Crossing the chasm with beacon products in the portable musicplayer industry

Yi-Nung Peng a,n, Susan Walsh Sanderson b

a College of Management, Yuan Ze University, 135 Yuan-Tung Road, Chung-Li 32003, Taiwanb Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180, USA

a r t i c l e i n f o

Available online 18 October 2013

Keywords:Technology evolutionDesign convergenceDominant designTakeoffBeacon productCrossing the chasm

a b s t r a c t

Firms competing in new product categories face great technical and market uncertainty as they try tomove from early adopters to mainstream markets (Mahajan and Muller, 1998; Muller and Yogev, 2006;Rogers, 2003). While the management literature identified several factors that may contribute toadoption, the role of specific product models has been understudied. To address this gap, we studiedportable digital music players (MP3 players) from 1987–2006 and tested the role of specific productmodels in market takeoff, convergence and product category evolution. We introduced the concept ofbeacon product, defined as a specific product model that has great appeal to customers and sends a strongsignal about what they want.

We found that Apple's first iPod model triggered market takeoff and that many competitors tried toemulate the original iPod design, leading to convergence around its key design features. But it took theiPod/iTunes store combination, a new ecosystem for the legal download of digital music, to bridgethe gap between early MP3 adopters, primarily young people, to mainstream markets. The iPod/iTunesecosystem proved more difficult for competitors to copy and many of the firms that had pioneered theMP3 category exited the industry or were relegated to small niches. By subsequently introducing newmodels with smaller form factors at lower prices and expanding iTunes Store offerings, Apple effectivelypreempted competitors from gaining share in this growing market.

& 2013 Elsevier Ltd. All rights reserved.

1. Introduction

Firms trying to compete in the early stages of a new productcategory are often faced with uncertainty about which technicalavenue will prove most fruitful or what product features customerswill actually prefer. That uncertainty leads to the exploration of agreat number of technical approaches and many different productvariants. In this paper we examine the earliest phases of the develop-ment of a product category by studying the introduction of MP3portable audio hardware players. We examine the role of individualproduct models in market takeoff and investigate whether or notthere is convergence over time as suggested by dominant designtheory. We introduce beacon product, a new construct that empha-sizes the role of an outstanding product model in the evolution of aproduct category. We believe that a beacon product may be aprecursor to the development of a dominant design, a predominanttheory in many management studies (Abernathy and Utterback,1978; Clark, 1985; Dougherty, 1990; O'Connor and Veryzer, 2001;

Reid and de Brentani, 2010; Utterback, 1994). We show that whilestartup firms like Diamond and Rio pioneered MP3 music hardwareplayers, Apple's iPod led to market takeoff. But it was the iPod/iTunescombination that allowed the MP3 category to crossover to main-stream markets, displacing music incumbents Sony and Philips, aswell as MP3 pioneers.

The organization of the paper is as follows. We first explore theliterature on the evolution of product categories with a primary focuson market takeoff, convergence and dominant design. We thenpresent our conceptual model and methodology. We follow with abrief history of MP3 technology and the development of early MP3hardware players. We examine the impact of Apple's iPod on markettakeoff, convergence and the development of a dominant design. Weanalyze the role of the iPod/iTunes ecosystem in moving the MP3category from a niche to mainstream market and conclude with asummary of our findings and observations.

2. Role of product design in takeoff, convergence andcross-over to mainstream markets

Management scholars have a long tradition of studying tech-nology and innovation, most notably from two primary traditions:one perspective emphasizes the evolution of technology and

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n Corresponding author. Tel.: þ886 988 722 272; fax: þ886 463 0377.E-mail addresses: pengyn@saturn.yzu.edu.tw (Y.-N. Peng),

sandes@rpi.edu (S.W. Sanderson).

Technovation 34 (2014) 77–92

market adoption and the other how technologies affect competitiveadvantage and the firm. While each of these perspectives haveyielded important insights, their finding have not been well inte-grated with each other leading to confusion as to how technologiesevolve and the impact of firm strategies on markets. In an articlecelebrating the 50th Anniversary of Management Science, Gavetti andLevinthal (2004, p. 1310) suggested that “analyses of firm perfor-mance differences are increasingly being placed more centrally in amarket context, where questions of consumer demand and marketcompetition are now more salient than had been the case for earlier,more purely firm-centered accounts.” This paper tries to bridge a gapin the literature on the evolution of markets and firm strategies.We focus on how specific product models can trigger market takeoff,how dominant designs emerge and how product categories canmove from niche to mainstream markets.

Innovation, embodied in products, has received scholarly atten-tion both directly and indirectly. For evolutionary economiststhe path of an innovation is thought to be the interplay betweeninnovations (mutation) and the market (selection). Danneels(2002) studied how product innovation contributes to firmrenewal and suggested that firms faced distinct challenges basedon whether a new product can draw on existing competences, orwhether it requires competences the firm does not yet have.Orihata and Watanabe (2000) showed that as an innovation goesthrough different stages of its life cycle, the companies learn,interpret, and implement what they learned from the market tofacilitate the creation of innovative product models. Innovativeproduct models can create new markets (O'Connor and Rice, 2013)and may also set the path for the development of an innovationcategory (Sahal, 1981, 1985).

Sahal (1981) introduced the concept of technological guidepostsbased on the observation that some product models are moreimportant than others in providing a foundation for the gradualevolution of product categories. These guidepost models, accordingto Sahal, leave a distinct mark on a category and become thefoundation for improvements (Sahal, 1981: 33). He observed thattechnological guideposts result from prior advances and are seldom amatter of radical breakthrough (Sahal, 1981: 36, 309). Further, heobserved, that the greater the variety of tasks to which a design isadaptable, the more likely it is to guide the general direction of futuretechnical advances (Sahal, 1981: 36, 309–310). Later Sahal (1985)described technological guideposts as an “innovation avenue”.

While the relationship between product innovations and themarket takeoff has not been well studied, a few scholars havesuggested a possible relationship between product innovations,market takeoff and the formation of a dominant design. Geroski(2000) provided an example of how competition between twovariants of an innovation, variant A and B, could lead to the market'seventual convergence onto one variant. He pointed out that a“sudden burst of adoption will occur” when one variant becomesthe winner and the subsequent reduction in variants can result in theformation of a dominant design.

The idea of a “burst of adoption” is also similar to the concept ofmarket takeoff described by various scholars (Agarwal and Bayus,2002; Golder and Tellis, 1997, 2004). Some scholars define markettakeoff as the transition between the early commercialization andgrowth stages (Golder and Tellis, 1997) or the point in time whenthe sales of a product class experiences a surge in adoption, oftenresembling a hockey-stick (Agarwal and Bayus, 2002). Factorscontributing to market takeoff are thought to be price drops(Golder and Tellis, 1997), and firm entry, as a proxy for productperformance improvement (Agarwal and Bayus, 2002). Golder andTellis (2004) suggested that information cascades—increased ben-efits and decreased risks to adoption for users as others adopt thesame products, and good economic conditions may also contributeto takeoff.

Abernathy and Utterback (1978) noticed that as “industries”evolve they tend to converge on a few solutions—narrowing tech-nological approaches. They called this concept dominant design.Murmann and Frenken (2006) published a meta-analysis summariz-ing how various scholars have applied dominant design at differentlevels of analysis ranging from the concrete product to the level ofa whole industry. Originally, dominant design was mainly thought ofas a product level phenomenon (Abernathy and Utterback, 1978;Utterback and Abernathy, 1975) but more recently some scholarshave used it to describe convergence at the firm and industry levels.Following up on his earlier analysis with Abernathy, Utterback (1994)used dominant design to refer to a collection of previous innovations.Christensen et al. (1998) expanded the concept to encompassarchitectural design. Because dominant design has been used todescribe product, firm and industry level phenomenon, there isconsiderable confusion over what is meant by dominant design,whether there is design convergence and what implication it has forthe evolution of the product category.

