Barriers to Innovation. Sony vs. IPod Case Analysis

March 4, 2012

The business case of Sony’s failure in capturing the digital music market offers very valuable insights for the students and practitioners of marketing. From the company’s history briefly recounted in the case we know that Sony had been the industry pioneer in transformational innovation through delivery of many breakthrough products in portable music, and through ever-enhanced miniaturization of those products.

All these hard-earned competitive advantages of the company, however, failed to deliver when the new era in portable music was emerging in the late 1990’s.

There are more than one approaches that can be utilized in analysis of Sony’s failure in their entrance to the digital music market. First, we will summarize the three main reasons that are touched upon in the case which caused Sony to lose the market to Apple’s iPod:

• Over-reliance on the technical expertise of the company at the expense of tuning into the customers’ wants, such as ease of use and instant gratification;
• Failure to exploit the synergies within the company’s various departments;
• Preoccupation with content protection which handicapped users’ experience in being able to transfer music between multiple devices, particularly non-Sony devices.

One of the approaches to understanding why Sony lost to iPod could be the analysis of the 4Ps concept and its application to the case.

The facts presented in the case make it very clear that the lack of technological innovation was not the reason of Sony’s falling behind in the soon to unfold fierce competition for the digital music consumers . In fact, Sony was the first to unveil its not just one, but two digital music players at Las Vegas Comdex trade show in 1999. It was two years before the introduction of the iPod by Apple, and presumingly should have given Sony sufficient time to capture the portable digital music market before the imitators entered the scene.

However, this introduction of two products at the same time demonstrated that Sony was too focused on the technical implementation of the product itself, and protection of its content from unauthorized copying, while ignoring the actual needs and wants of their prospective customers.

Specifically, Sony underestimated the new realities of the digital marketplace and the ease of converting and copying digital data that was becoming ubiquitous about the same time that they introduced their digital music players with built-in proprietary compression, ATRAC3. By that time MP3 was already the leading format for audio compression and Sony’s staying oblivious to this fact proved to be fatal for company’s success in the digital music marketplace.

Moreover, multiple internet file-sharing portals with Napster (which, ironically, was launched in the same year as Sony’s digital music players) at the head of the pack dealt a further blow to Sony’s attempts to protect their content through proprietary DRM (Digital Rights Management) schemes.

Admittedly, those file-sharing ventures were dealing in the murky waters of illegal copying and distribution of copyright-protected music, which eventually lead to their legal persecution and ultimately shutdown. But in the meanwhile these services managed to produce the new type of music consumers who had very particular requirements and characteristics:

• Ease of use and instant gratification – hence the disadvantage of Sony’s proprietary ATRAC3 format, which was also notoriously slow on conversions, compared to MP3;
• Portability of files between different devices – therefore Sony’s DRM was a major deterrent for these customers;
• New consumers became largely irreverent of the Intellectual Property (IP) rights, at least as far as music was concerned.

In summary, the digital music devices offered by Sony did not give the customers enough value for them to turn away from emerging freeloading services and ubiquitously transferable format of MP3.

In the case it was mentioned that the price of those devices was too high for general market. In essence, Sony was trying to maximize their profit in two categories at the same time: from devices themselves, and from selling the tightly-controlled content. Sony should have concentrated on grabbing their market share by either offering relatively low-priced devices combined with prime-priced proprietary digital music content, or higher-priced devices with freely transferable content in common format. Trying to chase both targets proved to be a lose-lose situation.

This was the weakness that Apple managed to exploit with the introduction of its iPod: though the music player itself was relatively expensive, it was using the common file format and music was easily transferable between different devices once purchased at a nominal price.

Even though the case does not provide enough information about promotion strategies employed by Sony for its digital music players, there is one very critical fact that could be easily overlooked. Sony was introducing not one, but two players at the same time, as was mentioned before. This seems to be another major blunder in their strategy.

The reason for this dual offer was rooted in the Sony’s organizational structure when two different, and highly competitive, departments worked on the same product. Sony’s failure to tame its inter-departmental turf wars resulted in significant confusion for prospective customers at the time when it was least affordable: introduction of the revolutionary new product.

This duplicity had already cost Sony in excessive spending on R&D for two essentially identical products. Now at the promotion stage the company would have to deliver two messages for two different products which are supposedly designed for the same purpose. Needless to say, it was not only wasteful of company’s resources, but also extremely detrimental to delivering relevant and focused information to the customers at the time when it was most needed. All these flaws in promotional strategy of Sony confused the customers and further contributed to failed differentiation of their player(s) in the marketplace.

The same can be said about the Sony’s placement strategies as about company’s promotion for its digital music players. Dual message would be confusing for its distribution channels partners, as well as dual efforts and expenses would be hurting company’s bottom line.

Having analyzed the causes for Sony’s failure in the digital music players market we need to make several concessions. The idea of a company using proprietary products or services is not inherently faulty. In Sony’s own history we can see a few examples when this approach paid off: the most notable would be the winning of Blu-ray format in high-definition DVD wars of the mid 2000’s, or success of its proprietary Memory Stick family (incidentally, it was an off-shoot of the technology developed for one of the music players in our case) of digital storage cards.

However, in these cases the market dynamics were significantly different from the digital music player. The cost of R&D for either of these technologies was very high and the number of companies that would be willing to enter into this industry was very limited. Moreover, in the case of Memory Stick storage cards, these cards were tightly connected to a broad spectrum of very popular and well-established other Sony’s products, from camcorders, to still cameras, to mobile phones and to PlayStation.

Generally speaking, the potential success of proprietary technologies depends on how competitive is the marketplace, but especially on how successful is the company in differentiating the proprietary product from generic substitutes, and conveying the value proposition of the product.

On the issue of Sony having advantage by owning the music content we maintain the position that this could be beneficial for the company only if it could offer the customers added value through unique customer experience or bundling it with other customer-perceived benefits. The content is highly commoditized in today’s market and does not lend to the owner’s success by its own virtue. And this was the reason of Sony’s failure to monetize effectively its content.

By contrast we could bring up an example of Netflix who does not own the content, but has been able to grow its business tremendously by offering customers the unique service through its highly sophisticated recommendations engine, unmatched library of available titles, efficient mail delivery service, and leveraging of the VOD technology.

In conclusion, Sony could have owned the significant share of digital music market if it did not get blindsided by its own previous successes in portable music devices and conducted proper evaluation of the market situation. Also, solving the internal silos problems could have streamlined its product development and help in developing appropriate marketing strategies.