CFerrelITunesMatch

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Ch r i s to p h e r W. Fe r r e l

Analysis of Apple iCloud and iTunes Match

Disruptive Innovations within the Music Industry

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AbstractAbout this discussion.

Since the mid-noughties, a growing number of consumers prefer to access their digital content via Cloud Computing SaaS providers (Renub Research, 2010). The purpose of

this discussion is to apply Clayton Christensen’s principles of disruptive innovations within the consumer Cloud Computing SaaS market. The history, current market and potential disrup-tive innovations of consumer Cloud Computing SaaS market are explored. In order to succeed in the consumer Cloud Computing SaaS market, a service provider must offer: 1.) Convenient and seamless accessibility of a consumer’s digital content across all popular consumer devices and 2.) Provide an incentive for copy-right holders, especially professionals within the entertainment industry, to invest in Cloud Computing. Based on its innovative features and the company’s historical success with emerging technologies, Apple, Inc.’s iCloud and iTunes Match appear to be the most likely to succeed in the consumer Cloud Computing SaaS market.

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Contents

Abstract 2

About this discussion.

Disruptive Innovations within the Music Industry 5

Analysis of Apple iCloud and iTunes Match.

References 11

Disruptive innovations Within the musiC inDustry


This document was created for academic purposes at St. Edward’s University and is not intended for

commercial use without express permission.



Disruptive Innovations within the Music IndustryAnalysis of Apple iCloud and iTunes Match.

Apple launches iCloud service by Justin sullivan/Getty imaGes



Clayton M. Christensen once noted that “disruption is a process, not an event (Christensen, 2004).” The development of the Cloud Computing industry serves as an exemplary illustration of Professor Christensen’s critical lessons in disrup-

tive innovations. Since the mid-noughties, industry analysts have suggested that Cloud Computing has the potential to disrupt the large-scale Information Technology (IT) industry by fundamentally altering how IT hardware and software applications are developed, deployed, ran and purchased (Armbrust, 2009; Renub Research, 2010). Cloud Computing provides a cost efficient solution for companies and consumers who require scalable datacenters. Companies and consumers only pay for their short-term resource requirements without enduring the costs involved in long-term planning and purchas-ing of datacenters. The flexibility of hardware resources offered by Cloud Computing has never before been available in the IT industry (Armbrust, 2009).

For purposes of this discussion, Cloud Computing is defined as the amalgamation of datacenter hardware and datacenter system software delivered via the Internet or an Intranet. The architecture of Cloud Computing has existed in internal datacent-ers of corporations for several years. Commonly referred to as grid computing, these private Cloud Computing systems gave rise to public Cloud Computing delivered most commonly by the Software as a Service (SaaS) delivery model (Armbrust, 2009). Currently the fastest growing segment, SaaS Cloud Computing claims 89% of the Cloud Computing Market (Renub Research, 2010). Apple, Google, Amazon Web Services, IBM, Cisco Systems, Microsoft, VMware, Hewlett-Packard, Oracle, Siemens. NEC, Network Appliance, Salesforce and Facebook are believed to be the most capable SaaS providers to claim market leadership of the Cloud Computing industry (Armbrust, 2009; Renub Research, 2010).

“Disruption is a process, not an event.”

Signals of Change

The purpose of this discussion is to apply Clayton Christensen’s principles of disruptive innovations within the consumer Cloud Computing SaaS market. While several compa-nies offer Cloud Computing services, it has yet to be determined what business model will succeed. As previously discussed, Cloud Computing initially gained popularity due to its resource flexibility and cost efficiency. While these performance factors ultimately disrupted Cloud Computing in large-scale business datacenters, the consumer market has yet to observe the same disruption. According the Christensen’s theory, the con-sumer market for Cloud Computing will most likely exist in a different value network.

The first evidence of Cloud Computing entering the consumer market is found in the recent 10-K Annual Reports of Western Digital Corporation and Seagate Technology Public Limited Company. The world leaders in hard-disk drive manufacturing, Western Digital and Seagate Technology currently serve overshot consumers. For years, data stor-age has been valued according to the price-per-MB of hard-disk drive’s storage capacity. In contrast, Cloud Computing is valued by its resource flexibility and cost efficiency. Like most disruptive innovations, Cloud Computing was not initially cheaper-per-MB than hard-disk drives. However, Western Digital and Seagate continued to improve upon its



price-per-MB performance until consumers found older technologies to be sufficient for their needs. The hard-disk drive market primarily relies on an ever-depleting number of undershot customers, as fewer and fewer customers are willing to pay a premium for enhancements to hard-disks’ storage capacity.

