www.christopherferrel.

com
CHRI STOPHER W. FERREL
Analysis of Apple iCloud and iTunes Match
Disruptive Innovations
within the Music Industry
z WWW.CHRISTOPHERFERREL.COM
Abstract
About this discussion.
S
ince the mid-noughties, a growing number of consumers
prefer to access their digital content via Cloud Computing
SaaS providers (Renub Research, 2010). The purpose of
this discussion is to apply Clayton Christensens principles of
disruptive innovations within the consumer Cloud Computing
SaaS market. The history, current market and potential disrup-
tive innovations of consumer Cloud Computing SaaS market are
explored. In order to succeed in the consumer Cloud Computing
SaaS mafket, a sefvIce pfovIdef must oef: 1.) ConvenIent and
seamless accessibility of a consumers digital content across all
popular consumer devices and 2.) Provide an incentive for copy-
right holders, especially professionals within the entertainment
industry, to invest in Cloud Computing. Based on its innovative
features and the companys historical success with emerging
technologies, Apple, Inc.s iCloud and iTunes Match appear to
be the most likely to succeed in the consumer Cloud Computing
SaaS market.
WWW.CHRISTOPHERFERREL.COM
Contents
Abstract z
About this discussion.
Disruptive Innovations within the Music Industry
Analysis of Apple iCloud and iTunes Match.
References ::
DISRUPTIVE INNOVATIONS WITHIN THE MUSIC INDUSTRY
WWW.CHRISTOPHERFERREL.COM
This document was created for academic purposes
at St. Edwards University and is not intended for
commercial use without express permission.
DISRUPTIVE INNOVATIONS WITHIN THE MUSIC INDUSTRY
WWW.CHRISTOPHERFERREL.COM
Disruptive Innovations
within the Music
Industry
Analysis of Apple iCloud and iTunes Match.
Apple launches iCloud service BY JUSTIN SULLIVAN/GETTY
IMAGES
DISRUPTIVE INNOVATIONS WITHIN THE MUSIC INDUSTRY
WWW.CHRISTOPHERFERREL.COM
C
layton M. Christensen once noted that disruption is a process, not an event
(Christensen, 2004). The development of the Cloud Computing industry serves
as an exemplary illustration of Professor Christensens critical lessons in disrup-
tive innovations. Since the mid-noughties, industry analysts have suggested that Cloud
Computing has the potential to disrupt the large-scale Information Technology (IT)
industry by fundamentally altering how IT hardware and software applications are
developed, deployed, ran and purchased (Armbrust, 2009; Renub Research, 2010). Cloud
ComputIng pfovIdes a cost ecIent soIutIon fof companIes and consumefs who fequIfe
scalable datacenters. Companies and consumers only pay for their short-term resource
fequIfements wIthout endufIng the costs InvoIved In Iong-tefm pIannIng and pufchas-
Ing of datacentefs. The exIbIIIty of hafdwafe fesoufces oefed by CIoud ComputIng
has never before been available in the IT industry (Armbrust, 2009).
Fof pufposes of thIs dIscussIon, CIoud ComputIng Is dened as the amaIgamatIon of
datacenter hardware and datacenter system software delivered via the Internet or
an Intranet. The architecture of Cloud Computing has existed in internal datacent-
ers of corporations for several years. Commonly referred to as grid computing, these
private Cloud Computing systems gave rise to public Cloud Computing delivered
most commonly by the Software as a Service (SaaS) delivery model (Armbrust, 2009).
Currently the fastest growing segment, SaaS Cloud Computing claims 89% of the Cloud
Computing Market (Renub Research, 2010). Apple, Google, Amazon Web Services, IBM,
Cisco Systems, Microsoft, VMware, Hewlett-Packard, Oracle, Siemens. NEC, Network
Appliance, Salesforce and Facebook are believed to be the most capable SaaS providers
to claim market leadership of the Cloud Computing industry (Armbrust, 2009; Renub
Research, 2010).
Disruption is a process, not an event.
