The MP3 Gadget Wars (Apple, Creative and Others)

Apple’s ability to stay ahead in the personal digital technology market is their special ability to tell consumers what is cool (something which Sony used to be able to do), i.e., Box 1 in Map 1. Their products, in this instance the iPods are not asking consumers what they want but surprising them with WOW designs in an MP3 player such that they become lifestyle items.

Apple endeavors to bring on products that enjoys the virtuous cycle shown in Map 1 between Box 2 (WOW you emotionall products) and Box 3 (Consumers vote for their products). This virtuous cycle is supported by their Box 1.

Creative Techology wants to occupy the pole position in MP3 players. Its strategy is to provide superior performance and features at a price point that is better than Apple (Box 4). They hope to own a virtuous cycle as shown between Box 3 and Box 4. Were they successful, the market would have signaled that consumers prefer performance and features (Box 4) over emotional appeal (Box 2). Sales data of the two companies products show that the virtuous cycle between Box 3 and Box 4 for Creative Technology is not as strong at the virtuous cycle between Box 3 and Box 2 that is owned by Apple.

As the market for MP3 players grow and mature, the virtuous cycle between Box 3 and Box 4 should become stronger than Apple’s controlled Box 2 and Box 3. By then Apple would have moved on to something else (Box 1) after Steve Jobs has divined where consumers want to be.

In the meantime, Creative Technology risks being sandwiched by cut throat priced products from the bottom e.g., Samsung, and the iPods from the top – See Box 5. Therefore the window for the virtuous cycle of Box 3 and Box 4 could be so small that Creative’s performance could really suffer. In this game that Creative has entered, they had no choice but to oust Apple or be prepared to move down market and valiantly defend their territory against all comers.

Creative never had Apple’s "Box 1" advantage. The market for MP3 players though growing rapidly, wasn’t fast enough for enough consumers to be part of Creative virtuous cycle (i.e., Box 3 and Box 4). When the market becomes much larger, it will also be the time when it is crowded with many competing suppliers. Prices for MP3 players can only head south. Another round of severe cost cutting at Creative looks inevitable as it fights for survival and fashions a comeback strategy.