Case Analysis
Week 3
Outline and Grading Guide (150 points)
Choose a case from the textbook for this assignment from the following list.
Case 20 – Apple
COMPANY NAME, WEBSITE, and INDUSTRY
State the company name, website address, and industry.
BACKGROUND and HISTORY
Briefly describe the company in the case analysis. What is their primary business, who were the officers or key players described in the case study? If the case study company is currently in business, list the company’s current CEO, total sales, and profit or loss for the last year where data is available. Identify key events or phases in the company’s history. Describe the performance of this company in the industry. Visit the company’s website and use http://finance.yahoo.com and/or some other financial search engine to find this data. (15 points)
NOTE: Make sure to use APA citations throughout the paper. The textbook should be cited if it is the source of information. If you are not familiar with APA citation, check out the tutorial APA Guidelines for Citing Sources at the end of the course Syllabus. There are videos to help you with the APA format and business research in the Week 1 Lecture.
ANALYSIS VIA PORTER’S FIVE FORCES MODEL
Analyze the competitive environment by listing the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitute products and services, and the intensity of rivalry among competitors in the industry (Chapter 2). Summarize your key points in a figure. (25 points)
STRATEGY USED
How does this company create and sustain a competitive advantage? What strategy from the readings was undertaken by this company? Were they successful? Can all companies use this strategy? How is the strategy affected by the life cycle in the industry? Remember to reference Porter’s generic strategies identified in Chapter 5 of the textbook, THIS IS CRITICAL. (40 points)
Specific STRATEGY(S)
Choose two specific strategies from this list.
– Ensuring Coherence in Strategic Direction (pages 26–32)
– Value Chain Analysis (pages 81–93)
– Resource View of Firm (pages 93–104)
– Industry Life Cycle Strategies (pages 187–195)
– Portfolio Management (pages 214–220)
Apply them in detail to the organization. Be sure to think strategically and show the results clearly. Use the strategy as a sub-header for each section so it is clear what is being applied. (40 points)
COURSE OF ACTION RECOMMENDED
If you were in a position to advise this company, what strategy would you recommend to sustain competitive advantage and achieve future growth? Be specific and list the steps the company should take for successful implementation of your course of action. (15 points)
OPINION
What do you think of this case study? Describe what you believe are the lessons learned from this case. (10 points)
REFERENCES
When you have completed the paper using the above sections, insert a page break and have a separate reference page. The references should be listed in accordance with the APA guidelines as shown in the tutorial. (5 points)
FORMAT:
• Use a title page.
• Font: Use Times New Roman, 12 point.
• Place your name in the upper left hand corner of the page.
• Each section of your paper should be headed by the bolded, capitalized item described above.
• Indent paragraphs.
• Insert page numbers bottom right.
• Paper length should be four to six double-spaced pages not including title page, references, or illustrations and tables.
• Use APA citations throughout the paper. If you are not familiar with APA citation, refer to tutorial, which is contained in the last section of our course Syllabus.
• Include a separate reference page at the end of the paper.
• Please prepare reference page as follows.
References
Dess, G., Lumpkin, G., & Eisner, A. (2012). Strategic Management (6e). Boston: McGraw-Hill Irwin.
Side Notes
• Save your paper in the following format: Your last name, initials of your first and middle name, and the company discussed in the case study.
EXAMPLE: If your name is Edward R Jones and you are writing a case study on Google, then the file name for your paper would be jonesergoogle.doc.
• Place the paper in the Dropbox designated by the weekly assignment.
Note that the report is worth 150 points and points are allocated for each section as noted in the outline.
Case 20: Apple Inc.
Taking a Bite Out of the Competition*
In January 2011 came the news that Apple’s visionary leader and CEO, Steve Jobs, would be taking yet another medical leave of absence. He did not say when he would return or why he was leaving, but the hints were ominous. The announcement prompted speculation of the return of pancreatic cancer, which was the cause of previous medical leaves by Jobs. In a letter to his 50,000 employees, Jobs handed off daily control of the company to Apple’s chief operating officer, Timothy D. Cook. He referred to his management team’s plans for 2011 and sounded an unusual emotional note: “I love Apple so much and hope to be back as soon as I can.”1
For shareholders, the announcement of Jobs taking another medical leave was troubling news. Apple Inc. shares dipped, and investors voiced their concerns for the future of the world’s largest technology firm. It posed yet again the unavoidable question that now loomed over 35-year-old Apple: What happens to a modern company whose innovations and inspirations are so closely tied to the vision of one leader when that leader’s influence is in decline?2
The company tried to downplay the impact of his departure. It tried to bury the news by announcing it on January 17, the Martin Luther King holiday in the United States, and then by presenting blowout financial results the next day. During a call with stock-market analysts, Cook said, “We feel very confident about the future of the company.” Apple had every reason to be confident.3 In the 2011 first quarter, Apple reported $26.7 billion in revenue, up 70 percent from a year before (see Exhibits 1 and 2).4 Although Apple may have mapped product plans for 2012 and beyond, analysts believed that without Jobs’ stubbornness and obsession about process and product details, Apple would never be the same.
