apple case

Apple, Inc. 2014 and the Global Smartphone Industry

Learning Objectives • The dynamics of industries and customers change over time and its implications for strategic actions
• The nature of sustainable competitive advantage
• The timing of strategic moves
• Multisided business platforms
• The challenge of reinvigorating competitive advantage through innovation
• The role of technology standards in competitiveness
• Role of the CEO as chief strategic thinker and manager

Introduction Despite beating market projections for fiscal first quarter (Q1) results 2014, Apple, Inc. headquartered in Cupertino, California, disappointed industry analysts and Apple watchers when it reported iPhone sales grew at a 7% rate, falling short of Wall Street expectations of a 15% increase.1 Apple's supremacy as the top dog in the fiercely contested high technology consumer electronics industry, especially in the U.S. was under attack. Since 2011, Apple was constantly losing ground to the Android operating system in the battle for smartphone supremacy at home and abroad.2 Analysts were looking for Tim Cook, Apple’s CEO to quickly act to prevent further market erosion and stem the advances of competitors.3 Apple was one of the most innovative companies of all times under Steve Jobs’ leadership introducing game changing products and services across an array of industries. Chief among the game changing products was the iPhone. Never before did one firm change the competitive dynamics so drastically in so many industries from computers, mobile phones, music, tablets, movies, photography, electronic components, newspapers and print media, as well as other industries. Eric Schmidt, Google's CEO, who once served on Apple's board of directors challenged Apple's lead in smartphones and tablets by offering the Android operating system (OS) free or at minimal charge to smartphone manufactures. Google’s open system approach of giving its Android OS away free of charge was a sharp contrast with Apple’s closed system, curated approach for its iOS (Operating System) used only in Apple devices. Walter Isaacson commissioned to write Job’s autobiography, interviewed Jobs. Isaacson wanting to know if Jobs made a strategic and costly mistake by keeping the Mac operating system a closed system, unlike Microsoft’s Windows operating system that was available to computer manufactures at a minimal cost. Eventually the open system’s Windows became the dominant OS capturing 98% of the global personal computer (PC) market. Open versus closed system approaches were a matter of great debate in the digital age. Schmidt interviewed for the Jobs’ book, commented: “Steve has a particular way that he wants to run Apple, it’s the same as it was twenty years ago, which is that Apple is a brilliant innovator of closed systems.4 Schmidt later commented that, “The benefit of closed systems is control. But Google has a specific belief that open is the better approach, because it leads to more options and competition and consumer choice.” Bill Gates weighing in on the discussion agreed with Schmidt, arguing that, “Competition among a variety of devices and manufacturers leads to greater consumer choice and more innovation.”5 In response to Schmidt’s comment Jobs stated: Google says we exert more control than they do, that we are closed and they are open. Well look at the results-Android’s a mess. It has different screen sizes and versions, over a hundred permutations.... I like being responsible for the whole user experience…We do not do it for the money. We do it because we want to make great products, not crap like Android.6 Apple was the most profitable company in the high technology industry. Its profit for the fiscal year ended September 2013 were triple Google's 2013 earnings and $9 billion more than its nearest competitor, Samsung Electronics. The profit and revenue results for Apple remained strong for the first quarter of 2014. (See Exhibit 1) In addition to competitor challenges to its smartphones and other mobile devices, Tim Cook, Jobs’ hand-picked successor faced criticism for Apple’s contract labor practices and its management of the environment. The nonprofit, China Labor Watch reported in July 2013 that Pegatron and Jabill Circuit two Apple suppliers were violating workplace standards. The nonprofit levied a formal complaint against Taiwan-based Pegatron for reportedly violating several major safety and environmental standards, and was now similarly accusing U.S. based Jabil Circuit, which was responsible for producing Apple’s low-cost iPhone.7,8

Even with this criticism Fortune magazine named Apple the most admired company in the world from 2008 to 2012. On September 30, 2013, Apple surpassed Coca-Cola to become the world's most valuable brand in the Omnicom Group's "Best Global Brands" report. Omnicom Group reported that value of the Apple brand at $98.3 billion, up 28 percent from the 2012 report. Coca-Cola was valued at $79.2 Billion.9 Apple was the world's second-largest information technology company by revenue after Samsung Electronics and the world's second largest smartphone manufacturer after Samsung. Apple was the largest publically traded corporation in the world by market capitalization with an estimated capitalization of $462.3 billion as of October 2013.10 (See Exhibit 2) Under Cook Apple’s string of successive big hit, innovative and unique products had stalled and Apple was again at a crossroads in its terms of its future direction. Apple’s ability to introduce game changing innovative products and its ability to charge premium prices for smartphones were being called into question. Would the company flourish or flop under Cook’s leadership?