Signals of Change
The purpose of this discussion is to apply Clayton Christensens principles of disruptive
innovations within the consumer Cloud Computing SaaS market. While several compa-
nIes oef CIoud ComputIng sefvIces, It has yet to be detefmIned what busIness modeI
will succeed. As previously discussed, Cloud Computing initially gained popularity due
to Its fesoufce exIbIIIty and cost ecIency. WhIIe these peffofmance factofs uItImateIy
disrupted Cloud Computing in large-scale business datacenters, the consumer market
has yet to observe the same disruption. According the Christensens theory, the con-
sumef mafket fof CIoud ComputIng wIII most IIkeIy exIst In a dIefent vaIue netwofk.
The fst evIdence of CIoud ComputIng entefIng the consumef mafket Is found In the
recent 10-K Annual Reports of Western Digital Corporation and Seagate Technology
Public Limited Company. The world leaders in hard-disk drive manufacturing, Western
Digital and Seagate Technology currently serve overshot consumers. For years, data stor-
age has been valued according to the price-per-MB of hard-disk drives storage capacity.
In contfast, CIoud ComputIng Is vaIued by Its fesoufce exIbIIIty and cost ecIency. IIke
most disruptive innovations, Cloud Computing was not initially cheaper-per-MB than
hard-disk drives. However, Western Digital and Seagate continued to improve upon its
DISRUPTIVE INNOVATIONS WITHIN THE MUSIC INDUSTRY
WWW.CHRISTOPHERFERREL.COM /
pfIce-pef-MB peffofmance untII consumefs found oIdef technoIogIes to be sucIent fof
their needs. The hard-disk drive market primarily relies on an ever-depleting number
of undershot customers, as fewer and fewer customers are willing to pay a premium
for enhancements to hard-disks storage capacity.
Meanwhile, a small market of consumers valued the convenience of accessing their digi-
tal content across all their digital devices. Since the mid-noughties, a growing number
of consumers prefer to access their digital content via Cloud Computing SaaS providers
(Renub Research, 2010). Western Digital and Seagate failed to publically acknowledge
Cloud Computing as a disruptive technology until 2009 and 2010, respectively (Seagate,
2008; Seagate, 2009; Seagate, 2010; Seagate, 2011; Western Digital, 2009; Western
Digital, 2010; Western Digital, 2011). Like many companies who focus resources solely
on sustaining technologies, Western Digital and Seagate were not prepared for disruptive
innovations. As described by Christensen, market leaders often fail to identify disruptive
technologies until it is too late to overcome the disruption (Christensen, 2004). Evidence
of thIs Iate fecognItIon can be found In Westefn DIgItaI's 2011 10-K AnnuaI Repoft:
WESTERN DIGITAL 2011 10-K ANNUAL REPORT
CONSUMERS TRADITIONALLY HAVE STORED THEIR DATA ON THEIR PC, OFTEN SUPPLEMENTED WITH
PERSONAL EXTERNAL STORAGE DEVICES. MOST BUSINESSES ALSO INCLUDE SIMILAR LOCAL STORAGE AS
A PRIMARY OR SECONDARY STORAGE LOCATION. THIS STORAGE IS TYPICALLY PROVIDED BY HARD DISK
DRIVES. RECENTLY, CLOUD COMPUTING HAS EMERGED WHEREBY APPLICATIONS AND DATA ARE HOSTED,
ACCESSED AND PROCESSED THROUGH A THIRD-PARTY PROVIDER OVER A BROADBAND INTERNET CON-
NECTION, POTENTIALLY REDUCING OR ELIMINATING THE NEED FOR, AMONG OTHER THINGS, SIGNIFICANT
STORAGE INSIDE THE ACCESSING COMPUTER. THIS TREND COULD CAUSE THE MARKET FOR DISK DRIVES IN
COMPUTERS TO DECLINE OVER TIME, WHICH COULD HARM OUR BUSINESS TO THE EXTENT THIS DECLINE IS
NOT OFFSET BY THE SALE OF OUR PRODUCTS TO CUSTOMERS WHO PROVIDE CLOUD COMPUTING SERVICES
(WESTERN DIGITAL, zo::).