Apple, at the top of BusinessWeek’s Most Innovative Companies list since 2004,5 had distinguished itself by excelling over the years not only in product innovation but also in revenue and margins (since 2006 Apple had consistently reported gross margins of around 30 percent). Founded as a computer company in 1976 and known initially for its intuitive adaptation of the “graphical user interface” or GUI (via the first mouse and the first onscreen “windows”),6 Apple had dropped the word computer from its corporate name in 2007. Apple Inc. in 2010 was known for having top-selling products not only in desktop (iMac) and notebook (MacBook) personal computers but also in portable digital music players (iPod), online music services (iTunes), mobile communication devices (iPhone), digital consumer entertainment (Apple TV), handheld devices able to download third-party applications, including games (iPod Touch via the App Store), and, recently, tablet computers (iPad) .
Although most of those innovations occurred after 1998, when Apple was under Steve Jobs’s leadership, there was a 12-year period in which Jobs was not in charge. The company’s ongoing stated strategy had been to leverage “its unique ability to design and develop its own operations system, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration and innovative industrial design.”7 This strategy required not only product design and marketing expertise but also scrupulous attention to operational details. Given Apple’s global growth in multiple product categories, and the associated complexity in strategic execution, would the potential loss of one man be sufficient to prevent the company from sustaining its competitive advantage? Was Steve Jobs essential to Apple’s success?
Company Background
Founder Steve Jobs
Apple Computer was founded in Mountain View, California, on April 1, 1976, by Steve Jobs and Steve Wozniak. Jobs was the visionary and marketer, Wozniak was the technical genius, and A. C. “Mike” Markkula Jr., who had joined the team several months earlier, was the businessman. Jobs set the mission of empowering individuals, one person–one computer, and doing so with elegance of design and fierce attention to detail. In 1977 the first version of the Apple II became the first computer ordinary people could use right out of the box, and its instant success in the home market caused a computing revolution, essentially creating the personal computer industry. By 1980 Apple was the industry leader and went public in December of that year.
In 1983 Wozniak left the firm and Jobs hired John Sculley away from PepsiCo to take the role of CEO at Apple, citing the need for someone to spearhead marketing and operations while Jobs worked on technology. The result of Jobs’s creative focus on personal computing was the Macintosh. Introduced in 1984, with the now-famous Super Bowl television ad based on George Orwell’s novel,8 the Macintosh was a breakthrough in terms of elegant design and ease of use. Its ability to handle large graphic files quickly made it a favorite with graphic designers, but it had slow performance and limited compatible software was available, so the product was unable to significantly help Apple’s failing bottom line. In addition, Jobs had given Bill Gates at Microsoft some Macintosh prototypes to use to develop software, and in 1985 Microsoft subsequently came out with the Windows operating system, a version of GUI for use on IBM PCs.
Steve Jobs’s famous volatility led to his resignation from Apple in 1985. Jobs then founded NeXT Computer; the NeXT Cube computer proved too costly for the business to become commercially profitable, but its technological contributions could not be ignored. In 1997 then Apple CEO Gilbert Amelio bought out NeXT, hoping to use its Rhapsody, a version of the NeXTStep operating system, to jump-start the Mac OS development, and Jobs was brought back as a part-time adviser.
Under CEOs Sculley, Spindler, and Amelio
John Sculley tried to take advantage of Apple’s unique capabilities. Because of this, Macintosh computers were easy to use, with seamless integration (the original plug- and-play) and reliable performance. This premium performance meant Apple could charge a premium price. However, with the price of IBM compatibles dropping, and Apple’s costs, especially R&D, way above industry averages (in 1990 Apple spent 9 percent of sales on R&D, compared to 5 percent at Compaq and 1 percent at many manufacturers of IBM clones),9 this was not a sustainable scenario.
All Sculley’s innovative efforts were not enough to substantially improve Apple’s bottom line, and he was replaced as CEO in 1993 by company president Michael Spindler. Spindler continued the focus on innovation, producing the PowerMac, based on the PowerPC microprocessor, in 1994. Even though this combination produced a significant price-performance edge over both previous Macs and Intel-based machines, the IBM clones continued to undercut Apple’s prices. Spindler’s response was to allow other companies to manufacture Mac clones, a strategy that ultimately led to clones stealing 20 percent of Macintosh unit sales.
Gilbert Amelio, an Apple director and former semiconductor turnaround expert, was asked to reverse the company’s financial direction. Amelio intended to reposition Apple as a premium brand, but his extensive reorganizations and cost-cutting strategies couldn’t prevent Apple’s stock price from slipping to a new low. However, Amelio’s decision to stop work on a brand-new operating system and try to jump-start development by using NeXTStep brought Steve Jobs back to Apple in 1997.
