c Ferrel Itunes Match

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CHRISTOPHER W. FERREL

Analysis of Apple iCloud and iTunes Match

Disruptive Innovationswithin the Music Industry



WWW.CHRISTOPHERFERREL.COM

AbstractAbout this discussion.

Since the mid-noughties, a growing number of consumers

prefer to access their digital content via Cloud Computing

SaaS providers (Renub Research, 2010). The purpose of

this discussion is to apply Clayton Christensen’s principles of

disruptive innovations within the consumer Cloud Computing

SaaS market. The history, current market and potential disrup-

tive innovations of consumer Cloud Computing SaaS market are

explored. In order to succeed in the consumer Cloud Computing

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seamless accessibility of a consumer’s digital content across all

popular consumer devices and 2.) Provide an incentive for copy-

right holders, especially professionals within the entertainment

industry, to invest in Cloud Computing. Based on its innovative

features and the company’s historical success with emerging

technologies, Apple, Inc.’s iCloud and iTunes Match appear to

be the most likely to succeed in the consumer Cloud Computing

SaaS market.




Contents

Abstract

About this discussion.

Disruptive Innovations within the Music Industry

Analysis of Apple iCloud and iTunes Match.

References



DISRUPTIVE INNOVATIONS WITHIN THE MUSIC INDUSTRY


This document was created for academic purposesat St. Edward’s University and is not intended for

commercial use without express permission.





Disruptive Innovationswithin the Music

IndustryAnalysis of Apple iCloud and iTunes Match.

Apple launches iCloud service BY JUSTIN SULLIVAN /GETTY

IMAGES





Clayton M. Christensen once noted that “disruption is a process, not an event

(Christensen, 2004).” The development of the Cloud Computing industry serves

as an exemplary illustration of Professor Christensen’s critical lessons in disrup-

tive innovations. Since the mid-noughties, industry analysts have suggested that Cloud

Computing has the potential to disrupt the large-scale Information Technology (IT)

industry by fundamentally altering how IT hardware and software applications are

developed, deployed, ran and purchased (Armbrust, 2009; Renub Research, 2010). Cloud

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scalable datacenters. Companies and consumers only pay for their short-term resource

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has never before been available in the IT industry (Armbrust, 2009).

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datacenter hardware and datacenter system software delivered via the Internet or

an Intranet. The architecture of Cloud Computing has existed in internal datacent-

ers of corporations for several years. Commonly referred to as grid computing, these

private Cloud Computing systems gave rise to public Cloud Computing delivered

most commonly by the Software as a Service (SaaS) delivery model (Armbrust, 2009).

Currently the fastest growing segment, SaaS Cloud Computing claims 89% of the Cloud

Computing Market (Renub Research, 2010). Apple, Google, Amazon Web Services, IBM,

Cisco Systems, Microsoft, VMware, Hewlett-Packard, Oracle, Siemens. NEC, Network

Appliance, Salesforce and Facebook are believed to be the most capable SaaS providers

to claim market leadership of the Cloud Computing industry (Armbrust, 2009; Renub

Research, 2010).

“Disruption is a process, not an event.”

Signals of Change

The purpose of this discussion is to apply Clayton Christensen’s principles of disruptive

innovations within the consumer Cloud Computing SaaS market. While several compa-

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will succeed. As previously discussed, Cloud Computing initially gained popularity due

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disrupted Cloud Computing in large-scale business datacenters, the consumer market

has yet to observe the same disruption. According the Christensen’s theory, the con-

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recent 10-K Annual Reports of Western Digital Corporation and Seagate Technology

Public Limited Company. The world leaders in hard-disk drive manufacturing, Western

Digital and Seagate Technology currently serve overshot consumers. For years, data stor-

age has been valued according to the price-per-MB of hard-disk drive’s storage capacity.

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most disruptive innovations, Cloud Computing was not initially cheaper-per-MB than

hard-disk drives. However, Western Digital and Seagate continued to improve upon its





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their needs. The hard-disk drive market primarily relies on an ever-depleting number

of undershot customers, as fewer and fewer customers are willing to pay a premium

for enhancements to hard-disks’ storage capacity.