Consumers traditionally have stored their data on their PC, often supplemented with
personal external storage devices. Most businesses also include similar local storage
as a primary or secondary storage location. This storage is typically provided by hard
disk drives. Recently, Cloud Computing has emerged whereby applications and data
are hosted, accessed and processed through a third-party provider over a broadband
Internet connection, potentially reducing or eliminating the need for, among other things,
sIgnIcant stofage InsIde the accessIng computef. ThIs tfend couId cause the mafket fof
disk drives in computers to decline over time, which could harm our business to the
extent thIs decIIne Is not oset by the saIe of ouf pfoducts to customefs who pfovIde
Cloud Computing services (Western Digital, 2011).
The Annual 10-K Reports from Western Digital and Seagate further support Cloud
Computing as a disruptive innovation. The current state of the hard-disk industry also
suggests that a new market leader will emerge in the data storage industry. Furthermore,
the emergent company will most likely provide consumer Cloud Computing SaaS ser-
vIces that fuIII the fequIfements of the data stofage Industfy's vaIue netwofk.
DISRUPTIVE INNOVATIONS WITHIN THE MUSIC INDUSTRY
8 WWW.CHRISTOPHERFERREL.COM
I
n order to be competitive in the consumer Cloud Computing SaaS market, two
important value criteria must be realized. First, one must provide convenient and
seamless accessibility of a consumers digital content across all popular consumer
devices. Including, but not limited to, desktop computers, laptop computers, tablet
computers, mobile phones as well as home and vehicle entertainment systems. Secondly,
one must provide an incentive for copyright holders, especially professionals within
the entertainment industry, to invest in Cloud Computing.
Competitive Battles
Google and Amazon released highly anticipated consumer-focused Cloud Computing
SaaS in 2011 (Albanesius, 2011). Both companies were clearly focused on providing
consumers with convenient and seamless accessibility of their digital content. Google
MusIc Beta and Amazon CIoud PIayef aIIow usefs to upIoad theIf dIgItaI musIc Ies
to a Cloud Computing datacenter. Beta testers of Google Music are allowed to upload
as many as 20,000 songs while Amazon provides 5GB of free storage and 20GB if cus-
tomers purchase an AmazonMP3 album (Albanesius, 2011; Miller, 2011). While still
largely under development, both Google and Amazon plan to integrate their services
across a wide variety of web-enabled computers and mobile devices running Android
operating system.
Despite a growing interest from consumers, Google and Amazon have been hampered
by IegaI concefns expfessed by dIgItaI content copyfIght hoIdefs. SpecIcaIIy, GoogIe
and Amazon have failed to secure licensing agreements with the artists, record labels
and publishers within the music industry (Albanesius, 2011). The Director of Music
at Amazon, Craig Pape, told The New York Times, We dont need a license to store
music. The Functionality is the same as an external hard drive (Miller, 2011). Google
agrees with Amazon and argues that they do not need licensing agreements because
users upload content that they already own (Albanesius, 2011).
1. Convenient and seamless accessibility of a
consumers digital content across all popular
consumer devices.
Copyright holders believe that Google and Amazon are in violation of licensing agree-
ments because access to a consumef's dIgItaI content fequIfes a stfeam of fe-downIoad
of said content for which royalties are owed (Albanesius, 2011). Copyright holders
have also expressed concern that Google and Amazon do not provide reliable methods
to prevent pirated content from being stored via their Cloud Computing services. The
Recording Industry Association of America (RIAA) successfully sued MP3.com in 2008
for providing a similar service (Price, 2011). The precedent set in the RIAA vs. MP3.
com case suggests that Google and Amazon will be forced to comply with the copyright
hoIdef's fequests.
