Innovating the iPod

Seldom has a single technological innovation affected so many markets at once - the music industry, hardware vendors, the labor market, artists and consumers themselves. This is the story of how the iPod was made. In a quest to make music more portable, designers and engineers at Apple got together to create the iPod. Steve Jobs, in his quintessential style, maneuvered through established, entrenched industry interests to finally price music in a way that addressed all stakeholders. An idea, however brilliant and singular, reaches perfection when many heads work together. The iPod story is as much a lesson in team collaboration as it is in decisive leadership.

What began with the invention of the phonograph by Edison in 1877, the journey of recorded music has been a fast paced one cruising through changes in musical tastes, technology and distribution. The mile stones in the journey of recorded music were tin-foil cylinders, wire, vinyl discs, tapes (reel-to-reel, 8 track and cassettes), discs (CDs and mini-CDs), and finally digitally compressed files, such as MP3. The survival of the fittest meant that different technologies in play were matched with different corporate players, to win customers.

From Stationary Jukebox to Personal Jukebox to iPod

The “portability” of music evolved simultaneously with recording technologies. A hundred years ago, one could listen to music only in the company of musicians. Gradually, gramophones, radios, phonograph players and later, jukeboxes and tape decks, made music portable although they were stationary. The introduction of the transistor radio in 1954 was the beginning. But the real breakthrough in personal portability was the “boom boxes” of the 1970s – the portable tape players which finally gave way to the Sony Walkman in 1979.  During this process, when the entire value-chain connecting the artist to the consumer was in motion, there were different corporate actors entering and departing from the economic stage.

The advent of electronic digitalization technologies meant capturing sound in digital rather than analog fashion. This ultimately resulted in the MP3 – a format for compressing music files, which is a dominant medium today for sound recording, storage and transfer. Usually, MP3 files were transferred among personal computers and over websites such as Napster and Gnutella. But the use of compressed musical files would grow manifold if they could be stored on miniature, personal jukeboxes. The first mass-market entry of these was the Rio, a smaller version of the walkie-talkie, launched by Diamond Multimedia in 1998. It held twenty-four songs, with twelve hours of battery power, and it sold for less than $200.  Hit by an intellectual property infringement lawsuit by the Recording Industry Association of America, the Rio failed to deliver, though several hundred thousand units were sold.  Meanwhile, a “personal jukebox” project team was working on the personal portability concept at Digital Equipment Corporation (DEC). They had arrived at a point where a couple of hundred tunes could be portable. They had also solved problems of ‘energy management, sound processing, navigation and integration with personal computers.’  But with the acquisition of DEC by Compaq, followed by the acquisition of Compaq by Hewlett-Packard, the project was in a hopeless situation. It was eventually sold to the Korean company HanGo and the resulting product was introduced as the PJB-100, in November 1999. It was slow, had poor user interface and was expensive.

Apple Enters Portable Music

Interestingly enough, at this juncture, personal portability of music was mostly not on the radar for Apple. Instead, Steve Jobs, a founder of Apple, was fascinated by the potential of video transfer. In the early 1990s, it led to the development of FireWire that allowed the rapid transfer of massive amounts of digital information from one device to another. It became an important part of Apple’s development of iTV. This was the genesis of Apple’s Digital Hub strategy, announced January 2001, “The idea was to produce the world’s greatest portfolio of consumer software, available only to those smart enough, cool enough and thinking-different enough to buy an Apple computer.” Digital Hub ushered in iMovie.

While Apple was hooked on video, consumers were learning how to rip and share music. The iMacs, without CD-burners, were fast losing customers’ attention. Once the company realized it had misread the market, it somewhat reluctantly added iTunes to its portfolio. This resulted in a $195 million quarterly loss announced in January 2001 – the first quarterly loss incurred by Apple since Jobs had returned to take on the CEO role in July 1997. It was a real wake-up call.

The Birth of the iPod

Innovation and trendiness had become cornerstones of Apple’s reputation. Its failure to anticipate the importance of music in the lives of personal computer users was uncharacteristic. But the origins of this miscalculation were sowed in much earlier and could be traced back to controversial decisions at the very top.

