Going down-market: the iPod Shuffle ends the flash-player wars

Yesterday I told you of my desire for an iPod shuffle. You did not buy me one, but I forgive you, because I’m finding the introduction of the iPod Shuffle to the market to be such an incredibly thought-provoking event that its music would only distract me.

The flash MP3 player marketplace is one where the memory sizes are around 256MB and sold for $120 and up. These units have an LCD screen and some significant semblance of controls on them.

Apple took a gamble that’s outlined in “The Innovator’s Solution” by producing the iPod Shuffle for a 20% profit margin instead of 28%, gambling that it would move in volume. “The Innovator’s Solution” does an excellent job explaining how technology innovations shake out in the marketplace. It would describe the existing flash MP3 player market as “over-served” while pointing out that not everyone who might buy a player has yet seen a product attractive to them. The features of an over-served market are that its customers have more features than they really need, and will happily shop for a lower-priced unit if it is available.

Apple figured this out and decided that they could lose most of the bells and whistles on a flash-based MP3 player and with the money they saved increase the amount of memory on the device. Typically what happens in such a situation is that the existing manufacturers go up-market, focusing on their best customers and producing ever more-expensive products with better features and better margins. They abandon the low-end of the market to the disruptor (Apple) and often take on a command-and-control attitude described by Christensen as “threat rigidity”.

Consider this quote: “I wonder if the Shuffle is really easier to use than a similar product which incorporates a screen… we don’t need to blindfold people by taking away functionality and choice. There’s a boundary, and when you cross that it can be seen as patronising.”

That quote came from the Marketing manager for Creative, which makes flash-based MP3 players that everyone now thinks are too expensive. Tell me if he doesn’t sound like he feels threatened.

According to Christensen, when a company experiences the threat, they redirect all their resources to countering the threat and miss the opportunity it brings. The opportunity in this case is to go after all the new people that are in the market for players at this cheaper price. Instead the established companies typically go up-market, looking for more features to serve their best customers, and looking to increase their product’s prices, and therefore, their profit margins.

In fact this is exactly what Yang Duk-Jun, CEO of the company that makes the iRiver flash-based music device, says he will do:

“In a sense it’s not a competitor to an iRiver product because we have more features and focus on the premium area,” he said. “Maybe there is a certain group of users who don’t care about searching (for songs) and displays. Apple may replace the products low-end users are using but for (listeners who are) a little bit serious, this group won’t like this type of product.”

iRiver is clearly falling into the trap of going up-market. Christensen explains that long-term, going up-market doesn’t work as a strategy. The new competitors use the money they make at the low-end and figure out how to move up and compete with the now-elevated competitors. Sadly, this strategy won’t even work in the short term for iRiver and Creative.

As companies like iRiver go up-market they run into Apple. If they say, “We can’t compete with the iPod Shuffle, we’ll make items with bigger drives in the 4GB range”, they have to fight the iPod Mini and with it, Apple marketing prowess. Who wants to enter that market against the dominant player? Any cool new feature you put in your player, Apple will copy and put in their player.

If they go far up-market into the 20-50GB player market, they can kiss their ass goodbye as the ubiquitous Apple iPod shows them who’s boss. I challenge you to walk down the street of any major city with pedestrian traffic without seeing an iPod being used in every block. The iPod brand has developed a momentum that exceeds what Apple has been able to pull off with their desktops.

Makers of flash-based MP3 players are going to be extinct if they don’t change something radical about the way portable music works. According to my reading of the Innovator’s Solution, that means they must either:

• Find a new set of customers that isn’t yet being served by the existing MP3 player market and produce a truly unique product for them,
• Learn how to produce an MP3 player that’s as cheap or cheaper than the iPod Shuffle, with better functionality, while still making money on the device (this does not seem likely), or
• Produce an MP3 player with fewer features than the iPod Shuffle that correspondingly costs less and beat Apple at their own game.

These options are not attractive if you’re in the business of making a flash-based MP3 player. Let’s hope that if you are the CEO of iRiver or Creative, you come up with an idea real, real, quick now.

If you have a subscription to The Street, my buddy Aaron has an excellent comparison of Apple products from 1984 to now adjusted for today’s dollars. [Subscription required]