Zune case study

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Zune HBS case study from my strategy class as part of my MBA.

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Zune case study

  1. 1. agenda overview analysis alternatives recommendations q&a update : TOO ZUNE TO TELL? patrick joiner david kelver ted rowbottom yuri yoshida
  2. 2. agenda overview analysis alternatives recommendations q&a update AGENDA • Overview • Situational Analysis • Alternatives • Recommendations • Q&A • Update 2
  3. 3. agenda overview analysis alternatives recommendations q&a update OVERVIEW What is Zune? Company perspective: Platform for a social ecosystem built around Microsoft products Consumer perspective: MP3 player with functions very similar to iPod For this presentation we will be focusing on the MP3 market. However, our alternative actions and recommendations will reflect the company as a whole 3
  4. 4. agenda overview analysis alternatives recommendations q&a update HISTORY Portable Transistor Sony Apple Radio Walkman MPMan iPod (1954) (1979) (1998) (2001) Portable Portable First HDD Microsoft AM/FM CD Player Zune Cassette (1984) (1998) (2006) (mid 1970s) 4
  5. 5. agenda overview analysis alternatives recommendations q&a update KEY PLAYERS Computer, electronics, and software maker Well regarded for design and ease of use Computer multimedia parts manufacturer Industry leader in PC audio technology South Korea based, captured 50% of Korean market at one time Understood impact of iTunes early on 5
  6. 6. agenda overview analysis alternatives recommendations q&a update KEY PLAYERS • World-leading supplier of flash memory data storage products • Partners with other companies for software • One of the world’s best known names in consumer products • Manufactures and sells a broad range of products, including Walkman • One of the world’s best known and largest companies • Operating systems, office applications, entertainment 6
  7. 7. agenda overview analysis alternatives recommendations q&a update MP3 PLAYER MARKET SIZE Market Value (estimated) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2006 2007 2008 7
  8. 8. agenda overview analysis alternatives recommendations q&a update MP3 PLAYER GROWTH TRENDS MP3 Player Sales Forecast Hard disk players Flash Players 120 70 20 -30 8
  9. 9. agenda overview analysis alternatives recommendations q&a update ZUNE HISTORY • July 2006 launch of Zune umbrella brand confirmed; Zune MP3 player is to be the first product • Zune consists of hardware (player) and software (Zune Marketplace) – Meant to provide a variety of digital entertainment services – Development was placed under J. Allard’s oversight in the Xbox division – Shows that Microsoft is trying to build competencies in the electronics hardware industry • Zune was launched on November 14, 2006 9
  10. 10. agenda overview analysis alternatives recommendations q&a update ZUNE COMMERCIAL 10
  11. 11. agenda overview analysis alternatives recommendations q&a update ZUNE OBJECTIVES • Ultimate goal is to make Zune the center of an entertainment ecosystem built around Microsoft Products • Sell 1,000,000 units by June 2007 • Enable Microsoft to get an early lead in the next generation of mobile devices 11
  12. 12. agenda overview analysis alternatives recommendations q&a update MACRO ENVIRONMENT General Economic Conditions - Medium • Sales will rise and fall with economic conditions • More expensive models hit first by a recession Availability of lower priced mp3 players partially counters income effect Societal values and lifestyles Legislature and Regulations – Strong • People are demanding the freedom to – Medium to very strong • Lawsuit against Diamond listen to what they want when they want to MP3 Player Multimedia ruled MP3 players legal Increasing demand for integration of daily functions onto one device (music, schedules, sync with outlook, Industry • Threat of legal challenge very high movies, podcasts, etc…) Increasing acceptance of illegal downloads creates an opportunity to break iTunes dominance Population demographics - Strong Technology - Strong • Use of MP3 players growing • Demand for an increasing number of among all demographic groups features and integration has the industry • Youth market fueling industry waiting on new technology to be developed dominance • High demand for new technology increases • MP3 players seen as a fashion supplier power accessory 12
