One of the most complicated parts of entering the MP3 player market would be to overcome Apple’s reputation. There are numerous consumers who have an established brand loyalty with Apple products, in general, and iPod, in particular, and therefore would not switch easily to anyone other brand. Accordingly, in order for a new MP3 player to be successful in the current market, it should have a better design, be cheaper and should have an absolutely new look to the MP3 industry. Therefore, there are no major technological barriers to enter the existing MP3 player market (, 2006).
Barriers to entry
Considering barriers to entry to the MP3 player market, the cost of entry is comparatively low. In addition, Apple, the market leader, has constantly made high profits and is extremely successful in the MP3 industry. High industry profits attract an ever-growing number of potential rivals that are trying to enter this lucrative market.
Moreover, there are no major legal barriers to enter the market. This could be exemplified by Apple that does not have any patents on the MP3 technology (Barney, 2008). Consequently, potential new entrants are open to use any available technology. Hence, if competitors could create an MP3 player, they are welcome to try and sell their products on the relatively open market. Furthermore, companies could examine economies of scale that should lead to constant minimisation of product costs. This could be a significant barrier for new entrants. Therefore, for a new entrant the first start up costs are high, but not impossible (Barney, 2008).
One of the ways to raise the profit margin is to charge a higher price to consumers. However, companies could only be successful when their products have a perceived value for customers.
Overall, the static analysis of Bain suggested three types of barriers: economies of scale, absolute cost advantages and product differentiation (Bain, 1956). In contrast, Stigler suggested that “a cost of production must be borne by a firm which seeks to enter an industry, but not by firms already in the industry” (Stigler, 1968).
Currently, Apple had contracted with Samsung, the first flash memory creator, to buy 40% of Samsung’s flash memory production (Apple, 2010). As a result, Apple had a considerably low price on this important element of an MP3 player. Having flash memory production with reasonable prices allowed Apple to produce an iPod Nano which uses flash memory rather than hard drive (Apple, 2010). The new deal with Samsung allowed Apple to produce more advanced and innovative products. In contrast, rivals lacking this technology found it difficult to compete with Apple in this segment.
Not only due to various advantages as a result of the Apple and Samsung contract, but also owing to economies of scale, Apple managed to obtain nearly 80% of the market share for its iPod. Furthermore, since the iPod Nano market launch, some competitors such as Rio and Olympus stopped their production and left the market even having high-quality products (Skee, 2009).
New competitors could not offer such a wide and good range of products as Apple. This activity coupled with the iTunes Music Store allowed Apple to be the only profitable online music trader (, 2007). Accordingly, Apple’s iPod and iTunes along with iTunes Music Store help the company to become the market leader (Evans,2005).
iTunes Music Store accessories became highly important since they use its own dock connector, so effectively an iPod could only use iTunes Music Store accessories. Moreover, iPod accessories cannot work with other MP3 players. In addition, these accessories are typically quite expensive. These two factors forces consumers to stick to an Apple’s iPod when changing their MP3 players. The major reaction from the competitors’ side was to develop an industry standard for a common portable device connector (Evans, 2005).
Apple has numerous advantages owing to it is large size and historic leadership in this market. However, a particularity of Apple is that it strongly protects its own technologies such as format and connector, to name a few. This adds additional barriers to entry the MP3 player market.
Price competition
“If products of different businesses could satisfy the same customer requests, then the pressure from substitute products is considered to be comparatively high” (Hill, 2004).
Whilst Apple's iPods were available in all price segments, iPod APPs ran from $50 to $100 higher than competitors’ (Robert Semple, 2007). The major rivals in the MP3 player sector included Creative, SanDisk and Samsung, each of them having a market share below 10% (Robert Semple, 2007). In 2006, Microsoft also introduced its Zune line of MP3 players. It should be noted that in 2005, iPod has a 26% market share of the global MP3 player segment, also it has a 51% share of the total revenue of Apple Inc (Lee, Eun-Min, 2006). Having 73% of the US MP3 player market and 72% of global HDD-type product market, iPod is a clear leader in the MP3 player sector. (Lee, Eun-Min, 2006)
On the hardware level, nearly all players are mostly comparable to iPod MP3 players. However, competitors found themselves at a main disadvantage with the appearance of Apple’s iTunes store (Robert Semple, 2007), which gave Apple an additional competitive edge over its rivals. Even though there are numerous competitors in the online music store market such as Virgin and MSN Music, to name a few, Apple managed to retain its market leadership. As a result, the iTunes Music Store has almost 80% of the market share (Robert Semple, 2007).
