Apple, iPods, Network Effects & Interoperability

I’ve enjoyed reading Dave Hoffman’s post on the iPod phenomenon and Josh Wright’s rejoinder. I wasn’t too tempted to jump in until Frank (in the comments) blamed the iPod’s success on network effects. Interestingly, Apple has long been the victim of network effects in the personal computer sector. Although I had a Mac computer in 1988, I soon had to switch to IBM clones in order to be able to communicate with co-workers, clients, and courts. By making a product with hardware and software that was not interoperable, even though its product was arguably superior, Apple lost market share to the makers of cheaper computers that all used interoperable operating systems and software. Now, Microsoft Word tries with each new version to come closer to what MacWrite achieved in the 80s and Apple tries to rebound in a world where many people have two computers and technology has allowed some material to go between the two systems.

So, I am interested in the madness behind duplicating this strategy in the mp3 industry of creating a product that stands out but stands alone. One can go to any electronics store and buy a cheaper mp3 player that will use MusicMatch, or one can buy the much more expensive iPod that requires the use of iTunes (unless you have access to someone with a computer science degree). First, why would Apple go down this road again? Second, why is this scenario working better this time? The only difference I can see is the point that Dave makes — mp3 players, while pricey, are almost disposable. Perhaps network effects are not going to favor the interoperable here over the superior first-mover because the initial outlay is not as substantial. If I’m buying an expensive computer, I want to be able to use it for awhile, communicate with others and possibly resell it on the open market, but if I’m just buying something that lasts a year, I’ll buy the cool one. Any other explanations? (Yes, I have an iPod, but our other $150 mp3 player broke twice in one year also.)

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4 Responses

  1. Chris says:

    Currently there are little or no reasons to interoperate with other systems so Apple can get away with propreitary systems. Once all-in-one sysetms become more popular (DVRs, Tivos, phones,PDAs etc) Apple will start paying a price for not playing nice with everyone else.

  2. jeff says:

    It was conservative corporate cultutre that froze out the mac , spilling over to home choice buying to be compatable with the work pc etc.

    Different market, different buyers different drivers (thank goodness)

  3. Frank says:

    I have to say, I don’t get it either. You’d think that they’d want some sort of interoperability–or at least a diversity of music sources other than iTunes.

    My only guess is that Apple is trying to be the Amazon of music sales. Amazon leveraged a dominant distributor position into good relative “bargaining power” with big publishers. Therefore, they got to force many copyright owners to agree to innovations like “Look Inside the Book” (See Wired article “The Great Library of Amazonia), or “used book” sales on the same page as new book sales.

    Apple appears to want to become the dominant distributor, so it can force the music industry into lower prices….or at least get a bigger “cut” of sales. There have been some dust-ups over this already–apparently the industry wants to sell at higher, various prices (like $2 for the new single, $1.19 for old backlist stuff) than Apple’s $1-for-all scheme.

    So if there’s one good thing about Apple’s exploitation of network effects, it’s their potential to reduce the extraordinary market power the recording industry cartel has achieved via mergers (4 companies now own over 90% of songs). Just think of Apple as “single payer music care,” driving down music prices the way single-payer health care systems monopsonistically reduce health costs. On the other hand, who knows how much of the price reduction goes to consumers, and how much to Apple.

  4. bill says:

    Other analogies for Apple:

    The iPod is the new MTV.

    Apple is the Microsoft.