Apple’s Product Information Apple was unique in that it was one of just a few companies that designed, manufactured and marketed both hardware and software products first with its line of Macs and then with its array of high technology consumer devices. The Company was renamed Apple Inc. on January 9, 2007, to reflect its shift from selling mainly computers toward a focus on consumer electronics. Apple products included mobile communication and media devices, personal computers, and portable digital music players, and sold a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. It’s products and services included: iPhone®, iPad®, Mac®, iPod®, Apple TV®, a portfolio of consumer and professional software applications, the iOS and OS X® operating systems, iCloud®, and a variety of accessory support offerings. Apple sold and delivered digital content and applications through the iTunes Store®, App StoreTM, iBooksStoreTM, and Mac App Store. The Company sold its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers (See Appendix A for a brief overview of Apple’s Products).11 As of June 2014, Apple maintained 25 retail stores in fourteen countries, as well as the online Apple Store and iTunes Store, the latter of which was the world's largest music retailer. The company had 73,000 permanent full-time employees and 3,300 temporary full-time employees worldwide. Its annual revenue in 2013 totaled $170 billion. As of Q1 2014, Apple's five-year growth average was 39% for top line growth and 45% for bottom line growth. In May 2013, Apple entered the top ten of the Fortune 500 list of companies for the first time, raising 11 places above its 2012 ranking to take the sixth position12 (See Exhibit 3).

Steve Jobs – “The Father of the Digital Revolution” On April fool’s day 1976, out of his parents’ garage in Los Altos, California Steve Jobs with his high school friend Steve Wozniak founded Apple computer to develop and sell personal computers. Mike Markkula, an angel investor joined the two Steves in their fledging partnership turning it into Apple Computer Co. in January 1977, valued at $5,309.13 Four years later the partners took the company public becoming the most oversubscribed IPO (initial public offering) since Ford Motors in 1956. By December 1980, Apple was valued at $1.79 billion and in the process it would make three hundred people millionaires.14 Apple, under Steve Jobs became one of the most successful companies of all times. Jobs’ passion was to build an enduring organization. Steve Jobs born in 1955 died of pancreatic cancer on October 5, 2011. At the time of his death Jobs was hailed as one of America’s most successful and celebrated entrepreneurs. Through Apple, he was widely recognized as a charismatic pioneer of the personal computer revolution. His influential career in computers and consumer electronics transformed several industries from computers and smartphones to music and movies. Jobs was the first to see the commercial potential of Xerox PARC's mouse-driven graphical user interface, which led to the creation of the Apple Lisa and shortly after the successful line of Macintosh computers. Jobs played a key role in introducing the LaserWriter, one of the first widely available laser printers. After a power struggle with Apple’s Board and Apple’s CEO John Scully in 1985, Jobs was forced out of Apple and founded NeXT, a rival computer platform development company to Apple specializing in the higher education and business markets.15 When Jobs left Apple he owned 6.5 million shares of the company’s stock, 11% of the company, worth more than $100 million. He quickly sold his shares and within five months dumped all but one share so he could attend shareholders meetings if he wanted.16 In turn, Apple’s Board elected to sue NeXT and Jobs on claims that Jobs was using Apple’s proprietary technology in the NeXT platform. Eventually, Scully and Jobs reached an out-of-court agreement involving no financial damages.17 For a few years after Jobs departure, Apple was able to coast comfortably with high profit margins based on its temporary dominance in desktop publishing. Scully, buoyed by Apple’s Board backing and the continued high profit margins boastfully proclaimed that “Jobs wanted Apple ‘to become a wonderful consumer products company,’….’this was a lunatic plan…. Apple would never be a consumer products company…. We couldn’t bend reality to all our dreams of changing the world [some called the counter-intuitive, ambitious, demands of Steve Jobs on his company and its employees as Jobs’reality distortion field]…. High tech could not be designed and sold as a consumer product.”18 In 1986, Jobs acquired the computer graphics division of Lucas film, which was subsequently spun off as Pixar. He was credited in Toy Story (1995) as an executive producer. Walt Disney eventually purchased Pixar Animation Studios. In 1996, after Apple had failed to deliver its operating system, called Copland, then Apple’s CEO Gil Amelio turned to NeXT Computer and its NeXTSTEP platform.
The NeXTSTEP platform became Apple’s primary operating system and the foundation for the Mac OS X operating system. At Amelio’s request, Jobs returned to Apple as an advisor, and reluctantly took control of the company as interim CEO. By that time Apple was on its fourth CEO in just a few years. Michael Dell at the time of Jobs appointment as Apple’s interim CEO stated, “It (Apple) was on the rocks," When he was asked what would he do with Apple, he stated, “I'd shut it down and give the money back to the shareholders," Jobs noted, that "Apple was about 90 days from going bankrupt … and it was much worse than I thought when I went back initially."19 As the new CEO of the company, Jobs oversaw the development of the iMac, iTunes, iPod, iPhone, and iPad, and on the services side, the company's Apple Retail Stores, iTunes Store and the App Store. The success of these products and services provided Apple with strong financial returns. Making many industry analysts and Apple watcher described the reinvigoration of Apple by Jobs as one of the greatest turnarounds in business history After Jobs’ death accolades and honors poured in. Jobs was recognized for his influence in the technology and music industries and was called: legendary, a futurists and a visionary, the Father of the Digital Revolution, master of innovation, the master evangelist of the digital age and a design perfectionist.20