Meanwhile, a small market of consumers valued the convenience of accessing their digi-

tal content across all their digital devices. Since the mid-noughties, a growing number

of consumers prefer to access their digital content via Cloud Computing SaaS providers

(Renub Research, 2010). Western Digital and Seagate failed to publically acknowledge

Cloud Computing as a disruptive technology until 2009 and 2010, respectively (Seagate,

2008; Seagate, 2009; Seagate, 2010; Seagate, 2011; Western Digital, 2009; Western

Digital, 2010; Western Digital, 2011). Like many companies who focus resources solely

on sustaining technologies, Western Digital and Seagate were not prepared for disruptive

innovations. As described by Christensen, market leaders often fail to identify disruptive

technologies until it is too late to overcome the disruption (Christensen, 2004). Evidence

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WESTERN DIGITAL 2011 10-K ANNUAL REPORT

“CONSUMERS TR AD IT IO NA LLY HAVE STORED TH EI R DATA ON TH EI R PC , OFTEN SUPPLEMENTED WITH

PERSONAL EXTERNAL STORAGE DEVICES. MOST BUSINESSES ALSO INCLUDE SIMILAR LOCAL STORAGE AS

A PRIMARY OR SECONDARY STORAGE LOCATION. THIS STORAGE IS TY PI CAL LY PROVIDED BY HARD DISK

DRIVES. RECENTLY, CLOUD COMPUTING HAS EMERGED WHEREBY APPLICATIONS AND DATA ARE HOSTED,

ACCESSED AN D PROCESSED TH RO UG H A TH IR D-PARTY PROVIDER OVER A BROADBAND INTERNET CON -

NECTION, POTENTIALLY REDUCING OR ELIMINATING THE NEED FOR , AMONG OTHER THI NGS , SIGNIFICANT

STORAGE INSIDE THE ACCESSING COMPUTER. THIS TRE ND COULD CAUSE THE MARKET FOR DISK DRIVES IN

COMPUTERS TO DECLINE OVER TIM E, WHICH COULD HARM OUR BUSINESS TO THE EXTENT THI S DECLINE IS

NOT OFFSET BY THE SALE OF OUR PRODUCTS TO CUSTOMERS WHO PROVIDE CLOUD COMPUTING SERVICES

(WESTERN DIGITAL, ).”

Consumers traditionally have stored their data on their PC, often supplemented with

personal external storage devices. Most businesses also include similar local storage

as a primary or secondary storage location. This storage is typically provided by hard

disk drives. Recently, Cloud Computing has emerged whereby applications and data

are hosted, accessed and processed through a third-party provider over a broadband

Internet connection, potentially reducing or eliminating the need for, among other things,

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Cloud Computing services (Western Digital, 2011).

The Annual 10-K Reports from Western Digital and Seagate further support Cloud

Computing as a disruptive innovation. The current state of the hard-disk industry also

suggests that a new market leader will emerge in the data storage industry. Furthermore,

the emergent company will most likely provide consumer Cloud Computing SaaS ser-

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In order to be competitive in the consumer Cloud Computing SaaS market, two

important value criteria must be realized. First, one must provide convenient and

seamless accessibility of a consumer’s digital content across all popular consumer

devices. Including, but not limited to, desktop computers, laptop computers, tablet

computers, mobile phones as well as home and vehicle entertainment systems. Secondly,

one must provide an incentive for copyright holders, especially professionals within

the entertainment industry, to invest in Cloud Computing.

Competitive Battles

Google and Amazon released highly anticipated consumer-focused Cloud Computing

SaaS in 2011 (Albanesius, 2011). Both companies were clearly focused on providing

consumers with convenient and seamless accessibility of their digital content. Google

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to a Cloud Computing datacenter. Beta testers of Google Music are allowed to upload

as many as 20,000 songs while Amazon provides 5GB of free storage and 20GB if cus-

tomers purchase an AmazonMP3 album (Albanesius, 2011; Miller, 2011). While still

largely under development, both Google and Amazon plan to integrate their services

across a wide variety of web-enabled computers and mobile devices running Android

operating system.

Despite a growing interest from consumers, Google and Amazon have been hampered

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and Amazon have failed to secure licensing agreements with the artists, record labels

and publishers within the music industry (Albanesius, 2011). The Director of Music

at Amazon, Craig Pape, told The New York Times, “We don’t need a license to store

music. The Functionality is the same as an external hard drive (Miller, 2011).” Google

agrees with Amazon and argues that they do not need licensing agreements because

users upload content that they already own (Albanesius, 2011).

1. Convenient and seamless accessibility of a

consumer’s digital content across all popular

consumer devices.

