Apple and the computer industry – Mini-case

Apple Inc1.

Apple is the world's largest information technology company by revenue, the world's largest
technology company by total assets, and the world's second-largest mobile phone
manufacturer. On November 25, 2014, in addition to being the largest publicly traded
corporation in the world by market capitalization, Apple became the first U.S. company to be
valued at over US$700 billion. The company employs 115,000 permanent full-time employees
as of July 2015 and maintains 453 retail stores in sixteen countries as of March 2015; it
operates the online Apple Store and the iTunes Store which is the world's largest music retailer.

Apple's worldwide annual revenue totaled $233 billion for the fiscal year ending in September
2015. The company enjoys a high level of brand loyalty and, according to the 2014 edition of
the Interbrand Best Global Brands report, is the world's most valuable brand with a valuation of
$118.9 billion.

Apple was established on April 1, 1976, by Steve Jobs, Steve Wozniak and Ronald Wayne to
sell the Apple I personal computer kit. The Apple I kits were computers single handedly
designed and hand-built by Wozniak.
Apple was incorporated January 3, 1977. During the first five years of operations revenues grew
exponentially, doubling about every four months. Between September 1977 and September
1980 yearly sales grew from $775,000 to $118m, an average annual growth rate of 533%.

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Source Wikipedia (https://en.wikipedia.org/wiki/Apple_Inc.)

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In 1984, Apple launched the Macintosh, its debut was signified by "1984", a $1.5 million
television commercial directed by Ridley Scott that aired during the third quarter of Super Bowl
XVIII on January 22, 1984. The commercial is now hailed as a watershed event for Apple's
success and a "masterpiece".

The Macintosh initially sold well, but follow-up sales were not strong due to its high price and
limited range of software titles. The machine's fortunes changed with the introduction of the
LaserWriter, the first laser printer to be sold at a reasonable price, and PageMaker, an
early desktop publishing package. The Macintosh was particularly powerful in the desktop
publishing market due to its advanced graphics capabilities, which had necessarily been built in
to create the intuitive Macintosh Graphic User Interface. It was also leading the educational
market.

In 1985, a power struggle developed between Jobs and CEO John Sculley, who had been hired
two years earlier. The Apple board of directors instructed Sculley to "contain" Jobs and limit his
ability to launch expensive forays into untested products. Rather than subm it to Sculley's
direction, Jobs attempted to oust him from his leadership role at Apple. Sculley found out that
Jobs had been attempting to organize a coup and called a board meeting at which Apple's
board of directors sided with Sculley and removed Jobs from his managerial duties. Jobs
resigned from Apple and founded NeXT Inc. the same year.

After Jobs' departure, the Macintosh product line underwent a steady change of focus to higher
price points. Newer models selling at higher price points offered higher profit margin, and
appeared to have no effect on total sales as power users snapped up every increase in power.
However, this policy began to backfire in the last years of the decade as new desktop publishing
programs appeared on PC clones that offered some or much of the same functionality of the
Macintosh but at far lower price points. The company lost its monopoly in this market, and had
already estranged many of its original customers who could no longer afford their high priced
products.

The Christmas season of 1989 was the first in the company's history that saw declining sales,
and led to a 20% drop in Apple's stock price. Later that year, Apple introduced three lower cost
models, the Macintosh Classic, Macintosh LC and Macintosh IIsi, all of which saw significant
sales due to pent up demand. The success of Apple's lower-cost consumer models, especially
the LC, also led to cannibalization of their higher priced machines. To address this,
management introduced several new brands, selling largely identical machines at different price
points aimed at different markets. These were the high-end Quadras, the mid-range Centris line,

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and the ill-fated Performa series. This led to significant market confusion, as customers did not
understand the difference between models.

Through this period, Microsoft continued to gain market share with Windows by focusing on
delivering software to cheap commodity personal computers, while Apple was delivering a richly
engineered but expensive experience (top of the line macs went for around $10,000 and
provided profit margins of over 50%). Apple relied on high profit margins and never developed a
clear response to this threat; Sculley tried to move Apple into the mass market segment (for
instance pricing the Mac Classic at $999) but that was unsustainable given the higher cost
structure that Apple had. At this time, a series of major product flops and missed deadlines
sullied Apple's reputation, and Sculley was replaced as CEO by Michael Spindler. Spindler cut
costs and reduced Apple workforce by 16%, but Apple continued losing momentum. By the end
of 1996, in a single quarter they lost over $69 million and Spindler was replaced by Amelio.
Amelio declared that Apple would return to a price-premium strategy but continued with
extensive layoffs and cut costs. After numerous failed attempts to improve Mac OS with several
projects Amelio chose to purchase NeXT and its NeXTSTEP operating system and, most
notably, brought Steve Jobs back to Apple.