Apple’s Historic Competitive Advantage Under Jobs leadership, Apple built its strategy and business model on several key factors. The Company’s business strategy leveraged its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative design. First was the way it designed its PCs and subsequently its electronic consumer products to be easy to use, most often letting customers use or play with the product right out of the box. Key to the strategy was the Macintosh’s user-friendly graphical user interface, (GUI) which was acquired at a minimal cost from Xerox Corporation in 1979. Jobs and his engineers were able to significantly improve the GUI making it a prime feature and differentiator of Apple’s computers in the rapidly emerging PC industry.21 Second, whether it was an obsession for total control of Apple, its products, and technology Jobs maintained a closed system, proprietary environments with its computers, IPhone, IPad, and iTunes operating systems. This was contrary to the open system approached used by Bill Gates and Microsoft Corporation that made its Windows operating system designed to operate on Intel’s microprocessors available at a minimal cost to PC manufacturers in the early days of the computer industry. Eventually, Microsoft’s open systems approach closed the gap between Apple’s lead in proprietary technology and its rivals spurring the rapid growth of the PC industry. With the introduction of Windows 3.0 in 1991 Apple computer business was on a path toward history. Third, Apple was well recognized for being a leader in designing and introducing, branded “Insanely great products with high innovation content that attracted strong buyer loyalty. Its digital hub strategy was the basis for its eco-system approach to high technology.” For Jobs, Apple operated at the nexus of Science, Technology and the Arts.22 Fourth, rapid growth of its products and services afforded Apple the economies of scale (e.g., one of the largest purchasers of flash memory in the world) that significantly lower its supply chain costs and provided the company bargaining power with its vendors. The success of its product line and its eco-system, digital hub strategy provided Apple with economies of scope (e.g., the ability to cross-sell iPhones, iPads, Macs, iTouch, Apps and services online and through Apple’s retail stores and its major big box vendors, retailers and other distributors. Finally, Apple’s unique and innovative business model allowed it to charge higher than average industry selling prices and earning it higher than industry average gross margins. For example Apple’s average selling price for its iPad was $600 while the industry average price was closer to $300. Buyers could purchase Amazon’s Kindle Fire HD 7” 8GB Tablet for $139. Apple also had a significant price premium on its iPhones compared to similar competitors’ models. In 2013, IDC expected smartphone ASPs (average selling prices) to hit $337, down 12.8% from the $387 recorded in 2012.23Premium pricing and differentiation fueled Apple’s growth and provided the funds for next generation products.

Global Smartphone Industry
The smartphone industry was a hyper-competitive, global market characterized by aggressive price cutting that resulted in downward pressure on industry profits and gross margins. Competitors frequently introduced new products that resulted in short product life cycles, evolving industry standards, continual improvement in product price/performance characteristics, rapid adoption of technological and product advancements by competitors, and price sensitivity on the part of consumers.24One of the factors contributing to smartphone growth was the convergence of several Internet technologies including PCs and tablets as more and more consumers and businesses were switching away from computers to tablets and smartphones.

Technology Convergence: PCs, Tablets and Smartphones

PC shipments were declining in every region of the world. International Data Corp. (IDC) reported worldwide PC shipments would decline about 6% in 2014. PC shipments declined 9.8% in 2013. Declines stemmed from a lack of innovation by PC manufacturers coupled with an increased in popularity for smartphones and tablets. For example, the success of Apple’s iPad mini had cannibalized sales of MacBook.25 Worldwide tablet shipments were forecasted to grow from 221 million units in 2013 to 386 million units by 2017 for a 15% compounded annual growth rate (CAGR). By value, tablet shipments would grow at an 11.5% CAGR from $79.4 billion in 2013 to $123 billion in 2017.26

