Monday, January 25, 2010

The integration is the product

I've avoided speculating on the rumored Apple tablet--Apple will announce whatever it announces on Wednesday, everyone will know the truth, and the world will go on. However, both Apple and Amazon are pursuing a powerful strategy that makes the hardware device just one part of a much more comprehensive product.

In today's world, it's not all that difficult to build a personal media player or an eBook reader;  just go to CES or follow Engadget or Gizmodo, and you'll see more of both kinds of devices than you thought possible. What Apple did that was so powerful is that it linked a successful online media store with its best-of-breed personal media player, the iPod. Prior to Apple, you purchased an MP3 player from one company, it came with music management software (usually from another company), and you were on your own to purchase (or steal) music from wherever you could get it. Apple was the first to offer a completely integrated product: Player, music management software and music store, all of which were best-of-breed. Their strengths leveraged each other. When Apple introduced Windows support, the flood gates opened and Apple quickly dominated the player, music (now media) management and media retailing businesses.

Amazon is pursuing the same model with its Kindle, but it approached the eBook business from the retail side rather than software or consumer electronics. As of today, the Kindle 2 is the best-of-breed eBook reader, and Amazon is far and away the #1 seller of eBooks. Last week's announcement by Amazon of its 70% royalty plan for self-publishing authors is likely to reinforce that lead. The company's CreateSpace service helps authors edit and design eBooks (for a price), and then sell the resulting eBooks on Amazon. Everything integrated together is much more powerful than any individual component.

That brings me to my point: The integration IS the product. In the media business, you have to bring everything together: Content creation, distribution, management and devices. You also have to do all of them well; Sony has media players, a store, content creation and content management software. It even owns a record label and film studio, yet it's a faint shadow of Apple. The same goes for eBooks, where Sony builds readers, writes content management software and has its own store, yet it's a poor second-place player to Amazon.

If I had to pick one business to be in, I'd pick the content distribution business. The distributors will be the "arms dealers" for the myriad of media player manufacturers chasing Apple and eBook reader manufacturers chasing Amazon. If you can't come to market with an integrated offering, you're at best going to be a niche player. Consumers have voted overwhelmingly for integrated solutions with their dollars. That's why I wouldn't at all be surprised to see Apple follow the same model with whatever it announces this week, combining the iTunes Store and iPhone App Store to support a new range of content. Apple has taught the world that the integration is the product.
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