APPLE'S MARKET CAPITALIZATION in 2001 was $7 billion, while Sony's was $55 billion. Apple introduced the iPod, a portable digital music player, in October 2001, and the iTunes music store 18 months later. Through these two strategic moves, Apple redefined the music industry, reinventing itself as a content-delivery mobile-device company. Signaling its renaissance, Apple changed its name from Apple Computer, Inc., to simply Apple, Inc. Many observers, however, wondered what happened to Sony -- the company that created the portable-music industry by introducing the first Walkman in 1979.

Sony's strategy was to differentiate itself through the vertical integration of content and hardware, driven by its 1988 acquisition of CBS Records (later Sony Music Entertainment). This strategy contrasted sharply with Sony Music division's desire to protect its lucrative revenue-generating, copyrighted compact discs (CDs). Sony Music's engineers were aggressively combating music piracy by inhibiting the Microsoft Windows media player's ability to rip CDs and by serializing discs (assigning unique ID numbers to discs). Meanwhile, Apple's engineers were developing a Digital Rights Management (DRM) system to control and restrict the transfer of copyrighted digital music. Apple's DRM succeeded, protecting the music studio's interests while creating value that enabled consumers to enjoy portable digital music.

Sony had a long history of creating electronics devices of superior quality and design. It had all the right competencies to launch a successful counterattack to compete with Apple: electronics, software, music, and computer divisions. (Sony's Electronics Division even was the battery supplier for Apple's iPod.) Cooperation among strategic business units had served Sony well in the past, leading to breakthrough innovations such as the Wa1kman, PlayStation, the CD, and the VAIO computer line. In this case, however, the hardware and content divisions each seemed to have own idea of what needed to be done. Cooperation among the Sony divisions was also hindered by the fact that their centers of operations were spread across the globe: Music operations were located in New York City and Electronics design was in Japan, inhibiting face-to-face communications and making real-time interactions more difficult.

Sony's CEO Nobuyuki Idei learned the hard way that the Music Division managers were focused on the immediate needs of their recordings competing against the consumer-driven market forces. In 2002, Idei shared his frustrations with the cultural differences between the hardware and content divisions:

The opposite of soft alliances is hard alliances, which include mergers and acquisitions. Since purchasing the Music and Pictures businesses, more than ten years have passed, and we have experienced many cultural differences between hardware manufacturing and content businesses .... This experience has taught us that in certain areas where hard alliances would have taken ten years to succeed, soft alliances can be created more easily. Another advantage of soft alliances is the ability to form partnerships with many different companies. We aim to provide an open and easy-to-access environment where anybody can participate and we are willing to cooperate with companies that share our vision. Soft alliances offer many possibilities.

In contrast, Apple organized a small, empowered, cross-functional team to produce the iPod in just a few months. Apple successfully outsourced and integrated many of its components and collaborated across business units. The phenomenal speed and success of the iPod and iTunes's development and seamless integration became a structural approach that Apple now applies to its successful development and launches of new products like the iPhone and iPad. By early 2011, Apple's market capitalization had increased by a factor of 44 times, to $310 billion (making it the most valuable technology company on the planet), while Sony's market value had declined by almost 40 percent, to $35 billion.

QUESTIONS:

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2. Why had Sony been successful in the past (e.g., with the introduction of the Walkman, PlayStation, the CD, and the VAIO computer line)?
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4. Why do you think Apple succeeded in the digital portable music industry, while Sony failed?
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6. What could Sony have done differently to avoid failure? What lessons need to be learned?
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8. What recommendations would you give Sony's CEO to help them compete against Apple?
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