Monopolies: Is Apple Computer Inc. a Monopoly? A Study of ipod Hardware Market Share in the MP3 Player Market

Transcription

1 Federico Iossa 12CC Extended Essay Monopolies: Is Apple Computer Inc. a Monopoly? A Study of ipod Hardware Market Share in the MP3 Player Market

2 Introduction There are many factors and circumstances in determining whether is a company is a monopoly or not. Some things to consider are: market share, product substitutes, if the company is blocking entry to the market and determining if the company is the price maker for their particular market. This essay will use economic theory, information taken from the Internet and Apple Computer Inc. to investigate whether or not Apple Computer Inc. can be considered a monopoly or simply a strong competitor in the market of music hardware and software.

3 Methodology To perform my investigation many resources are used. Textbooks are used to fully understand the concepts of monopolies and oligopolies and the factors that are used to determine monopolies and oligopolies. The Internet will be used to find information on Apple Computer Inc's products and prices as well as general information on the company. The Internet will also be used to find press releases and notes from Apple's annual stock holder meetings to find information on market share, annual growth and their presence in the relevant market. I will compare Apple's Market Share and growth figures to other companies in their market. I will also use figure to determin whether Apple Computer Inc. can be considered a monopoly in the MP3 player field. What is a Monopoly? A monopoly exists where there is only one firm or supplier in an

4 industry. In practice, firms which have a dominant share of the market tend to be referred to as monopolists. Firms gain monopoly powers in the long run because of barriers to entry to the industry. There are various barriers to entry which can create monopolies 1 Properties of a Monopoly Single Sellers: This is when there is a single firm providing a service or product in a market. No Close Substitutes: The product or service is unique in ways which go beyond brand identity and cannot be easily replaced. Price Maker: In subtotal monopolies this is when a firm controls so much of the supply of the product or service that even if they raise the price the other competitors cannot make up the difference and cannot take a significant part of market share. Blocked Entry: Factors blocking a firm from entering a market. Depending upon the form of the monopoly these barriers can be economic, technological, legal (basic patents on certain drugs), or of some other type of barrier that completely prevents other firms from entering the market. 2 Some Properties of a Natural Monopoly Higher Market share based on consumer choice. 1 Definition from Economics third edition by Alain Anderton 2 opoly

5 Apple Computer Inc.'s Market Share in the Music Hardware Market In the area of mp3 players and online music content delivery Apple Computer Inc.'s ipod music player holds a market share of a little over 87% approximately(exact figure not disclosed by Apple Computer Inc.). Their market share gives Apple a de facto monopoly in this sector. 3 Has Apple Computer Inc. done anything illegal to keep their market dominance? Not likely, there has been no evidence of anything. Apple has been accused on infringing on several patents 4 but those cases are not directly relevant to their status of being a monopoly. Market Share and Growth As you can see from the above pie chart displaying Apple's ipod current market share it holds over ¾ of the market. 3 De facto monopoly- A system where many suppliers of this product is allowed but the market is so dominated by one firm that competitors may as well not exist. Anti-Trust laws are used in some cases to prevent de facto monopolies from occurring. 4 Information from-

6 The above graph shows the ipod's market share in The ipod has lost ground. Apple's market share has gone down by 5% over the past two years but apple still has a very commanding share. If Apple's market share declines in a similar pattern in 2008 the could be down to 82% of the total digital music player market. Meaning in 14 years if the trend continues they could lose their dominating grasp in this market. Does Apple Computer Inc. Control the Prices in Their Market? 5 Information on-

7 A pure monopolist is the only one supplier in an industry so that monopolist can take the market demand curve as its own demand curve. The monopolist then faces a down slopping AR curve with the MR curving having twice the gradient of the AR curve. The firm can now be called a price setter or maker for their certain industry. The firm cannot successfully that the consumers in the market will not tolerate. The elasticity of the demand curve acts as a restraint over the behavior of pricing over the monopolist. Assuming the monopolist want to maximize his profits (MR=MC) you can establish a short run equilibrium curve as shown in the diagram below. 6 6 Diagram and theory taken fromhttp://

8 The above graph is a comparison of prices of 30GB digital music players with all the same basic features from the year The ipod is at $249 on the same level as Creative's Zen player. While the iaudio player is at $377 and Creative's Nomad is at $ All prices gathered from-