Meanwhile, a small market of consumers valued the convenience of accessing their digi-tal content across all their digital devices. Since the mid-noughties, a growing number of consumers prefer to access their digital content via Cloud Computing SaaS providers (Renub Research, 2010). Western Digital and Seagate failed to publically acknowledge Cloud Computing as a disruptive technology until 2009 and 2010, respectively (Seagate, 2008; Seagate, 2009; Seagate, 2010; Seagate, 2011; Western Digital, 2009; Western Digital, 2010; Western Digital, 2011). Like many companies who focus resources solely on sustaining technologies, Western Digital and Seagate were not prepared for disruptive innovations. As described by Christensen, market leaders often fail to identify disruptive technologies until it is too late to overcome the disruption (Christensen, 2004). Evidence of this late recognition can be found in Western Digital’s 2011 10-K Annual Report:

WESTERN DIGITAL 2011 10-K ANNUAL REPORT

“Consumers traDitionally have storeD their Data on their pC, oFten supplementeD With personal external storaGe DeviCes. most businesses also inCluDe similar loCal storaGe as a primary or seConDary storaGe loCation. this storaGe is typiCally proviDeD by harD Disk Drives. reCently, ClouD ComputinG has emerGeD Whereby appliCations anD Data are hosteD, aCCesseD anD proCesseD throuGh a thirD-party proviDer over a broaDbanD internet Con-neCtion, potentially reDuCinG or eliminatinG the neeD For, amonG other thinGs, siGniFiCant storaGe insiDe the aCCessinG Computer. this trenD CoulD Cause the market For Disk Drives in Computers to DeCline over time, WhiCh CoulD harm our business to the extent this DeCline is not oFFset by the sale oF our proDuCts to Customers Who proviDe ClouD ComputinG serviCes (Western DiGital, 2011).”

Consumers traditionally have stored their data on their PC, often supplemented with personal external storage devices. Most businesses also include similar local storage as a primary or secondary storage location. This storage is typically provided by hard disk drives. Recently, Cloud Computing has emerged whereby applications and data are hosted, accessed and processed through a third-party provider over a broadband Internet connection, potentially reducing or eliminating the need for, among other things, significant storage inside the accessing computer. This trend could cause the market for disk drives in computers to decline over time, which could harm our business to the extent this decline is not offset by the sale of our products to customers who provide Cloud Computing services (Western Digital, 2011).

The Annual 10-K Reports from Western Digital and Seagate further support Cloud Computing as a disruptive innovation. The current state of the hard-disk industry also suggests that a new market leader will emerge in the data storage industry. Furthermore, the emergent company will most likely provide consumer Cloud Computing SaaS ser-vices that fulfill the requirements of the data storage industry’s value network.



In order to be competitive in the consumer Cloud Computing SaaS market, two important value criteria must be realized. First, one must provide convenient and seamless accessibility of a consumer’s digital content across all popular consumer

devices. Including, but not limited to, desktop computers, laptop computers, tablet computers, mobile phones as well as home and vehicle entertainment systems. Secondly, one must provide an incentive for copyright holders, especially professionals within the entertainment industry, to invest in Cloud Computing.

Competitive Battles

Google and Amazon released highly anticipated consumer-focused Cloud Computing SaaS in 2011 (Albanesius, 2011). Both companies were clearly focused on providing consumers with convenient and seamless accessibility of their digital content. Google Music Beta and Amazon Cloud Player allow users to upload their digital music files to a Cloud Computing datacenter. Beta testers of Google Music are allowed to upload as many as 20,000 songs while Amazon provides 5GB of free storage and 20GB if cus-tomers purchase an AmazonMP3 album (Albanesius, 2011; Miller, 2011). While still largely under development, both Google and Amazon plan to integrate their services across a wide variety of web-enabled computers and mobile devices running Android operating system.

Despite a growing interest from consumers, Google and Amazon have been hampered by legal concerns expressed by digital content copyright holders. Specifically, Google and Amazon have failed to secure licensing agreements with the artists, record labels and publishers within the music industry (Albanesius, 2011). The Director of Music at Amazon, Craig Pape, told The New York Times, “We don’t need a license to store music. The Functionality is the same as an external hard drive (Miller, 2011).” Google agrees with Amazon and argues that they do not need licensing agreements because users upload content that they already own (Albanesius, 2011).

1. Convenient and seamless accessibility of a consumer’s digital content across all popular consumer devices.

Copyright holders believe that Google and Amazon are in violation of licensing agree-ments because access to a consumer’s digital content requires a stream or re-download of said content for which royalties are owed (Albanesius, 2011). Copyright holders have also expressed concern that Google and Amazon do not provide reliable methods to prevent pirated content from being stored via their Cloud Computing services. The Recording Industry Association of America (RIAA) successfully sued MP3.com in 2008 for providing a similar service (Price, 2011). The precedent set in the RIAA vs. MP3.com case suggests that Google and Amazon will be forced to comply with the copyright holder’s requests.

