BLUE OCEAN STRATEGY - Apple iTunes

Theory

The case ‘The Marvel Way: Restoring a Blue Ocean’ is one great example of the blue ocean
strategy. After experiencing bankruptcy, and the pressure to repay a high interest debt,
everybody considered the company to be doomed. Marvel then came out of the red ocean
situation, redefined their scope and market and came out successfully via their blue ocean
strategy.

Firstly Marvel eliminated all the preconceived notions set in the entertainment industry. They cut
down on the costs of movie making almost upto 30%, unlike any other contemporary studio.
They took mediocre actors, rather than stars and made the whole movie about the Marvel
character rather than the movie star. The pay to these actors also was low..

Marvel then built their own movie studio, licensed their characters, and started to produce their
own movies. They extensively cut down on their costs, brought their characters closer to the
audience and real life. All of this worked in the favor of Marvel, who started gaining high
revenues. Their initial source of revenue was the customers of comic books and toys. Now
through their movies, they converted a whole new customer segment as their audience. By
attracting this non audience, and tapping an untapped market, reducing the costs, as well as
improving the quality and their characters, Marvel successfully emerged out of its death trap.
Similarly, another company which implemented the blue ocean strategy successfully was Apple.
Let’s see how.

Case History

In the late 1990s, there was a sudden surge in the music business, where illegal files were being
shared tremendously. Many music sharing giants like Napster, Kazaa and Limewire had created
online platforms for the free sharing of music across the globe. But this was being done illegally.
By the end of 2003, more than 2 billion music files were being shared this way. This had a direct
impact on the CD recording industry, cannibalising it with the download of online digital music.
This led to a huge demand to the digital downloads rather than paying about 19$ on an average
for one CD. In addition to this, soon came the trend for music or MP3 players, that enabled
customers listen to digital music. Apple capitalized on this trend, using Blue Ocean Strategy and
made the most out of this.

When, Why and How?

Strategy Formulation using PEST Analysis

Political Factors
The music industry in general doesn’t have that huge an impact due to the political conditions.
The political factors which mainly played a role during that period were the different players of
the industry pushing the governments to introduce strong legislation against piracy, which was a
major issue then.
Economic Factors

The economic factors aren’t directly related but indirectly due to the leisure economy of
individuals. People suddenly have started to spend increasing time on leisure activities on the
internet, and were shifting from the traditional model of busing a CD to listen to music.

Social Factors

Social factors play a huge role when it comes to the music industry. Most of the social changes
in the society have a direct connection to the kind of music being made. After the world war II,
the emergence of a new market ‘teenagers’ gave rise to a wide market for popular music. The
demand for albums or singles was decided by the social factors. The likes of different kinds of
audience became classified as different kinds of music such as pop, rock, metal, jazz and so on.
Music has also led to many social influences in the UK, mainly due to the Afro-American culture
in the US.

Technological Factors

Technology is the key influencer in the music industry. The industry has been constantly
changing due the the developments in technology. The 1980s brought about a major change as
the shift from analogue to CD to digital technology happened. CDs were the main music format
during the 1990s. Soon after, in 2000s the illegal downloading of digital music started as a wave.
Then the mp3 players were a major technological development.
This gave a major opportunity for Apple which released its iPod just then, to capitalise on this
illegal downloading of digital music and the demand for it.

Choosing the strategy

Blue Ocean Strategy - The digital music industry

The MP3 players industry in the late 1990s mainly targeted educated teens and early youth.
There was mainly flash MP3 or Hard drive MP3 player. Then came the Apple iPod, which
mainly targeted the older age group of over 30 years. It gave a huge capacity for about 1000
songs, was easily portable and a convenient user interface.

Until then the digital music industry was divided into two parts. The subscription based music
services, or the illegal music downloads online. What the subscription based music services had
that the illegally downloaded music did not have was good quality music but with limited rights,
limited options and that they came with a complex pricing mechanism. Whereas the digitally
downloaded free music had a wide range of options and was free, but with very poor quality and
was illegal. Consumers had to choose a trade off between these two options.
Apple thus came up with the blue ocean strategy where it grouped these two offerings and came
up with iTunes. There was a huge potential in this offering as it was untapped and has never been
explored. The customers had never seen a legal channel for digital music, offering a huge range
of music, at a price which appeals to the whole market of potential music customers. Adding to
this offering, it provided excellent quality, as well as the combination of the iPod and the iTunes
store.

The iPod used the iTunes software, which was the first subscribed music service provider for a
base minimum fare. It was an easily useable software, always synchronised with the iPod and
had an easily manageable music collection.

The combination of iPod + iTunes software was priced high, very sleek, had a decent enough
storage capacity, was very easy to handle as well as transfer or organize music. In comparison to
the MP3 players which were low in terms of price, size, storage capacity and had a moderate
ease of use and navigation.

Through this Apple could eliminate the concern of illegal downloads, raise the quality of music
downloads and the ease of usage, reduce the restrictions being imbibed on purchased music, as
well as create a whole new offering which the world had never seen before.

How did Apple do this?

Apple made an agreement with five of the major music giants - Sony, Universal Music Group,
BMG, EMI and Warner Brothers Records. This enabled it to offer a wide range of digital music
legally. The users could also listen to a 30 second sample of songs, and pay per the song. The
price was as low as 99 cents, when an album CD was being sold at an average of 19$. It catered
to those audience who didn’t want to buy the CD or an album as a whole, but just wanted 1 or 2
songs of an album. The downloading was made hassle free, with all the songs of an album being
made available at one place, and navigating through the interface was very user friendly. The
iTunes also displayed features such as pooling similar songs, such as celebrity playlists, billboard
charts, staff favorites, etc.

iTunes provides to the music makers 65% of the price of a digital song, such that they benefit too
out of this digital music craze as well as used a copyright protection for the songs.

Today iTunes Music store has a huge array of offerings and is the largest music channel in the
US.

Learnings

Apple strategically launched its iTunes store, along with one of the most trending device of that
period the iPod. This became a winning combination. It just did not stop with the invention of
iTunes software, but made sure it excelled in all other aspects as well, like the design, user
interface, availability of a huge choice of music, etc.
It developed an iconic status for its iPod. Along with benefiting from this, it added value to all
the stakeholders in the music industry who were losing out a lot of revenue due to the piracy
issues.

It came up with the offering of letting people buy an individual track of song, during those times
people only knew buying or downloading the whole album of songs, to listen to the one song
they actually like. Along with this, it still maintained the practice of an album download by
offering the albums at discounted prices. So, it promoted the original practice, as well as came up
with an offering giving the customers a whole new range of opportunities.

Therefore the learnings from Apple’s blue ocean strategy through iTunes are
1) Develop a market segment which has never been tapped into
2) Make sure the competitors become irrelevant in your market space
3) Try differentiating your firm as well as following a low cost strategy