From niche to mainstream markets. From a market perspective,an important stream of research focusing on the diffusion ofnew technologies began with Rogers' (1962) introduction of theS shaped curve to reflect the stages before an innovation reachescritical mass (from a niche to mainstream). Foster (1986) used theS curve concept to suggest that, unencumbered by existingtechnology, new entrants are most likely to innovate in a newtechnology arena. Moore (1991) argued that whether an innova-tion is developed by an incumbent or a new firm, there is a chasmbetween the expectations of early adopters (technology enthu-siasts and visionaries) and the early majority (the pragmatists) andpioneering firms often struggle to make products with widespreadappeal. The role of innovative products in reaching mainstreamconsumers is not well understood nor is howmarkets move from aniche to a mainstream market.

Levinthal (1998) suggests that while an initial technology formmay not differ substantially from its predecessor, separation, and adistinct selection environment, may trigger divergent evolutionarypaths (Levinthal, 1998: 218). From this application area (niche), atechnology may be able to penetrate other niches and may evenout-compete prior technologies. The process of “creative destruc-tion” may occur when a technology that emerges from onespeciation event (or niche) is successfully able to invade anotherniche. When these niche technologies cross into mainstreammarkets they may seriously affect incumbent companies, withsome incumbents able to adapt and others not.

Finally, an important stream of literature concerns how incum-bents miss opportunities. Explanations range from the nature ofthe technology itself (Abernathy and Clark, 1985; Tushman andAnderson, 1986), organizational issues (Abernathy and Clark, 1985;Henderson and Clark, 1990; McDermott and O'Connor, 2002) failuresto understand market shifts (Christensen, 1997; Christensen andRaynor, 2003; Christensen and Rosenbloom, 1995; Danneels, 2004;Henderson, 2006; Liefer et al., 2000; Tripsas and Gavetti, 2000), andthe need to develop market capabilities.

3. Conceptual model

Building on the insights of these scholars we propose a modelof market takeoff, design convergence and crossover to main-stream markets highlighting the role of outstanding products(illustrated in Fig. 1). In our model, a company initiates a projectto design a product (model) that it introduces into the market.Customers react to the model, and based on observations abouthow specific models fare, the original company (or another firm)produces a new model that reflects these insights. As Sandersonand Uzumeri (1997) illustrated in the case of the evolution of the

Y.-N. Peng, S.W. Sanderson / Technovation 34 (2014) 77–9278

Sony Walkman product family, competitors vie with each other toproduce new models that will attract customers and the categoryevolves from a niche to a mainstream market.

Most early models attract only moderate interest and attention.Initially, the number of adopters is small (represented by a thinarrow line between products and market size) due to the limitedfit of the product to the real market needs. As the product categorybegins to mature and more models are introduced, some modelswill attract more customers than others. Periodically a model mayappear that has a very strong appeal to consumers. Firms, includ-ing the one that introduced the product in the first place, will seekto emulate the popular model and introduce their own variants. Asthey iterated their designs, firms will likely emulate these success-ful model(s) in developing their newmodels. We call these modelsbeacon products to emphasize their role in leading the way forfurther development. We use the term beacon product to refocusattention on the critical role of a specific model and to distinguishit from the outcome of convergence or dominant design.

From a technical point of view, the beacon product can be anincremental innovation but consistent with Sahal's insight aboutguidepost designs, it often has a radical effect on the marketproviding a significant improvement or extension of the capabil-ities of the products that came before it.

We hypothesize that the beacon product may help lead todesign convergence as competing firms offer products with similarfeatures (Pa, Pb, Pc, and Pd). As more models with similar designsare launched or customers flock to a favored design, productvariation may be reduced. Firms producing models that are notas popular (P1 in Fig. 1) may exit the market due to lack of demandfor their variant. P2, as a variant of the original innovation, mayalso exit the market for the same lack of consumer interest. Apossible outcome would be for the firm that produces the variantwith high demand to grow in market share, displacing other firms.The beacon product construct builds on the insights of dominantdesign and guidepost theories and provides a linkage between afirm's product strategy and market reactions.

The concept of dominant design has drifted over time and hascome to describe an abstract coalescence of characteristics thatmany product models share. The beacon product construct refo-cuses attention at the product level. We study specific product

models and the reaction of customers to those models. We suggestthat specific popular product models act to guide companies intheir future product development. As companies emulate thedesign features of specific popular models, the product categoryevolves and these popular features become standard on mostmodels. Some features of the beacon product may be moredifficult to emulate than others due to patent protection or otherspecial capabilities of the innovating firm. Unsuccessful firms willexit the industry leaving a smaller number of firms to share agrowing market (Nelson, 1991).

The beacon product concept complements dominant designtheory by providing direct evidence of how a dominant designmight emerge. In the case of the MP3 category, we hypothesizethat Apple's innovative iPod model triggered takeoff and waswidely emulated by competitors. The beacon product constructcomplements technological guideposts and dominant design the-ory and contributes to our understanding of early stage productcategory evolution.

To summarize, the main ideas at the heart of our model are:(1) specific innovative product models can trigger a surge inadoption that may lead to market takeoff; (2) product modeldesigns will converge as firms emulate an innovative beaconproduct; (3) the beacon product provides a new direction forinnovation increasing demand that may crossover to mainstreammarkets; and (4) firms that are less able competitors may besqueezed out and exit the market.

3.1. Methodology

To test our model we studied the development of the MP3product family and the evolution of MP3 music players from 1987to early 2006 following the case study method described by Yin(2002). We collected longitudinal qualitative and quantitative dataon the key sources of innovation and actions of the firms whopioneered the MP3 product category, focusing on portable hard-ware players, a development that followed the first use of MP3software on PCs by several years. To ensure the reliability andvalidity of the data and to establish an objective account of theevolution of MP3, we collected information from many sources. Todetermine whether the iPod triggered market takeoff, unit sales of

Fig. 1. Beacon product model.

Y.-N. Peng, S.W. Sanderson / Technovation 34 (2014) 77–92 79

US portable digital music players between 1999 and 2005 wereanalyzed following the market takeoff identification method usedby Golder and Tellis (1997). We used the Levene method (Norusis,2000) to test whether the design of products introduced after theiPod converged. The fate for pioneering firms was analyzed usingdata on market share. A diagram of the sources of data and variablesis presented in Fig. 2 and further details of the data and analysis inthe remainder of Section 3.

3.1.1. Data using keyword search of popular and specialized pressWe conducted two broad-based keyword searches on ABI/

Inform, a source for articles from both popular and specialtypublications, using two keywords: (1) MP3 and (2) digital music.These keywords provided good coverage of different aspects ofMP3 related innovations and a chronology of industry evolution.Typical publications reviewed included: (1) Business Magazines—Business Week and Fortune; (2) Newspapers—New York Times andWall Street Journal; (3) Two Popular Technology Magazines—PCMagazine and PC World; (4) Popular Music Magazines—Rolling StoneMagazine and Billboard. For information on the early evolution ofMP3 software we used books by Alderman (2001), Frankel et al.(1999), Fries and Fries (2000), Haring (2000), Lickfett (2000), Menn(2003), and Milstead (2003). The official biography “Steve Jobs”(Isaacson, 2011) was a valuable source for direct information ondecision making at Apple.

We also used public documents including data from the US PatentOffice, the US Census Bureau, and the Pew Research Center's Internet& American Life Project. They helped us understand the initiatives

and technological resources developed by firms in the MP3 industryas well as demographic changes in the consumption of digital music.

Publications from music industry associations such as theInternational Federation of the Phonographic Industry (IFPI) andthe Recording Industry Association of America (RIAA) were veryhelpful in provided industry sales data over time.

We used company websites and press releases for model intro-duction dates. Product specifications were collected from usermanuals. We conducted an in-depth interview (eight hours) withDmitry Boldyrev, a software developer who played a key role inthe development of the MP3 innovation by porting AMP to theMacintosh (MacAMP) and Microsoft Windows (WinAMP) plat-forms. In addition, we interviewed managers in the Sony VAIOdivision and read accounts of various aspects of MP3 history in theUS, Japan and Europe.

3.1.2. Statistical analysis on design convergence dataTo objectively examine the nature of convergence of the MP3

player models, we collected product specifications and dates ofintroduction. We compared the brand names that appeared inadvertisements in the New York Times from 1997–1999 with thoseincluded in PC Magazine reviews. We found that PC Magazine hada larger number of brands than those that were advertised inthe New York Times. PC Magazine is targeted to a much morespecialized audience and manufacturers frequently send out pressreleases and products for review to magazines that cover theirindustry. Expert reviewers also “ask” for samples from companieswhen new products are launched. We realize that companies did

Fig. 2. Data collection and analysis scheme.

