Factors affecting Software Business Models
Companies can have multiple business models and those models can contain variations of affecting
factors. Most important of those factors are competing environment, customers, resource
environment, financial environment, corporate business strategies and characteristics of product and
service offering. We try to explain those factors and describe what the key components are in the
case iTunes.
1. Competing environment
iTunes was brought to highly rivalry environment. The competition market was divided into
software which enables either legal or illegal activities. At the time, file swapping services like
Kazaa, Morpheus and Napster where leading software which people used. Those software where
free to use so they manage to collect a widely range of users. And users consider them easier to use
than legal software. A Subscription-based model was a most common what legal software uses.
Companies like Americas Online’s, MusicNet, Full Audio’s Music Now, ReaolOnes’s Rhapsody,
Music Matchs MX, EMusic and Pressplay used that subscription-based model with variety of
revenue models. They tried to provide a ‘pay per song’ model also but they couldn’t develop a
custom which customers would approve of. So iTunes’ had to compete against to popular and easy
using illegal software and legal software which have a big database but were suffering to find paying
customers.
2. Customers
Customers in music listening and selling product can be defined everyone who has a computer,
online connection and listen music. iTunes is also focused to private using so the main segment is
B2C. iTunes’ music offering also limited the smallest music areas off, focusing to offer main record
companies artists.
Users of iTunes were a much different than other online music stores. Apple had developed own
culture to its users that had a high image. That associate with Apple’s products like iTunes also.
Using of iTunes was seemed to be cool and trendy. Before that buying music from online wasn’t in
very good reputation. Apple manages to touch customers who behavioural acting was role model in
regular life. Result of that, the mainstream audience followed up later.
3. Resource environment
Because iTunes was a part of Macintosh the distribute channels were already existing for the
software. Main partnerships had to do with the record label companies. Apple manages to get 5 big
music labels: BMG, EMI, Sony, Universal and Warner and they did a revenue sharing agreement
with them. And iTunes also featured 80-100 independent artists apart from the deal from record
labels. iTunes also had some exclusive songs from 20 popular artists. Those things together made
iTunes resource environment significantly better than other music store software.
4. Financial environment
iTunes is Apple’s product and case report doesn’t focus on Apple. Therefore there cannot see clearly
any main financial environment. The point of view is more to understand the domain markets where
iTunes was competing. iTunes’ role mainly was improving Apple’s cash flow. And, for record
labels being stakeholders, the one big reason was overcome music piracy and improves cash flows.
5. Corporate business strategies
The biggest problem what iTunes had was to try to combining a program what would satisfy both
users of illegal music programs and users of legal music programs. Both groups had their own
specific requirements what to think of. Apple had to think what are the indicators what would get
people buy songs from internet and what are the indicators what would get new people use their
software before competitors.
Other strategy was how to manage keep iTunes’ offering fresh and alluring, that the customers
would use software longer. Overall it was important to focus on customer satisfaction. That was
made by easy using interface and augmented product parts which gave advance to iTunes comparing
to competitors.
Figure x. Brand equity
For Apple the brand image is always been important thing. That’s way we selected Berry’s model
which shows the channels where company’s brand equity is built (Berry, 2000). Apple’s knowhow
in these channels was a big thing in succeeding the record labels to co-operating with iTunes. Apple
has managed to gain a good presented brand with their CO Steve Jobs. Therefore Apple’s brand
equity was so strong that the threshold was low for record labels to start to be stakeholders. Good
brand image was also helping customers to adopt iTunes for themselves. And keeping up with good
customer experience iTunes brand equity was positive growing.
6. Characteristics of product and service offering
iTunes is integrated in Macintoshes and support for other operating systems has been added later
trough internet. Updating will handle via internet connection. From the beginning, it was clear that
iTunes had to make a distance from being just a part of an operating system. iTunes was marketed as
own independent software.
Apple’s idea with iTunes was trying to overcome the difficulties what other music suppliers had
have. They think that competitor’s main problems were poor quality, unreliable performance,
unpopular selling models (subscription-based) and imposed limitations of downloading. The main
thing was also to find a solution how to get music piracy enthusiasts to use legal software. Apple
thought their problem was more behavioural than anything else. That’s why they offered a much
rights to user they could and giving a reasonable song prising system what would people accept.
They also pay attention to selection of the music and good-quality downloads.
Product development model
Product development model contains layers which the whole software is consisting. It defines the
structures which are creating value to the product. So the model can be considered as a base where
everything builds. It’s also necessary that we can separate the different pieces of the model, because
it is easier to examine smaller units. And via that we can understand better the functions that a
company will have. In this case study we divided product development model in four pieces:
Product, parameterised product, plausible promise and product platform.
1. Product & Parameterised product
Product is a tool which a company uses to gain profit. And it includes a lot depth in it that we try to
discover. It has more than just a visual side what wee see. In our case the product is Apple’s iTunes.
