Good or Bad Competitors

A company really needs and benefits from competitors. The existence of competitors results in several strategic benefits. Competitors may share the costs of market and product development and help to legitimize new technologies. They may serve less-attractive segments or lead to more product differentiation. Finally, competitors may help increase total demand. For example, you might think that an independent coffeehouse surrounded by Starbucks stores might have trouble staying in business. But that's often not the case:4

Coffee-shop owners around the country have discovered that the corporate steamroller known as Starbucks is actually good for their business. It turns out that when a Starbucks comes to the neighborhood, the result is new converts to the latte-drinking fold. When all those converts overrun the local Starbucks, the independents are there to catch the spillover. In fact, some independent storeowners now actually try to open their stores near a Starbucks if they can. That's certainly not how the coffee behemoth planned it. "Starbucks is actually trying to be ruthless," says the owner of a small coffeehouse chain in Los Angeles. But "in its predatory store-placement strategy, Starbucks has been about as lethal a killer as a fluffy bunny rabbit."

However, a company may not view all of its competitors as beneficial. An industry often contains "good" competitors and "bad" competitors.5 Good competitors play by the rules of the industry. Bad competitors, in contrast, break the rules. They try to buy share rather than earn it, take large risks, and play by their own rules.

For example, Yahoo! Music Unlimited sees Napster, Rhapsody, AOL Music, Amazon, com, and most other digital music download services as good competitors. They share a common platform, so that music bought from any of these competitors can be played on almost any playback device. However, it sees Apple's iTunes Music Store as a bad competitor, one that plays by its own rules at the expense of the industry as a whole.6

With the iPod, Apple initially created a closed system with mass-appeal. In 2003, when the iPod was the only game in town, Apple cut deals with the four major music labels that locked up its device. The music companies wanted to sell songs on iTunes, but they were afraid of Internet piracy. So Apple promised to wrap their songs in its FairPlay digital rights management (DRM) technology—the only copy-protection encryption that is compatible with iPods and iPhones. Other digital music services such as Yahoo! Music Unlimited and Napster reached similar deals with the big music labels. When Apple refused to license FairPlay to them, those companies turned to Microsoft for DRM technology. But that meant that none of the songs sold by those services could be played on the wildly popular iPod and vice versa. The situation has been a disaster for Apple's competitors. Although some recording labels, notably EMI and Universal Music Group, are now foregoing DMR technology in an effort to weaken the bargaining power they gave to Apple by first insisting on it, iTunes still holds a commanding 80 percent of the digital music market. It recently sold its four billionth song.

The implication is that "good" companies would like to shape an industry that consists of only well-behaved competitors. A company might be smart to support good competitors, aiming its attacks at bad competitors. Thus, Yahoo! Music Unlimited, Napster, and other digital music competitors will no doubt support one another in trying to break Apple's stranglehold on the market.

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