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THE FUNDAMENTALS OF BUSINESS AND

ECONOMICS

Moving the Music at Apple iTunes

When Steve Jobs surveyed the marketplace for online music, he no doubt liked some of the things
he saw more than others. On the plus side, Apple was a well-known and highly regarded presence
in both the computer and music industries, so almost anything the company choose to do would
have the support a respect of many consumers and potential business partners. Plus, 2 million
people were already walking around with an Apple iPod, the enormously popular portable music
player. Moreover, Apple’s design team had a proven knack for making technology easier to use, a
critical issue in the technically complicated arena of digital music.
On the minus side, Jobs knew there would be serious challenges in any effort to turn online
music into a successful business venture. The technology would be complex, starting from the
need to collect and store hundreds of million of songs and to make them easily available to
millions of online customers at once. The technology might’ve been the easiest part of the whole
problem, however. The music business is a complex stew of strong personalities, strong
traditions, tangled legal contracts, and lots of people who want a piece of the financial action,
including performers, songwriters, music publishers, and record companies. Some artists refuse to
sell songs individually out of fear it will hurt CD album sales (and a few refuse to sell their music
online at all). As a result, Apple and other companies often need to negotiate deals one song at a
time—all of which takes time and costs money, to complicate matters even further, contractual
terms differ from country to country, requiring a new round of negotiations for each place. Then
there are the millions of music listeners who were already in the habit of simply making copies of
pirated songs. How could they be convinced to pay for a product that they’d already been tahing
for free?
After 25 years of doing commercial battle with the likes of IBM and Microsoft, though,
Steve Jobs has never been one to back down from a challenge. He added up those pluses and
minuses, then decided to lead Apple into the fray. The result is iTunes.com, the web-based music
site that illions of listeners now count on for getting the music they love. True to Apple form,
iTunes combines style with simplicity, making it easy for anyone with an iPod or the iTunes
player on their computer to load up on their favorite songs at $0.99 each (a separate categoryof
songs without usage restrictions began selling for $1.29 in 2007). The store now offers millions
of songs plus podcasts, audio books, TV shows, movies, games, and even college course lectures.
Measured by sales volume, at least, it’s hard to say that iTunes has been anything other
than a success, having sold several billion songs so far, plus 50 million TV shows and more than
a million movies. And it helped the company sell over 100 million iPods, which in turn has
created an entire industry of accesories, with more than 4,000 complementary products.
Is iTunes a profitable business venture, though? After all, when you’re selling something
for $0.99, you’d better run a pretty tight ship if you’re going to make any money. Skeptics
abounded when iTunes was launched. When Apple collects those $0.99 for each song it sells, it
first hands over $0.70 to whichever company contrlos the rights to the song. (This company then
has to divide $0.70 among music publishers, performers, and songwriters.) From the $0.29 Apple
keeps, it needs to cover its costs for advertising, staffing, computer systems, and other business
expenses. A single nationwide advertising campaign can cost millions of dollars, so you can get
an idea of how hard it is to strecth $0.29 to cover costs and turn a profit.
However, the company has said it just about breaks even on iTunes, and one financial
analyst concluded that it might make as much as $0.10 per song. Now, $0.10 won’t buy you
anything these days, but $0.10 multiplied by several billion certainly will. 21

Critical Thinking Questions

1. If Steve Jobs decided to let iTunes operate at a loss to generate mare sales of iPods, does
iTunes still qualify as a profit-seeking business? Explain your answer.
2. Is iTunes a goods-producing business or a service business? Why?
3. What barriers to entry did iTunes have to overcome to enter the online music business?

LEARN MORE ONLINE

Visit the iTunes website at www.apple.com/itunes. What does the website do to appeal to
customers? What goods and services are offered? In what ways does the website encourage
visitors to make purchases?
(For the latest information n iTunes, visit www.prenhall.com/bovée and click on “Real-
Time Updates.”)

Test Your Knowledge

Questions for Review
1. Why do businesspeople study economics?
2. Why are knowledge workers a key economics resource?
3. How is capitalism different from communism and socialism in the way it achieves economic
goals?
4. Why is government spending an important factor in economis stability?
5. Why might a government agency seek to block a merger or acquisition?

Question for Analysis

6. Why is it often easier to start a service business than a goods-producing business?
7. Why is competition an important element of the free-market system?
8. Why do governments intervene in a free-market system?
9. How do countries know if their economic system is working?
10. Ethical Considerations. Because knowledge workers are in such high demand, you decide to
enroll in an evening MBA program. Your company has agreed to reimburse you for 80
percent of your tuition. You haven’t revealed, however, that once you earn your degree, you
plan to apply for a management position at a different company. Is it ethical for you to accept
your company’s tuition to reimbursement; given your intentions?

Question for Application

11. Company sales are skyrocketing, and projections show that your computer consulting
business will outgrow its current location by next year. What factors should you consider
when selecting a new site for your business?
12. How would a decrease in Social Security benefits to the elderly affect the economy?

Practice Your Knowledge

Sharpening Your Communication Skills
Select a local service business you are familiar with. How does that business try to gain a
competitive advantage in the marketplace? Write a brief summary, describing whether the
company competes on speed, quality, price, innovation, service, or a combination of those
attributes.

Improving Your Tech Insight: Instant Messaging

If you’re a serious user of instant messaging (IM), do you remember what it was like those first
few times you communicated through IM? Chances are it changes the way you interacted with
friends and family. IM may have started as a way for individual computer users to stay in touch,
but it quickly became a major communication tool for businesses worldwide. For both routine
communication and exchanges during online meetings, IM is now widely used throughout the
business world and is beginning to overtake or even supplant e-mail for internal communication
in many companies. Businesses use IM to replace in-person meetings and phone calls, to
supplement online meetings, and phone calls, to supplement online meetings, and to interact with
customers. Key benefits include rapid response to urgent messages and lower cost than phone
calls and e-mail. Enterprise IM, systems created specifically for businesses, go beyond typical
consumer systems with such features as remote display of documents, remote control of other
computers, advanced security, message archiving, newsfeeds from blogs and websites, and even
automated bot capabilities in which computers mimic human beings to help with basic customer
service tasks.
Research one company’s use of IM for either internal communication among employees or
external communication with customers and business partners. To learn more about how IM
works, you can check out http://computer.howstuffworks.com/instant-messaging.htm. For the
latest on the business applications of IM, log on to www.instantmessagingplanet.com. In a brief
e-mail message to your instructor, describe the company’s use of IM and explain how it has
changed the way the company does business.

Expand Your Knowledge

Discovering Career Opportunities
Thinking about a career in economics? Find out what economists do by reviewing the
Occupational Outlook Handbook in your library or online at www.lbs.gov/oco. This is an
authoritative resource for information about all kinds of occupations. Search for ”economists,”
then answer these questions:
1. Briefly describe what economists do and their typical working conditions.
2. What is the job outlook for economists? What is the average salary for starting
economists?
3. What training and qualifications are required for a career as an economist? Are the
qualifications different for jobs in the private sector as opposed to those in the
government?

Let’s Make Creation and Innovation