Competing without scarcity: How Microsoft failed to gain control

Over the past couple years the sales of iPods by Apple have skyrocketed. One of the many reasons for the success of the iPod is the success of iTunes. iTunes emerged as the leader in legal music downloading after the public uproars about music pirating and sharing led to serious punishments. iTunes is an example of an information good. It costs a great deal of money to acquire the songs but once it has the rights it costs almost nothing to sell one additional song to a customer. This is also a non-rival good, which means that there is not a limited supply. Just because I bought a song doesn’t mean that there are none left for you. The supply is endless. This makes it difficult for other competitors to compete. Since the songs aren’t scarce, consumers will not be willing to pay more than the lowest price. Apple solidified its control over the industry by making songs purchased from iTunes compatible only with iPods.

Once the iPod and iTunes gained a foothold, their market share boomed. This created several challenges for Microsoft who sought to launch their version of the iPod called the Zune. Daniel Westlake wrote in a blog article called "Zune Pricing Strategy" that Microsoft’s best option was to take a huge loss on the Actual device in order to steal market share from Apple. Microsoft can’t get the discounts that Apple can and therefore cant price the individual songs lower than iTunes. Therefore their only choice was to sell the Zune for $150 cheaper than the iPod. This strategy relies on the thinking that once people buy the Zune they will be forced to buy the songs from Microsoft’s program that is compatible with the Zune. Microsoft estimated it would lose around $300 - $400 million dollars before they could gain full control from Apple and a profit could be made. While the Zune was cheap and had different features including a wider screen, the public stuck with what everyone else already had. The sales of iPods soon dwarfed that of the Zune and Microsoft sealing the coffin on the idea of ever stealing market share.

- Randy Abbott, Jeanette Elliot and Dan Furey