Introduction
Earlier than expected, Apple started the European version of its successful iTunes musicstore on June 15. In the US, Apple has been able to show the music industry that legal music downloading can be a successful business - if only consumers are offered attractive services. In its first year of existence, iTunes sold 70 million songs. According to Apple, this corresponds to a market share of 70% of the total online music business worldwide. The question is now, if Apple will be able to repeat its US success in Europe and become the long-term market leader and what this would mean for European consumers.

The starting position for Apple in Europe today is significantly different from that in the US one and a half year ago: While iTunes was the first major legal online music store in the US, Apple is entering an already very competitive online music market in Europe. Each month, new online music stores are opening their virtual doors ranging from Napster 2.0 to AOL. The largest European music platform OD2 already has a large network of distribution partners with strong brand names such as Coca Cola, MTV or Microsoft‚s msn Music Club. Other providers such as Dell, Yahoo, Amazon or Sony are planning to start their own music services this year. This means that Apple will have to compete with some of the strongest brand names in Europe. But how is Apple going to differentiate itself from its competitors in Europe?


What are Apple‚s competitive advantages?
  • Surely not over the price. Price competition can be expected to become ruinous in Europe, because the large number of online music stores is not only competing against each other but also against the even larger number of illegal – and costless – music offerings on the Internet.
  • iTunes‚ large number of features and services, e.g. very intelligent search and archiving functionalities, sampling and playlists are an important short-term advantage, but can in the medium-term be copied by competitors.
  • The same is true for Apple‚s comparatively relaxed DRM rules, which allow users to burn songs onto an unlimited number of CDs and use them on up to five computers. In the medium-term, competition should result in similar usage restrictions across all online music offerings.
  • Apple‚s broad portfolio of more than 700,000 tracks is often cited as its main competitive advantage. In the US, Apple was not only able to offer music from all five major labels, but also from more than 450 independent labels. In Europe, however, negotiations with some of the most important „indies“ have failed to-date. Sony Connect, probably iTunes‚ foremost competitor, is expected to open its European online music store at the beginning of July with about 500,000 songs. It will be intriguing to see, if Connect will better be able to include the independent labels into its offering.

Apple is offering a seamlessly integrated system
Despite the mentioned threats, there is one strong argument why Apple has a good chance of being successful in Europe even in the long-term: Apple is not just selling music, but a very intelligent and perfectly integrated system of software, hardware and music services. Within this system, less profitable areas of business can be subsidised by the more lucrative ones. And the integrated nature of the system makes it very attractive to consumers.

The most profitable area of business for Apple is its iPod portable music player. Until the beginning of this year, Apple had sold more than two million iPods. Not only in the US but also in Europe the iPod has become an absolute must-have for trendy music-fans. Music platforms that cannot subsidise their music stores with profits from device sales will have a hard time, particularly against the backdrop of thin margins to be expected in the downloading business.

In this respect, so far only Sony can be regarded as a serious competitor for Apple, offering both, a music platform and very stylish music players. However, Apple seems to have the edge on Sony here. First, because even Sony‚s hip Walkman devices, do not reach the cult status of the iPod. And, second, because Apple has the proven ability to offer truly integrated systems. The seamless integration of the iPod with the iTunes software, the store, and the various services and features is Apple‚s most crucial competitive advantage. iTunes users can, for example, easily, quickly and without any problems, syncrhonise large music archives across various devices; convert different music formats (not only MP3s but also unprotected Microsoft Windows Media Audio files); import music from CDs; play, publish and share playlists (among others charts of more than 1000 radio stations); and connect their home stereo wirelessly with the iTunes music store or the iPod over a new connector device, called AirPortExpress.

What will be the effect for consumers?
While in the PC business, bug-plagued systems and complicated use are broadly accepted flaws (due to the lack of choice), ease of use and perfect functionality are imperative in the consumer electronics business. Apple has understood this necessity and seems well positioned with its integrated „music system“ to serve consumers‚ demands.

This competitive threat will on the one hand be beneficial to European consumers since it will force competitors to offer high-quality services at low prices. It will probably also foster competition on usage rules, as the flexibility of DRM rules could become a criteria of choice for consumer – just like price or quality.

The question remains to be discussed though, if a strong market position of Apple will be detrimental to consumer interests, e.g. by hindering standardisation efforts. More compatibility among online stores, music formats and music players would increase transparency and ease of use for consumers. If Apple‚s Fairplay DRM becomes a de- facto standard due to Apple‚s strong market position and the company sticks to its policy of not licensing its Fairplay DRM system (with sales of the iPod in mind) less rather than more competition could be the result in the long term.

Bottom line
The integrity of Apple's music systems is a strong argument for a long-term success of iTunes in Europe. However, it is yet unclear how a strong market position of iTunes would affect European consumers. Much will depend on if and how Apple will make its system compatible with other digital music offerings.

Sources

About the author: Nicole Dufft is a Senior Analyst at Berlecon Research. She has been analysing a varierty of ICT topics ranging from mobile computing and application service providing to DRM. Currently, she works in the field "digital consumer".

Status: first posted 05/07/04, included in INDICARE Monitor Vol. 1, No 2, 30 July 2004; licensed under Creative Commons
URL: http://www.indicare.org/tiki-read_article.php?articleId=22