How Sony gave away the MP3 player market to Apple… and then the digital music market

In 2001, Sony Corporation was already the giant conglomerate that we know today. It was engaged in four main operating segments – Electronics (including video games, network services and medical business), Motion pictures, Music and Financial Services. These made Sony one of the most comprehensive entertainment companies in the world. And yet, 2001 marked one of the greatest missed opportunities in the history of Sony. With the introduction of the iPod, Apple leapfrogged all of Sony’s legacy products in the portable music player market and strategically positioned itself as the number one platform for the emerging digital music market.

On paper Sony had all it needed to do what Apple did. And more if you consider all of the experience it had gained over several decades in the music and entertainment market. So how did this happen?

The biography of Steve Jobs by Walter Isaacson (2011, © SIMON & SCHUSTER) provides key insights to answer this question (if you haven’t read the book yet, I highly recommend it). I summarise below the relevant passages, paraphrased and highlighted in italic.

Step 1: The iPod – a superior design

In April 2001 an interesting gathering took place in Apple’s fourth-floor conference room, where Steve Jobs decided on the fundamentals of the iPod.

The meeting started with a presentation of the potential market and what other companies were doing. Jobs, as usual, had no patience. He wouldn’t pay attention to a slide deck for more than a minute. When a slide showed other possible players in the market, he waved it away. “Don’t worry about Sony,” he said. “We know what we’re doing, and they don’t”. Instead Jobs liked to be shown physical objects that he could feel, inspect, and fondle. Unlike any other CEO, he was totally engaged with the product. So three different models were brought to the conference room and Steve settled right on one of the options.

Product development started right away after this meeting, with Steve Jobs getting actively involved in design sessions using his genius for product simplification and aesthetics. Ten years later, Apple has sold 300m iPods and holds an estimated 78% market share of the music player market, which doesn’t leave much room for good old Sony…

But what led to this staggering success was not just the iPod’s superior design. Mostly, it was the creation of a superior platform.

Step 2: The iTunes store – a superior platform

In 2001, executives in music companies were desperately scrambling to agree on a common standard for copy-protecting digital music. Warner Music and AOL Time Warner were working with Sony in that effort, and they hoped to get Apple to be part of their consortium so a group of them flew to Cupertino in January 2002 to see Jobs.

It was not an easy meeting, Jobs, sitting at the head of the conference table, fidgeted and looked annoyed. After four slides, he waved his hand and broke in. “You have your heads up your asses,” he pointed out. “You’re right,” they said after a long pause. “We don’t know what to do. You need to help us figure it out.”

If the music companies had been able to agree on a standardized encoding method for protecting music files, then multiple online stores could have proliferated. That would have made it hard for Jobs to create an iTunes Store that allowed Apple to control how online sales were handled. Sony, however, handed Jobs that opportunity when it decided, after the January 2002 Cupertino meeting, to pull out of the talks.

Instead Sony joined with Universal to create a subscription service called Pressplay (ever heard of it, anyone?). Meanwhile, AOL Time Warner, Bertelsmann, and EMI teamed up with RealNetworks to create MusicNet. Neither would license its songs to the rival service, so each offered only about half the music available. Both were subscription services that allowed customers to stream songs but not keep them, so you lost access to them if your subscription lapsed. On top of that, they had complicated restrictions and clunky interfaces.

At this point Jobs could have decided simply to indulge piracy. Free music meant more valuable iPods. He knew, however, that the best way to stop piracy was to offer a legal alternative that would be more attractive than the brain-dead services that music companies were concocting. So Jobs set out to create an “iTunes Store” and to persuade the five top record companies to allow digital versions of their songs to be sold there.

When the iTunes platform went live in April 2003, Bill Gates expressed his frustration. He admitted that Steve Jobs’ abilities to focus in on a few things that count, get people who get user interface right, and market things as revolutionary were amazing. But he also expressed surprise that Jobs had been able to convince the music companies to go along with his store. “Somehow they decided to give Apple the ability to do something pretty good”.

How good did iTunes turn out to be? The chart below shows the cumulated number of digital transactions completed on iTunes since its launch.

iTunes downloads

As you can see, the “billionth download” landmark was reached after less than a year-and-a-half of operations. Pretty good indeed…

Take-away lessons

Here are the lessons you would hope Sony’s management has gained from that experience:

Lesson 1: a company is only as good as its product/service

Sony should have been able to develop an innovative product and re-invent the portable music player market more than 20 years after they had first introduced the Walkman back in 1982. With the ever-improving access to the internet and consumers’ interest in digital music, radical innovation should have been Sony’s priority in the late 90’s. Instead, they were spending millions of dollars improving the efficiency of their manufacturing process and supply chains so that they would be able to ship more and more of their devices to the market and at a cheaper price. Nor should they have been spending millions on advertising, trying to convince consumers that Sony’s portable music devices are “the cool thing”

Lesson 2: strong leadership is needed to beat the silos

What made the iTunes success all the more infuriating to executives at Sony is that in principle they could have done the same, but they just never could get their hardware, software and content divisions to row in unison. This kind of “silo” mentality was unthinkable under Steve Jobs at Apple. He reined as a king (some would say dictator) and was the unifying element around which all divisions would orbit. This is reflected in the high level of integration in Apple’s products and services: beyond being compatible, they complement and reinforce each other.

Any employee from Sony would have been stunned by the decision-making process that took place in April 2001 when Jobs decided on the fundamentals of the iPod. At Sony just like in many other major corporations, decisions like this would have taken dozens of meetings, the production of hundreds of PowerPoint slides and going back for more market study and competitor analysis. Would Sony’s history have been the same had it been shepherded by a stronger leadership?

Has Sony capitalised on these lessons?

Two things make me think that is not the case:

  • have a look at the evolution of Sony Corp’s share price over the last two years… it doesn’t seem like they are anywhere near the end of their ordeal (ticker symbol SNE at the New York Stock Exchange)

SNE stock price 2011-12

  • as far as lessons 1 and 2 are concerned: I will not attempt to judge whether Sony Corp’s executive team has improved its leadership and decision-making processes but I will give my humble opinion about the quality of Sony’s mobile phones: they are crap! I’ve had an Xperia phone (by Sony Ericsson) for just over a year and I can’t wait to get rid of it
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