Unlike Amazon and Google, Apple, Inc. has successfully secured licensing agreements for
their release of iCloud and iTunes Match service. Announced at Apple, Inc.s Worldwide
DISRUPTIVE INNOVATIONS WITHIN THE MUSIC INDUSTRY
WWW.CHRISTOPHERFERREL.COM p
APPLE RELEASES ITUNES
:o. BETA p
Developer Conference (WWDC) in June of 2011, the iCloud and ITunes Match services
appear to address both critical value criteria. The iCloud is a described as a virtual
hard drive that is accessible from all of Apples popular consumer devices running iOS
5 and iTunes 10.5, including the iPhone, the iPad, iPod Touch as well as Mac and PC
computers (Price, 2011). iCloud users receive 5GB of storage for free with option to
upgrade to 10GB for $20 per year, 20GB for $40 per year and 50GB for $100 per year
(AIbanesIus, 2011). AIong wIth dIgItaI musIc Ies, usefs can upIoad theIf pIctufes, apps,
calendars, email and contacts to their iCloud account. The convenience and accessibil-
Ity of ICIoud IafgeIy satIses the fst vaIue cfItefIon.
More importantly, Apple has a competitive advantage in the consumer Cloud Computing
SaaS market because they have successfully negotiated licensing deals with copyright
holders. The iTunes Match software portion of the iCloud service will pay royalties to
copyfIght hoIdefs each tIme a subscfIbef stfeams of fe-downIoads a dIgItaI musIc Ie.
2. An incentive for copyright holders
to invest in Cloud Computing.
The remarkable innovation of this technology is that iTunes match will not only pay
royalties for legally obtained content, but it will pay royalties for illegally obtained
content as well (Price, 2011). Because the royalties are based on access, even pirated
content will be subject to royalty payments to copyright holders. By monetizing pirated
matefIaI, ITunes Match Is the onIy CIoud ComputIng sefvIce to date that satIses the
second value criterion.
DISRUPTIVE INNOVATIONS WITHIN THE MUSIC INDUSTRY
1o WWW.CHRISTOPHERFERREL.COM
A
pple, Inc. has a proven track record of successful development and implementa-
tion of disruptive innovations. The iPod, iTunes, iPhone, App store and the iPad
are all innovative examples that have contributed to Apples 58.85% growth in
net income during the past 36 months (Hoovers Online, 2011). Google, in comparison,
has seen a 26.48% growth in net income during the past 36 months. During the same
time, Apples iPhone sales increased by more than 90% and accounted for 39% of the
companys 2010 revenue (Hoovers Online, 2011). The growth in consumer-focused
products suggests that Apple is highly in tuned with current consumer needs and that
iCloud will successfully appeal to the consumer Cloud Computing market.
Strategic Choices
Apples commitment to innovation has created a value network that deters entrants due
to the high barriers associated with overlapping value networks. Christensen explains
that when an entrant companys value network overlaps with an incumbents supplier or
customef, a choke poInt occufs (ChfIstensen, 2004). Choke poInts fofce fms to spend a
greater amount of resources in order to disrupt the industry because they are in direct
competItIon wIth the Incumbent fm's vaIue netwofk. ShouId the ICIoud become the
mafket Ieadef, theIf Incumbent vaIue netwofk wIII cIaIm hIghIy unIque suppIIefs and
customefs. TheIf netwofk wIII be unIque because the dIgItaI musIc content Is suppIIed by
a feIatIveIy smaII amount of copyfIght hoIdefs. Because an entfant fm cannot sImpIy
create new copyright holders, they will be forced to spend more resources in order to
form licensing agreements with artists, labels and publishers. An overlap in customers is
also likely given that iCloud favors Apples highly popular proprietary devices. In other
wofds, It wIII be vefy dIcuIt fof an entfant attackef to appeaI to AppIe's suppIIefs and
customefs because the unIque vaIue netwofk wIII cause an ovefIappIng vaIue netowofk.
&KRNHSRLQWVIRUFHUPVWRVSHQGDJUHDWHUDPRXQW
of resources in order to disrupt the industry
Apples commitment to innovation further supports the iCloud and iTunes Match as
disruptive technologies. Due to their previous successes, Apples investors trust in their
business processes and methodology and allow Apple freedom to identify and develop
disruptive innovations. It seems likely that iCloud will succeed as the market leader
in consumer Cloud Computing SaaS because of the competitive advantage created by
iTunes Match.