In 1985, when Jobs had been unceremoniously marginalized by the firm’s board for being “unproductive and uncontrollable,” a failed power struggle with then-CEO (and former PepsiCo boss) John Scully, led him to quit before he could be fired. A decade later, when Apple was in complete disarray, it turned to Jobs to revolutionize Apple’s product line. When he joined in 1996, he began by streamlining the number of offerings. His master-stroke was the introduction of the translucently colorful iMacs, which represented a dramatic aesthetic statement about what Apple thought about itself, relative to its drab competitors. In an iconoclastic move, the integral floppy disc was eliminated. Though, it had aesthetic and technical benefits, it flew in the face of the wave of CD burning and sharing activities that was sweeping across young communities at the time. It severely limited the attractiveness of iMacs to this important customer segment. Sharing, filing and playing music was, in fact, an important and durable attribute of PC performance. Once Jobs realized this, he launched an imaginative effort to catch up to the rest of the industry. In his typical full-speed-ahead fashion, he moved to regain Mac’s attractiveness among customers. In a candid admission to Fortune, Jobs said, “I felt like a dope. I thought we had missed it. We had to work hard to catch up.”

Steve Jobs would not tolerate a program that was ugly or acted ugly.

Again, in a departure from the norm, where it prided itself in doing everything, the company looked for a ready-made solution. It licensed the SoundJam MP music player. This had been written by programmers including Jeff Robbin, who had previously worked at Apple as a systems software engineer. Robbin was rehired to turn the software into iTunes. SoundJam was designed to work with the Mac, but it was not a typically elegant Apple program, “Steve Jobs would not tolerate a program that was ugly or acted ugly.” Once SoundJam was brought into Apple, this lack of elegance had to change! Robbin recounted that iTunes was completed in its first commercial version in four months and introduced in January 2001, at the Macworld Conference & Expo.

Once iTunes was fixed, the Mac could work effortlessly with almost any MP3 player. The leadership realized that the rest of the “portable music value chain” was mediocre. Though file saving and transfer were now easy, the players were expensive, unattractive, and slow, with a short battery life.

Things had to move quickly to rectify this value-chain problem, if the iPod was to become as successful as it did in such a short time. Apple moved decisively along the entire value chain to take command. Jobs, calls this “vectors in time” – the ways in which a technology advances over time across a broad set of devices and approaches. This was exemplified when Jon Rubenstein visited Toshiba to look at hard-drive advances. He chanced upon a new 1.8-inch drive that Toshiba had just developed. According to Rubenstein, who was then Apple’s senior vice president of hardware, “[Toshiba] said that they didn’t know what to do with it … I went back to Steve and I said, ‘I know how to do this (i.e. a small portable music device). I’ve got all the parts.’ So Jobs said, ‘Go for it.’”  This was the mandate to create the team that would create the iPod. Rubenstein had come to Apple from NeXT, where he had also been Job’s chief hardware person.

Redefining Apple’s Innovative Culture

Even in the 1990s, well before the iPod and the iPhone, Apple was one of the most “innovative” firms. Not only did Apple give us the personal computer, it had, created one of the most “beloved” technologies of contemporary times – the Mac. At the heart of that success was an “innovative culture” envied by many. Steve Wozniak, Apple’s co-founder, recalled, “There are occasionally short windows in time when incredibly important things get invented that shape the lives of humans for hundreds of years. The development of the Macintosh computer was one of these events, and it has changed our lives forever. It’s chilling to recall how this cast of young and inexperienced people who cared more than anything about doing great things created what is perhaps the key technology of our lives.”

You need a few creative people, and the rest get the work done.

A visit to the Apple campus in those days, gave an impression of absolute freedom, if not chaos. Don Norman, who was the head of Apple’s Advanced Technology Group, remembers it well, “When I joined Apple in 1993, it was wonderful. You could do creative, innovative things. But it was chaotic. You can’t do that in an organization. You need a few creative people, and the rest get the work done.” According to Norman, Apple’s engineers were rewarded for being imaginative and inventive, not for the difficult job of knuckling down and making things work. They would invent all day, but rarely did what they were told … Orders would be handed down, but incredibly, six months later nothing had happened. It was ridiculous.”