Y.-N. Peng, S.W. Sanderson / Technovation 34 (2014) 77–9280

not send out every model to PC Magazine for review so wecollected only models listed from PC Magazine online review,which tended to be more representative of overall product lines. Inaddition, we collected model level data directly through companywebsites. Using these sources we are confident that the reviewcoverage for players in the portable digital product category issatisfactory for the purposes of this study.

Models from 33 MP3 player firms were reviewed between 1998and 2005 in PC Magazine online reviews. Model specificationsfor 799 models were accessed from each of 33 firm websites andsupporting documentation was downloaded. Data on model specifi-cations included: (1) storage types—flash memory, hard drive, CD-ROM, MiniDisc, or Hi-MD, (2) file formats used by players—MP3,WAV, WMA, AAC, etc., (3) physical size and (4) physical weight. Wealso coded various additional functions such as FM radio receiving,transmitting, recording, and in-line recording, etc. We were able tocollect data on the official prices of 357 models (not all model priceswere available) from company websites. 247 other retail price pointswere determined using Amazon.com. These prices were usuallylower than those found on the company websites.

We collected information on the launch dates for the modelsincluded in the study. To determine the model introduction date, wecollected press releases from 3 different sources: (1) press releasesfrom company websites (companies did not always include all thepress releases online); (2) press release dates provided to trademagazines, newswires, and user enthusiast groups; and (3) firstdate available on Amazon.com. We found that the dates collectedthrough various press releases and those provided by Amazon.commatched reasonably well. We also collected quantitative consumerresponses—(1) number of reviews and (2) average consumer reviewson 5-point scale from Amazon.com. At the end of this effort our dataincluded: (1) 33 brands, (2) 799 models, (3) 504 introduction dates, (4)604 prices of models and (5) specifications for 799 models. Levenetests were performed using these data to examine the nature ofconvergence in MP3 players.

4. Evolution of music technologies

Fig. 3 shows the evolution of music technologies from the early1980s to late 1990s. Sony and Philips had been dominant in themusic industry for the two decades after they jointly developedthe Compact Disc (CD) standard in the early 1980s. Althoughthe CD format was very successful when it was introduced in 1982,both Sony and Philips realized by 1986 that sales of compactcassettes (audio tapes) were slowing. Portable CD players had a“skipping” issue and the CD's lack of recording capability may havelimited its appeal. By the end of the 1980s, the “problem” of choice

for Sony and Philips was to address the limitations of existing CDdevices and to come up with a technology that had recordingcapability and could prevent skipping. In 1992, Philips and Sonyled the industry with digital audio file compression and decom-pression technologies and each introduced products they thoughtwould be able to replace compact cassettes.

Sony introduced the MiniDisc in 1992 and the same year Philipsintroduced the Digital Compact Cassette (DCC). The DCC had limitedmarket success and Philips stopped production of the devices andtapes in late 1996 and early 1997 (Anonymous, 2001, 2003a).

4.1. Development of MP3 standard

In 1987, researchers at the Fraunhofer IIS (Institut fur Integri-erte Schaitungen) started to work on a new perceptual audiocoding algorithm in the context of a EUREKA project (EU147Digital Audio Broadcasting (DAB)), a joint effort between Fraun-hofer IIS researchers, headed by Karlheinz Brandenburg andProfessor Dieter Seitzer of the University of Erlangen. The algo-rithm they developed allowed significant file compression whilemaintaining original sound quality. MP3 could achieve a 1:12 datacompression ratio. By contrast, a CD-ROM held 673 MB of data,which translated into 74 min of music or 20 songs on an audio CD.On the same CD-ROM, using an MP3 compression algorithm, a CDcould hold 12 h of music or 150 songs (Fries and Fries, 2000).

In 1988, the International Standardization Organization (ISO)established the Motion Picture Expert Group (MPEG) to develop adigital coding standard for video and audio signals (Musmann,2006). While other firms, such as Sony and Philips, had developedtheir own compression technologies, for a variety of reasonsthat had little to do with sound quality, the MPEG adopted theFraunhofer IIS coding algorithm ISO-MPEG Audio Layer-3 (MP3) asthe standard. In April 1989, Fraunhofer IIS received a Germanpatent for MP3. MP3 was later included in the MPEG-2 standard in1992 (Fraunhofer IIS, 2009).

By the late 1990s, after MP3 was established as the standardfor compressing digital music, a number of technologies cametogether to launch the MP3 music revolution. This revolution wasenabled by the development of open source codecs, easy-to-useGraphical User Interfaces (GUI) and the availability of higherbandwidth Internet connections (Alderman, 2001; Frankel et al.,1999; Heuser, 2001; Lickfett, 2000; Menn, 2003; Morrison andWhitehouse, 2008; PlayMedia, 1997).

4.2. Development of the early MP3 players

The first portable MP3 players were developed in Korea byKwang-su Moon and Jung-ha Hwang, in November, 1997. Theyassigned their patent rights separately to two Korean companies,Saehan and DigitalCast (Anonymous, 2006c). Saehan and Digital-Cast marketed MPMan and MPStation (the two portable MP3players) in Korea in 1997. In 1998, the two companies jointlystarted a company in the United States to market the MPMan F-20.Although MPMan pioneered the MP3 hardware players, the firm'sefforts met with limited success.

Following MPMan, Diamond Multimedia, Creative Labs, andSony introduced MP3 players using flash memory as their musicfile storage medium. Later, in 1999, HanGo introduced the PJB-100,the first MP3 player using a hard drive. The PJB-100 was the resultof collaboration between Compaq and HanGo. Creative Labs andArchos also introduced hard drive MP3 players.

As shown in Table 1, these early MP3 players, including theMPMan F-20, Rio PMP300, Creative Normad and the Sony NW-MS7, used flash memory. The music file format was the MP3 withthe exception of Sony's NW-MS7model that used ATRAC3, Sony'scompeting compression algorithm. With storage capacity of 64Fig. 3. Life cycles of various audio technologies.

Y.-N. Peng, S.W. Sanderson / Technovation 34 (2014) 77–92 81

Megabits, these pioneering models held about the same number ofsongs and were similar in size to the CD Walkman. In effect, theywere an MP3 flash memory version of the CD Walkman with theadvantage that they did not skip. In contrast, early hard drive MP3players, such as the HanGo PJB-100, Creative Labs' Nomad Jukebox and Archos' Jukebox 6000 carried more music but were muchlarger and heavier than these early flash-based players. They couldstore more music but their low bandwidth (12 MB/s) connectionmeant that it took a long time to fill up the hard drive.

Although the early flash-based MP3 players solved the skippingproblem and were reasonably lightweight their main drawbackwas that users needed to change music on quite often and transferspeeds were slow. By contrast, hard drive-based MP3 players couldcarry more music but they were large and heavy and also requireda long time to load.

4.3. Original Apple iPod and its innovative design

Apple identified the limitations of these early players anddeveloped a model that would alleviate many of these constraints(see Fig. 4). The iPod was similar in size to flash memory MP3players (7.62 in.3 vs. 4.05–7.02 in.3) but had a much larger storagecapacity (64 MB vs. 5 GB). Compared with other hard drive MP3players, the iPod was also much lighter (5.6 oz. vs. 10.7–12 oz.) andhad a much higher data transfer rate (400 MB/s vs. 2–12 MB/s)than all of the other MP3 players in the market at the time. Indeed,the iPod had the storage capacity of a hard drive player with theportability of a flash player.

Its high capacity, small size, fast file transfer rate and ease ofuse really distinguished the iPod from the rest of the competition,attracting new customers to the MP3 category (Mick and Fournier,1998). Key among Apple's iPod innovations and what set it apartfrom other MP3 players were its improved portability (measuredby size and weight) and storage capacity enabled by the use ofa new Toshiba 1.8 in. hard drive (Isaacson, 2011: 385). To ensurefast music file transfer and management, Apple used Firewire, atechnology that the firm had previously developed. To navigatemusic and control the iPod, Apple developed an innovative scrollwheel (Isaacson, 2011: 388). We discuss these four innovationsbriefly below.