Smartphones were gradually replacing traditional mobile phones (non-smartphones) and this trend was expected to continue. Worldwide smartphone shipments by dollar value were expected to grow at an 11.5% CAGR between 2014 and 2018. Smartphone unit shipments were expected to grow at an 11.5% CAGR from 1.2 billion in 2014 to 1.7 billion in 2018. While mobile phone unit shipments were forecasted to grow at a 4% CAGR from 1.8 billion in 2013 to 2.2 billion in 2018.27

Worldwide Smartphone Shipments

In 2013, North America accounted for 15% of global smartphone shipments; Latin America, 9%; Europe, the Middle East, and Africa (EMEA), 24%; and Asia Pacific, (APAC) 52%. This would change by 2017 with a shift to 11% for North America, 9% Latin America, 21% EMEA, and 59% APAC. It was expected that smartphone shipments would grow at a CAGR of 5.7% in North America, 14.1% in Latin America, 10.4% in EMEA, and 16.8% in APAC. (S&P) between 2013 and 2017.28 The ratio of non-smartphones to smartphones was expected to change from 45%/55% in 2013 to 25%/75% by 2017.29

Demand for smartphones was largely driven by replacements by current mobile phone users as well as first-time users. Competition amongst smartphone manufacturers, especially in Asia was forcing down prices making smartphones affordable to the middle class and accelerating penetration. The increased competition within Android-based smartphones was forcing vendors to innovate, introduce differentiated smartphones and reduce prices all contributing to an increase in demand for smartphones. Samsung accounted for 31.3% of worldwide smartphone shipments in 2013; Apple, 15.2%; LG, 4.5%; Huawei, 4.8%; Lenovo, 4.7%; and others, 39.5%. (See Exhibits 4 and 5).30
Android dominate the market on a global scale with devices running Google’s Android O.S., capturing 79% of the entire smartphone unit shipments. Apple’s iOS platform captured 15.2% of global share in 2013 down from 19% in 2012. While Apple's global share had declined, Apple captured sizable profits on its iPhone compared to rival smartphone manufacturers and Apple’s iPhone sales were expected to significantly grow in China and the rest of Asia.31

United States In 2013, Smartphone penetration in the U.S was at 68%, with 80 million users still without a smartphone. The iPhones remained enormously popular in U.S. with a market share of 57.6% at the end of March 2014. This was an increase from the 50.3% market share at the end of November 2013. The Android operating system was not far behind with a 35.9% market share, a decline of 7.8% from the same period a year earlier. For Q1 2014, Apples iPhone lost ground in the U.S. to Android.32 Apple commanded over 50% share of AT&T and Verizon smartphone sales in the U.S. The gap between Apple and Samsung’s share of Sprint’s smartphone sales was a bit closer with Apple sitting at 36% versus Samsung’s 30%. Samsung captured the majority of T-Mobile’s sales (See Exhibit 6).33

Apple was the top original equipment manufacturer (OEM) vendor in U.S. with 41.3% of the smartphone OEM market. Windows Phones was the least selling, with just 5.3% of the market share, an overall decline of 0.3% from the same period last year. Companies selling the Android O.S. could not match Apple’s iOS platform as a major source of income. InfoTech reported that for the 2013 holiday season iOS users were 5 times more likely to purchase online and that these purchases average $93.94 compared to $48.10 for Android transactions. The report noted that the iOS dominated revenue for app developers with $21,276 average revenue per developer on iOS compared to $6,000 revenue per developer for Android. The report concluded that Apple had control over that part of the online market that was very comfortable with buying apps online and that it “wasn’t a far stretch to assume that they also experience high purchases for other Apple products, iTunes store downloads and App store downloads” (See Exhibit 7).34 Microsoft had emerged as the latest smartphone OEM vendor, after its acquisition of Nokia Corporation devices and services. Nokia Lumia devices accounted for 93.5% of all Windows Phone 8 powered devices, Nokia remained a popular brand global. However, Kantar World Panel ComTech reported the Windows Phone faced an uphill battle in most countries, even as sales of cheaper Android phones were growing in China, U.K and U.S.35

China Android captured 80% share of the market for smartphones in China. Android growth in sales were partly a result of a price war for low priced smartphones being waged by local vendors such as ZTE Corporation and Xiamoi. These vendors wanted to bring out the cheapest Android products possible in a country with 700 million smartphone users, most of whom could not afford a premium models, like the iPhone. Apple iPhones sales (Q1, 2014) accounted for 17.9% of market share in China, a decline from 23.3% market share achieved during the same three-month period a year earlier.36