  13. 13. agenda overview analysis alternatives recommendations q&a update FIVE FORCES Competition from Rivals: Very Strong • 6 major players: Apple, Creative, iRiver, Microsoft, SanDisk, Sony • Apple – 65-80% of the market Switching costs in a way protects them Others have less than 6% each and they are fighting for a bigger share Microsoft 2.8% after the Nov 19 – Dec. 23 Holiday season (2006) Substitutes: Moderate but expected to be strong Buyer power – Weak to Medium • Samsung and Nokia already introduced phones that could store songs (up to • Buyers are retailers and consumers 3,000) • Apple controls 70% of the market • Apple announced plans for the iphone • Retailers must stock to consumer (2007 release) demand Zune Contemplating jump into the phone market • Many buyers have high switching costs • Substitutes include portable handheld due to previous purchases of iPods and devices (Nintendo DS, PSP, Satellite radios) iTunes music Supplier Power – Strong New Entrants – Weak/strong • Stiff competition among mp3 makers for memory • High barriers to entry and hard drive advantages have increased Massive R&D costs supplier power Necessity of complements to compete Evidence of this seen in price volatility (online music distribution, complement among flash memory suppliers (Supply game systems etc.) and Demand) 13
  14. 14. agenda overview analysis alternatives recommendations q&a update DRIVING FORCES • Product innovation • Increased convergence • Continued growth and demand • Growing use of internet/wi-fi • Changes in demographics 14
  15. 15. agenda overview analysis alternatives recommendations q&a update KEY SUCCESS FACTORS • Brand reputation • Number of models (HDD/flash) • Ease of use • R&D expertise • Continuous product innovation • Vertical integration as a content provider • Marketing/market research 15
  16. 16. agenda overview analysis alternatives recommendations q&a update STRATEGIC GROUP MAP 16
  17. 17. agenda overview analysis alternatives recommendations q&a update COMPETITIVE STRENGTH MATRIX Key success factor Weight Apple Sony Creative iRiver SanDisk Microsoft Brand Reputation 0.2 9 1.80 9 1.80 5 1.00 2 0.40 3 0.60 7 1.40 Number of models (flash + hdd) 0.2 6 1.20 7 1.40 7 1.40 4 0.80 10 2.00 1 0.20 Ease of use 0.15 9 1.35 7 1.05 7 1.05 7 1.05 7 1.05 5 0.75 R&D expertise 0.1 9 0.90 8 0.80 7 0.70 6 0.60 6 0.60 9 0.90 Continuous Innovation 0.15 8 1.20 4 0.60 6 0.90 6 0.90 6 0.90 2 0.30 Vertical integration 0.1 10 1.00 7 0.70 2 0.20 2 0.20 2 0.20 7 0.70 Marketing/Research 0.1 8 0.80 8 0.80 7 0.70 4 0.40 6 0.60 8 0.80 Weighted Score 1 6.45 5.35 4.95 3.95 5.35 3.65 17
  18. 18. agenda overview analysis alternatives recommendations q&a update SWOT – OPPORTUNITIES/THREATS Opportunities Threats • Expansion of wireless file-sharing • Emerging next generation • License Zune-technology technologies / substitute consolidation of all non-Apple • Price competition competitors • Volatile supply prices • Acquisition • Regulatory barriers • Leapfrogging • The shifts in buyers’ preferences • Partnership with content provider away from the market • Loosening DMR software • Expand market place purchasing options. 18
  19. 19. agenda overview analysis alternatives recommendations q&a update STRATEGIC OVERVIEW Corporate • Broad Differentiation Strategy • Offensive Move: Leapfrogging, but failed Complementary • Alliances / Partnership (100 suppliers) • Outsourcing Strategies • Vertical Integration • R&D Functional • Marketing Strategies • Sales 19
  20. 20. agenda overview analysis alternatives recommendations q&a update VALUE PROPOSITION Product Leadership Operational Excellence Customer Intimacy 20
  21. 21. agenda overview analysis alternatives recommendations q&a update ZUNE BUSINESS MODEL • Become the Center of an Social Ecosystem – Integrate Zune with other Microsoft products • Employ a Razor and Blade Strategy – Subscription-based revenue generation • $14.95/month all-you-can-listen – Support with Accessories • 100+ suppliers – Complementary software offerings 21
  22. 22. agenda overview analysis alternatives recommendations q&a update PRIMARY ACTIVITIES Value Chain Microsoft Zune Who is Component Superior? R&D Superior Superior No one Production Equivalent Equivalent iPod Marketing & Sales Superior Equivalent iPod Customer Service Inferior Inferior iRiver 22
  23. 23. agenda overview analysis alternatives recommendations q&a update SUPPORT ACTIVITIES Value Chain Microsoft Zune Who is Component Superior? Company Superior Not Enough Not Enough Infrastructure Information Information Information Superior Superior No one systems Logistics & Superior Superior No one procurement Human resources Equivalent Superior On par with Apple 23