4.3.1. 1.8 in. Hard drive innovationDuring a trip to Japan in February 2001, Jon Rubinstein, an

Apple engineer, learned that a tiny, 1.8 in. high capacity drive wasbeing developed by Toshiba. The drive was about the size of asilver dollar and could hold 5 GB of storage or about 1000 songs(Isaacson, 2011: 385). With Jobs concordance, Rubinstein securedexclusive rights to all of these small disk drives that Toshiba couldproduce for $10 million dollars. Toshiba's tiny drive, weighing only5.6 ounces, was significantly lighter and smaller than the drivesused in competing MP3 products and it had much greater capacity.As we saw in Fig. 4, the iPod offered twice the capacity for thesame size and close to twice the capacity for the same weight ascompeting models. With exclusive access to the Toshiba drive,Apple had a head start on its competitors, but by the summer of2003, other hard drive manufacturers such as Hitachi, started tooffer small competitive hard drives (Spooner, 2003).

4.3.2. Firewire innovationApple had the advantage of having control of both hardware and

software and Firewire enabled Macs to transfer 1000 songs to theiPod in less than 10 min (Isaacson, 2011). The Firewire standard (IEEE1394) was published in 1995 and Apple, Sony, NEC and Compaq putIEEE 1394 ports on their PCs from 1998 on (Teener). Jobs decided toinclude Firewire (400 MB/S), a faster updated version on the iMac, inOctober 1999 (Isaacson, 2011). Competing MP3 player manufacturesdid not start to make models with USB2 (480 MB/S) connectionsuntil 2002 (most of the non-Mac PCs had only USB1 port (12 MBS))(see Appendix 1A). The iPod used both Firewire and USB 2 from April2003. The iPod's high transfer rate was a critical factor in the successof the iPod as illustrated by a sample of reviewers' comments fromAmazon talking about FireWire.

“There is more than a 10x difference in the amount of informationa FireWire card can transmit versus a USB card. For example, let'ssay you have 10 Gigabytes of songs to transfer. With USB, you aretalking about 8–10 h to transfer all that information. With Fire-Wire you are talking about an hour tops. Time saved alone makesthe $35 investment worthwhile.”

Table 1Pioneering MP3 players.

Company Digital cast Diamond media Creative labs Sony HanGo Creative Labs ArchosModel name MP-Man F-20 Rio PMP 300 Normad NW-MS7 PJB-100 NOMAD Jukebox Jukebox 6000Date of introduction Feb 98 Sep 98 Apr 99 Sep 99 Nov 99 Sep 00 Dec 00Price $200 $200 $170 $432 $750 $500 $399Size (in.3) 7.02 5.51 5.52 4.05 18.59 41.25 18.72Weight (oz.) 2.4 2.4 2.26 2.36 10.7 12 12Storage technology Flash Flash Flash Flash HD HD HDMusic Format MP3 MP3 MP3 ATRAC3 MP3 MP3 MP3Storage capacity (MB) 64 64 64 64 4800 6000 6000Bandwidth to PC (MB/s) 2 2 2 12 12 12 12

Intro. Date

Company

Model

Price

File Format Weight

Storage Tech. Bandwidth

64 64 64 64

4800

6000 6000

5000

7.02 5.51 5.52 4.05

18.59

41.25

18.72

7.62

0500100015002000250030003500400045005000550060006500

0

5

10

15

20

25

30

35

40

45

50

Feb. 98 Sep. 98 Apr. 99 Sep. 99 Nov. 99 Sep. 00 Dec. 00 Oct. 01

Digital Cast

Diamond Media

Creative Labs

Sony HanGo Creative Labs

Archos Apple

MP-Man F-20

Rio PMP 300

Normad NW-MS7 PJB-100 NOMAD Jukebox

Jukebox 6000

iPod

$200 $200 $170 $432 $750 $500 $399 $399

MP3 MP3 MP3 ATRAC3 MP3 MP3 MP3 MP3

2.4 oz 2.4 oz 2.26 oz 2.36 oz 10.7 oz 12 oz 12 oz 5.6 oz

Flash Flash Flash Flash HD HD HD HD

2 MB/s 2 MB/s 2 MB/s 12 MB/s 12 MB/s 12 MB/s 12 MB/s 400 MB/s

MBCubic Inch

Capacity(MB) Size (cu. in.)

Fig. 4. Comparison between early MP3 players and Apple iPod.

Y.-N. Peng, S.W. Sanderson / Technovation 34 (2014) 77–9282

“My other portable is a Rio 500 with a USB 1.1 interface. Itransferred about 430 MB's of data into the iPod in far less timethan it takes for about 60 MB's into the Rio.”

Source: Amazon.com.

4.3.3. Scroll wheel innovationSome industry experts have credited Apple's iPod success to its

outstanding innovation in navigation and its easy to use scroll wheel(Kasrel and Bernoff, 2001; Machrone, 2004). The scroll wheel has beendescribed as mouse-like. With it, users are able to control the devicemore easily and precisely (Kasrel and Bernoff, 2001; Machrone, 2004).Machrone (2004) captured this advantage in his article comparing thedesign of various portable digital music players:

“A button or switch has a cycle time: the time required todepress it, the time for you to recognize that it's been actuated,and the time to release it. A well-designed switch shouldbalance travel, effort, and physical feedback. You can't provideinput any faster than the switch's cycle time, and when theswitch is used for scrolling through menus, the stage is setfor UI disaster. By contrast, the Synaptics scroll wheel on theiPod (the same technology that is in many laptop touch pads)responds at human speed. It is what makes the mouse sosuccessful: Things happen at the rate you determine. There's nocycle time, no waiting for feedback, no pressing twice becauseyou're not sure whether the device “heard” you.”

Source: Machrone (2004).

4.4. iTunes innovation

Many industry observers have credited Apple's success to theiTunes Store for opening up the legal music download business(Kasrel et al., 2001a, 2001b; Levy, 2004). On the software side,iTunes, the music management software and later online music storebundled with the iPod, was very easy to use even for people withlimited computer knowledge. Moreover, it gave users an avenue tolegally download music, an important advantage in an era whenillegal downloading was receiving increasing scrutiny.

“iTunes had extremely high usability and convenience. A keyelement of this offering was wrapping content in DRM — digitalrights management. But Apple's DRM (called FairPlay) suc-ceeded because it was nearly invisible to consumers.”

Source: Bernoff et al. (2005).

iTunes was unveiled at the January 2001 Macworld and offeredfree to all Mac users who would now be able to rip, mix, burn theirmusic (Isaacson, 2011: 383–4). Over the years, improvements infile swapping technologies led to widespread file sharing, parti-cularly among college students, who had access to broadbandconnections. Commercial peer to peer networks were developedand greatly expanded music available as downloads. In an effort tostem the tide of illegal downloads, the RIAA sued 261 individuals,some of whom were college students and teenagers (Anonymous,2003b). But despite RIAA efforts, the trend of illegal downloadingwas unstoppable (Nash, 2011). Although the original iTunes wasnot much better than competitors such as Real Jukebox, WindowsMedia Player, MusicMatch, and SoundJam (Breen, 2001) when it wasfirst introduced, in 2003Apple negotiating contracts with key recordcompanies (Leonard, 2003) catching other competitors be surpriseand fundamentally altering the course of the music industry. We willtake up the important role of iTunes in the evolution of MP3 categoryin Section 7.

4.5. Consumers reaction to the iPod

In order to understand how consumers perceived the iPodrelative to other MP3 players we did a content analysis based onuser ratings posted on Amazon. The individuals who posted thesereviews are not necessary Amazon consumers or online shoppersas anyone can post a review on the Amazon website. Amazonprovides a simple 5-point scale for users to express their generalexperiences with a product.

We collected the reviews and ratings of the 3 early iPod modelsthat were introduced from October 2001 to July 2002. Theseincluded the 5 GB model for Macintosh platform only, and the10 GB and 20 GB models for both Wintel and Macintosh platforms.It is important to compare the opinions of Wintel users andMacintosh users as Macintosh users might prefer the iPod simplybecause it is an Apple product. In general, we found this wasnot the case. The average rating for the 5 GB Macintosh iPod was4.5 among 88 reviewers compare the 4 to 4.5 for Wintel andMacintosh supported models.