REFERENCES
WWW.CHRISTOPHERFERREL.COM 11
References
ALBANESIUS, C. (zo::). APPLE RELEASES ITUNES MATCH DEVELOPER BETA. PC MAG. RETRIEVED FROM
HTTP://WWW.PCMAG.COM/ARTICLEz/o,z8:;,zpzo6,oo.ASP=FBID=JHXKXB_OSHT
ALBANESIUS, C. (zo::). REPORT: GOOGLE PREPPING MP STORE AHEAD OF ITUNES MATCH? PC MAG.
RETRIEVED FROM HTTP://WWW.PCMAG.COM/ARTICLEz/o,z8:;,zp(6;,oo.ASP=FBID=JHXKXB_OSHT
ARMBRUST, M., FOX, A., GRIFFITH, R., & JOSEPH, A. D. (zoop). ABOVE THE CLOUDS: A BERKELEY VIEW
OF CLOUD COMPUTING. UNIVERSITY OF CALIFORNIA, (UCB/EECS-zoop-z8), o;-o:. EECS DEPARTMENT,
UNI VERSI TY OF CALI FORNI A, BERKELEY. RETRI EVED FROM HTTP: //WWW. EECS. BERKELEY. EDU/PUBS/
TECHRPTS/zoop/EECS-zoop-z8.HTML
CHRISTENSEN, C. M., ANTHONY, S. D., ROTH, E. A. (zoo(). SEEING WHATS NEXT?: USING THE THEORIES
OF INNOVATION TO PREDICT INDUSTRY CHANGE. HARVARD BUSINESS SCHOOL PRESS.
HOOVERS ONLINE. (zo::). APPLE INC. COMPANY REPORT. RETRIEVED FROM HTTP://WWW.HOOVERS.COM/
COMPANY/APPLE_INC/RTJCCI-:.HTML
MILLER, C. C. (zo::). AMAZON INTRODUCES A DIGITAL MUSIC LOCKER. THE NEW YORK TIMES. RETRIEVED
FROM HTTP://BITS.BLOGS.NYTIMES.COM/zo::/o/zp/AMAZON-INTRODUCES-A-DIGITAL-MUSIC-LOCKER/
PRICE, J. (zo::). ICLOUD: A MUSIC INDUSTRY GAME-CHANGING PRODUCT. TUNECORE. RETRIVED FROM
HTTP://BLOG.TUNECORE.COM/zo::/o6/I CLOUD-%Ez%8o%p-A-MUSI C-I NDUSTRY-GAME-CHANGI NG-
PRODUCT.HTML
RENUB RESEARCH. (zo:o). CLOUD COMPUTING SAAS, PAAS, IAAS MARKET, MOBILE CLOUD COMPUTING,
M&A, INVESTMENTS, AND FUTURE FORECAST, WORLDWIDE. RETRIEVED FROM HTTP://WWW.SLIDESHARE.NET/
RENUBRESEARCH/CLOUD-COMPUTING-MARKET-WORLDWIDE
SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY. (zo::). FORM :o-K.
SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY. (zo:o).
FORM :o-K. SEAGATE TECHNOLOGY PUBLIC LIMITED COMPANY. (zoop). FORM :o-K.
WESTERN DIGITAL CORPORATION. (zo::). FORM :o-K.
WESTERN DIGITAL CORPORATION. (zo:o). FORM :o-K.
WESTERN DIGITAL CORPORATION. (zoop). FORM :o-K.
WESTERN DIGITAL CORPORATION. (zoo8). FORM :o-K.
SPECIAL THANKS TO OTTO COSTER AND SMASHING MAGAZINE FOR PROVIDING THIS BEATIFUL INDESIGN TEMPLATE
ABOUT THE AUTHOR
Christopher W. Ferrel is a musician and student
currently working towards an MBA in Digital
Media Management at St. Edwards University in
Austin, Texas. He specializes in artist management
and direct-to-fan marketing campaigns.
cwferrel@gmail.com
www.christopherferrel.com