROKR,thefirstmobilephonethatofferedcompatibilitywithApple’shighlytoutediTunesmusicservice.Atfirstglance,thisteamingofthreeindustryleadersthreatenedtoshutcompetitorsoutofthenewfrontierofmobilemusic.ByApril2006,Applehadshipped50millioniPoddigitalmusicplayerssincetheproductlinedebutedin2001,andhadrecentlysolditsone-billionthsongthroughiTunes.1Furthermore,thereleaseoftheROKRalignedApplewiththeleadingNorthAmericanplayersinbothmobilephonemanufacturing(Motorola,witha36.4%marketshare)andwirelessservice(Cingular,witha32%marketshare).2,3Despitemediahype,however,salesoftheROKRfellfarbelowexpectations.4Criticspannedthedeviceforitshighprice($250),itslowmemorycapacity,anditsincompatibilitywithnon-iTunesservices.Accordingtoreports,thecapacitylimitation—theROKRstoredjust100songs—grewoutApple’sfearofiPodcannibalization.5Thisunsuccessfulmarriageofcorporategiantscreatedmorequestionsthananswersabouttheemergingfieldofmobilemusic,whichpromisedtoturnthemobilephoneintothemusicdeviceofchoice.AlthoughtheiPodaccountedformorethanhalfoftherapidlygrowingmarketforportablemusicplayers(projectedtogrowata33%CAGRto165millionunitsby2010),theconvergencebetweenhandsetsandmusicplayersthreatenedtoundermineApple’scompetitiveposition.6Aquarteroftheworld’spopulationalreadyownedamobilephone,andoneanalystpredictedthatby2008,halfofthe860millioncellphonessoldworldwidewouldbeabletostoreandplaysongs,upfrom8%in2005.7LeadingU.S.mobileoperators(alsoreferredtoascarriers)salivatedatthispotentiallymassiveopportunity.MobilecarriersCingular,Sprint-Nextel,andVerizonWirelesshadeachlaunchedmobilemusicservicesinlate2005,butnoneofthoseserviceshadmadeasignificantimpactonthebroaderdigitalmusicmarketwithinitsfirstsixmonthsofoperation.Thecarriersfacednaggingstrategicquestionswithrespecttotheirapproachtoindustrypartnerships,theirunderlyingtechnologyplatforms,andtheirpricingstrategies.Inmid-2006,industryexpertscontinuedtodebatewhethermobileoperatorswouldbeabletotoppleApplefromitsdominantpositionwithinthedigitalmusicecosystem.ManyDoNotC[e-mail]:AMobileMusicRevolution?2believedthatcarriers,bydevelopingmobilemusicasamajornewmarket,wouldabletoofferatrulysuperiorvalueproposition.OthersarguedthatApple,buildingonitshistoryofinnovationandstrategicnimbleness,wouldmeetthischallengeandretainitsleadership.8(SeeExhibit1—DigitalMusicEcosystem.)Againstthatbackdrop,technologygiantssuchasMicrosoftandGooglewerealsoexploringstrategiestoaddressthedigitalmusicindustry.MicrosofthadalreadymadeitspresencefeltinthatindustrythroughitsWindowsMediaplatformanditsMSNMusicstore,andthereleaseofitslong-rumorediPodcompetitorwasimminent.NowMicrosofthadtodecidewhetherandhowitshouldleveragethoseandotherassets—suchasitsWindowsMobileOS—toexpandintomobilemusic.Google,overtheprioryear,hadexpandeditsscopeastheleadingInternetsearchenginebyaggressivelyenteringadjacentbusinesses,andobserversspeculatedthatitwoulduseitsever-expandingonlinepropertiesanditsstrongadvertiserrelationshipstolaunchacompellingdigitalmusicoffer.Inadditiontothestrategicquestionsthateachofthesemajorplayersfaced,broaderindustry-levelquestionsloomed.HadApplealreadycapturedthedigitalmusicmarket,ordidmobilemusicrepresentanew,potentiallyrevolutionaryopportunity?Inlightofrelativelyslowconsumeradoptiontodate,whatwouldittakeformobilemusictocaptivateacriticalmassofconsumers?Whichplayers,giventheirverydi