Porter five force model of music industry

Porter’s Five Forces model is the business tool to analyse the degree of competition
in any industry which it depends on five basic forces including internal rivalry, threat
of entry, substitute products, supplier power, and buyer power. These forces may
affect and destroy the profits of existing companies. (Besanko, D. et al., 2002)
According to these forces, companies in the industry can see their strengths and
weaknesses and they can predict industry trend which is still be given them
opportunities or threats. After using this model to analyse, they can take an
appropriate strategy to improve organization performance. (Porter M., 1997) In
response to essay question, digital music portable player industry will be analysed
critically through each five forces and give an example of some companies that the
theory captures their strategic position in this industry.

Digital music portable player is a gadget to play music in audio file format encoded in
MP3, ACC, or other audio formats. Users have to download music from internet or
convert CD audio into this file format and store it in flash memory or build-in hard
disk (PC Magazine, 2006) In this industry, there are many companies that dominate
the market including Apple, Creative, iRiver, and Sony. The price of the product is
quite different that customers can buy it from £31 to £183 depended on the features
of the product or capacity of memory. (Price Grabber, 2006)

The first force of this model is “Internal Rivalry”. In this industry, the intensity of
competition is high because there are many players in the industry and each
company try to complete with each other by developing new products in the market
all the time. For example, Microsoft has recently launched their new product which is
MP3 player “Zune”. It has many features which is different from other products in
the market such as an integrated FM tuner, bigger screen, and WiFi connection.
Microsoft reports that Zune can penetrate into the market and gain the market share
from dominant companies. Two weeks after launching, it took the second place of
the market from SanDisk and grabbed 9% of the U.S.A. market but following Apple
whose its product (iPod) still dominated the market (Martell, D., 2006) Moreover,
“Cut Price” is popular business strategies in the industry. Most companies use it to
overcome with other competitors and it can drive the industry to be more
competitive. For example, Creative is a MP3 Player manufacturer that lost the
market position to Apple two years ago. In 2005, Sim Wong Hoo, the founder of
Creative, declared war on Apple’s iPod by launching new and modern product
(Creative Zen Neeon) which Apple tried to counter by cutting price on its product
that it forced Creative to do the same thing in its product; therefore, the intensity of
rivalry was increasing gradually from this situation. (Sudhaman A., 2005) Besides,
the market is growing very fast in the industry that it could also make the industry to
be more competitive as well. For instance, iRiver anticipates that MP3 player market
in Thailand will continue to grow increasingly and consumer’s demand will double in
the near future; therefore, iRiver has launched new product in the market which it
hopes to gain more market share from 13.7% up to 20%. (Veerasak, 2005) When
the market is growing very fast; it tends to stimulate many companies to enter and
launch their product in the market to gain profit in the industry.

The second force is “Threat of entry”. In this industry, threat of entry is medium
because the production cost is quite low. For example, the cost of material,
packaging, assembly of iRiver (H320) only costs £69 and the company can sell it in
retail shop at £153 (Skee G., 2005) Therefore, it may attract new competitors to
enter into the market due to the low cost of material and the high product margin.
Furthermore, the International Federation of the Phonographic Industry (IFPI)
reports that the demand for music on the internet and mobile phones is booming and
it may replace physical formats such as tape, CD, and DVD in the future; hence, it
can be predicted that the market is still growing gradually (The Computer & Internet
Lawyer, 2005). As a result, many companies come into the market and pose new
threat to existing companies. For example, Microsoft has recently entered to this
industry and launched “Zune” into the market. Many experts believe that Zune might
be a competitive rival with iPod; however, it is not easy for new entrants to gain
market share in this industry. It is obvious that Apple is still the market leader
because Apple has economies of scale in its production that Apple produces and sells
iPod more than 10 million with the high margin cost in each year. Next, Apple’s
product is highly differentiated from other brands that customers still buy iPod due to
its differentiation. For instance, iPod Nano, the latest model from Apple, has
attractive features such as full color screen and the copyright-click wheel button, and
iTune system which customers can use it easily to buy and download songs into iPod
from internet. As a result, it is difficult for new entrants which have recently entered
into the market to develop product to overcome existing companies in the industry.
(Baker, L. V. & McGuire M., 2005)

The third force that affects the industry is “Supplier Power”. In this industry, the
bargaining power of supplier is medium because, firstly, there are a lot of suppliers
which provide materials for companies such as flash memory, hard disk,
semiconductor, and so forth. These suppliers mostly come from Asia region
especially in China which is a major source for many companies due to the low price
of material. Secondly, according to a supplier in the industry, iSuppli anticipates that
the shipment of MP3 players with Hard Disk Drive (HDD) – based product is growing
up to 42.6% in 2009 from 26.6% in 2004. Consequently, it made many suppliers
come to produce material for MP3 Player market. (Electronic News, 2005) Thirdly,
most companies in the industry have power to negotiate with suppliers regarding the
price of material. Nowadays, the demand of digital music player is growing
dramatically; therefore, the growth of the market made many companies have to
produce their product in high volume in order to serve market’s need and it made
suppliers lost bargaining power because the large production gives company to be
able to order material in high volume from suppliers. Furthermore, some companies
that need lots of material in their production tend to have a long-term agreement
with supplier to supply them material. For example, Apple need to have lots of
material such as flash memory and hard disk memory for its product; therefore,
Apple decided to make a long-term supply agreement with flash memory
manufacturers such as Samsung, Toshiba in order to get good deal of price and
ensure to have material for their product up until 2010. (EDN, 2006)

The forth force is “Buyer Power”. The bargaining power of buyer in the industry is
low. Although, there are a lot of competitors in the market, products in some
companies made a great success in sales volume every year such as iPod. It is not
product’s price but it is product’s differentiation and the brand of the product. As a
result, Apple can set price for its product and it can push high switching cost to
customers if they want to change to other products in the market. Importantly,
customers buy iPod because it also contains good features and attractive
appearance. For instance, although, the price of iPod Nano is higher than other
competitors in the market, the excellent features and functions of the product such
as it can be played movies and it has higher storage capacity compared to previous
model (iPod Mini) made Apple to get lots of profit from iPod Nano in 2005 which iPod
Nano is not only just Apple’s best selling iPod, but also the best – selling digital
music player model worldwide (Reppel E. A. et al., 2006)

The last force of Porter’s model is “Substitute Product”. The threat of substitute
product in the industry is medium because digital portable music products are quite
unique which could not be easily replaced by other products. Products have many
advantages for customers. For example, it is cheaper to download songs from
internet into iPod than buy CD audio. Next, the quality of sound is equal to an
original CD after encoding into audio file format. Customers can enjoy listening music
as the same as they enjoy listening music from original CD but cheaper price.
(McElhfarn K., 2006) Therefore, these are reasons why a MP3 player is still popular
today.

However, there is a product which perhaps can replace MP3 player. It is “Music
Phone” which is a mobile phone with integrated music players such as Nokia N91
with a built-in 4GB hard drive or Motorola E398 with removable memory card. Music
phone can download songs via WAP or GPRS and store it in a built-in or removable
memory. Importantly, many experts believe that the music phone will be the most
serious threat to the industry in the near future because it is all-in-one functions that
customers can use it for both communication and entertainment. (Sun Microsystems
Inc., 2006) According to some recent research, the benefit of music phone will make
some consumers may hesitate to spend £149 on MP3 Player when they could buy
music phone with £169 or £189. (Inet, 2006)

According to the industry analysis by Porter’s Five Forces model, it can make
companies in the industry to know their strengths and weaknesses that a company
can use this theory to develop a strategy to position itself in the industry against
competitive forces which drive the industry competition or weaken company’s status.
(Porter M., 1979) According to this analysis, there are three forces that weaken the
industry including “Internal Rivalry”, “Threat of New Entry”, and “Threat of Substitute
Product”. Although, the low cost of production and the growth of MP3 market can
attract new comers to enter easily into the market such as Microsoft, it is tough
tasks for them to overcome with existing companies. When there is new comer,
existing companies must develop and improve their product in order to protect the
market share and keep their product differentiated all the time such as Apple’s iPod
Nano. Next, another force that weakens existing companies in the industry is “Threat
of Substitute Product”. Nowadays, music phone is considered to be a substitute
product in this industry. It is obvious that when mobile phone is capable to be used
in many purposes such as FM tuner, built-in camera, MP3 Player, organizer, e-mail,
and so forth. It will make an impact on digital portable music device more or less.
Therefore, some companies in the industry have a plan to deal with these all-in-one
products. For example, Apple and Microsoft have a plan to be partnership with
mobile phone company such as Motorola to develop “Hybrid Product” which makes
mobile phone to download songs and play digital music files via Apple’s iTune and
Microsoft’s Windows Media technology (Business Thai, 2005) It shows that Apple and
Microsoft has a business strategy to deal with the substitute product which this force
would weaken Apple and Microsoft in the future.

In conclusion, after applying Porter’s Five Forces model to analyse the digital
portable music industry. It is found that there are different degrees of competition in
each force. The high level of force is internal rivalry because there are many
competitors in the industry that they tried to overcome with each other by improving
and launching new products in order to gain market share. Moreover, the MP3 Player
market is growing rapidly; therefore, it will attract new comers to enter into the
market which it will make more competition. Next, the medium levels of forces are
threat of new entry, supplier power, and threat of substitute product. These three
forces are considered to have medium level because existing companies still have
potential to protect their own position and market share. Regarding the threat of new
entry, it is easy for new comers to enter the market such as the low cost of
production; however, the existing company such as Apple has a strength point in its
product which is highly dfferentiated and the company’s brand is very strong;
therefore, the company and product still dominated in this market. Next, the
bargaining power of supplier is also considered to have a medium level because
companies in this industry have much power to negotiate with suppliers because
they are able to order material in large quantity that it will make them to get good
price. Next, the threat of substitute product also has medium level. Although, the
product has many advantages which is still in high demand and popular in the
market, the coming of the all-in-one product which is the combination between
mobile phone and MP3 Player can pose a serious threat in the future. The last force
which has the low level is the bargaining of buyer power. In this industry, most
buyers have not much power to control price of the product especially high-end
products such as Apple (iPod Nano), Microsoft (Zune), or Creative (Zen) because
products are highly differentiated that will make consumers not to have much choice
to buy the product and also make the switching cost high as well if they want to
change the product. Finally, Porter’s Five Forces model will make companies in this
industry to know their strength and the weakness and it will help them to create
action plan to deal with external factors in order to be successful company in this
industry.