Finally, Apple offered the first real solution to buy music online, partly owing to its success in signing contractors with the five majors record labels (Apple, 2006). This allowed Apple to have a significant catalogue of songs. In addition, Apple permits consumers to copy songs on a MP3 player and also to burn CDs. These actions force consumers to actually acquire songs online and pay for them.
Conclusion
The influence of the market competition on barriers to entry, price competition and brand loyalty was described with an example of the monopolistically competitive MP3 player industry. Furthermore, it was evidently recognised that medium barriers to entry, considerable profits and relatively fast growth of the MP3 player market attracted various new market entrants that managed to enter this market with no significant efforts owing to a large number of differentiated products. This led to a constant decrease of an average market price of a MP3 player. Consequently, MP3 players became more affordable to consumers. As a result, sales of MP3 players are projected to grow even further attributable to enhanced technology and falling prices.
Bibliography
- (Apple, 2006) - Apple Annual Report 2006.
- (Apple, 2010) - Apple Annual Report 2010.
- (AppleInsider, 2006) - “Inside Apple's Latest iPod Touch-screen Patent Filing”, AppleInsider, Jul 2006. Retrieved on 6 December 2010 from http://www.appleinsider.com/articles/06/07/20/inside_apples_latest_ipod_touch_screen_patent_filing.html
-
(Arnold, 2010) - Arnold, R.A., “Microeconomics”, 2010, 10th Edition, South-Western College Pub.
- (Bain, 1956) - Bain, J. S., “Barriers to New Competition”, Harvard University Press, Cambridge, MA, 1956.
- (Barney, 2008) - Barney, J., Hesterly, W., “Strategic Management and Competitive Advantage”, Pearson Prentice Hall, 2008, p 41.
- (BBC, 2001) - “MP3 Player Sales to Soar”, BBC, 2001. Retrieved on 6 December 2010 from http://news.bbc.co.uk/1/hi/entertainment/new_media/1256783.stm
- (Chioveanu, 2007) - Chioveanu, I., “Advertising, Brand Loyalty and Pricing”, ESRC Centre for Economic Learning and Social Evolution, 2007. Retrieved on 7 December 2010 from http://else.econ.ucl.ac.uk/papers/uploaded/323.pdf
-
(,2007) - , M.D. "Links to Tens of Thousands of Legal Music Downloads". Retrieved on 5 December 2010 from
- (Electronic parts institute, 2006) - “Market Trend of MP3 Player”, Electronic parts institute, Jun 2006.
- (Evans, 2005) - Evans, J. “iPod Haters Scheme for a Dock”, Macworld. Retrieved on 5 December from http://www.macworld.co.uk/news/index.cfm?home&NewsID=13211
- (Hill, 2004) – Hill, C. W. and Jones, G. R. (2004), p. 48f
- (Hoch, 1993) - S. J. Hoch and S. Banerji, “When do private labels succeed?”, Sloan Management Review 34, Summer 1993, p 57-67.
-
(Iliev, 2004) - Iliev, V., Lindinger, A., Poettler, G. “Apple Computer Inc: Strategic Audit”, Dubline Institute of Technology, Feb. 2004, pp. 1-181. Retrieved on 6 December 2010 from
-
(In-Stat, 2006) - “MP3 Player Market to Reach 286 Million Units by 2010”, In-stat, 2006. Retrieved on 6 December 2010 from
- (Kaldor, 1949) - Kaldor, N., “The Economic Aspects of Advertising”, Review of Economic Studies, 1949 - 1950, pp. 1 -27.
- (Lambin, 1976) - Lambin, J. Advertising, Competition, and Market Conduct in Oligopoly Over Time. Amsterdam: North Holland, 1976.
- (Lee, 2006) - Lee, E.-M., “Current Market Trends of MP3 player”, IT Strategy, 2006, p.30.
- (Massey, 1965) - Massey, W. and R. Frank, "Short-term Price and Demand Effects in Selected Market Segments." Journal of Marketing Research, May 1965, pp. 171 -185
- (Mintel, 2005) - “Portable Audio Players - UK”, Mintel, Technology:UK, Market Intelligence Essentials, Jul 2005, Retrieved on 5 December 2010 from http://academic.mintel.com/sinatra/oxygen_academic/my_reports/display/id=114673&anchor=atom#atom0
- (Semple, 2007) - Semple, R. Sun, S. and Wu, T. “Apple Computer Inc.”, Analysts’ report, Credit Suisse, June 5, 2007, p. 6.
- (Skee, 2009) – Skee, G., "Zune HD review", October 26, 2009. Retrieved on 5 December 2010 from http://rearthusa.com/blog/?tag=zune-hd-review
- (Stigler, 1968) - Stigler, G., “The Organization of Industry”, University of Chicago Press, Chicago, IL, 1968.