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Apple’s iTunes stance is wrong

I am a big proponent of Apple products and the strategy of a well-defined and easy-to-use “ultimate driving experience” in computing, over a discombobulated “open” environment that has proven to produce stagnated growth, specifically with the massive greenfield of computer agnostic users. Apple therefore remains the one-eyed King in the land of the blind.


Apple violates free-market principles

But Apple can and should do better if it wishes to sustain its growth long-term. And one of the specific areas that need strategic improvement is the role of iTunes.

iTunes violates too many free-market principles that otherwise could ensure a more aggressive growth and secure a winner-takes-all business strategy.

In March of 2008 I wrote an article about the fundamental rules of marketplaces that distinguishes its purveyors from Super Stores and concluded based on those rules that many companies, including Amazon, failed to meet marketplace criteria. So does iTunes.

The premise of free-market principles is simple. A free-market is a mechanism or place where buyer and seller are free to trade their goods without arbitration (unless to curtail illegal activity) of the intermediary. So, according to my fundamental rules of marketplaces, here is where iTunes fails:


Rule #1 violation: arbitrated participation
Not everyone can sell on iTunes, only those meeting specific requirements can participate. Free-markets rely on freedom to participate on both supply and demand using self selecting criteria.

Rule #2 violation: arbitrated transactions
Apple actively regulates supply and therefore actively engages in giving advantage to certain torso and long-tail transactions.

Rule #3 violation: no free-pricing mechanisms
Apple does not allow the labels to establish their own price or pricing models for the content they represent. In addition there is no subscription model for certain content, nor a reverse auction. iTunes provides a monolithic method for selling content that stifles supply side competition and provides reduced resale methodologies compared to the conventional models.

Rule #5 violation: preferential treatment
There is limited transactional transparency to the buyer that could lead him to buy anything but the top-100 content. iTunes provides limited transactional transparency to anything but the torso of supply, which in keeping with the purpose of a meritocracy will unjustly give preference to established rather than new emerging artists.

Rule #7 violation: challenges the labels
Support for the livelihood of intermediaries (on the supply side) is important to have them unleash their content to the marketplace. While Apple does deal directly with the labels in many circumstances, it enforces a rigid rule of law that moves the power of labels away from them.

Rule #6 violation: meaningless reputation
Those recommending content have not been validated to being buyers and frequent consumers of that content, and hence the opinion of window shoppers may be unjustly perceived as the opinions of those who bought the content (and played it all the way through). Similar to the imaging markets, where those that appreciate photography are not necessarily the ones that buy – and therefore matter.

Rule #8 violation: duality
By virtue of Apple actively marketing iTunes content (The Beatles etc.), it is not only performing the role of the marketplace but also acting as a record label, giving preferential treatment to content it likes over those that have to rely on authentic establishment of merit.


Stagnating hyper growth and staying power

The labels are already somewhat reluctant to deal with Apple, mostly because they feel they are losing power in the way the content they represent will be distributed. That will make them scour the planet for alternatives, and partner with other content platforms that do offer them the control they used to have in conventional distribution. Fortunately for Apple, its competitors are doing an even more lousy job in applying market principles and technology, today.

But the success of Apple’s iTunes strategy can only continue when beyond the novelty of digital distribution and the music player market lock-in (time sensitive to erosion), it starts to offer true free-market capabilities described in my marketplace rulebook. Today Apple fails in 7 of 8 fundamental free-market rules and is therefore merely another content Super Store, rather than a winner-takes-all free-market.

Apple can do much better with iTunes, so as to embrace the music industry with truly open arms and offer whoever is in control of content, record label or artist the most comprehensive free-market model it can to let the music sell itself.

The role of technology, again, is not to act as the market maker but to support and extend the behavior of existing markets, a crucial distinction we talk about often. Because when technology acts as if it is more than a better distribution mechanism for markets without applying fundamental marketplace rules it is doomed to find itself replaced soon.

The reputation of Apple is at stake now. If it continues to act like a Super Store and thus arbitrates and competes with the labels as a super label, it may be too late for it to ever become the trusted free-market other labels and new artists will flock to in the future. A damaged reputation cannot simply be repaired by new technology.

So, now you have an example of what I described “In the land of the blind” of why Apple, despite its phenomenal, well deserved success can still do so much better.

BTW: the stance of the App Store is comparable to iTunes, with similar debilitating marketplace violations, albeit protected by more proprietary content.


About Georges van Hoegaerden

After my ideas had raised $14M and returned over $100M to investors in Silicon Valley I could not help but detect major flaws in the evolutionary process of, and support for innovation. On an entrepreneurial quest to root-cause I evolved my focus from - first - the economics of innovation to - second - the innovation of economics and - third - ended up completely reinventing the human value-system maximizing our collective diversity and ingenuity. I named my invention Renewable Economics™.


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