Europe, Japan and Australia Apple posted strong sales of the iPhone 5s in Europe, Japan and Australia during a three-month period ending March 31, 2014. Apple iPhone was the leader in Japan, with 57.6% of the smartphone market. iPhone sales were helped by the decline of Blackberry OS, lack of momentum in Android sales, and having a stronger relationship with NTT Docomo its Japanese partner. The market share of Windows phones was under 1%, despite the low 40% Smartphone penetration in Japan (See Exhibit 8: Is Android Becoming the New Windows?).37 In all the top five European countries, Great Britain, France, Spain, Germany and Italy, Android and Apple shares were helped by a rapid decline of Blackberry, Nokia and other operating systems For Q1 2014, Android phones accounted for 70.7% of the smartphone market, while Apple’s iPhones stood at 19.2%. The market share of iPhones grew steadily in France, Great Britain and Spain during the first quarter of 2014. The share of Windows phones jumped to 10.0%, towards the end of November 2013, but slumped ever since to 8.1%, a decline of 20% in just four months.38

The Operating Systems Battle: Google vs. Apple Apple under Jobs revived its personal computer business increasing its U.S market share to 8% by the time of his death. This growth was driven by Apple’s innovative digital hub strategy that linked Apple’s eco-system of mobile devices, services, iTunes, iStore, and apps to Apple’s line of Mac computers. Powerful rivals such as Google, Samsung, Amazon, Microsoft and others were now replicating Apple’s digital hub strategy and offering their own smartphones and tablet computers. By 2010, Android share of the smartphone market exceeded Apple for the first time. By 2011, Android operating systems were on over 170 devices while Apple’s iOS system was on 5 devices, all Apple products (2 iPhone models, 2 iPad models and iTouch). Google also changed the relationship between the major operating system companies and the telecom carriers. In its deal with Verizon, Google agreed to give Verizon and other telecom carriers 30% of app revenue. Google also gave app developers 30% of app revenues. Finally Google gave Verizon a small percent of Google’s mobile advertising revenues. Sharing revenue with telecom carriers gave carriers incentives to sell smartphones with the Android O.S. and provide additional bandwidth and network capacity to handle the increasing volume of data and services flowing through the network (voice, video, data, software, etc.). While Apple shared 30% of app revenue with app developers, it did not share app or advertising revenue with its major carrier AT&T.39 Both Apple and Google launched their app stores in 2008. Since then Apple users download significantly more apps than Android users, although Android app buyers were growing at a faster rate.40 A Yankee Group survey from April 2013, found that the buying intent for new customers to iOS and Android was about the same, but loyalty to one ecosystem or the other was not. Only 9 percent of the Apple device owners surveyed said they would switch to another platform with their next phone purchase, while 24 percent of Android owners plan to abandon the Android platform. And Apple buyers were more likely to adopt other parts of the product lineup, such as the $99 Apple TV, which was the top selling Internet streaming device.41

Amazon’s Fire Jeff Bezos, Amazon’s founder and CEO announced in June that Amazon would start selling a smartphone called Fire using the Android OS exclusively through AT&T starting at the end of July, 2014. The Fire when purchased through AT&T’s two-year contract would cost $199 to $299. Amazon’s price cut the equivalent iPhone 5s 32-gigabyte and 64-gigabyte handsets by $100 each. Without a contract the Fire would sell for $649 to $749. One feature of the Fire was Firefly that used the devices’ camera and sensors to recognize merchandise, signs, music or television shows. Bezos strategy was to use Fire as a mobile cash register to boost ecommerce sales to Amazon.42,43

Tim Cook’s Leadership at Apple Tim Cook joined Apple in 1998 after 10 years at IBM. At Apple, Cook was responsible for most of Apple’s day-to-day operations and was credited with revamping Apple’s global supply chain, making it one of the most efficient and effective in the industry. Cook was named CEO of Apple Inc. on August 24, 2011.44 Cook, steadily introduced and announced several product upgrades and updates. While some Apple watchers believed Cook’s was slow to respond to competitors moves and their string of several innovative product introductions, Cook was crafting a new strategy and approach for Apple.45 From October 2011 to March 2012, Apple under Cook’s leadership added upgrades to its iOS 5, iPhone 4S, Siri, iCloud, iPad and Apple TV. At its June 2012 World Wide Developers Conference (WWDC) Cook introduced the iOS 6 and the Mac OS X Mountain Lion. Upgrades were announced for the MacBook Air and Pro lines, Airport Express N Routers and Time Capsules. In October Cook announced a new iPhone 5, updated iPad Mini, iPad, iMac, MacBook Pro, a new iPod Touch and iTunes 11.46 Cook changed several members of Apple’s executive team. In October 2012, Scott Forstall resigned as senior vice president of iOS, becoming an advisor to Cook until his departure in 2013. John Browett, who was SVP of retail, was dismissed after six months on the job having received 100,000 shares worth $60 million when he joined. Jonathan Ives, design SVP was made head of Apple's Human Interface team. Craig Federighi became the head of iOS software engineering and services chief Eddy Cue took over responsibilities for Maps and Siri. These moves came when revenues and profits for Apple’s 3rdquarter 2012 results were less than predicted. One analyst commented that Forstall was forced to step down because Cook "…decided to lance the boil as internal politics and dissent reached a key pitch." Cook's direction since becoming CEO was to build a culture of harmony, which meant "weeding out people with disagreeable personalities—people Jobs tolerated and even held close, like Forstall." Other analysts questioned the moves noting that, "Apple's ability to innovate came from tension and disagreement."47 In April 2012, Time included Cook on its annual 100 Most Influential People in the World list. By year-end, Apple had experienced its most productive year with over 15 products released. During 2013, Apple introduced a cheaper iPod Touch model, announced an updated MacBook Pro and released iOS 7 and Mac OS X Mavericks. It also introduced a new MacBook Air carrying Intel's latest Haswell CPUs and the latest WiFi technologies.48

