The Real Competitive Advantage of the Apple Ipod

Introduction

The contemporary press is flooded with articles and commentaries extolling the phenomenal success of Apple's iPod. It seems everyone has an opinion as to how design has contributed to the dominance of Apple in this lucrative, emergent market, targeted--if not lusted after--by savvy high tech giants Sony, Samsung, Dell and Microsoft.

But I suspect that something more clever is afoot; that Apple's design strategy is in line with something we call "value transference." And if my suspicion is correct, the technology at the heart of the iPod will have little to do with their long-term competitiveness in the consumer electronics realm.

Each new iPod embodiment brings a fresh form, feature, function and cost based analysis: The New York Times' David Pogue offers good consumer reports on a consistent basis. Frog Design's Luke Williams suggests that the "clean" look of this product is an intentional consequence of references to the white ceramic and polished chrome tropes of the humble bathroom design experience--we keep calling the iPod such a "clean design" expressly because it references these materials and finishes; Susannah Cullinane of the BBC News suggests that the central iPod design elements were borrowed from the similarly successful Regency TR-1 transistor radio launched in 1954; Engadget's Clicker columnist Stephen Speicher postulates how Apple is poised to use the new iPod to capture the portable video market; still others propose that Apple is looking to control the cell phone handset, or video remote markets, with future generations of this product.

These reflections on design strategy are interesting, and speculating on future target markets is always provocative. But I suspect that something more clever is afoot; that Apple's design strategy is in line with something we call value transference--a dynamic strategy that can be quite successful in technology markets. And if my suspicion is correct, the technology at the heart of the iPod will have little to do with their long-term competitiveness in the consumer electronics realm. Further, if we look in the right places, we can learn precisely where Apple intends to move, leveraging the design of the iPod--but not the kind of design you think.

Research Foundation

At the Kellogg School of Management's Center for Research on Technology & Innovation, we study how contemporary firms use innovation and design to build and sustain competitive advantage. Of particular interest to our research team is the premeditated tactical and strategic use of specific intellectual property regimes (patents, marks, secrets and copyrights) in a time-sequenced manner.

Marks, unlike patents or copyrights, never expire if used properly. Registered design elements that serve as a brand foundation are therefore indefinite forms of competitive advantage.

Our findings overwhelmingly support the conventional wisdom that design decisions cast a big shadow on the commercial success of the product over its lifecycle. But more recently, we have found that some firms know how to build brand identity through great design, and they understand how to leverage and secure critical design elements and cognitive touch points of the user experience through non-traditional marks. In the process, they build strong, transferable brand identity throughout the product lifecycle that can be leveraged in future offerings.

This has led us to consider the possibility that the cognitive touch points of the user experience can be reconciled--and secured or monopolized--as unique brand elements through non-traditional marks. Marks, unlike patents or copyrights, never expire if used properly. Registered design elements that serve as a brand foundation are therefore indefinite forms of competitive advantage.

Value Transference

Value transference, in a nutshell, is the premeditated use of multiple intellectual property regimes at specific points across the product lifecycle, in order to realize sustainable differentiation. This is typically achieved by using patents early in the lifecycle to secure functional differentiations--such as new combinations of storage or battery technology (utility patents), and/or unique ornamental attributes (design patents). But while the focus of the functional differentiation remains unique at or near the launch of a new product, it is not sustainable. While a company has this advantage, however, they'll want to build an association between patented aspects of the offering, and a non-functional cognitive touch point of the user experience. The critical design elements central to the cognitive touch point (shape, color, sound) are then secured with a registered trademark. To complete the strategy, carefully orchestrated advertising builds the association in the mind of the target consumer. (Recall that trademarks can last indefinitely if used properly, and hence sustain the competitive advantage.) When done correctly, value transference helps to mitigate the enormous cost reduction pressures inherent in markets with short product life cycles such as electronics.

In today's global marketplace, it is axiomatic that successful innovations based on great designs will be emulated-- and in some cases, boldly copied--without any regard for the intellectual property of the innovators.

Classic examples of value transference that contribute to enduring brand advantages include the Dolby name in consumer electronics, the NutraSweet red swirl in food ingredients, the Purple Pill (Prilosec and Nexium) in pharmaceuticals, Legos and Barbie in the toy market, and the shape of the Nintendo game boy or the original game controller. All of these now famous brands began as patented products--the Barbie doll included. Achieving this level of brand strength is the result of integrated product innovation and marketing.

iPod dissection art via iPoding

Applied to the iPod

So how does all of this apply to Apple and the iPod? A quick teardown of my iPod [Exhibit 1 above] reveals that most all of the guts of this product are made by others: Toshiba, Sony, Portal Player, Samsung, Texas Instruments, Wolfson Microlectronics, Cypress Semiconductor, Synaptics and others--a veritable who's who in the high tech hardware industry. These suppliers keep their technology ahead of the performance and cost curves, and Apple benefits. Apple integrates these discrete components (through software intelligence) and packages them in the clean white-and-chrome "bathtub."

Apple, however, is not the only customer of