BOX 4.1

iPod and iTunes: Internationalization of Design and Implementation

The Apple iPod is a digital music player with a highly stylized industrial design and an easy-to-use click-wheel user interface. It was not the first media player, but it is certainly the most commercially successful. The first model was announced on October 2001. By April 2007, over 100 million had been sold. As an example of the rapid design cycle of modern consumer products, five generations have been launched in only 6 years: the iPod, iPod mini, iPod shuffle, iPod nano, and video iPod.

The iPod plays audio and video media in standard formats, such as the open standards MP3 (MPEG-1 Audio Layer 3) and Apple proprietary formats.

A key element of Apple’s success is the platform which it developed for digital media that encompassed its online store, iTunes. iTunes was introduced in April 2003 to sell individual songs at the price of $0.99 each. iTunes Media is encoded using Apple’s AAC format with additional levels of encryption. The representation and its associated digital rights management system make it possible to authorize up to five computers and an unlimited number of iPods to play the files. An unlimited number of audio compact disks can be produced from the digital representation, but at a loss in quality.

The iPod offers an interesting case study in the internationalization of product design and implementation.1 For the fifth-generation video iPod, among the most costly components are those contributed by companies headquartered in Japan (Toshiba, which supplies the hard drive), Korea (Samsung Electronics, which supplies the flash memory), and the United States (Broadcom Corporation, which supplies the multimedia processor). These components are in turn manufactured around the globe—in China (hard drive), in Taiwan or Singapore (media processor), and in Korea (the memory). The device is assembled by the Taiwanese firm Inventec Corporation in Mainland China. The analysis by Linden, Kraemer, and Dedrick indicates that out of a suggested retail price of $299, the cost of all components of the iPod is $144. Of the $155 price difference, $80 accrues to Apple and $75 to the distributor and retailer. Apple’s value is the single largest component and is larger than that associated with the most expensive physical component, Toshiba’s hard drive. This value of Apple represents the company’s considerable competitive advantage in product conception, design, and marketing. Apple is amply compensated for the innovation that the firm has embedded in the product. The portion captured by U.S. firms—design, distribution, and sales—exceeds the value of its manufactured components. Although to a large extent the iPod is not manufactured in the United States, it is designed and sold here, and U.S. firms do quite well in the bargain.

  

1See G. Linden, K. Kraemer, and J. Dedrick, “Who Captures Value in a Global Innovation System? The Case of Apple’s iPod,” Personal Computing Industry Center, University of California, Irvine, June 2007.



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