On July 9, 1997, Amelio was ousted by the board of directors after overseeing a three-year
record-low stock price and crippling financial losses. Jobs acted as the interim CEO and began
restructuring the company's product line going from 15 to just 4 product lines. He positioned
Apple as a premium brand, developing hype and unique products with attractive design (iMac,
Mac Pro, MacBooks) while investing a lot in innovation projects to upgrade Apple specific
operating systems yearly and develop Apple software (iLife suite, Final Cut Pro, Safari, iWork).
In the meantime, PowerPC chips were replaced by Intel ones. Moreover, at the 1997 Macworld
Expo, Jobs announced that Apple would join Microsoft to release new versions of Microsoft
Office for the Macintosh, and that Microsoft had made a $150 million investment in non-voting
Apple stock.

During his keynote speech at the Macworld Expo on January 9, 2007, Jobs announced that
Apple Computer, Inc. would thereafter be known as "Apple Inc.", because the company had
shifted its emphasis from computers to consumer electronics. This event also saw the
announcement of the iPhone and the Apple TV. Apple would achieve widespread success with
its iPhone, iPod Touch and iPad products, which introduced innovations in mobile phones,
portable music players and personal computers respectively.

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In an article posted on Apple's website on February 6, 2007, Jobs wrote that Apple would be
willing to sell music on the iTunes Store without digital rights management (DRM), thereby
allowing tracks to be played on third-party players, if record labels would agree to drop the
technology.

In July 2008, Apple launched the App Store to sell third-party applications for
the iPhone and iPod Touch. Within a month, the store sold 60 million applications and
registered an average daily revenue of $1 million, with Jobs speculating in August 2008 that the
App Store could become a billion-dollar business for Apple. By October 2008, Apple was the
third-largest mobile handset supplier in the world due to the popularity of the iPhone.

After years of speculation and multiple rumored "leaks", Apple announced a large screen,
tablet-like media device known as the iPad on January 27, 2010. The iPad ran the same touch-
based operating system as the iPhone, and many iPhone apps were compatible with the iPad.
This gave the iPad a large app catalog on launch, despite very little development time before
the release. Later that year on April 3, 2010, the iPad was launched in the US. It sold more than
300,000 units on its first day, and 500,000 by the end of the first week.

In June 2010, Apple released the iPhone 4, which introduced video calling, multitasking, and a
new uninsulated stainless steel design that acted as the phone's antenna.

It has been argued that Apple has achieved such efficiency in its supply chain that the company
operates as a monopsony (one buyer, many sellers) and can dictate terms to its suppliers.

On October 5, 2011, Apple announced that Jobs had died, marking the end of an era for Apple.
From 2011 to 2012, Apple released the iPhone 4S and iPhone 5, which featured improved
cameras, an "intelligent software assistant" named Siri, and cloud-sourced data with iCloud;
the third and fourth generation iPads, which featured Retina displays; and the iPad Mini, which
featured a 7.9-inch screen in contrast to the iPad's 9.7-inch screen. These launches were
successful, with the iPhone 5 (released September 21, 2012) becoming Apple's biggest iPhone
launch with over 2 million pre-orders and sales of 3 million iPads in three days following the
launch of the iPad Mini and fourth generation iPad (released November 3, 2012). Apple also
released a third-generation 13-inch MacBook Pro with a Retina display and new iMac and Mac
Mini computers.

Apple Inc. reported that the company sold 51 million iPhones in the Q1 of 2014 (an all-time
quarterly record), compared to 47.8 million in the year-ago quarter. Apple also sold 26 million
iPads during the quarter, also an all-time quarterly record, compared to 22.9 million in the year-
ago quarter. The Company sold 4.8 million Macs, compared to 4.1 million in the year-ago
quarter.

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The personal computer industry 2

While Apple invented the concept of personal computer, IBM brought PCs into the mainstream
in the 1980s and contributed to have the new standard “Wintel” dominating the industry.
Thousands of manufacturers, from big names like Dell to no-name assemblers, build PCs
around the standard building block from Microsoft (operating system) and Intel (processors).

