Mike Elgan, who is the author of last weeks Computer world article “Opinion: Why Microsoft’s Zune scares Apple to the core” has kindly responded to my posting last week. I have taken the time to response in more detail this week.

The State of Play

It is now common knowledge that first part of the iPod execution has been near flawless. Indeed Jobs has got everything he wanted from the Music Companies, especially the pricing model he wanted. Recently the license to sell music was renewed and Apple was able, despite the Music Industry, to again get what he wanted. This is an important part of the battle because Apple is currently setting the “tune” for the digital industry as a whole, and Microsoft is going to have to respond to Apple being the Market Maker, traditionally a Microsoft role. The content providers are going to play a big role going forward and we need to understand them.

What is the content providers agenda?

The biggest fear that the Music Industry, and to a lesser extent the Movie Industry (I will get to that), has is that this new distribution channel has the opportunity to completely change the dynamic of the industry to the worst for them. They have for years controlled what enters the channel, what the retailers could sell, and what the Radio Stations could play. The Music Industry works from the center out, they control what enters the channel. The dirty secret of the music industry is that they willfully stopped retailers from gaining too much control over what the consumer was able to consume. This of course is changing with the internet and specifically with iTunes. They are dismayed that there is one dominant player and a number of also-rans (Amazon, Yahoo, Rhapsody etc). The concentration of retail power in one player is not in their interest, so they basically have welcomed Microsoft with open arms.

CDs and multi song formats are revenue maximizes. The format of 12 tracks per CD was to justify the $14+ cost of the CD, not to offer consumers choice. That is why they killed off the single because it was costing album sales. This approach is now explicitly threatened.

Microsoft of course is busy offering everything that the Music Industry wants in regards to Digital Rights Management (DRM) and will continue to yield to RIAA pressure to ratchet up the limitation of consumer rights. You will see this in subtle changes in the End User License Agreement (EULA) over a period of time and an increase in the limitations of what you can and cant do with downloaded music. What you will see from the Zune Shop is a whole host of “exclusive” content from them. The Industry will give Microsoft preference over Apple for a number of chart busters to coopt consumers onto their platform. Microsoft will in turn yield to the industries demands as I mentioned above.

What about Windows Distribution Strength?

The Windows Distribution strategy is another key area they can increase their traction. However I would caution that they currently have the Department of Justice (DOJ) camped on their doorstep until 2011 so they can’t get up to the nasty tricks they used to do. Also the European Union is also getting feistier in their attempts to reign in Microsoft, which also limits their options (re the Windows Media Player).

So lets take the coercion tactics off the table and concentrate on what Microsoft can do legally in the channel. Firstly the obvious step is to bundle Zune player into the Windows Media Player environment (except the EU). By tying the Zune player closer you immediately force users into the Zune environment whether they like it or not, and consumers always follow the line of least resistance. This is a benefit that Apple does not have. Although they have an excellent competitive suite of products of which Microsoft has to match, they don’t have the benefit of being preinstalled on desktops and laptops, nor being baked into the corporate desktop images.

However this may provoke a new round of legal battles, because Real Networks, Apple and others could argue that this is a monopoly tie in which as we know is illegal under the Sherman Act, and there already is a court convened to handle this currently. I am sure the Microsoft lawyers have been up late at night thinking about this. At the very lest, the PC companies will be able to replace or remove this option, without incurring the wraith of Microsoft (those students of PC history will remember the infamous Compaq memo where Microsoft threatened to cancel their Windows license if they did not stop shipping Netscape).

I do think that however this is a channel that will generally open up to Microsoft, especially if some incentives were attached to this, including allowing them to resell the Zune Player. However how much this will drive sales of the player is unknown. The key to this question is how consumers purchase music players and whether PC software drives the Music Player, or the Music Player drives the PC software and service.