Unlike Amazon and Google, Apple, Inc. has successfully secured licensing agreements for their release of iCloud and iTunes Match service. Announced at Apple, Inc.’s Worldwide



apple releases itunes 10.5 beta 9

Developer Conference (WWDC) in June of 2011, the iCloud and ITunes Match services appear to address both critical value criteria. The iCloud is a described as a virtual hard drive that is accessible from all of Apple’s popular consumer devices running iOS 5 and iTunes 10.5, including the iPhone, the iPad, iPod Touch as well as Mac and PC computers (Price, 2011). iCloud users receive 5GB of storage for free with option to upgrade to 10GB for $20 per year, 20GB for $40 per year and 50GB for $100 per year (Albanesius, 2011). Along with digital music files, users can upload their pictures, apps, calendars, email and contacts to their iCloud account. The convenience and accessibil-ity of iCloud largely satisfies the first value criterion.

More importantly, Apple has a competitive advantage in the consumer Cloud Computing SaaS market because they have successfully negotiated licensing deals with copyright holders. The iTunes Match software portion of the iCloud service will pay royalties to copyright holders each time a subscriber streams or re-downloads a digital music file.

2. An incentive for copyright holders

to invest in Cloud Computing.

The remarkable innovation of this technology is that iTunes match will not only pay royalties for legally obtained content, but it will pay royalties for illegally obtained content as well (Price, 2011). Because the royalties are based on access, even pirated content will be subject to royalty payments to copyright holders. By monetizing pirated material, iTunes Match is the only Cloud Computing service to date that satisfies the second value criterion.



Apple, Inc. has a proven track record of successful development and implementa-tion of disruptive innovations. The iPod, iTunes, iPhone, App store and the iPad are all innovative examples that have contributed to Apple’s 58.85% growth in

net income during the past 36 months (Hoover’s Online, 2011). Google, in comparison, has seen a 26.48% growth in net income during the past 36 months. During the same time, Apple’s iPhone sales increased by more than 90% and accounted for 39% of the company’s 2010 revenue (Hoover’s Online, 2011). The growth in consumer-focused products suggests that Apple is highly in tuned with current consumer needs and that iCloud will successfully appeal to the consumer Cloud Computing market.

Strategic Choices

Apple’s commitment to innovation has created a value network that deters entrants due to the high barriers associated with overlapping value networks. Christensen explains that when an entrant company’s value network overlaps with an incumbent’s supplier or customer, a choke point occurs (Christensen, 2004). Choke points force firms to spend a greater amount of resources in order to disrupt the industry because they are in direct competition with the incumbent firm’s value network. Should the iCloud become the market leader, their incumbent value network will claim highly unique suppliers and customers. Their network will be unique because the digital music content is supplied by a relatively small amount of copyright holders. Because an entrant firm cannot simply create new copyright holders, they will be forced to spend more resources in order to form licensing agreements with artists, labels and publishers. An overlap in customers is also likely given that iCloud favors Apple’s highly popular proprietary devices. In other words, it will be very difficult for an entrant attacker to appeal to Apple’s suppliers and customers because the unique value network will cause an overlapping value netowork.

Choke points force firms to spend a greater amount of resources in order to disrupt the industry

Apple’s commitment to innovation further supports the iCloud and iTunes Match as disruptive technologies. Due to their previous successes, Apple’s investors trust in their business processes and methodology and allow Apple freedom to identify and develop disruptive innovations. It seems likely that iCloud will succeed as the market leader in consumer Cloud Computing SaaS because of the competitive advantage created by iTunes Match.

reFerenCes


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albanesius, C. (2011). report: GooGle preppinG mp3 store… aheaD oF itunes matCh? pC maG. retrieveD From http://WWW.pCmaG.Com/artiCle2/0,2817,2394675,00.asp#FbiD=Jhxkxb_osht

armbrust, m., Fox, a., GriFFith, r., & Joseph, a. D. (2009). above the ClouDs: a berkeley vieW oF ClouD ComputinG. university oF CaliFornia, (uCb/eeCs-2009-28), 07-013. eeCs Department, universit y oF CaliFornia, berkeley. re trieveD From ht tp://W W W.eeCs.berkeley.eDu/pubs/teChrpts/2009/eeCs-2009-28.html

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seaGate teChnoloGy publiC limiteD Company. (2011). Form 10-k.

seaGate teChnoloGy publiC limiteD Company. (2010).

Form 10-k. seaGate teChnoloGy publiC limiteD Company. (2009). Form 10-k.

Western DiGital Corporation. (2011). Form 10-k.




speCial thanks to otto Coster anD smashinG maGazine For proviDinG this beatiFul inDesiGn template

ab o u t t h e au t h o r

Christopher W. Ferrel is a musician and student currently working towards an MBA in Digital Media Management at St. Edward’s University in Austin, Texas. He specializes in artist management and direct-to-fan marketing campaigns.

[email protected]

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