A recent article in Businessweek discusses how Dell plans to make a second play into the MP3 space based on its recently acquired Zing software and the ex Apple iPod executive, Tim Bucher, that came with it. The strategy that they are taking looks to drive the MP3 player market right into Dell’s sweet spot, but the question is going to be whether they can produce an attractive player, and if they cannot what other ways could they take advantage of the market.
Dell has a history of taking a trial run in a market, leaving and coming back stronger running back to when they first entered the laptop market. The failure of the first attempt caused them to post their first ever loss. They studied the lessons they learnt from this and re-entered the laptop market bigger and better. Since then they have had trial runs in the server, storage, workstation, printer, peripheral and leasing markets before re-launching to greater success after having learned the lessons needed. Typically the trial run has been with third party re-badging with the second slice being with their own designed equipment. That Dell has previously played in the MP3 market and is now re-entering suggests that they have a very good idea on how to make money.
The crux of what has been made public to date is to create an open distribution system that multiple vendors can use. It sounds like they might be setting up a system where they build a wholesale media warehouse and offer a simple set of retail solutions and services that other parties can buy. They could take a cut on the pass through, or could even charge at cost if there was other ways for them to gain revenue from the system. If this is correct it is a system that I believe could really work.
If anything about the iPod has driven its success though, it is the utility of its design and the (relative) ease of use of iTunes. While Dell can get the second down, it is not particularly renowned for its design work. Even if they can find designers, what features could they offer over the iPod that could attract people away? It will likely come down to a player with similar features at a lower price as Dell is still the lowest cost of sale vendor around. For this to work for Dell the volume needs to be very high. I have my doubts.
The revenue then needs to come from the service. We already know that the position of iTunes is not unassailable with Amazon currently taking large chunks of market share, the trouble Apple has had attracting more studios over to the DRM free iTunes plus. The key here will be to dominate the back end. At the moment the best you could do to sell licensed music yourself would be an affiliate program, having a wholesale backend would allow you to set up a store and take a direct cut. The difference is that with a front-end sales system you can dictate your own margins. Giving the record company a single entity to negotiate with, while allowing them to get a large retail presence will also suit them greatly. This will be an interesting story to watch develop.