Steve Jobs’s Return
One of Jobs’s first strategies on his return was to strengthen Apple’s relationships with third-party software developers, including Microsoft. In 1997 Jobs announced an alliance with Microsoft that would allow for the creation of a Mac version of the popular Microsoft Office software. He also made a concerted effort to woo other developers, such as Adobe, to continue to produce Mac-compatible programs.
In late October 2001, Apple released its first major noncomputer product, the iPod. This device was an MP3 music player that packed up to 1,000 CD-quality songs into an ultraportable, 6.5-ounce design: “With iPod, Apple has invented a whole new category of digital music player that lets you put your entire music collection in your pocket and listen to it wherever you go,” said Steve Jobs. “With iPod, listening to music will never be the same again.”10
This prediction became even truer in 2002, when Apple introduced an iPod that would download from Windows—its first product that didn’t require a Macintosh computer and thus opened up the Apple “magic” to everyone. In 2003 all iPod products were sold with a Windows version of iTunes, making it even easier to use the device regardless of computer platform.
In April 2003, Apple opened the online iTunes Music Store to everyone. This software, downloadable on any computer platform, sold individual songs through the iTunes application for 99 cents each. When announced, the iTunes Music Store already had the backing of five major record labels and a catalog of 200,000 songs. Later that year, the iTunes Music Store was selling roughly 500,000 songs a day. In 2003 the iPod was the only portable digital player that could play music purchased from iTunes, and this intended exclusivity helped both products become dominant.
After 30 years of carving a niche for itself as the premier provider of technology solutions for graphic artists, Web designers, and educators, Apple appeared to be reinventing itself as a digital entertainment company, moving beyond the personal computer industry. The announcement in 2007 of the iPhone, a product incorporating a wireless phone, a music and video player, and a mobile Internet browsing device, meant Apple was also competing in the cell phone/smartphone industry.
In 2011 Apple expanded the iPhone to operate on the Verizon network along with AT&T’s network. The company introduced the iPod Touch, a portable media player and Wi-Fi Internet device that allowed users to purchase and download music directly from iTunes without a computer. Apple also opened the App Store. Users could now purchase applications written by third-party developers specifically for the iPhone and iPod Touch. These applications included games, prompting analysts to wonder whether Apple was now becoming a competitor in the gaming market.
Apple was becoming a diversified digital entertainment corporation (see Exhibit 4). Analysts had already believed Apple had “changed the rules of the game for three industries—PCs, consumer electronics, and music … and appears to have nothing to fear from major rivals.”11 On top of steady sales increases of its computers sales and of the iPod/iTunes, the added categories of iPhone and iPad were showing substantial growth. Apple was now taking bites out of the competition on all fronts.
Apple’s Operations
Maintaining a competitive edge required more than innovative product design. Operational execution was also important. For instance, while trying to market its increasingly diverse product line, Apple believed that its own retail stores could serve the customer better than could third-party retailers. By the end of 2010, Apple had an average of 317 stores open, including 84 international locations, with average store revenue of about $34.1 million.12 In addition to the “Genius Bars” Apple had installed in its own retail stores, Apple also invested in programs to enhance reseller sales, including the placement of Apple employees and knowledgeable contractors at selected third-party reseller locations. The company explained that it “believes providing direct contact with its targeted customers is an efficient way to demonstrate the advantages of its … products over those of its competitors.”13
In further operational matters, regarding a head-to-head competition against Dell in the computer market, for instance, Steve Jobs was quick to point out that market share wasn’t everything. While Dell’s perceived dominance might have been partly the result of its efficient supply-chain management, Apple had outperformed Dell in inventory and other metrics since 2001.14 In addition, Apple had the best margins, partly because of its simpler product line, leading to cheaper manufacturing costs.15 In 2010 Apple beat Dell and HP (as well as Nokia, IBM, Samsung, and Sony Ericsson) and took the number-one spot on AMR Research’s Supply Chain Top 25.16
Regarding suppliers of components for Apple’s diverse products, Apple had entered into certain multiyear agreements with suppliers of key components, including microprocessors, NAND flash memory, dynamic random access memory (DRAM), and LCD displays. Some of these long-term supplier-agreement partners included Hynix Semiconductor, Intel Corporation, Micron Technology, Samsung Electronics, and Toshiba Corporation. Also, in addition to using its own manufacturing facilities in Ireland, Apple had been outsourcing manufacturing and final assembly of iMacs, iPods, and iPhones to partners in Asia, paying close attention to scheduling and quality issues.
Supply chain and product design and manufacturing efficiencies were not the only measures of potential competitive superiority. Apple had also historically paid attention to research and development, increasing its R&D investment year after year. In 2010, Apple spent $1.8 billion on R&D, an increase from $1.3 billion in the previous year.17 Among its current rivals, Apple’s R&D investment was beaten only by Microsoft, Hewlett-Packard, and Google.18
Status of Apple’s Business Units in 2011
The Apple Computer Business
In the computer market, Apple had always refused to compete on price, relying instead on its reliability, design elegance, ease of use, and integrated features to win customers. Some analysts believed Apple had the opportunity to steal PC market share as long as its system was compatible, and no longer exclusively proprietary, and offered upgrades at a reasonable cost.19 But the real opportunity for increased market share was the Intel-based iMac desktop and the MacBook/MacBook Pro portable, both using the Intel Core Duo processor. The only part of the computer system not designed and manufactured by Apple was this processor and the memory.