There are some things that we do know and can extract from the Apple success:

• The appetite for music players is there. Apple more than anyone else has exposed the market to the hows and wherefores of digital music and it is affecting sales of CDs materially. This will only continue to gain steam.
• Vertical integration is the answer to this problem. Microsoft by controlling the hardware, software and content has basically stated that their platform model failed and they need a vertically integrated solution. However this does beg the question as to what level of integration is necessary, does this mean to the store itself?
• There are plenty more consumers out their to convert. Although the sales of the iPod have been impressive, there are still far more people buying CDs than digital music but the trend is clear.
• Brand equity is a vital component of the sale. The consumer needs to invest in what and how they consume the product. The iPod displays enormous product affinity that leads to an emotional investment. Once you get the user emotionally invested you have them for life and they become your salesforce. Apple has been extraordinary at this.
• 3rd Party eco system is vital to increase the consumer investment in the product. The investment companies like Griffith and others have made reinforces product and brand affinity.

Offering the Same but in Brown is not enough

I believe the key ingredient in the success of the iPod was the pursuit of ease-of-use. The first experience that a customer has with digital music is the player itself. They usually hear through advertising or through friends that they need to check out the iPod. The iPod sets you free, opens the inner you etc. They then proceed to the Apple Store to try out the iPod. It is no coincidence that you can touch, feel and use the iPod in the store. This tactile experience is vital to the purchase. How it feels in you hand, how you can use it with just one hand (very important for commuters), the smooth back, the glossy front all contribute to the sale. It is an industrial designers and anthropologists dream.

Another component is the aspiration sale. That is where a person will initially purchase the Nano in anticipation of purchasing the Video iPod. There is a powerful social incentive to move up (just like cars). This also means that the investment in iTunes is safe. (A close friend of mine just moved from the Shuffle to the Video iPod. She was going to go to the Nano, but moved to the Video iPod instead). Microsoft needs to respond with flash based players and compete in the mid player market. (However I have said that Apple has the flash memory production controlled tightly).

The next step is the affinity step. Apple Stores are always full of people of all sorts, discussing the products, dragging friends around. Why do I make it a habit of going to Apple Stores in different cities?. I do it to be part of a larger community of like-minded folks. This of course reinforces the purchasing decision.

So how can Microsoft replicate this when it doesn’t have (or intends to) have this level of vertical integration?. Obviously they are good at online communities and building online buzz, but most of their customers need to be less tech savvy. You need to be able to reach the guy who has a Bose Lifestyle Stereo System and listens to Stravinsky. Obviously the iPod does that for them (they are also more likely to own a Powerbook). You need to reach the university student, the rapper, the soccer mum and the nascar dad.

The answer actually is counter-intuitive, and it lies in the work of Malcom Gladwell. You need to find the influencers and convert them. You need to forget everyone else and concentrate on the few individuals that tell everyone else what to buy. Now this maybe what is behind the brown case, but there is going to need to be more, a lot more than brown and wireless sharing. There needs to be the wow factor that appeals to the narrow interest rather than trying to build wide support. This can be University Students for example. They are definable and reachable.

The Holiday Socks Test

I have a simple test to see if a product has a coolness coefficient that takes the product into the transcendental plane. That is the holiday socks test. Ask yourself the simple test. How do I react if a get two presents for Christmas, firstly a pair of socks, and secondly a Video iPod?. Each of these are the extremes of gifts. Obvious a socks quotient is at the lower end of the scale, and the Video iPod is at the higher end of the scale. The brilliance of the iPod is that the Wow factor cuts across demographics, where as a Nintendo Console does not.

The Wow Quotient is the measure of surprise and delight at the purchase, a happy scale if you will. Microsoft not only has to figure out how to have a wow quotient more than the Video iPod, they have to have response should be measured off the scale. This is a measure of perceived value or utility of the gift.

How Microsoft can improve its wow factor and it’s Christmas present status?. This is a more challenging issue and over time and probably through a number of false starts, but they probably know this.

There is not a lot of argument that Microsoft will acquire market share with it’s Zune Player(s). As I stated earlier, Microsoft will pick up the Playsforsure market which is about 5%. They will pick up additional growth in the market which will logically reduce Apple’s growth delta and eventually reduce Apple’s market share as a result. My question still remains, will those who have already decided to buy Apple iPod change, and will little Johnny or Susie be upset that there is a Zune player in there Christmas Stocking this year.

Computerworld light on facts heavy on speculation

Apple Prepares for Battle

Zune not IPod Killer, a Microsoft Partner Killer

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