How Sony missed out on the iPod

Sony used to rule the roost back in the days of the Walkman. But an innovation dilemma saw the company lose its dominance in the sector to Apple's iPod and the rest is history.

A decade ago Apple launched the iPod with the slogan “1,000 songs in your pocket”. The claim encapsulated seamless integration of content and delivery. The launch of the iPod mattered not just for what it did, but for what it implied for the future. The age of the personal computer was ending, giving way to an era in which a single handheld device would be the gateway to every service that could be delivered electronically.

So why didn’t Sony do it? The company created the Walkman, the analogue predecessor to the iPod. For a generation, Sony was the world’s most successful consumer electronics company. It developed a vision of integration of devices and content long before Apple dreamt of going into the music business. The route Sony followed was acquisition. In 1987, Sony bought CBS records. Two years later the company purchased Columbia Pictures.

Sony had seen the future. And it worked, but not for them. Apple went on to dominate the new markets, transforming itself from a computer company into both a leading consumer electronics company and a major retailer. Sony didn’t even come close. (In his biography of Steve Jobs, Walter Isaacson recounts a discussion with the Apple founder on this issue.)

However, its failure is hardly unique. The acquisition of AOL by Time Warner is now notorious as possibly the worst merger in history, although Royal Bank of Scotland’s purchase of the Dutch bank ABN Amro runs it close.

As at Sony, Time Warner’s vision of the future was correct. But, as at Sony, it didn’t work for them. Amazon, a retailer, transformed the distribution of print media: just as Apple, a computer company, has transformed the distribution of audio-visual media. And paradoxically, Sony, which didn’t have a book business, proved more effective in e-publishing than in exploiting new distribution systems for audio and video.

AT&T saw in the 1980s that the emergence of computing and telecommunications would define the future of both industries. The vision was again well-founded. But the belief that the means of influencing that future was to buy a computer company was a preposterous misconception, and AT&T would play only a secondary role in the dramatic events that followed.

Narratives of industry evolution often represent fairy tales constructed by corporate financiers, or ambitious chief executives. They relentlessly seek rationale, however spurious, for the next deal. Remember the cradle-to-grave financial services business that would arise from the merger of Travelers and Citibank? Or the seamless home-to-destination service that would follow from United Air Lines’ purchase of car hire and hotel businesses? But the narratives that were used as justification for the Sony or Time Warner or AT&T transactions were not fantasies.

So why did they not come to pass? The explanation can be found in Clayton Christiansen’s analysis of the innovator’s dilemma. Established companies in an industry are naturally resistant to disruptive innovation, which threatens their existing capabilities and cannibalises their existing products. A collection of all the businesses which might be transformed by disruptive innovation might at first sight appear to be a means of assembling the capabilities needed to manage change. In practice, it is a means of gathering together everyone who has an incentive to resist change.

The executives of music companies, film studios and book publishers did not rush to embrace the opportunities offered by new channels of distribution. They saw these technological developments as threats to well established business models in which they had large personal and corporate investments. And they were right to think this. So convergence was accomplished by groups such as Apple and Amazon, which had no similar vested interests to oppose change, These companies succeeded precisely because they were outsiders.

Economic growth is held back by industries where established interests are so powerful that disruptive innovation can be staved off for ever. Financial services is probably one. And education another. I think often of the contrast between the power of information technology to transform the process of learning, and the little progress that has been made towards actually doing so.

John Kay is a columnist for the Financial Times. 

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