In October 2010 Apple introduced a newer, lighter, redesigned version of the MacBook Air, the “world’s thinnest notebook.” The new MacBook Air combined features of the iPad with the notebook.20 Although the design was considered “revolutionary,” the stripped-down product did not have an optical drive except as a separate external purchase, had limited connectivity with only one USB port, and had a battery that was not user-replaceable. Even so, with its aluminum construction, it was perceived to be sturdy and much easier to carry than other full-size notebooks and therefore most appropriate for travelers in Wi-Fi hotspot areas.21
The continuing push to convert customers to the Macintosh computing products saw Apple sell 4.13 million Mac computers, both desktops and laptops, worldwide during the first quarter of 2011, an increase of almost 23 percent over the same quarter in the previous year.22 Sales of Apple computers in the United States did see a decline over the previous quarter, but not as much as the yearly domestic shipments of HP (down 6.1 percent) and Dell (down 6 percent). According to market analysis done by Gartner, the Mac’s domestic market share grew from 7.4 to 9.7 percent, putting it in fifth place overall in Gartner’s survey of PC vendor units shipped in 4Q2010.
The Personal Digital Entertainment Devices: iPod
Although many analysts felt the MP3 player market was oversaturated, Apple introduced the iPod Touch in 2007, intending it to be “an iPhone without the phone,” a portable media player and Wi-Fi Internet device without the AT&T phone bill.24 The iPod Touch borrowed most of its features from the iPhone, including the finger-touch interface, but it remained mainly an iPod, with a larger viewing area for videos. Apple released the fourth-generation iPod Touch in September 2010, with upgraded features like an HD camcorder, front-facing camera, integrated microphone, FaceTime video calling, Retina Display, gyroscope sensor, and a slimmer, lighter design. It was deemed the best iPod yet, offering all the fun of the iPhone experience without a carrier contract or monthly bill.25
Apple reported selling 19.45 million iPod units during the first quarter of 2011, a decline of 7 percent over the same period in the previous year.26 Even with the decline in iPod sales, Apple was still leading well over its rivals. The research by NPD group in 2010 claimed that iPod had a 76 percent share of the MP3 player market in the United States, while Microsoft’s Zune had only a 1 percent share.27
Mobile Communication Devices: iPhone
In 2007 further competition came from the blurring of lines between the digital music player and other consumer electronic devices: The telecom players wanted to join the digital music market. While others may have seen the computer as central to the future of digital music, the telecom companies thought the mobile phone could become a center of this emerging world. Apple’s entry, the new iPhone device, combined an Internet-enabled smartphone and video iPod. The iPhone allowed users to access all iPod content and play music and video content purchased from iTunes. Apple made an exclusive arrangement with AT&T’s Cingular Wireless network to provide cellular service.
The iPhone debuted with a 4-GB model for $499 and an 8-GB model for $599, and estimates from component manufacturers suggested it would cost between $230 and $265 to make, yielding Apple’s preferred gross margin of about 50 percent.28 This would allow room for price adjustments based on component or customer demand. The smartphone market in 2007 was estimated at 10 percent of all mobile phone sales, or 100 million devices a year. Steve Jobs said he “would like to see the iPhone represent 1 percent of all mobile phone sales by the end of 2008.”29 This proved to be a conservative estimate.
In July 2008 Apple began selling the iPhone 3G, the second-generation of the iPhone product. The 3G service upgrade accompanied expanded worldwide distribution, through carrier relationships in over 70 countries. Either because of the increased access or because of Apple’s marketing push, 6.9 million iPhone 3Gs were sold in the first quarter of its availability, compared to “6.1 million first-generation iPhone units sold in the prior five quarters combined.”30 As one analyst commented, “When Steve Jobs first introduced the iPhone in 2007, he pointed out that the market for cell phones worldwide was far greater than the market for any other type of consumer electronic device.”31 Worldwide demand for the iPhone was growing: The iPhone was launched in Saudi Arabia and the UAE through Mobily and Etisalat, and got 25,000 subscribers in the first few hours of its availability.32 Now it appeared that Jobs was correct. He had forecast a 1 percent market share of the cell phone market and by 2010 had achieved 2.9 percent.