5. Impact of the iPod on market takeoff

We hypothesized that the iPod's outstanding design mighthave triggered market takeoff for the MP3 player category as awhole. To test our hypothesis, we used unit sales of US portabledigital music players between 1999 and 2005 (see Table 2). In thisanalysis, we followed the market takeoff identification methodused by Golder and Tellis (1997). We determined that 2001 wasthe year of market takeoff. 2000 was the first year that we couldcalculate the increases in sales given data limitations in industrysales. In 2000, the percentage of sales increase was 2%, a figurethat was below the takeoff threshold given the half millionindustry wide unit sales. In 2001, the year of the iPod introduction,sales increased 42%, a figure above the takeoff threshold. If thesales of iPod models were removed, unit sale would have beenreduced to 17%.

Table 3 shows the rankings of the top five brands of MP3players before and after the introduction of the iPod. Rio, one ofthe first movers in the MP3 player market, ranked first from 2000to 2002. Although some industry reviewers were initially criticalof Apple due to the iPod's high price and lack of Windowscompatibility (Anonymous, 2004a; Hiawatha, 2001), Apple sold125, 000 iPod units in the first quarter of 2002 (Apple ComputerInc., 2002). These media experts were more positive about theiPod's innovative features, such as its small size, good user inter-face, and speed of data transfer (Mossberg, 2002). Apple rankedfourth in units sold in 2002 (see Table 3). Apple dealt with iPods'Windows incompatibility problem by bundling the iPod with theMusicMatch in July 2002 (Apple Computer Press Release, 2002)

Table 2iPod sales and share of US MP3 player market.Source: Apple Computer Inc. (2004, 2005d), Breznick et al. (2004), Palenchar(2006), Sherman (2002), and Wargo (2005).

Year Market size(000 units)

iPod sales(000 units)

iPod market share

1999 5002000 5102001 724 125 17.32002 1737 381 21.92003 3031 939 31.02004 7126 4416 62.02005 24,812 22,497 90.7

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and offered a Windows version of iTunes by October 2003 (AppleComputer Press Release, 2003). After opening the iPod to Win-dows users Apple became the market leader in the MP3 players in2003 with other companies trailing far behind in unit sales andprofitability.

MP3 players, led by Apple's iPod were also having a big impacton sales of CD players. Portable CD player sales peaked in 2000and by 2003 were on a steady decline with sales of MP3 playersbuilding gradually and eventually replacing portable CD players.The sharp decline of the CD players' sales in 2003 and the largeportion of Apple MP3 player sales after 2001 likely acceleratedthe substitution process (Anonymous, 1998, 2004a; Gerson, 2003,2004, 2005; Palenchar, 2001).

5.1. Apple's market dominance

Although different sources provide varied market share infor-mation, the iPods' dominance in the US market was obvious after2003. As Table 2 shows, iPods have accounted for over 50% of themarket share in units sold since 2004 based on the data from theConsumer Electronics Association (CEA). Market share data fromthe NPD Group Inc., another leading market research firm, alsoshows the iPod's market dominance even higher in 2007 and 2008(72% and 71% respectively) (Buskirk, 2008).

6. iPod and design convergence

We hypothesized that outstanding products like the iPod play abig role in the development of the product category as they provide abeacon that indicates a good direction for future product design. Tounderstand whether “convergence” of MP3 player design actuallytook place, as suggested by dominant design theory, we relied on theLevene test of homogeneity of variances because of its tolerance tothe non-normal distribution of the data (Pett, 1997). By convergencewe mean decreases in differences among product models. If productmodels were converging we would expect to see a decrease invariance for figures of merit in model designs over time. Weexamined weight and size of MP3 players as these variables havebeen studied by other scholars and have been used as proxies forproduct designs. In a study of convergence in cellular phones inJapan, Funk (2003) used weight to study the formation of a dominantdesign. Henderson and Clark (1990) indicated a relationship betweendevice size and design architecture to determine the emergence of adominant design (Christensen et al., 1998).

6.1. Design convergence

Table 4 presents descriptive statistics of hard drive playersintroduced between 1999 and 2005. We focused our analysis tohard drive MP3 players since that was the design of the first iPodmodel. MP3 players were decreasing in size and weight steadilyover time. If our hypothesis was correct, and the iPod wasemulated, we would expect to see convergence.

Figs. 5 and 6 show boxplots of the size and weight of hard driveMP3 players. The data for 1999 and 2000 should be ignored due tothe limited number of cases (only 1 in 1999 and 2 in 2000). Firstintroduced in 2001, the iPod led the industry in portability—it wasthe lightest and smallest hard-drive player on the market. In 2002(seen in the same figures), we see that new MP3 devices“extended” to the region where the iPod was, as if the industryafter 2001 was heading toward where the iPod was “pointing.”

Table 3Top 5 brands of MP3 players.Source: Various issues of TWICE magazine (Anonymous, 2001, 2004a, 2005, 2006a;Buskirk, 2008).

Ranking 2000 2001 2002 2003 2004 2005

1 Rio Rio Rio Apple Apple Apple2 D-Link Creative RCA Sony Rio Creative3 RCA RCA Samsung Rio iRiver H-P4 Sony Nike Apple RCA RCA iRiver5 Creative D-Link Archos Archos Digitalway Rio Table 4

Descriptive statistics of hard drive based MP3 players (size and weight).

1999 2000 2001 2002 2003 2004 2005

Size (in.3)Mean 30.0 22.3 18.5 11.1 8.6 7.1n 1 2 12 12 29 35 43Variance 253.8 97.7 114.0 18.7 21.7 29.7

Weight (oz.)Mean 11.5 8.6 7.8 6.6 5.4n 1 2 10 11 28 37 41Variance 7.3 3.0 8.7 5.3 16.8

Fig. 5. Boxplot of hard drive based MP3 players by size.

Fig. 6. Boxplot of hard drive based MP3 players by weight.

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If competing firms were to imitate the iPod, they would likelyneed time (a year) to develop and manufacture their new designs.As a result, we expected that the design of the new productsoffered in 2003 would be similar to the original iPod and wewould observe a statistically significant decrease in variancebetween 2002 and 2003 (see Fig. 7).

Table 5 shows the results of the Levene test. As expected, thevariance in size decreased between 2002 and 2003 (from 114 in.3

to 18.7 in.3) and this decrease was statistically significant at a 95%confidence level. After 2003, however, the products offered byfirms did not converge any further due to the stabilization of theirdesigns and the lack of noteworthy innovations. Thus, we found nostatistically significant decrease in variances in the year following2003. During the following years variance differences were notstatistically significant. Size changes in MP3 players supportconvergence for the year after the original iPod innovation butnot for subsequent years.

We expected a statistically significant decrease in the variance inthe weight of the MP3 players in 2003 and statistically insignificantchanges in variance afterward. However, the weight variance of MP3players showed a statistically significant increase between 2002and 2003 at the 90% confidence level and a statistically significantdecrease in 2004 at the 90% confidence level. For other periods, thedifferences in variances were not statistically different. This meansthat we did not see statistically significant convergence of modelscorresponding to the weight of MP3 player.

The mixed support for convergence in player size but not weightneeds further study. Given the definition of dominant design at the

architectural level (Christensen et al., 1998), the size of a technolo-gical device is likely related to the design architecture. The weight ofthe MP3 players may be related to innovations in components.Apple's initial exclusive control over tiny hard drives may have beena factor limiting the designs of other competitors.

In addition, the larger and heavier players (shown in Figs. 5 and 6)were video MP3 players developed by Archos and iRiver andintroduced in 2004 and 2005, Archos introduced video in an attemptto distinguish itself from Apple but it lagged behind in ease of useand portability. Building on its strength in miniaturization and use ofadvanced components from suppliers, in 2005 Apple introduced aniPod with video in a small package.