  24. 24. agenda overview analysis alternatives recommendations q&a update CORE COMPETENCIES • R&D • Marketing • Distribution Channel • Product Integration 24
  25. 25. agenda overview analysis alternatives recommendations q&a update PERFORMANCE MEASURES Costly to Imitate? Unique or Rare? Consequences substitutable? Performance Implications Competitive Valuable Not R&D / Yes Yes Yes No Temporary Above Technology Competitive Average Advantage Returns Product Yes/No No No No Competitive Average Integration Parity Returns Marketing Yes No No No Competitive Average Parity Returns Broad Yes Yes Yes Yes Sustainable Above Distributio Competitive Average n Channel Advantage Returns 25
  26. 26. agenda overview analysis alternatives recommendations q&a update PERFORMANCE Six Month Results Market Feedback • 9% of MP3 player market after • Generally negative - only 11% of first week, compared to Apple’s consumers interested in file 63% sharing function • SanDisk and other competitors • Did not allow users to download responded with aggressive price from the internet cuts • Not compatible with Microsoft’s • Fell to 5th place with a 2% share own PlaysForSure standard of the market (10.2% share of the • Incompatible with rivals’ software market for 30 GB devices) • Ranked 15th out of 17 hard drive players 26
  27. 27. agenda overview analysis alternatives recommendations q&a update MEDIA REACTION 27
  28. 28. agenda overview analysis alternatives recommendations q&a update SWOT: STRENGTHS/WEAKNESSES Strengths Weaknesses • Vertical integration: end-to-end solution • Similar to iPod • Has access to vast resources ⇒ can take • Use of proprietary digital encoding prolonged fight system • Long battery life • Larger than and not as attractive as iPod • Wireless connectivity • Limitation placed on “squirted” music • File-sharing content • Available in only 3 colors • No follow-up products under Zune brand • Narrow scope of product offering • Possibility of sharing data via wireless dependent on large number of users • No internet connection • Ease of use 28
  29. 29. agenda overview analysis alternatives recommendations q&a update PROBLEM STATEMENT • How can Zune reverse its loss of market share and regain the momentum it had following its launch? • What can Zune do to increase its revenue streams? • How can Microsoft save its social ecosystem? 29
  30. 30. agenda overview analysis alternatives recommendations q&a update ALTERNATIVES Improve product and broaden scope Drop hardware and license software Divest Zune or parts of Zune Blue ocean strategy 30
  31. 31. agenda overview analysis alternatives recommendations q&a update ALTERNATIVE 1: IMPROVE AND BROADEN SCOPE Concept: Significantly expand product offerings, usability, and software integration Requires: •Fixing compatibility problems with Microsoft's own software •Launching a new line of flash memory MP3 players •Building competencies in customer intimacy •Lowering switching costs to Zune •Compatibility with rivals’ software •Raising switching costs from Zune Probable Requirement: Acquisition of rival with customer intimacy competencies 31
  32. 32. agenda overview analysis alternatives recommendations q&a update ALTERNATIVE 1: IMPROVE AND BROADEN SCOPE Cost Benefit • Shifting of Resources to • Broader Scope of build new Competencies Product Offerings • Possible Acquisition Cost • Increased Switchovers for iRiver from iPod users • Substantial R&D • Increased Market Share Investment and Market Visibility • Potential Lawsuit over Proprietary Rights 32
  33. 33. agenda overview analysis alternatives recommendations q&a update ALTERNATIVE 2: DROP HARDWARE – LICENSE SOFTWARE Concept: Abandon MP3 market as a hardware provider and focus on providing licensed software to all iPod rivals Requires: • Lenient or Tailor-made DRM Software • Fixing compatibility problems with Microsoft’s own software • Unrestricted Internet Functionality • Bridging the Gap between Rivals • Significant Software Modification 33
  34. 34. agenda overview analysis alternatives recommendations q&a update ALTERNATIVE 2: DROP HARDWARE – LICENSE SOFTWARE Cost Benefit • Loss of Zune as an Umbrella • Allows Microsoft to Focus on Brand Core Competencies of Software • Possible Lawsuit over Proprietary Design and Licensing Rights • Allows Microsoft to Continue its • Substantial R&D Investment Fight with Apple • Increases Revenue Stream from Zune Marketplace • Lower Overhead Costs • Substantial Boost to the Ecosystem 34