Copyright holders believe that Google and Amazon are in violation of licensing agree-

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of said content for which royalties are owed (Albanesius, 2011). Copyright holders

have also expressed concern that Google and Amazon do not provide reliable methods

to prevent pirated content from being stored via their Cloud Computing services. The

Recording Industry Association of America (RIAA) successfully sued MP3.com in 2008

for providing a similar service (Price, 2011). The precedent set in the RIAA vs. MP3.

com case suggests that Google and Amazon will be forced to comply with the copyright

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Unlike Amazon and Google, Apple, Inc. has successfully secured licensing agreements for

their release of iCloud and iTunes Match service. Announced at Apple, Inc.’s Worldwide







Apple, Inc. has a proven track record of successful development and implementa-

tion of disruptive innovations. The iPod, iTunes, iPhone, App store and the iPad

are all innovative examples that have contributed to Apple’s 58.85% growth in

net income during the past 36 months (Hoover’s Online, 2011). Google, in comparison,

has seen a 26.48% growth in net income during the past 36 months. During the same

time, Apple’s iPhone sales increased by more than 90% and accounted for 39% of the

company’s 2010 revenue (Hoover’s Online, 2011). The growth in consumer-focused

products suggests that Apple is highly in tuned with current consumer needs and that

iCloud will successfully appeal to the consumer Cloud Computing market.

Strategic Choices

Apple’s commitment to innovation has created a value network that deters entrants due

to the high barriers associated with overlapping value networks. Christensen explains

that when an entrant company’s value network overlaps with an incumbent’s supplier or

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greater amount of resources in order to disrupt the industry because they are in direct

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create new copyright holders, they will be forced to spend more resources in order to

form licensing agreements with artists, labels and publishers. An overlap in customers is

also likely given that iCloud favors Apple’s highly popular proprietary devices. In other

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of resources in order to disrupt the industry

Apple’s commitment to innovation further supports the iCloud and iTunes Match as

disruptive technologies. Due to their previous successes, Apple’s investors trust in their

business processes and methodology and allow Apple freedom to identify and develop

disruptive innovations. It seems likely that iCloud will succeed as the market leader

in consumer Cloud Computing SaaS because of the competitive advantage created by

iTunes Match.



REFERENCES


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HTTP://WWW.PCMAG.COM /ARTICLE /,,,.ASPFBID=JHXKXB_OSHT

ALBANESIUS, C. (). REPORT: GOOGLE PREPPING MP S TORE… AHEAD OF I TUNES MATCH? PC MAG.

RETRIEVED FROM HTTP://WWW.PCMAG.COM /ARTICLE /,,,.ASPFBID=JHXKXB_OSHT

ARMBRUST, M., FOX, A., GRIFFITH, R., & JOSEPH, A. D. (). ABOVE THE CLOUDS: A BERKELEY VIEW

OF CLOUD COMPUTING. UNIVERSITY OF CALIFORNIA, (UCB/EECS--), -. EECS DEPARTMENT,

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TECHRPTS / /EECS--.HTML

CHRISTENSEN , C. M., ANTHONY, S. D., ROTH, E. A. (). SEEING WHAT’S NEXT?: USING THE THEOR IES

OF INNOVATION TO PREDICT INDUSTRY CHANGE. HARVARD BUSINESS SCHOOL PRESS.

HOOVER’S ONLINE. (). APPLE INC. COMPANY REPORT. RETRIEVED FROM HTTP:// WWW .HOOVERS.COM /

COMPANY /APPLE_INC /RTJCCI-.HTML

MILLER, C. C. (). AMAZON INTRODUCES A DIGITAL MUSIC LOCKER. THE NEW YORK TIMES. RETRIEVED

FROM HTTP://BITS.BLOGS.NYTIMES.COM / / / /AMAZON-INTRODUCES-A-DIGITAL-MUSIC-LOCKER /

PRICE, J. (). ICLOUD: A MUSIC INDUSTRY GAME-CHANGING PRODUCT. TUNECORE. RETRIVED FROM

HTTP:/ /BLOG. TU NE CO RE .CO M / / /ICLOUD-E-A-MUSIC- INDUSTRY-GAME-CHANGING-

PRODUCT.HTML

RENUB RESEARCH. (). CLOUD COMPUTING – SAAS, PAAS, IAAS MARKET, MOBILE CLOUD COMPUTING,

M&A, INVESTMENTS , AND FUTURE FORECAST, WORLDWIDE. RETRIEVED FROM HTTP://WWW .SLIDESHARE .NET /

RENUBRESEARCH /CLOUD-COMPUTING-MARKET-WORLDWIDE

SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY. (). FORM -K.

SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY. ().

FORM -K. SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY. (). FORM -K.

WESTERN DIGITAL CORPORATION. (). FORM -K.




SPECIAL THANKS TO O TTO COSTER AND SMASHING MAGAZINE FOR PROVIDING THIS BEATIFUL INDESIGN TEMPLATE



ABOUT THE AUTHOR

Christopher W. Ferrel is a musician and student

currently working towards an MBA in Digital

Media Management at St. Edward’s University in

Austin, Texas. He specializes in artist management

and direct-to-fan marketing campaigns.

[email protected]

www.christopherferrel.com

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c Ferrel Itunes Match