Can the Apple iTunes business model ever be emulated?

15 Apr 2010

Consumers wanting a one-stop shop for digital entertainment need look no further than iTunes. Since Apple introduced the store on 9 January 2001 at the MacWorld Conference & Expo in San Francisco, it has evolved into the world’s most popular destination for apps, films, music, videos, podcasts, TV shows and audiobooks.

Globally, more than 10bn songs have been downloaded for the iPod as well as 4bn mobile apps for the iPhone smart phone. With the launch last week of Apple’s newest computing device, the iPad tablet, the Apps element of iTunes is set to go stellar in terms of newspapers and e-books, not to mention games and other apps.

What is a business model?

So, what’s the secret to the success of Apple? At its core is its business model, but first, a definition of the term.

“A business model is three things,” says Dr Peter McNamara, senior lecturer, UCD Quinn School of Business. “First, a business model needs to be a clear expression of how the firm will solve a job of work for the customer: a customer value-adding proposition.

“Second, a business model needs to have a profound understanding of how to extract profit from this job of work from the customer: an economic logic.

“Third, a business model needs to consider in a realistic manner what are the resources and capabilities necessary to do this job of work in an efficient and effective way: resources and capabilities.”

With respect to Apple (which declined a request for an interview), it has made use of interconnected technologies.

Says McNamara: “Business models are difficult to copy by incumbents where they are not discrete, but rather a set of interconnected technologies, or a complimentary bundle.

“The iPod is a great example of this. It was not the first mobile digital music player. Creative and Sony were active in the market at the same time as or before the iPod. What Apple did well was nail the job of work. It mixed elegant, simple design with reliable portable technology, an easy way to download music from the internet and a trusted brand.

“The economic model was strong: profits were captured in the machine itself. The resources and capabilities were a complimentary bundle difficult to copy.”

Conflicting interests

Sony’s struggle was that the economic interests of Sony Electronics and Sony Music conflicted, according to McNamara.

“One captured profits via the machine, the other via the copyright. The beauty of Apple was that it did not have these conflicts.”

This example, he says, points to the reality that each firm’s business model is unique.

“No two people are the same, nor are two business models. For a business model to truly succeed it must match the unique needs of a customer, the unique resources and capability configuration of the firm and therefore will inevitably be different from traditional (and all other) rivals.”

Another point business and investors should bear in mind is to not be carried away by the excitement that is technology.

“When investors get romanced by technology they are in real danger of losing money,” McNamara explains.

“When they focus on the fundamentals of a business model they are more likely to pick winners.”

Consistency in value for customers

He advises investment in firms that have an internally consistent story of how they create value for the customer. 

“The internet does not defy the laws of economics. It succeeded where the business model is logical; it fails where it is not.”

Many internet business models have an interesting story of how to create value for the customer, but they often fail to consider how they will capture sustainable profit from this business, he adds.

“In essence, they falsely believe that the general laws of economics have somehow been broken by a new technology, or way of doing business.”

There has been much talk about how the internet changes traditional business models and little evidence of what this means. In the early Nineties, the internet was viewed as a transformational business model that would make traditional business models redundant, but to date, this has not transpired to be the case, explains McNamara.

“Rather, the internet has followed a trajectory common to many prior technologies that offered the opportunity to reduce costs of information processing and communication.

“The view that the internet fundamentally changes business models is, I think, a misunderstanding of what a business model is in the first place,” he adds.

By Tina Costanza