Cook’s New Apple After three years of what some analysts saw as small moves, Cook’vision and bolder strategy for Apple was taking shape. In February 2014, Cook made headlines when he challenged shareholders to "get out of the stock" if they didn't share the company's views on sustainability and climate change. Cook wanted Apple to be more collaborative as it faced new challenges, particularly from Google and its Android mobile operating system. Cook broadened the company's legendary laser focus by looking outside Apple for innovative technologies, joint ventures and partnerships.49 In April 2014, after several rounds of negotiations with investor Carl Ichan, Cook with the Board’s approval bought back $100 billion of its shares—more than any company in U.S. history—after years of hoarding cash. Also in April, Apple settled a feud with Google, a rivalry that Steve Jobs once called a "holy war."50 In late May, while analyst were still looking for the next new thing regarding Apple’s mobile devices and perhaps a SmartWatch, Cook took a risky and bold move for Apple by acquiring Beats Electronics headphone business for $3 billion. The deal was striking in that it diverged from Apple’s past strategy of acquiring smaller firms and immediately submerging them into the Apple culture and brand. With Beats, Apple acquired a well-known brand with more than 500 employees. Beat was started and led by two strong willed entrepreneurs Jimmy Iovine and hip-hop artist Dr. Dre. Iovine and Dre were two high-powered music executives not known for marching to someone else's beat. Beats' streaming service was the key attraction for Apple in making the acquisition. Customer reaction to Apple’s owns iTunes Radio service had been lukewarm compared to rivals such as Spotify and Pandora Media at the time of the deal. In late July 2014, Bose filed suit against Beats and Apple claiming that Beats and Dr. Dre had infringed on several Bose’s noise cancelation patents. Apple’s Board was expected to approve the purchase of Beats at their September meeting.51 In June 2014, Cook and IBM’s CEO Ginni Rometty announced a partnership between their companies. The partnership would enhance IBM's business apps to its customers while providing Apple access to IBM's large corporate customers, a historically weak market segment for Apple. Apple and IBM would work together to create easy-to-use business apps and sell iPhones and iPads to IBM's corporate customers. IBM and Apple were archrivals under Steve Jobs when the two companies fought bitterly for over 30 years in the PC industry. In 1981, IBM offered a PC in direct competition to Apple's line of computers. In a major strategic error, IBM's gave Bill Gates and Microsoft rights to own and license the DOS operating system to IBM and PC manufacturers. IBM argued that the money was in the hardware, not the software. DOS was the forerunner of Windows and became the dominate industry standard operating on billions of computers capturing over 98 percent of the global market. Questions arose as to whether or not the two former enemies could work together given their past history and their divergent organization cultures and customer focus. The possibility of a larger Apple presence in the enterprise segment might lead to some tension between end-users and information technology professionals, who were traditionally Windows supporters.52 On July 22nd, Cook announced that Apple would offer iPhones with 4.7-inch and 5.5-inch screen sizes, significantly larger than the iPhone’s 4 inch screen. The larger screen iPhones were in response to Samsung and other manufacturers models with large screens utilizing the Android O.S. Large screen Android smartphones were sold at a premium price an area that was dominated by Apple. Over 98% of Android smartphones sold globally priced at the equivalent of $400 or above featured a display greater than 5 inches according to Counterpoint Research. Samsung was feeling the pinch in emerging markets where its low-to-mid-end smartphones faced intense price competition from rival Asian handset makers Lenovo Group Ltd. and XiaomiInc.53 Earlier in 2014, Apple announced that it had formed a partnership with China Mobile, Ltd. to sell Apple’s iPhones. China Mobile was that country’s largest telecommunications carrier. Apple expected demand for its iPhones to surge from the partnership with China Mobile. Bigger-screen smartphones were popular in China and other emerging markets where the smartphone was replacing the personal computer as a main computing device. To fulfill demand Apple told its two main iPhone contract assemblers Pegatron Corp. and Foxconn to ramp up capacity in its plants for up to 120 million iPhones by year-end. Apple was expecting a much higher than normal failure rate for its iPhone because of the newer larger screen’s more complicated technology.54