6.2. Convergence to iPod's round control interface

The iPod increased demand for MP3 players and attracted newfirms to this growing market as well as reentry of some compe-titors who had previously left the industry. D-Link entered in 2000but exited just 2 years later. Dell entered in 2003 and exited in2006 and Intel also had a brief presence in 2001. Some industrypioneers, such as Rio, Creative Labs, Archos still sell MP3 players,although they command a small market share relative to Apple, atleast in the US.

One of the most salient aspects of the iPods' design is its patentedclick wheel—a round control interface with a touch sensitive surface(Zadesky and Tan, 2006). The round control interface (not the clickwheel itself) was found in numerous MP3 players such as the BenQJoybee 700, the PonGo RipDrive, the Frontier Lab L1, the RCA LyraRD2765, the Archos Gmini xs100, the Digitalway HD400, the Sam-sung YM-PD1, and the Sony HD1, HD3 and HD5, models allintroduced after 2003. One of the few models that deviated fromthe round click wheel design was the Rio Carbon Pearl, a model thatinstead used an oval shaped interface. A few manufactures such asCreative Labs and iRiver, used a touch sensitive interface with a lineardesign instead of a round design. Those models included the Zentouch, Zen Micro, the Zen Sleek, and the Zen Vision from the CreativeLabs and the iRiver H10.

After 2006, Sandisk, the company with the 2nd largest marketshare (Anonymous, 2006c) also used an iPod-like round user inter-face (Apple Computer Inc., 2002). Another important example wasMicrosoft's Zune, introduced on November 14th, 2006 (Anonymous,2004b), a model that was very similar to Apple's 2005 iPod. (AppleComputer Inc., 2005c). As shown in Table 6 and Fig. 8, these modelswere similar in size, weight, capacity, price, user interface and datatransfer interface. They differed only in radio and Wi-Fi capabilities.

However, during the 2 years it was in the market (2007 and2008), the Zune with 3% and 4% market share barely touchedApple's 71% and 72% market share but instead took away fromCreative (4% and 2%). Neither Microsoft nor Creative grew verymuch in proportion to Apple (Anonymous, 2006c).

7. Apple's iPod/iTunes ecosystem and sub family development

7.1. Development of iTunes store

We have seen that the combination of the iPod and the originalversion of iTunes induced takeoff of the MP3 category and con-vergence of MP3 player design. While the iPod and iTunes wereimportant in building demand for MP3 players, the real break-through that had a significant impact on the industry was thelaunch of the iTunes Store in 2003. Earlier we discussed thedifficulties music industry executives were having in dealing withonline music piracy. Even powerful firms like Philips and Sony,who controlled both music content and music device players, were

Fig. 7. Design convergence of MP3 players.

Table 5Levene's statistics of hard drive based MP3 players' size and weight.

Period Decrease (�)or increase (þ)

Levenestatistic

p-Value

Year Variance Year Variance

Size(in.3)

2000 253.8 2001 97.7 � 0.743 0.4052001 97.7 2002 114 þ 0.426 0.5212002 114 2003 18.7 � 20.029 0.000nn

2003 18.7 2004 21.7 þ 0.262 0.6122004 21.7 2005 29.7 þ 0.001 0.972

Weight(oz.)

2000 2001 7.3 2.168 0.1722001 7.3 2002 3 � 0.524 0.4782002 3 2003 8.7 þ 3.621 0.065n

2003 8.7 2004 5.3 � 2.914 0.093n

2004 5.3 2005 16.8 þ 1.429 0.236

nn Significant at 95% level.n Significant at 95% level.

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experiencing significant loses and were having trouble sellingmusic in their traditional CD format.

The launch of the iTunes Store surprised everyone. Even rivalBill Gates expressed frustration and grudging admiration in anemail after Apple unveiled the iTunes Store as suggested hissubject line, “Apple's Jobs again.”

“Steve Job's ability to focus on a few things that count, getpeople who get user interface right, and market things asrevolutionary are amazing things,” wrote Gates expressed hissurprise that the music companies were willing to go alongwith the iTunes Store.

“This is very strange to me. The music companies' own opera-tions offer a service that is truly unfriendly to the user. Somehowthey decide to give Apple the chance to do something pretty good.”

And later, Gates' call to action,” Now that Jobs has done it weneed to move fast to get something where the interface andRights are as good… I think that we need some plan to provethat, even though Jobs has us a bit flat footed again, we canmove quick and both match and do stuff better. ”

Source: Isaacson (2011: p. 404).

Apple had come into the rescue of the music industry andpresented a viable solution to stem online piracy (Nash, 2011) and,at the same time, created a sustainable competitive advantage thatwas difficult to emulate.

How was Apple able to accomplish what the music giants couldnot? Apple was the only company to possess the software (iTunes)and hardware design capabilities (computer and the iPod)required to deliver an easy-to-use, end-to-end solution for down-loading music to portable devices (Isaacson, 2011, p. 393). Apple'sinitial success with the iPod–iTunes combination from 2001 gaveJobs the credibility he needed to negotiate with music labelexecutives to sell tracks, not album, and make them availablethrough Apple's iTunes Store (Isaacson, 2011). As indicated byDoug Morris, the head of the Universal Music Group:

“He (Jobs) proposed this complete system: the iTunes Store, themusic-management software, the iPod itself. It was so smooth.He had the whole package”.

Source: Isaacson (2011, p. 398).

Development of the iPod and iTunes combination required goodsoftware and hardware design capabilities that were a result of long-term accumulation of important tangible and intangible resourcesincluding intellectual property, organizational, and reputationalassets (Galbreath, 2005). In addition, the iPod was build on Apple'sesthetic design capabilities cultivated by Jobs since the company'searly days and, as other scholars have noted, is frequently related tothe sensibilities of the founder (Candi and Saemundsson, 2008).Apple's strong intellectual property assets included hardware andsoftware patents developed specifically for the iPod and iTunes(Andre et al., 2010; Fadell, 2011; Robbin et al., 2007).

Organizational assets were also very important for the devel-opment of iTunes and iPod. iTunes was based on SoundJam, MP3software for the Mac, which had been acquired by Apple in 2000.The three founders of SoundJam (Jeff Robbin, Bill Kincaid, andDave Heller) stayed with Apple and developed iTunes. Apple hiredTony Fadell (who had been trying to sell his MP3 player idea toSony and Philips) to lead the development of the original iPod.

Apple's esthetic design capability was a result of continuousefforts since the company was first established in the late 1970s.First, Apple outsourced industrial design by using external designagencies in Europe. In 1996, Apple brought Jonathan Ive, their keydesign consultant, in-house, establishing one of the best industrialdesign capabilities in the world (Kunkel, 1997; Letzing and Morse,2011).

The iTunes Store, opened in 2003, helped promote iPod devicesales (Isaacson, 2011) but it also played a key role in reducing illegaldownloads and providing a digital music revenue stream for firmswhere one didn't exist before (Nash, 2011). In Table 7, we can see thatlegal sales of digital download music only accounted for 0.8% of theoverall music sales in 2004. By 2012, sales reached an estimated 45%.The iTunes Store accounted for around 70% of the digital download

Table 6iPod and Zune comparison.Source: Amazon.com (2009a, 2009b), Apple Computer Inc. (2005c) and Marriott (2006).

iPod 30 G iPod 80 G Zune

Size (in.3) 2.4�4.1�0.43 2.4�4.1�0.55 2.4�4.4�0.58Screen (in.) 2.5 2.5 3Weight (oz.) 4.8 5.5 5.6Capacity (GB) 30 80 30Date of introduction October 12 2005 October 12 2005 November 14 2006Data transfer interface USB2 or Firewire USB2 or Firewire USB2Hardware user interface Circular Circular Circular

Lower part of the device Lower part of the device Lower part of the deviceRadio Attachment Attachment YesWi-Fi None None YesPrice $249 $349 $249.95

Fig. 8. The Apple iPod and Microsoft Zune.

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music sales in the US and the iPod's market share, measured in sales(see Table 2) grew from 17.3% in 2001 to 90.7% in 2005. Apple'sdominance was a result of the seamless integration of the iPod,iTunes and music content. Although many companies tried, thiseasy-to-use ecosystem proved very difficult to emulate.