  35. 35. agenda overview analysis alternatives recommendations q&a update ALTERNATIVE 3: DIVEST ZUNE Concept: Withdraw completely from the industry Requires: Finding a buyer - TWO OPTIONS Sell Spin Off • Easiest Option • Ample Resources • Technologically Superior • Loss of Value Chain Synergy • Sell Software, Hardware, or • Sufficient Customer Base both • Retain Ownership 35
  36. 36. agenda overview analysis alternatives recommendations q&a update ALTERNATIVE 3: DIVEST ZUNE Cost Benefit • Damage to the ecosystem • Cease future R&D, Marketing • Out of an expanding costs market • Rapid Reallocation of • Loss of brand visibility Resources • Sunk Costs • R&D, Marketing and Sales • Opportunity costs • Loss of Employee Motivation 36
  37. 37. agenda overview analysis alternatives recommendations q&a update ALTERNATIVE 4: BLUE OCEAN Concept: Give the Customers What They Want Requires: •Creating a new market based around wireless file-sharing •Lenient or non-existent DRM software •Fixing compatibility problems with Microsoft's own software •Unrestricted internet functionality •Bridging the gap between rivals •Partnerships with media producers •Open sourcing parts of Zune OS for individual modification •Eliminate switching costs outside of product price Probable Requirement: Legal Fees 37
  38. 38. agenda overview analysis alternatives recommendations q&a update ALTERNATIVE 4: BLUE OCEAN Cost Benefit • Goes against company • Improved Revenue Stream history from Zune Marketplace • Substantial R&D investment • Increase Market Share • Probable lawsuit over • Eliminates Most Switching proprietary rights Costs • Partnership costs with media • Increased Market Share and providers Market Visibility • May damage brand name • Substantial Boost to the • Loss of software control due to Ecosystem open sourcing 38
  39. 39. agenda overview analysis alternatives recommendations q&a update RECOMMENDATION Improve the Product and Product Scope Rationale There is a lot of potential in the market Zune is a technologically superior MP3 player Wireless file sharing can become an industry driving force Failure to gain market share Shift to software licensing Distinct competitive advantage 39
  40. 40. agenda overview analysis alternatives recommendations q&a update IMPLEMENTATION PLAN Making the Commitment (2007) Gaining Market Share (2008-2011) Evaluate Effectiveness Measures (Ongoing) Switch to Licensing if Needed (2011) 40
  41. 41. agenda overview analysis alternatives recommendations q&a update MAKING THE COMMITMENT (2007) Key Points •Listen to the customer •No more spin! •2.8% share of the market and no flash memory player •Squirt function, as is, doesn’t sell •No excuse for lack of software compatibility •Ecosystem is in danger •Zune must gain traction •Enforce close cross-business collaboration •Create a team charged with maximizing value chain synergies and strategic fits 41
  42. 42. agenda overview analysis alternatives recommendations q&a update MAKING THE COMMITMENT (2007) Objectives •Establish Zune as a superior, proprietary technology •Loosen DRM restrictions, prepare for lawsuits •Full Compatibility with Microsoft products •Expand R&D, solicit and act on market feedback, release constant updates and upgrades •Expand Zune Marketplace purchasing options •Pay per song in addition to All-You-Can-Eat •Attack first-time buyers by establishing dominant customer service •May require acquisition of iRiver •Create partnerships with Media Content Providers •Podcasts, Music producers, Concert promoters 42
  43. 43. agenda overview analysis alternatives recommendations q&a update VALUE PROPOSITION Operational Customer Excellence Intimacy Product Leadership 43
  44. 44. agenda overview analysis alternatives recommendations q&a update VALUE PROPOSITION Operational Excellence Product Leadership Customer Intimacy 44
  45. 45. agenda overview analysis alternatives recommendations q&a update GAINING MARKET SHARE (2008-2011) Key Points •Drive product development •Expand software offerings •Shape and define the ecosystem •Development of next generation technology 45
  46. 46. agenda overview analysis alternatives recommendations q&a update GAINING MARKET SHARE (2008-2011) Objectives •Lower subscription costs for Zune Marketplace •Continuous release of new products •Flash memory players •Complementary Software •5 software improvements/Applications per month •Consumer generated ideas •Open Zune Marketplace to all non-iPod users •Increase revenue from music subscriptions •Next generation mobile products 46