Going into 2009, it appeared that the cell phone landscape was changing yet again, with smartphones becoming the device of choice for most manufacturers—smartphones with multiple features, including cameras. New cell phones with megapixel cameras debuted at Barcelona’s 2009 Mobile World Congress from Sony Ericsson and Samsung: “What’s behind the megapixel marathon? It’s no secret that the iPhone’s camera is one of its weakest points. Seems to me the competition is looking for vulnerabilities and has identified imaging capability as something they can deliver that the iPhone so far hasn’t.”33 Along with Sony Ericsson and Samsung, other cell phone makers, LG and Taiwanese manufacturer High Tech Computers (HTC), offered new phones with touch screens in an attempt to compete with the iPhone.34
Part of the popularity of the iPhone during the 2008 holiday season was explained by analysts as being the result of the highly prolific output of third-party software developers. These applications were available via Apple’s App Store, where they could be downloaded to the iPhone, either increasing its capability or allowing users to play games and otherwise entertain themselves. This prompted these analysts to wonder whether gaming companies such as Nintendo and Sony would have to pay attention to Apple as a competitor in the gaming market. The analysts quoted one iPhone customer who said he had sold his Sony PSP and might get rid of his Nintendo DS, because in “the short amount of time I’ve had the iPhone, I’ve played more games on that than on my PSP and DS combined.”35 Regarding additional upgrades to the iPhone, or to other products in the smartphone group, CEO Steve Jobs agreed that Apple’s iPhone business “had become too big to ignore.”
iPhone 4
In the beginning of June 2010, Apple introduced the new iPhone 4, which claimed to be the thinnest smartphone with the newest version of Apple’s most advanced mobile operating system. “iPhone 4 is the biggest leap since the original iPhone,” said Steve Jobs. “FaceTime video calling sets a new standard for mobile communication, and our new Retina display is the highest resolution display ever in a phone, with text looking like it does on a fine printed page. We have been dreaming about both of these breakthroughs for decades.”36 The video call did not use up the AT&T minutes, which made the FaceTime feature very marketable. The speed of the operating system was apparent in every app being launched, the form factor of the phone is super thin and incredibly solid, and Apple boasted a 44 percent increase in battery life compared to the iPhone 3G. The iPhone 4’s 16-GB and 32-GB models received preorders for more than 600,000, which was the largest number of preorders Apple has ever taken in a single day. Apple had sold over 1.7 million of its iPhone 4 within just three days after its launch, making it the most successful product launch in Apple’s history.37
However, iPhone 4 came with its own share of controversies. Despite the rapid sales, soon there were lots of complaints from customers about the iPhone 4 dropping calls. Apparently the phone could lose reception if a palm or a finger blocked the device’s lower left corner. This hot topic of an iPhone 4 problem created a huge web uproar, earning its own moniker: “Antenna-gate.”38 When Steve Jobs was asked about the reception problem, his reply to the customers was: “Just avoid holding it that way or simply use one of the cases.” Consumer Reports refused to recommend the iPhone 4 and recommended duct tape as a solution. Apple and Jobs were heavily criticized for their less than impressive handling of the issue. Jobs appeared visibly annoyed at the whole “antenna-gate” affair and said, “This has been blown so out of proportion—it’s incredible” as he paced back and forth across a stage. But he also stressed customer satisfaction as a priority and offered a free phone case to help prevent the reception problem.39 Bloomberg reported that Jobs knew about the issue before the phone was released, alleging that management had been told about it by Apple’s antenna expert, Ruben Caballero. Though Jobs described the story as “a crock,” Apple had suggested as early as June 2010 that users buy a case or avoid touching the lower left corner, indicating they likely knew something was up.40
On July 2, 2010, Apple issued a statement saying that it had found a mistake in the formula for calculating signal strength. Jobs called a press conference where he admitted there was a mistake and said that the company would issue a free software update that incorporated the correct formula. Although the “antenna-gate” problem created a lot of buzz and criticism on the Internet, it did not seem to diminish Apple’s sales in any way.41 Apple disclosed strong results for the second quarter of 2010 that exceeded analysts’ expectations. “Let me be very clear on this,” COO Tim Cook said during Apple’s call with analysts. “We are selling every unit we can make.” He informed the analysts that U.S. schools had managed to spend a record amount on Macs despite struggling with plummeting budgets. It seemed like the antenna problem had not affected Apple’s reputation in a strong way, as the demand for Apple’s devices and services remained as high as ever.42
In February 2011 Apple released the iPhone 4 in the Verizon network in addition to the (formerly exclusive) AT&T network. The move was expected to give Apple an important new source of sales in its biggest market for the iPhone and help it compete with rival Google Inc., which had made inroads with its Android operating system to develop high-end smartphones. Analysts predicted that Verizon could sell up to 13 million iPhones in 2011.43
However, analysts believed that the idea of Apple transforming the smartphone industry as it had the MP3 player market might require that Apple broaden its market even more. New offerings might include cell phone products that could compete with the new netbook PCs: a portable book reader to compete with Amazon’s new Kindle reader, a portable movie player, and even a low-cost, entry-level phone—and all should provide services and add-ons through the App Store so that “average users can clearly see that there are enough high-quality services on offer to justify spending $30 per month [for a] mobile broadband subscription.”44
Tablet Computer: iPad