Conclusion: Will Apple Flourish or Flop? Was Cook doing enough to maintain Apple’s lead in breakthrough technology for its iPhone and other mobile devices and services? Cook noted:

We have to focus on products, making the best products… If we do that right and make great products that enrich peoples' lives, then the other things will happen.55

Was Cook just replicating Steve Jobs "build it and they will come" approach or was he truly overseeing a new and revolutionary Apple under his leadership? While Apple had more than one million customers visit its Apple Stores daily, and had nearly 600 million online App Store accounts was this enough to keep Apple’s momentum going in the right direction? Was there more to Apple's success formula than setting out to build great products and cathedrals to attract loyal customers?56 Although Apple’s revenues were growing it’s gross margin and profit growth declined (See: Exhibits 1and Exhibit 9). Apple’s stellar financials belied the fact that Apple was losing market share both at home and abroad for its smartphones to rival manufactures utilizing Google’s Android operating system. Apple’s iPhone was now competing against a host other companies, including Samsung, HTC, Microsoft, Amazon and several others. As one Apple observer commented, “the halo starts to wear off unless the seeming miracles that transform markets or industries keep happening.”57

Exhibit 1: Apple’s Selected Financial Information

Apple Selected Financial Information

(In millions, except number of shares which are reflected in thousands and per share amounts)

Sep-13
Sep-12
Sep-11
Sep-10
Sep-09
Net sales 170,910 156,508 108,249 65,225 42,905
Cost of sales 106,606 87,846 64,431 39,541 25,683
Gross Margin 64,304 68,662 43,818 25,684 17,222
Gross Margin Percentage
37.6%
43.9%
40.5%
39.4%
40.1%
Research and development 4,475 3,381 2,429 1,782 1,333
R&D as a % of net sales
3%
2%
2%
3%
3%
Selling, general, and administrative 10,830 10,040 7,599 5,517 4,149
SG&A as a %l net sales
6%
6%
7%
8%
10%
Total operating expenses 15,305 13,421 10,028 7,299 5,482
Owners' Equity as a % net sales
9%
9%
9%
11%
13%
Operating income (loss) 48,999 55,241 33,790 18,385 11,740
Other income and expenses 1,156 522 415 155 326
Income before provision for income taxes 50,155 55,763 34,205 18,540 12,066
Provision for income taxes 13,118 14,030 8,283 4,527 3,831
Net income (loss) 37,037 41,733 25,922 14,013 8,235
Return on sales
22%
27%
24%
21%
19%

Total Assets

Cash, cash equivalents and marketable securities 146,761 121,251 81,570 51,011 33,992
Net Property, Plant and Equipment 16,597 15,452 7,777 4,768 2,954
Total assets 207,000 176,064 116,371 75,183 47,501
Return on Assets
18%
24%
22%
19%
17%
Total liabilities 83,451 57,854 39,756 27,392 15,861
Total shareholders' equity 123,549 118,210 76,615 47,791 31,640
Return on Equity
30%
35%
34%
29%
26%
Earnings per share

Basic
$40.03
$44.64
$28.05
$15.41
$9.22
Diluted
$39.75
$44.15
$27.68
$15.15
$9.08
Share used in computing earnings per share

Basic 925,331 934,818 924,258 909,461 893,016
Diluted
931,662 945,355 936,645 924,712 907,005
Cash Dividends per common share
$11.40
$2.65
$0.00
$0.00
$0.00
Source: Apple, Inc., 10K Report September 28, 2013: Complied from data found in Apple’s 10K; See: http://investor.apple.com/financials.cfm

Exhibit 2: Apple’s Stock Performance Comparisons

Source: Case Author

Exhibit 3

Apple, Inc.'s Net Sales by Operating Segment, Net Sales by Product, and Unit Sales by Product, 2011-2013

The following table shows net sales by operating segment and net sales and unit sales by product during 2013,2012,2011

(dollars in millions and units in thousands)

2013
Change
2012
Change
2011

Net Sales by Operating Segment:

Americas
62,739
9%
57,512
50%
38,315

Europe
37,883
4%
36,323
31%
27,778

Greater China (a)
25,417
13%
22,533
78%
12,690

Japan
13,462
27%
10,571
94%
5,437

Rest of Asia Pacific
11,181
4%
10,741
8%
9,902

Retail
20,228
7%
18,828
33%
14,127

Total net sales
$170,910
9%
$156,508
45%
$108,249

Net Sales by Product:

iPhone(b)
91,279
16%
78,692
71%
45,998

iPad(b)
31,980
3%
30,945
61%
19,168

Mac(b)
21,483
-7%
23,221
7%
21,783

iPod(b)
4,411
-21%
5,615
-25%
7,453

iTunes, software and services(c)
16,051
25%
12,890
38%
9,373

Accessories(d)
5,706
11%
5,145
15%
4,474

Total net sales
170,910
9%
156,508
45%
108,249

Unit Sales by Product:

iPhone
150,257
20%
125,046
73%
72,293

iPad
71,033
22%
58,310
80%
32,394

Mac
16,341
-10%
18,158
9%
16,735

iPod
26,379
-25%
35,165
-17%
42,620

(a) Greater China includes China, Hong Kong and Taiwan.

(b) Includes deferrals and amortization of related non-software services and software upgrade rights.

(c) Includes revenue from sales on the iTunes Store, the App Store, the Mac App Store, and the iBooks Store and revenue from sales of AppleCare, licensing and other services.
(d) Includes sales of hardware peripherals and Apple-branded and third-party accessories for iPhone, iPad, Mac and iPod.

Source: Apple Inc., 2013 10-K reports. P27

See: http://investor.apple.com/financials.cfm;

Exhibit 4

Exhibit 5
Source: Sourabh, “3 Android Data Showing “Why Android is the New King of Technology?” SourceDigit, January 15, 2014

Exhibit 6

Source: Lee, Taylor, “Apple is the Leading Smartphone Vendor in U.S.” Ubergizmo, May 21, 2014

Exhibit 7

Source: Train, Phi, “Inequality Between iOS and Android Market Shares,” Infographic: Social Times, March 26, 2014

Exhibit 8
Exit 8

Source: Sourabh, “3 Android Data Showing “Why Android is the New King of Technology?” SourceDigit, January 15, 2014

Exhibit 9

Source: Apple, Inc., 10K Report September 28, 2013: Complied from data found in Apple’s 10K

APPENDIX A: BRIEF OVERVIEW OF APPLE PRODUCTS AND SERVICES

IPhone: Apple’s line of iPhone (smartphones) combined a phone, music player, and internet device in one product, and was based on Apple’s iOS Multi-TouchTM operating system. IPhone had an integrated photo and video camera and photo library app, and on qualifying devices, also included Siri®, a voice activated intelligent assistant. IPhone works with the iTunes Store, the App Store and iBooks Store for purchasing, organizing and playing music, movies, TV shows, podcasts, books, and apps.
IPad: iPad and iPad miniTM were the Company’s line of multi-purpose tablets based on Apple’s iOS Multi-Touch operating system
Mac: Mac was the Company’s line of desktop and portable personal computers. Macs feature Intel microprocessors, the OS X operating system and included Mail, Safari web browser, Messages, Calendars, Apple’s desktop computers included iMac®, Mac Pro® and Mac mini. The Company’s portable computers included MacBook Pro® and MacBook Air®.
IPod: The Company’s iPod line of portable digital music and media players included iPod touch, iPod nano®, iPod shuffle® and iPod classic®. All iPods work with iTunes to purchase and synchronize content.
ITunes and the iTunes Store: Apple’s iTunes app, available for both Mac and Windows personal computers, keeps users’ music, movies, and TV shows organized in one place. ITunes was integrated with the iTunes Store, the App Store and the iBooks Store. The iTunes Store allowed users to purchase and download music and TV shows and to rent or purchase movies. The App Store allowed customers to discover and download apps and purchase in-app content. The iBooks Store features e-books from major and independent publishers
Mac App Store: The Mac App Store allowed customers to discover, download and install Mac apps. The Mac App Store offers applications in education, games, graphics and design, lifestyle, productivity, utilities and other categories. The Company’s OS X operating system software and its iLife, iWork and other application software titles were also available on the Mac App Store. iCloud: iCloud was the Company’s cloud service, which stores music, photos, applications, contacts, calendars, documents and more, keeping them up-to-date and available to multiple iOS devices and Mac and Windows personal computers.
Operating System Software iOS: iOS was the Company’s Multi-Touch operating system that serves as the foundation for iOS devices. iOS 7 was the current version and was released in September 2013. Apps delivered with iOS for qualifying devices included Safari web browser, FaceTime video calling, Maps with turn-by-turn directions, Mail, Contacts, Calendar, Clock, Weather, Calculator, Notes, Reminders, