Apple and the digital music market

Has the digital music market irreversibly tipped in Apple’s favor?

One might have been able to make a positive claim to the above question prior to Apple’s removal of DRM. DRM provided the grounds for high switching and high homing costs, since Apple’s proprietary Fairplay DRM software was incompatible with non-Apple players and products. Apple was able to grab an 80% market share in the digital music market. A part of this advantage came from customers getting “locked in” once they purchased DRM-encoded music in AAC format through iTunes. Now that iTunes sells DRM-free music, this has removed this advantage along with the high switching and homing costs. It is expected that Apple’s iTunes will see a decreased market share in a DRM-free environment, as users will be able to obtain music content from other sources. However, it is unlikely that consumers will switch music content providers unless Apple is the only source offering DRM-free music which, would give Apple a clear advantage, since consumers prefer DRM-free music due to its universal usability and freedom from usage restrictions.

Regardless of the DRM situation and its impact on iTunes, Apple has admitted that it earns no real profits from music sales through iTunes and that Apple’s true revenue is generated by hardware sales such as iPod and iPhone sales. Therefore, Apple will continue to be a profitable and successful company as long as it continues to keep its competitive advantage derived from its customer-focused, easy-to-use, and innovative technology...not through music sales.

Apple has been able to keep its dominant share in the portable digital music player market by continually releasing newer, better, versions of its iPods. A replacement mentality among consumers has emerged. Consumers have been replacing their older iPods for newly released versions thus, allowing Apple to defeat stagnant sales within a saturated market. Additionally, Apple’s iPhone has been the next product line extension of its digital music players and includes an integrated mini-computer and cell phone. With over 17 million iPhone sales within 2yrs, the iPhone has seen impressive growth and has placed Apple in the lead for the mobile digital music market.