When Jobs returned to Apple in 1997, some things needed to change, including the chaos, if the company was to remain viable. He reduced the entire product portfolio to just four pieces: two notebooks and two desktops, one of each aimed at the professional and consumer markets. The idea was to never compete in the commodity market where most mainstream PC manufacturers had unwittingly found themselves. Apple would sell premium products for premium margins.

Building the iPod Team

When products were dropped, it did not mean losing the talent associated with those teams. Jobs was a great believer in building an organization around ‘great teams’. The iPod team reflected this belief. Rubenstein was a key member of the team, in charge of hardware. It was, in fact, Rubenstein’s decision to launch the iMac without a floppy disc, which had contributed to the dilemma that the organization now faced.

Design had always held a special place of honor at Apple. For the iPod team, Jobs chose Jonathan Ive who was head of Apple’s design group. Jobs was appreciative of Ive and his team, “I’ve found … the best industrial design team I’ve ever seen in my life.” Ive had already won the London Design Museum’s Designer of the Year award twice. He said he worked with a heavenly design team, where “one of the hallmarks of the team is inquisitiveness [and] being excited about being wrong because that means you’ve discovered something new.”

It was spring 2001, and Jobs wanted the new portable music device on store shelves in time for Christmas. This meant creating a new team without disrupting any of the other ongoing Mac projects. So the third key member of the iPod team came from outside of the organization. The choice was Tony Fadell, 32 years old, who had developed gadgets for General Magic (where he worked with Mac founders Andy Hertzfeld and Bill Atkinson) and at Philips (where he headed-up their handheld PDA work).

During the eight-week contract that was offered by Rubenstein, Fadell was put in charge of a small team of engineers and designers, who put the device together quickly. The team took as many parts as possible off the shelf: the drive from Toshiba, a battery from Sony, some control chips from Texas Instruments. The basic hardware blueprint was bought from Silicon Valley startup PortalPlayer.

Fadell believed that it was important to “make a system.”

Fadell believed that it was important to “make a system.” It was Fadell who really pulled the whole spectrum of activities, from FireWire to iTunes, together, along with the hardware, to achieve Jobs’ ambition. He said, “I think the definition of product has changed over the decades. The product now is iTunes Music Store and iTunes, and the iPod and the software that goes into the iPod…. We’re really about a system.”

Michael Dhuey, the fourth member, was an Apple III, Lisa, Macintosh and Mac II veteran hardware engineer, who had the job of designing the electronics hardware for the device in eight months. Although daunting in both physical and schedule challenges. Dhuey was given free reign by Apple to get the job done.

The Way They Worked

Despite the extraordinary scale of ambitions for the iPod, the goals articulated by the leadership were surprisingly simple, broad yet precise. For the hardware: A thousand songs in your pocket; for the software: so easy that your Mother could do it; and for the project: and on the shelves in eight months! The team could get to work without feeling constrained by the way the vision was presented – they were both totally focused and liberated at the same time!

The space that they worked in was also important. Jonathan Ive’s design team had always worked in quarters with little personal space, without cubicles or offices. The studio was a large open space with several communal design areas. Ive said, “By keeping the core team small and investing significantly in [prototyping] tools and process, we can work with a level of collaboration that seems particularly rare. In fact, the memory of how we work will endure beyond the products of our work.”

Prototyping was also a continuing theme that ran through the iPod team experience. The iPod team members had prototype devices of their own to take home and test under a variety of “live” situations.

There aren’t discrete, sequential development stages. Instead, it’s simultaneous and organic.