In April 2010 Apple released the iPad, a tablet computer, as a platform for audio-visual media, including books, periodicals, movies, music, games, and web content. More than 300,000 iPads were scooped up by eager tech consumers during the device’s first day on store shelves. By the first quarter of 2011, Apple had sold around 15 million iPads around the world. The price ranged from $499 to $829, with the costlier models having more memory and/or 3G, and it worked on the AT&T network. Weighing only 1.5 pounds, this lightweight, portable, and touch-screen device was seen as a gigantic iPod Touch.45
Considering that previous tablet computers had failed to catch on in the mass market, Apple made a bold move by introducing the iPad. Since its release, some users have criticized the iPad for a lack of features such as a physical keyboard, a webcam, USB ports, flash support, and its inability to multitask, share files, and print. However, features like the sleek design, accurate touch screen, iBooks, photo and e-mail apps, and fast and easy-to-navigate software have made the iPad popular in business, education, and the entertainment industry. A survey by a research company showed that iPad usage in office workplaces was linked to the goals of increased employee productivity, reduced paperwork, and increased revenue. The research firm estimated that the mobile-office application market in North America may reach $6.85 billion in 2015, up from an estimated $1.76 billion in 2010.46 Selected by Time magazine as one of the 50 Best Inventions of the Year 2010, the iPad has been labeled by critics as simply a new category of gadget.47
Up until September 2010, Apple iPads accounted for 95 percent of tablet computer sales, according to research firm Strategy Analytics. By the end of 2010, that figure had fallen to 75 percent. The loss of share was due to the arrival of new tablet devices, mainly based on Google’s open-source Android system. Other platforms had also begun to appear, including Microsoft’s Windows 7 and HP’s WebOS.48
In March 2011 Apple released the iPad 2, a slimmer, lighter, and faster device than its predecessor, complete with cameras both on the front and rear. It was made available on both the AT&T and Verizon networks at the same price as the original iPad.
The Software Market
Although Apple has always created innovative hardware; software development was also an important goal, with implications for long-term sales growth. Software was increasingly becoming Apple’s core strength.49 The premier piece of Apple software is the operating system. OS X allowed Apple to develop software applications such as Final Cut Pro, a video-editing program for professionals’ digital camcorders, and the simplified version for regular consumers, called iMovie. The iLife software package provided five integrated applications, allowing the computer to become a home studio: iMovie; iDVD, for recording photos, movies, and music onto DVDs; iPhoto, for touching up digital photos; GarageBand, for making and mixing personally created music; and the iTunes digital music jukebox. Also available is iWork, containing a PowerPoint-type program called Keynote and a word-processor/page-layout program called Pages. Both iLife and iWork underwent major upgrades in 2009, further increasing their respective abilities to compete with Microsoft applications.
Apple’s Web browser, Safari, was upgraded in 2009 to further compete with Windows Internet Explorer, Mozilla Firefox, and the new entrant, Chrome from Google. Apple announced, “Safari 4 is the world’s fastest and most innovative browser,”50 but analysts were quick to point out that Google’s Chrome, which debuted six months earlier, was perhaps the first to take the browser interface in a new direction. One commentator called Chrome “a wake-up call for the Safari UI guys…. It’s not that any particular feature of Chrome is so wonderful, or even that the sum of those features puts Safari back on its heels in the browser wars. It’s the idea that someone other than Apple has taken such clear leadership in this area. Google Chrome makes Safari’s user interface look conservative; it makes Apple look timid. And when it comes to innovation, overall daring counts for a lot more than individual successes or failures on the long-term graph.”51 Reviews of Apple’s Safari upgrade noted, “Whether or not the individual features of Chrome inspired Apple, it’s clear that Apple isn’t going to let Google have the lead in browser innovation without a fight. And the more innovation that happens, the better it will be for users of Web browsers—which at this point is pretty much everybody with a computer!”52
Operating Systems
Further opportunity for software development came from the Mac’s new ability to run Windows. This meant that software such as iWorks could now convert Microsoft Office files to run on a Mac. In the past, third-party software developers such as Adobe always had to make a sometimes risky decision to create Mac OS versions of their popular products. Now that the Macs were using Intel Core Duo chips, much more versatility and cross-platform compatibility made it more profitable to design and develop for the Mac market.
An additional opportunity for operating-system competition opened up in 2007 with the introduction of the “netbook” category of portable computers. Smaller and cheaper than a regular laptop or notebook, these machines didn’t have the computing power to run the full version of either Windows XP or Mac OS X, so most manufacturers used the Linux operating system.53 Microsoft announced in late 2008 that its new operating system, Windows 7, the replacement for Vista, would be capable of running on a netbook. However, according to CEO Steve Jobs, Apple did not have any plans for producing a netbook product.54 Because the Apple operating system, designed to run only on Apple computers, was not available for independent sale, the new Windows operating system might gain traction in another computing category once again.
iTunes
Arguably, Apple’s most innovative software product was iTunes, a free downloadable software program for consumers running on either newer Mac or Windows operating systems. It was bundled with all Mac computers and iPods and connected with the iTunes Music Store for purchasing digital music and movie files that could be played by iPods and the iPhone and by iTunes on PCs.