7.2. The iPod/iTunes ecosystem enters the mainstream market

While the iPod had proved to be very successful in the MP3players market niche when it was first introduced in 2001, it was theiTunes Store and Apple's ecosystem that helped move the MP3category to a mainstream market. Initially, MP3 players were mostlyused by college students and other technology savy individuals butafter 2003, the demographics of download music users changed(see Fig. 9). The RIAA lawsuit in September 2003 slowed down musicdownloading from the Internet as many feared prosecution. Evenamong the youngest cohort, the percentage of individuals down-loading music decreased (from 52% to 28%). But the downloadingbehavior of the 30–49 group did not change much indicating thatthey were already more likely to be downloading music from legalonline sites such as the iTunes Store. By 2010, close to 45% ofindividuals between age 18 and 49 and 28% of those 50 or older weredownloading music online. Once consumers has an easy, inexpensiveand legal way to download music, they abandoned CDs and switchedto MP3 in droves.

After its launch of the iTunes Store, Apple dominated themarket for online music sales for several years. It is safe to saythat the iPod/iTunes ecosystem helped to bring the MP3 innova-tion across the chasm to the mainstream market.

7.3. The iPod/iTunes closed system's dominance

In the dominant design literature, different factors are thoughtto promote the emergence of a dominant design. For a compre-hensive literature review see (Suarez, 2004). Generally an opensystem of innovation promotes the formation of a dominate designaround it. Although iPod/iTunes was developed as a closed system,consumers could use almost any music file format downloadedfrom any source by importing them into iTunes. Apple created alock-in effect with its closed system but consumers did not care asmost were happy to have an end-to-end system that was easy touse. As we will see in the next sections, Apple ability to continue toinnovate in its players and online store was an important factor inthat success.

7.4. The iPod sub family development

While Apple's first iPod model triggered takeoff, the longer-termdominance of iPod and iTunes in the US market has been a result ofApple's continuing efforts to provide outstanding innovative models,to open new subcategories and to expand media content. Apple's iPodactually also led the industry from the perspective of file transferspeed, portability and price–performance ratio (see Appendix 1C).Portable MP3 players can be divided into two categories—playersusing flash memory and those using hard drive memory. Generallyspeaking, flash memory players are cheaper, lighter and smaller thantheir hard drive counterparts.

From the perspective of portability, a music player could beconsidered better when its storage capacity to size ratio is largerbecause it enables consumers to listen to more music and store morefiles in a small format. In storage capacity to size ratio, iPods alwaysled the industry average every year except 2001. This relationshipholds for both the hard drive and flash memory categories. Similarly,Apple led in storage capacity to price ratio (see Appendix 1B). Aportable digital music player could be considered better when itcosts less but has the same storage capacity.

iPod users reported a more positive overall user experience thanusers of other players. The average rating for the iPods were 4.16 whilethat of other MP3 players were 3.6 on a 5-point scale (see Table 8). TheiPods also received a larger number of reviews compared to otherplayers, 144.68 reviews for the iPods while 36.23 reviews for otherplayers (see Table 9). These differences in average ratings and numberof reviews are statistically significant even at 99% confidence levelbased on the ANOVA analysis (see Table 9).

These results suggest that Apple's long-term success in theportable digital music player market is because of their on-goingeffort to maintain leadership in product performance and value toconsumers.

Table 7iTunes store market share and the impacts on digital music market.Source: Billboard Magazine, NPD Group Press Releases, and Fortune Magazine.

Year iTunes market sharein legal musicdownload market (%)

Legal music downloadmarket share to musicsales of all formats (%)

Digitaldownload musicsales (millions)

2003 70 NA 25.02004 70 0.8 194.62005 75 2.3 530.12006 70 13 917.62007 70 20 1319.92008 80 33 1805.92009 69 35 2055.12010 70 40 2207.02011 70 40 2563.82012 64 45 2792.6

37%

51% 52%

28%

43%

19%23%

27%23%

45%

9%

15%12%

6%

28%

0%

10%

20%

30%

40%

50%

60%

Jul-Aug 2000 Feb 2001 Mar-May 2003 Nov-Dec 2003 Oct-Nov 2010

The

per

cent

age

of e

ach

coho

r of

In

tern

et u

sers

who

dow

nloa

d m

usic

Survey Date

Age: 18-29Age: 30-49Age: 50+

Fig. 9. The demographics of music downloaders.Source: Reports from Pew Research Center's Internet & American Life Project.

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7.5. Apple's sub family development—iPod mini, Shuffle and Nano

The introduction of the iPod mini, Shuffle and Nano subfamilieshave played a significant role in expanding the market by addres-sing lower priced segments and models with more specificfeatures. These models co-existed with the full-featured models,effectively preempting lower priced competition. They have alsoexpanded demand for the MP3 players because their distinctiveproduct forms provide for greater portability—particularly attrac-tive for use in exercising.

Apple introduced the iPod mini in January 2004 (Anonymous,2006b) and it quickly became the best-selling MP3 player in theworld. Apple introduced the Nano only 11 months later when theiPod mini was still at its peak in sales and popularity. The Nano,with its 6.8 mm profile, required a complete reengineering andwas built around solid-state flash memory, had a new screen, clickwheel and new battery and chips. The Nano was thinner than apencil and lighter than two dollars in quarters and was one-fifththe size of the original iPod and 4 GB of memory, enough to hold1000 songs(Apple Computer Inc., 2005a).

The iPod mini and the Nano (Bruno, 2005), and even the moreportable version of the iPod with less capacity, represented a newforms of the original iPod design. After its introduction, the Nanobecame the most popular model among all iPods as a result of itssimplicity, small size and low price (Hesseldahl, 2007). Unques-tionably the iPod Shuffle, an even more portable iPod without adisplay, also became very popular (Jade and Marsal, 2005).

Apple's continuous efforts to innovate in form and functioncontributed to their long-term success. These results are consis-tent with Klepper and Simons (1997) conclusion that a firm'ssuccess breeds their future success and with Nelson and Winter(1977) observations of firm selection. Although Apple's first iPodmodel triggered takeoff, it Apple's Mini, Nano and Shuffle sub-families with their innovate new forms that opened market forMP3 players to a huge audience. By eliminating the display andmaking the device very small and low cost, Apple increased itsportability and value to consumers. As stated by Steve Jobs in apress release at the time,

“With most flash-memory music players, users must use tinydisplays and complicated controls to find their music; with theiPod shuffle you just relax and it serves up new combinations ofyour music every time you listen.”

Source: Apple Computer Inc. (2005b).

The iPod Shuffle captured 43% of the flash memory-basedportable MP3 player market during its first year (Jade andMarsal, 2005).

Apple's success has been so great that it has been difficult forother firms, even those with great capabilities like music incumbentsSony and Philips, and software giants like Microsoft to compete withApple's iPod family. Moreover, although many competitors have triedto emulate Apple's iPod/iTunes ecosystem, no one has been assuccessful. Supporting the iTunes platform has required millions ofdollars of investment (Locke, 2011). Steve Jobs contributed to iTunes'success by the long-term and costly investment in various resourcesand capabilities. Apple made a large investment in computer severand network infrastructure that enabled the company to transferhuge amounts of data on the Internet and handle million oftransaction online. They also developed a system similar to Amazon'sone-click shopping and successfully managed relationships withmajor music labels (Leonard, 2003). Apple's fully integrated end-to-end solution would prove to be much better than the piecemealexperience that customers had available at the time (Isaacson, 2011)making it possible for Apple to crowd out most other competitors atleast in the US market.

8. Conclusions

This paper has shown that during the early stage of an innovation,both market and technology uncertainties are high and an out-standing model with innovative features (beacon product) can triggertakeoff. The products that trigger takeoff are often the culmination ofincremental innovations that are particularly good at addressing theneeds of the later-stage adopters. This observation is consistent withthe insights of Sahal in his work on guideposts and Abernathy and

Table 8Descriptive statistics of user ratings of iPod and other MP3 players.

N Mean Std. dev. Std. error 95% Confid. interv. for mean Min Max

Lower Upper

Amazon ratingOthers 405 3.60 0.73 0.04 3.52 3.67 1.0 5.0iPods 31 4.16 0.27 0.05 4.06 4.26 3.5 4.5Total 436 3.64 0.73 0.03 3.57 3.70 1.0 5.0

No. of Amazon reviewsOthers 438 36.23 57.64 2.75 30.81 41.64 0.0 357iPods 31 144.68 119.84 21.52 100.7 188.6 7.0 417Total 469 43.39 68.92 3.18 37.14 49.65 0.0 417

Table 9ANOVA table of the iPod and other MP3 players.