According to Time Magazine, there are two lessons to be learned from stories like this: “… one about collaboration, one about control. Apple employees talk incessantly about what they call “deep collaboration” or “cross-pollination” or “concurrent engineering.” Essentially, it means that products don’t pass from team to team. There aren’t discrete, sequential development stages. Instead, it’s simultaneous and organic. Products get worked on in parallel by all departments at once – design, hardware, software – in endless rounds of interdisciplinary design reviews. Managers elsewhere boast about how little time they waste in meetings; Apple is big on them and proud of it. “The historical way of developing products just doesn’t work when you’re as ambitious as we are,” says Ive. … “When the challenges are that complex, you have to develop a product in a more collaborative, integrated way.”

Steve Jobs and Innovation Leadership

Every successful innovation is forged by leadership, and the iPod is no exception. Yet Steve Jobs was not known for having a “light-touch” when it came to leadership style. Employees had several Steve Jobs stories to share. Time Magazine wrote, “Jobs … needs … control because he is fastidious about technology … and he recognizes that in an increasingly networked world, in which gadgets can’t just do their own thing but have to talk to one another, that conversation will go better if [he] has scripted both sides of it. “One company makes the software. The other makes the hardware … It’s not working,” Jobs says. “The innovation can’t happen fast enough. The integration isn’t seamless enough. No one takes responsibility for the user interface. It’s a mess.”

The magazine also said, “The second lesson … is about control, and to that extent, it’s a lesson about Jobs himself. He is one of the technology world’s great innovators but not because he’s an engineer or a programmer. He doesn’t have an MBA either. He doesn’t even have a college degree. [He dropped out of Reed College after one semester.] Jobs has a great native sense of design and a knack for hiring geniuses, but above all, what he has is a willingness to be a pain in the neck about what matters most to him.”

As Rubinstein put it, “With Steve pushing me, I [could] achieve things I wouldn’t be able to do on my own.” The quest for excellence in all things has marked Steve Jobs and Apple from the start.

Content: The Last Piece of the Puzzle

When the Apple iPod was introduced in late 2001, it weighed 6.5 ounces, had a 5-gigabyte hard-drive. It could hold 66 hours of music (roughly 1,300 tracks) and cost $399. At the same time, iTunes was available for transferring CD tracks from a Macintosh, but not from a PC. And technically, the legality of the transfers was still in question.

Record labels and artists – the intellectual property holders of their music, were one of the biggest obstacles in their reluctance to make recorded music more portable. They tightly controlled the channels of distribution.

The lesson from the IP-holder’s war against Napster was clear: They owned the content beyond legitimate personal listening, and certainly when “sharing” was involved. There was little point in having an iPod if there was nothing to listen to. Jobs knew that this limited the potential market for iPods, and this had to change. His intention was not just the manufacture of devices, but to “rewire” the listening experience. A mere diktat of “Don’t steal music!” would not work. It was clear that there needed to be a strategy to win over IP-holders.

In January 2002, two vice-presidents from Warner Music, traveled to Cupertino to meet Jobs. He reportedly castigated them that his customers deserved better and needed an easy-to-use music store. He said companies were trying to suck out all the money from digital music for themselves. Subsequently, Jobs unveiled the iTunes Store at a meeting with Roger Ames, then Chairman and CEO of Warner Music. This was accepted and led to a content-licensing agreement. Warner suggested that tracks sell for 99 cents as a “hook” to attract customers, of which Apple would receive 22 cents. Shortly thereafter, the biggest record label, Universal, also bought in and so did Sony.

In January 2009, iTunes had grown to become the largest on-line music seller in the world, having sold more than 6 billion songs worldwide. As a result of the iTunes music store, Apple now occupied one of the most powerful places in the music value chain. Bono, the lead singer of the popular group U2, even suggested that the iPod was the most beautiful art object in music culture since the electric guitar.

By IMD Professor Bill Fischer

About Professor Fischer

At IMD, Bill Fischer is professor of Innovation and Technology Management. He is program director for two of IMD’s flagship Innovation programs as well as teaching in several other senior executive programs. He has a career that spans many industries (including WHO) and geographies and has deep knowledge of China, where he has worked extensively. He holds a DBA from George Washington University.
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