In spite growth in the PC industry propelled by the development of internet in the early 2000s,
the PC market began to be saturated (It is estimated that as of 2015 more than 2 billion PCs are
used around the world). Market saturation can be seen in the steady decline of average selling
price of PCs estimated at around 8 to 10% compound decline per year between 1990s and
2005 and a steadied decline of 2% from 2005 to 2011. Excluding Apple, in 2011 the average net
profit margins for PC makers was around 5%.

Customers valued performance, price, and durability of PC machines and bought PCs in
electronic retail stores, big distributors, and often through the “white box” channel: No name
machines assembled by local entrepreneurs sold to small offices and home offices. This
channel covered about 30% of sales in 2011.

Suppliers to the PC industry fell into one of two categories: those who made products with many
sources (memories, hard drives, key boards, etc.) and those who made products that had just a
few sources: microprocessors (the hard brain of a computer) and operating systems (the soft
brain of a computer). Microprocessor industry has been historically dominated by Intel (about
80% of market share), while the operating systems industry by Microsoft (90% of PCs worldwide
run some version of Windows). Developing a new operating system is quite expensive. For
instance Windows 7 cost about $2.5 billion to develop (considering development and marketing
costs) giving Microsoft a revenue of about $50 per copy. Windows 7 was the fastest selling
operating system in history with over 100 million units sold in 6 months.

Assignment Questions:

1. Analyze the structure of the personal computer industry.

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Source: HBR Case “Apple Inc. in 2012” by David Yoffie and Penelope Rossano

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 Exhibit 13 – Global PC market unit sales 1996-2015
Unit sales to global PC market

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Units
(M) 70.9 80.6 92.9 113 135 128 132.4 168.9 189 218.5 239.4 271.2 302.2 305.9 351 352.8 352.7 316 315.9 288.7

Grow t
h (pct.) 17.8 13.7 15.3 22.2 18.7 -4.9 3.4 27.6 11.9 15.6 9.6 13.3 11.4 1.2 14.7 0.5 0.0 -10.4 -0.2 -8.0

Sales volume worldwide grew rapidly in the late 1990s but declined during the early 2000s recession. Sales increased again for the rest of the decade though more slowly in the
late 2000s recession. After a substantial growth into 2010, sales volume has remained fairly stable, until a substantial dip starting in 2013 caused by the switch to pads.

Exhibit 2 – Historical Vendors Market Share 2001–2014

Rank 2001 2002 2003 2004 2005

1 HP 18.4 HP 14.2 Dell 14.9 Dell 16.4 Dell 16.8

2 Dell 13.2 Dell 13.2 HP 14.6 HP 14.6 HP 14.6

3 IBM 6.4 IBM 5.2 IBM 5.3 Lenovo 6.8 Lenovo 6.9
4 NEC 3.8 Fujitsu 3.8 Fujitsu 3.7 Fujitsu 3.8 Acer Inc. 4.6

5 Toshiba 2.8 Toshiba 2.8 Acer 2.9 Acer 3.4 Toshiba 3.3

Others 55.4 60.9 58.6 55.1 53.8

Global PC market share by units, percent (2006-2014)

Rank 2006 2007 2008 2009 2010 2011 2012 2013 2014

1 Dell 15.9 HP 18.1 HP 18.2 HP 19.1 HP 17.9 HP 16.6 HP 16.1 Lenovo 16.9 Lenovo 18.8

2 HP 15.9 Dell 14.2 Dell 14.1 Acer 12.9 Acer 13.9 Lenovo 12.5 Lenovo 14.9 HP 16.2 HP 17.5

3 Acer 7.6 Acer 9.7 Acer 10.6 Dell 12.1 Dell 12.0 Dell 11.7 Dell 10.7 Dell 11.6 Dell 12.8

4 Lenovo 7.0 Lenovo 7.4 Lenovo 7.5 Lenovo 8.0 Lenovo 10.9 Acer 10.8 Acer 10.2 Acer 8.0 Acer 7.9

5 Toshiba 3.8 Toshiba 4.0 Toshiba 4.6 Toshiba 5.0 Asus 5.4 Asus 5.7 Asus 6.9 Asus 6.6 Asus 7.2

Others 49.8 46.5 44.9 42.8 40.0 42.8 41.2 40.7 35.7

Exhibit 34 - Global Mac sales 2002-2015 (million units)

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Source: https://en.wikipedia.org/wiki/Market_share_of_personal_computer_vendors
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Source: http://www.statista.com/statistics/276308/global-apple-mac-sales-since-fiscal-year-2002/

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 Exhibit 45 - Apple quarterly revenues 2010-2015

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Source: http://uk.businessinsider.com/apple-q3-earnings-2015-7?r=US&IR=T