Although the volume was there, iTunes had not necessarily been a profitable venture. Out of the 99 cents Apple charged for a song, about 65 cents went to the music label; 25 cents went for distribution costs, including credit card charges, servers, and bandwidth; and the balance went to marketing, promotion, and the amortized cost of developing the iTunes software.55
Several competitors had tried to compete with the iTunes service. RealNetworks’s Rhapsody subscription service, Yahoo MusicMatch, and AOL music downloads all had competed for the remaining market share, using the potentially buggy Microsoft Windows Media format.56 Even though one commentator had said in 2004 that “ultimately someone will build a piece of software that matches iTunes,”57 as of 2011 the only serious competition was from Amazon and My Space.
Making it potentially worse for Apple’s competitors, music artists overwhelmingly supported Apple, because, as Jobs reported, “almost every song and CD is made on a Mac, it’s recorded on a Mac, it’s mixed on a Mac. The artwork’s done on a Mac. Almost every artist I’ve met has an iPod, and most of the music execs now have iPods. And one of the reasons Apple was able to do what we did was because we are perceived by the music industry as the most creative technology company.”58
Steve Jobs had negotiated a deal with the Big Five record companies (Sony Music Entertainment, BMG, EMI, Universal, and Warner) to sell songs on iTunes. Jobs asked the music labels to stop requiring that digital music distributors such as iTunes use copyright protection. By taking the lead in this, Apple could potentially come out ahead of the game again: If copyright protection was not required, iTunes songs could be played on non-iPod music players, and music purchased on other services could be played on the iPod. In what might have been perceived as a PR ploy, Jobs said that allowing music to be sold online without digital rights management (DRM) technology would “create a truly interoperable music marketplace—one that Apple would embrace ‘wholeheartedly.’”59
Four major music labels—Universal Music Group, Sony BMG, Warner Music Group, and EMI, along with thousands of independent labels, offered their music in iTunes Plus, Apple’s DRM-free format with higher-quality 256 kbps ACC encoding for audio quality virtually indistinguishable from the original recordings.”60 This made iTunes, with its 10 million DRM-free tracks, “the largest music store library on Earth.”61 I n addition, iPhone 3G customers could download music directly onto their phone for the same price as downloading to their computer, the price having changed to include three price points, $0.69, $0.99, or $1.29, depending on what the music labels charged Apple. This tiered pricing was supposedly adopted in response to potential competition from other download sites such as Amazon and MySpace, although analysts pointed out that the music labels had previously demanded variable pricing and that Apple needed this cooperation from the content providers.62
As of 2010 the iTunes Store had sold over 10 billion songs, and analysts projected that by 2012 it could “well account for a staggering 28 percent of all music sold worldwide.”63 The iTunes store continued to dominate the U.S. market for online movies in 2010, accounting for $248.3 million, or 64.5 percent of total consumer spending on movie electronic sell-through and Internet video on demand.64
The App Store
In March 2008, Apple announced that it was releasing the iPhone software development kit (SDK), allowing developers to create applications for the iPhone and iPod Touch and sell these third-party applications via the Apple App Store. The App Store was made available on version 7.7 of iTunes, and it was directly available from the iPhone and iPod Touch products. This opened the window for another group of Apple customers, the application developers, to collaborate with Apple. Developers could purchase the iPhone Developer Program from Apple for $99, create either free or commercial applications for the iPhone and iPod Touch, and then submit these applications to be sold in the App Store. Developers would be paid 70 percent of the download fee iPhone or iPod Touch customers paid to the App Store, and Apple would get 30 percent of the revenue. The applications ranged from simple audio files that were available for free (e.g., ringtones), to straightforward programs that sold for 99 cents (e.g., a program that turned the iPhone into a simple voice recorder), to full-featured applications that retailed for up to $69.99 (e.g., Fore-Flight Mobile, which allowed pilots to get weather and airport information).
As of March 2011, over 10 billion apps had been downloaded from the App Store. The revolutionary App Store offered more than 350,000 apps in 20 different categories to users worldwide.64 The success of this distribution channel for smartphone add-ons had Microsoft and other manufacturers, such as Nokia and Blackberry maker Research in Motion, rushing to open their own mobile software stores, hoping to follow Apple’s “runaway success”65 in yet another category.
