Why Spotify Will Kill iTunes
Posted on Harvard Business Review: July 22, 2011 11:02 AM
Though you might not even be aware of the competitor that is attacking the music titan of the past decade, that iTunes business model is about to be blown up completely and swiftly. And it could even be thought of as fitting; iTunes accomplished the exact same thing during its early-2000s attack on the bricks-and-mortar retail music industry. Apple set the stage to decimate Tower Records and Sam Goody before either had a clue their industry was about to revolt. But innovation theory can provide a crystal ball; theory could have predicted iTunes’ success and it’s currently predicting Spotify’s success.
To appreciate the truth of this claim, it’s vital to understand one of Clayton Christensen’s theories on marketing and product development: Jobs-to-be-done. Jobs-to-be-done suggests that in order to predict how to develop, compare, and position our products, we should be driven by a fundamental understanding of what that product is hired to do. For example, every day I hire a Coke to be a wake-me-up mid-afternoon break in my workday. To get the Coke, I walk from my building to a store next door and pay $1.25. I could substitute a free cup of coffee from my own office, which would provide my much-needed caffeine at no cost. But because the job is to break up the afternoon, I value both the caffeine in the product and the distance I walk to pick up the product. I am happy to pay for the Coke because it completes the job I hire a mid-day beverage to complete. To disrupt the purchase of my afternoon Coke, a product would has to be fundamentally advantaged in one of the two areas I value for that product; caffeine and time away from my desk.
When it comes to the music industry, I used to hire Tower Records to deliver my music. For that job, I valued Tower’s music selection, the store’s convenient locations, the fact that its music was compatible with my Discman, and the low prices. When I compared Tower to other options to fulfill that job, it was pretty well positioned.
Enter iTunes. After iTunes was introduced, its online model beat Tower in selection, convenience, and price. As an online storefront it had a fundamental advantage. It was in your home, had no shelf space limiting its inventory, and could beat Tower on price because of its lower fixed costs. The only thing that might have kept Tower treading water at first was its ability to be compatible with Discmen, which we know now disappeared quickly. With a basic grasp of technology innovation trends, Tower should have known as much and immediately begun running around with its hair on fire.
Now, a decade later, enter Spotify (at least, enter the U.S. market). Based on the job of delivering music, Spotify completes the job of delivering music in much the same way as iTunes does. Spotify is conveniently located, has a wonderful selection, is compatible with my computer, smartphone, and tablet (which are in turn compatible with my stereo and car), and is backward-compatible to play music from my existing iTunes library.
It’s easy to read the above statement and seem doubtful. Even if Spotify competes in a similar fashion, that doesn’t mean it’s better than iTunes. Indeed, Spotify’s 12 million tracks don’t compare with those available on iTunes. And though Spotify is compatible with a handful of important devices, iTunes proliferates. But this is the nature of what Professor Christensen calls low-end disruption. At first, a disruptive product fails to deliver a superior offering to the incumbent technology in one or more characteristics of the job-to-be-done. But consumers switch nonetheless because the disruptor has a systemic advantage in at least one of these characteristics. We gave up minicomputer performance for the cost advantage of PCs, we gave up plasma television contrast for the slimness of the LCD, and we gave up the personality of written letters for the speed of emails.
Spotify holds a systemic advantage over iTunes in one particular job characteristic of delivering music: relative pricing. While iTunes and Spotify both deliver music over the net, Spotify’s position as a radio service lets it price far below the level of iTunes. For $10 a month, I can gain access to unlimited music as long as I am listening through a Spotify music player. I don’t even have to be connected to the net. Because Spotify pays record labels only a small royalty by audio stream, it has aligned its business model around this low pricing. It’s business model innovation.
Though Spotify did not pioneer this disruptive innovation, it is the first time mainstream media is exposing the American public to it. And we know it’s disruption because it is a business model, fundamentally advantaged in one of the characteristics we value in completing the job-to-be-done. Over time this model will displace iTunes. We’ve seen the future, because that’s what disruptive theory lets us do.
For another look at the Spotify launch, see “Why I’m Not Going Near Spotify (and Why You Shouldn’t Either).”
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