  47. 47. agenda overview analysis alternatives recommendations q&a update EFFECTIVENESS MEASURES (ONGOING) Strategic Goals 2006 Yearly 2011 Expand # of models offered 1 4 20 Increase market Share 2.8% 4% 20% Improve usability ratings 15 -3 1 Implement customer-generated 0 48 240 improvements Improve customer satisfaction N/A 16% 90% + 47
  48. 48. agenda overview analysis alternatives recommendations q&a update STRATEGIC GROUP MAP 48
  49. 49. agenda overview analysis alternatives recommendations q&a update QUESTIONS AND ANSWERS 49
  50. 50. agenda overview analysis alternatives recommendations q&a update UPDATE – 2008 Q4 RESULTS Zune iPod • Revenue decrease of 54% ($100 million) • New quarterly unit record of 22.7 million • Revenue decrease of 60% of company’s • Mobile device sales reach 27 million earnings in Entertainment and Devices Division • 208 million in total since began selling iPod (including iPhone) 50
  51. 51. agenda overview analysis alternatives recommendations q&a update UPDATE – GLOBAL DIGITAL REVENUES BY INDUSTRY Games Recorded Music Newspaper Films Magazines Source: PWC Global Entertainment and Media Report (2008), IFPI 51
  52. 52. agenda overview analysis alternatives recommendations q&a update UPDATE – DIGITAL MUSIC GROWTH (2008) Digital track sales broke the 1 BILLION mark The previous record was 844 million digital track purchases during 2007; an increase of 27% over 2007 Digital Album sales exceeded more than 65 million sales in 2008, up from 50 million in 2007; an increase of 32% over the previous year Note that digital album sales accounted for 15% of total album sales compared to 10% in 2007 and 5.5% in 2006 Nielsen SoundScan, the entertainment industry's data information system that tracks point-of-purchase sales of recorded music product, Nielsen BDS, the music industry’s leading music performance monitoring service, and Nielsen RingScan, which tracks mobile ringtone purchases, have announced their 2008 U.S. year-end sales and performance monitoring data for the 52-week period December 31, 2007 through December 28, 2008. 52
  53. 53. agenda overview analysis alternatives recommendations q&a update UPDATE – MP3 MARKET CHANGES •MP3 market still very fragmented •IDC predicted that annual sales of compressed audio players will reach 945.5 million units worth US$145.4 billion in 2009 •Many integrated products and services •iTunes, MTV Rhapsody •The market is growing, Apple maintains lead. •Expect shakeout in the next three to five years which will consolidate into fewer leaders http://www.crn.com.au/News/20484,digital-music-player-sales-seen-up-sharply-by-2009.aspx http://www.ifpi.org/content/library/DMR2009.pdf 53
  54. 54. agenda overview analysis alternatives recommendations q&a update UPDATE – MTV RHAPSODY (30 Jun 2008) Rhapsody launched a Web-based MP3 download store, selling songs for 99 cents and albums for $9.99. Access to all four major record labels Rhapsody also rents music to more than 1 million consumers through its $12.99-per-month music-subscription service http://www.nypost.com/seven/06302008/business/mtv_does_digital_117799.htm 54
  55. 55. agenda overview analysis alternatives recommendations q&a update UPDATE – IPHONE JAPAN Starting Friday, SoftBank's new "iPhone for Everybody" campaign offers the 8GB iPhone for free, so long as you sign up for a new two- year contract. The promotion runs through May 31. SoftBank will sell the 16GB iPhone for a steeply discounted price— just 11,520 yen (about US$119), which come out to less than $5 a month during the two-year service agreement. Monthly voice and data charges for its standard data plan (about US$62 a month)will be reduced by more than 25 percent. http://tech.yahoo.com/blogs/patterson/40174 55
  56. 56. agenda overview analysis alternatives recommendations q&a update SUPPLEMENTARY MATERIALS Sales and Revenue for Digital Music Player 80,000 Manufacturers, 2006 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 -10,000 Sony Microsoft Apple SanDisk Creative Labs ReignCom (iRiver) Sales/Revenue Net Income 56
  57. 57. agenda overview analysis alternatives recommendations q&a update SUPPLEMENTARY MATERIALS Microsoft Revenue by Business Unit 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2002 2003 2004 2005 2006 2007 2008 Client Business Server & Tools Entertainment and Devices Online Services 57
  58. 58. agenda overview analysis alternatives recommendations q&a update SUPPLEMENTARY MATERIALS 17% Apple 4% Zune 19% 57% SanDisk Creative 3% 58

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