9 The above graph shows the prices for digital music devices when they were first launched in They all started out at the same price point $399. From the above results one can conclude that Apple Computer Inc. is not a price maker in the digital music player market. All music players started out at the same price point and over the years Apple has decreased their price from $399 to $249, same as the Creative Zen player and iaudio dropped its price to $377 which today makes it more expensive then the ipod, the Creative Nomad has its price dropped to $175 making it cheaper then the ipod. Consumers have a lot of variety when it comes to prices in this market. Obviously price is not a big factor to the consumers when choosing their digital music players because they have cheaper option but they continue to buy Apple ipods. Therefore Apple is not controlling the price in the market because consumers have many choices but still opt to purchase ipods. Since the consumers opt to purchase ipods and Apple Computer Inc is not doing anything to stop other competitors from launching their products one could call Apple's ipod grasp on the MP3 player market as a natural monopoly. However one could argue that the declining price of ipods could be considered unfair competition. But since there are both competitiors with higher and lower priced MP3 players one

10 can see that apple is very little if any over setting the price in the MP3 player market. Why Apple Computer Inc. Is Not a Monopoly Digital Rights Management Digital Rights Management (generally abbreviated to DRM) is an umbrella term that refers to any of several technologies used by publishers or copyright owners to control access to and usage of digital data or hardware, and to restrictions associated with a specific instance of a digital work or device. The term is often confused with copy protection and technical protection measures; these two terms refer to technologies that control or restrict the use and access of digital content on electronic devices with such technologies installed, acting as components of a DRM design. 8 When downloading a music file from an MP3 service online the file comes with restrictions on what type of player it can be played on or how many times the said file can be played. Files purchased from Apple's itunes Music Store come in a file format called.aac. This format comes with the following restrictions: The protected track may be copied to any number of ipod portable music players. The protected track may be played on up to five (originally three) authorized computers simultaneously. The protected track may be copied to a standard Audio CD any number of times. o The resulting CD has no DRM and may be ripped, encoded and 8 Quoted from-

11 played back like any other CD. However, CDs created by users do not attain first sale rights and cannot be legally leased, lent, sold or distributed to others by the creator. o The CD audio still bears the artifacts of compression, so converting it back into a lossy format such as MP3 may aggravate the sound artifacts of encoding (see trans coding). A particular playlist within itunes containing a protected track can be copied to a CD only up to seven times (originally ten times) before the playlist must be changed. 9 Many people say that Apple is forcing consumers to purchase ipods because the content purchased on the itunes Music Store (biggest provider of online music) can only be played on ipods, according to Apple's DRM. However, companies have done this in the past without being accused of trying to monopolize said format by restricting it in their DRM license. Also the ipod is capable of For example, Sony, has their own proprietary format called, ATRAC 3. The ATRAC 3 format would only play on Sony made ATRAC 3 compatible MP3 players. The ipod also plays eight other music formats such as: MP3 and AIFF which are not affected by DRM licensing and can be played freely on any music player(which supports said format). So the consumer does not even need music purchased from the itunes Music Store to use his/her ipod. Consumers make decisions about everything they buy. Is this format acceptable for you or what you need? No MP3 player on the market, or any other consumer electronic device comes with every conceivable feature so it is up to the consumer to decide what features are indispensable to him/her and which ones are not. The consumer decides what he needs. There are proprietary formats for many other electronic devices. Some digital cameras only accept one type of memory card some software only 9

12 runs on certain computers..aac music bought from the itunes Music Store only works on ipods. If it is the consumers wish to play.aac formated music bought from the itunes Music Store he/she will buy an ipod. It is a natural monopoly, based solely on consumers choices. While Apple Computer Inc. does not allow anyone else to sell the.aac audio format, they have a right to the restricted distribution of their product. Just as for example no one can sell Tiffany, Dior or Virtu products without being an authorized retailer. No law currently states that Apple Computer Inc has to make their.aac format widely available. If a consumer should find the distribution of a product to be too limited or inconvenient the consumer could stop buying. Sometimes there are natural monopolies because it happens to be the best solution for the most number of people at that time. That may change over time but a natural monopoly is NOT illegal. 10 Conclusion Apple does not fit the description of a monopoly because it does not have the primary characteristics of a monopoly. Apple Computer Inc. is not the only seller in the MP3 player market. There are many competitively priced substitutes for the ipod. Also apple certainly is not barring anyone from entering the market. Apple is not preventing anyone from manufacturing, distributing or selling at retail a portable mp3 player (most stores carry dozens of choices). And unlike MS(Microsoft) who threatened computer manufacturers that they would pull their Windows OS license if the Netscape icon was featured on the desktop, that's restraint of trade! Examples gotten from and quoted fromttp://homepage.mac.com/metroxing/iblog/b /c /e /index.html 11 Quoted from the author ofhttp://homepage.mac.com/metroxing/iblog/b /c /e /index.html