The Future of Apple
Although Steve Jobs was credited with Apple’s ability to innovate and to appeal especially to a certain type of consumer (Jobs estimated Apple’s market share in the creative-professional marketplace as over 50 percent),66 Jobs himself credited his people:
We hire people who want to make the best things in the world … our primary goal is to make the world’s best PCs—not to be the biggest or the richest. We have a second goal, which is to always make a profit—both to make some money but also so we can keep making those great products…. [Regarding the systemization of innovation,] the system is that there is no system. That doesn’t mean we don’t have process. Apple is a very disciplined company, and we have great processes. But that’s not what it’s about. Process makes you more efficient … but innovation … comes from saying no to 1,000 things to make sure we don’t get on the wrong track or try to do too much. We’re always thinking about new markets we could enter, but it’s only by saying no that you can concentrate on the things that are really important.67
Jobs, according to the portrait laid out in countless biographies and articles over the years, is a control freak with a compulsive attention to detail. He routinely sent products back to the lab, killed them in their crib, demanded new features, or euthanized old ones, all while keeping Apple’s attention narrowly focused on just a few products with the potential for high returns. Jobs’ obsession with process and detail even filtered down to how he rolled out products. Besides exhaustively rehearsing his own presentations, he often insisted that executives from partner companies submit to a week or more of dry runs—and has been known to bounce executives at the last minute if they showed signs of nerves that could spoil a Jobs keynote.68
When Jobs announced he was taking another medical leave, the lingering question on everyone’s mind was obvious: Who will steer the ship when, inevitably, Jobs is gone? Most analysts were enthusiastic about the talents of Tim Cook, who was widely viewed as Apple’s next chief executive if and when Jobs permanently stepped aside. Cook was an operations genius, keen-minded, demanding, and adept at cutting costs while delivering complex products on time and coping with staggering growth targets. He was also monastic and incredibly devoted to Apple. He had oversight of sales, customer support, and logistics—which meant much of the company already reported to him. During Jobs’ previous two absences, Cook steadied the corporate ship so capably that in 2010 he was rewarded with $59 million in salary and stock. Still, during those past medical leaves, Jobs had remained involved in all major strategic decisions, Apple says. In that respect, Tim Cook was untested as a potential CEO.69 Critics claimed that he was a good temporary replacement, but lacked dynamism and creative vision.70
The rest of Jobs’ team was filled with star role players but not accomplished generalists.
• Jonathan Ive, Apple’s design chief, was one of the award-winning brains behind nearly all of Apple’s iconic computing and mobile products, was a highly accomplished presenter and speaker, and was known as a perfectionist. However, he lacked overall business expertise and credibility with Wall Street. Although he lacked the industrial and technical training to replace his boss, critics believed he could be a powerful cochair.71
• Marketing chief Philip W. Schiller was credited with some of the smart moves that placed iMacs, iPods, and iPhones as the chic devices to own in the public’s eye. He was known as loyal and effective but wasn’t considered a tech visionary. He did not have a dynamic public presence, and some saw him as a bad CEO—probably better suited at staying where he was, to support any future new CEO and ensure consistency.
• Scott Forstall, Apple’s software chief, was credited with the successful industry-defining iOS interface of the iPhone and iPad. He was a smooth public speaker, had notable attention to detail, possessed the right kind of technical knowledge and dynamism, and had become an increasingly important figure in key Apple product decisions. But he had little experience minting new hardware.
• Ron Johnson, the head of retail operations, had helped turn Apple into one of the world’s most profitable chains, but he was a retailer, not a technologist.72
Some outsiders feared that Jobs alone could stir this mix of talent. The unavoidable fact was that lots of people could manage the company. But only Steve Jobs could have had the visionary spirit—and risk tolerance—to turn Apple into a mobile phone company.
Apple had no shortage of talent within the company, but people needed to get to know them in order to prove Apple as a brand, not a person. More than just demonstrating that there was a capable team to take charge in Jobs’s absence, however, Apple could also mitigate concerns by demonstrating that many of the company’s values that Jobs represented would continue in his absence: true passion for innovation, design excellence, and almost unstoppable momentum around new product development.73
In the short term, the current team of Apple might actually outperform in the absence of its stubborn mentor. Without Jobs’ obstinacy at the negotiating table and unrelenting dedication to simplicity, it’s possible Apple could have avoided its rare mistakes, such as waiting too long to move the iPhone to Verizon (which gave momentum to phones powered by Google’s Android operating system) and blocking Adobe’s popular Flash video format on the iPad. An Apple without Jobs might one day even allow the iTunes media store to appear on devices such as HDTVs made by the likes of Sony and Samsung. Or perhaps Apple could introduce a stripped-down version of the iPhone to compete with lower-cost handsets. These moves would likely horrify Jobs; he would see them as muddying the user experience and diluting the Apple brand. Yet they would also make some business sense. Even without Jobs at the wheels, Apple could still deliver satisfying returns for shareholders. It could continue to press its gains in PC and mobile market share around the world, and it could build a sizable business selling to corporations.74
All this was speculative, of course, given the uncertainties about Jobs’ health. The fallout could be short term. People may admire CEOs, but ultimately it’s the brand they buy. Critics claim that while the shareholders may be concerned, the Apple brand will ultimately prove to be more than just one man—no matter how influential that man was. Whatever happens, the spirit of Steve Jobs will live on within Apple, and when it finally has to, Apple will carry on without him.