First we examine the levels of the iTunes. For this, we selected Kotler’s three layer dimension to
open those layers. The model opens the product in three layers; augmented product, expected
product and core product (Kotler, Armstrong, Wong & Saunders, 1996).
Figure 1. The levels of the product
The core product of iTunes is two-folded. First there is a music player, to listen music, and secondly
there is a music store, to buy music. And the core benefit is service-based model that satisfy users
need to listen and buy music easy and legally. In iTunes case there was first only a music player in
software. But Apple expanded iTunes that it also starts to serve music buyers. That duality can see
as a utility that befits the product to gain its success.
Expected product includes functions and features which enables the core product to work. In iTunes
these are usability, size, music database, music player, performance, functions and brand image.
Basically these are the components which build the iTunes itself. They all are necessary for the
product and without them the product could not work. And they are also the minimum features
which the product has to have.
- Usability describes how easy/hard is to use software. It can be example measured by the
customer satisfaction.
- Size is a measure how big is the iTunes.
- Music database includes all songs that are in the music store. And which are the songs that
user can buy.
- Music player allows user to listen the songs.
- Functions are possible actions what user can do by the iTunes.
- Brand image is a promise what the iTunes is.
- Performance describes how good/bad software handles inputs what user gives.
Augmented products are parts that will give more value to the product. They are optional choices
and therefore they are not necessary features. But product must have even some augmented parts
because these parts will different the product from its competitors. In case iTunes creation of
difference was successful. Apple managed to turn competitor’s troubles as their own advantage.
- Compiling albums allows that users could make their own albums mixing different songs
and different artists and bands.
- Right to users, mean that buyer could use the song he/she bought as he wishes (example
burning songs to CD).
- Under dollar pricing (99cent) per song was easy customer to understand and it gave advance
to iTunes comparing to other companies.
- Allow to save songs to users own computer without any restriction.
- 30 second sample gave user to possible listen songs before buying them. This helped the
problem that customer’s suspicion could prevent them to buy songs.
- Optional buying situation
- Installation was at first only available in Macintosh but it was fast expanded to Microsoft’s
environment also.
- Manual is database where users can found answers to questions about using the iTunes.
iTunes don’t need any tailoring. It just needs enough storage base, internet connection and common
operating system. So it cannot be consider as a parameterised product. The software have been
manage to avoid being too complex and not giving a much modifying choices to users. In fact, the
way it has been developed to today is creating a symbiosis with software and hardware. An alliance
between iTunes and iPod is best example how it is possible to utilize software and hardware, this
based also in the revolution of web 2.0 (O,Reilly, 2005). That knowledge of understand tomorrows
market is a big advantage to Apple.
2. Plausible promise & Product platform
At first, iTunes was only introduced into Macintosh users. This means that only 3% of all computer
users at the time, in 2003, could use iTunes. But the market was big enough that they manage to get
all the key record companies behind them. And with that 3% they have the opportunity to see how
the market would react with Apple’s new idea to sell music. So it can see that Macintosh users
where to some extent a test group before making software to rest of the operating software’s too.
iTunes was made available to Windows users later in 2003.
iTunes was originally built to be a music player. That led software to be two-folded after adding the
music store into it. It can see that iTunes was a new product in already existing music selling market.
But it can be also seen that iTunes was existing product in a new market. So there are two
perspectives to examine iTunes product-market -model. It is easier to understand this situation if it
will be viewed by Ansoff's product-market growth matrix. Ansoff matrix helps marketers to
understand different combinations between new/existing market and new/existing product. This will
help management to make more accurate product strategies.
Figure 2. Ansoff matrix
a) Market development strategy
The iTunes already existed before Apple made decision to move into music business. Music store
was just one element what added to software so that's why it can not bee seen as a new product.
Apple moved iTunes in a new market (by adding the music store). Before the possibility to buy
music, iTunes was more just a component in OS market and after that possibility iTunes’ market
was music industry. This strategy’s goal is to earn more revenue to the firm.
b) Product development strategy
The music selling industry in online already existed before iTunes’ online store. There where several
competitors in the field with a little bit different revenue logic what iTunes adopt. So it can see that
Apple’s iTunes was so remarkable different compared to its competitors that iTunes can consider as
a whole new product. This product strategy’s idea is to development firms offer to gain more
advantage to competitiveness.
Ansoff, I. (1957). Strategies for Diversification. Harvard Business Review, 35, 5,113-124.
Berry, L. L. (2000). Cultivating Service Brand Equity. Academy of Marketing Scienc, 28, 1, 128137.
Kotler, P., Armstrong, G., Wong, V., & Saunders, J. (1996). Principles of Marketing. Harlow,
England: Prentice Hall.