Sum of squares df Mean square F Sig.

Amazon ratingBetween groups 9.232 1.000 9.232 18.190 0.000Within groups 220.284 434.000 0.508Total 229.516 435.000

Number of Amazon reviewersBetween groups 340,512.628 1.000 340,512.628 84.466 0.000Within groups 1,882,641.397 467.000 4031.352Total 2,223,154.026 468.000

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Utterback Utterback and Abernathy (1975) in their case study of theDC3. We introduced the team beacon product to reflect the reductionin uncertainty that resembles the role of a lighthouse in piercingthrough the fog at sea.

Beacon products, like the original iPod in the portable MP3players category, are attractive to the mainstream consumers—theearly majority (Mahajan and Muller, 1998; Muller and Yogev,2006). Competitors reacted by offering products similar to thebeacon product. This emulation led to a clustering of modelsaround a set of features inspired by Apple's iPod designs. As otherfirms emulated Apple's designs the product category converged toa smaller number of model configurations than existed before thebeacon product.

At least early on, products from different firms account formore than 50% of the market share in the MP3 category. Onepossible outcome of this convergence is for firms to share themarket with products that are very similar, albeit led by the mostinnovative firmwith fast followers. Sanderson and Uzumeri (1997)saw this pattern in the evolution of the Walkman product family,with Sony the clear leader, introducing new product models six tonine months before its competition. Another outcome might bethe dominance of the beacon product company. Such a dominancecan occur if the beacon product company continues to provideinnovations customers value or build barriers preventing compe-titors from offering similar products. As we saw earlier in thepaper, copying the market leader was not easy because of theseamless integration of the iPod and iTunes Store. ReplicatingApple's extensive music collection, low price per song and seam-less integration of media and player, proved impossible for most ofApple's competitors. Moreover, Apple stayed ahead of the compe-tition through continuous innovation in form and function, intro-ducing a succession of models (at lower price points) preemptinglower priced competition.

What are the managerial implication of our study? It is beneficialfor a firm to be an innovation leader and if possible to create a beaconproduct that clearly addresses the needs of later-stage adopters. To besuccessful in the longer term, the innovative firm cannot rest on itslaurels but must continue to create new models that appeal to manyconsumer segments. If the beacon product company is successfulthey may effectively squeeze out all but the most tenacious compe-titors. In recent years we have seen a similar competition play out inthe courts with Samsung and Apple accusing each other of copyingeach other's smart phone and tablet designs.

Consistent with the evolutionary economics and managementliteratures, pioneering MP3 player producers were not always bigwinners and some firms exited the market relatively early. The Riobrand is no longer owned by Diamond Multimedia and was sold3 times, from Diamond Multimedia to S3 to SonicBlue and now to theD&M Holding. SonicBlue declared bankruptcy in 2003 (Anonymous,1994). HanGo exited the market in 2002 (Anonymous, 1997). MPManalso changed its ownership from a Korean to a Belgium firm in 2003(MPMan Europ, 2009).

Apple's dominance in MP3 music players suggests that on-going innovation and investment plays a vital role in determiningwho is successful in the long run. Sanderson and Uzumeri (1997)have shown that Sony, despite intense competition, kept itsleadership in the Walkman product category for two decades byoffering innovative products.

Although Archos pioneered the video subcategory with itsVideo AV140 model, introduced in early 2003, (Archos PressRelease, 2003) the unit was difficult to use, especially in convert-ing videos into the MPEG4 format using Archos' cumbersomeapplication and user interface. Apple followed Archos in introdu-cing video but had much greater success. While Archos still has asmall technology-savvy following Apple owns the mainstreammarket. The finding that pioneering products' performances did

not meet the need of the customers is similar to Bayus et al.'s(1997) conclusions. However, we found that Apple's success couldnot be simply attributed to timing of entry but to developing anoutstanding model that significantly outperformed other modelson the market at the time. Apple was able to resolve technologicaldesign tradeoffs such as portability and capacity that limitedearlier designs by using technologically advanced componentssuch as the 1.8 in. hard drive, Firewire and a click wheel tonavigate. Taking advantage of their software design capabilitiesApple developed iTunes and seamlessly integrated MP3 hardwareand software. Significant investments in information systems andrelationships with music labels gave the iPod/iTunes ecosystem asignificant competitive advantage that was difficult to replicate.

Apple's success with its MP3 players has been great in the US aswell as in Europe and Japan. In Europe, Apple MP3 productsaccounted for more than 40% of the market in 2004 (Salkever andSager, 2004). In Japan, iPods garnered 32% and 51.3% of the market in2004 and 2005 (Rowley, 2006). However, the iPod has been muchless dominant in the rest of the world particularly in such countriesas China, Taiwan, Korea, and India and where market informationwas less sophisticated and reliable in 2004 (Salkever, 2004).

In marked contrast to other finding in the literature thatsuggest that price drops fuel demand, MP3 player takeoff wastriggered by the original iPod, a product that was actually muchmore expensive than other models on the market at the time. In2001, the iPod was priced $399 while the typical portable digitalmusic player ranged in price from $118 to $157 between 2000 and2003 (Baum, 2005), suggesting that a price drop was not the majorfactor contribute to the market takeoff at least initially. Later, asApple introduced smaller and cheaper MP3 players, the marketexpanded substantially.

Some have suggested that part of Apple's success can beattributed to Apple's strong brand reputation. But Sony was oneof the pioneering companies in MP3 players and had a strongerbrand at least in music players (Shepard, 2001 ), good distributioncapabilities, and relevant proprietary technology. The outstandingproduct (beacon product) that launched the MP3 revolution camefrom Apple, a company that had no previous experience in themusic industry. We believe that it was the innovative design of theoriginal iPod that led to takeoff, Apple's subsequent modelimprovements that shaped the evolution of the MP3 productcategory and finally the iTunes Store that helped move MP3s froma niche to a mainstream market.

Taiwan has been a leader in contract manufacturing and Taiwa-nese contract manufactures have been making MP3 players for firmssuch as Apple and Rio since the beginning of the innovation (Kunkel,1999). In Taiwan, the portable music player market is much morefragmented than in the US and customers can purchase MP3 playerswith decent functionality at very low prices. In 2006, the Apple's iPodhad 8% in units (Chen and Hwang, 2006) and 29% in value of sales(Tan, 2006) and was the market leader with Samsung trailing closely.Taiwan is a much smaller market and has received little marketingattention from Apple. However, Apple was still the market leadersuggesting that Apple's strong marketing intensity is a plausiblefactor that helps to explain the varying success of the iPod indifferent international markets.

We concur with the observation that because firms have a lowcapacity for predicting which innovation strategies will succeed(Nelson, 1991), less successful firms will tend to imitate the strategiesof companies that are successful in the market and firms mayconverge in their strategies over time (Nelson, 1991). At the industrylevel, selection operates through the expansion of profitable firmsand the contraction of unprofitable ones and “firms evolve over time,with the condition of the industry on each day bearing the seeds ofits condition on the day following” (Nelson and Winter, 1974,pp. 893–894, cited in Poole and Van de Ven, 2004, pp. 131).

Y.-N. Peng, S.W. Sanderson / Technovation 34 (2014) 77–92 89

The path dependence of organizational adaptation and cumu-lative learning of technologies generally favor innovative firmsover followers, an idea that had its roots in Schumpeter (1934)(Poole and Van de Ven, 2004). In the long run, successful firms willhave coherent, path-dependent strategies that have evolvedthrough cumulative learning and are made up of a bundle ofroutines that are difficult to imitate (Dosi et al., 1992; Poole andVan de Ven, 2004). Clearly Apple developed capabilities that weredifficult to beat in the MP3 category and this case study providesus with an example of how outstanding design can transform anindustry. But path dependent strategies and technological ororganizational heritage can also hinder firms when use paradigmschange and firms stick with old paradigms too long.

Appendix A

See Figs. A1, B1 and C1.

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