Did you buy any CDs this Christmas?  If you did, the odds re you didn’t buy as many as you did in previous years.  A freefall in sales of physical music products (CDs and music DVDs) has been going on since 2000.  (For more data see Chicago Tribune article here.) That year CD sales peaked at 942 million units.  By 2005, the volume was down to 705 million – a full 25% decline!  And sales were off an additional 15.7% in the first six months of 2006.

Meanwhile, according to the Recording Industry Assocition of America, Sales of digital singles increased 71.3% in the first half of 2006.  Since inception in 2003, sales of iTunes have reached a staggering 1.5BILLION songs – making Apple Computer Company the 4th largest music seller in the U.S.  According to ComScore networks (see more data here), sales at iTunes increased a whopping 84% in the first 3 quarters of 2006.  According to the V.P. of communications at RIAA, Jonathan Lamy, "This is a markeptlace that went from nothing 3 years ago to this year surpassing a billion dollars in retail revenue" (quote from Tribune.)

You have to wonder, why is Apple capturing all these sales and all this value?  After all, they didn’t invent MP3 technology – the format that made digital music possible had been around for several years before Apple created its iPod version of the music storage and playback device.  Likewise, Napster had gone on to great infamy demonstrating the huge demand for a digital music site years before iTunes was launched.  Obviously it wasn’t a technology breakthrough that gave Apple this big success.

Furthermore, before Apple launched either iPod or iTunes Sony had already been a long-term leader in consumer electronics.  Sony’s famous Walkman, Discman and other products had pioneered portable music.  Sony had a global distribution for its products in stores of all types, including its own.  And Sony was a brand synonymous with quality in consumer electronic devices and music playback.  Sony even owned its own music label, and a huge archive of popular songs as well as contracts with several popular artists.  Sony had all the pieces to create and dominate the digital music business.  But it didn’t.

Sony was, and is, trapped in its Lock-in.  The company had two separate division for hardware and software (music), and the two didn’t talk to each other.  Worse, both divisions committed to the old music industry Success Formula, and had Locked-in on the physical distribution method for selling music (CDs). [For White Paper on music industry Success Formula and Lock-in visit here.]  Both feared cannibalization more than they sought breakthrough solutions, as Sony joined EMI, RCA and others in suing Napster into oblivion during 2000, hoping it would stop digital music sales and help them regain sales and profits.

Today the traditional music companies are still Locked-in, and Apple is making enormous profits.  Like Southwest in the airline industry, Apple is simply doing what the market wants and is reaping huge benefit because the most likely, and most powerful, competitors are more interested in preserving Lock-in than succeeding.  Just because competitors are large, and well funded, and full of good product development does not mean you can’t effectively compete against them.  When markets shift Lock-in often means that the most logical activity – that of existing competitors reaping the benefit – is often NOT what occurs.  And it makes enormous markets available for new competitors to develop new Success Formulas that create above average returns.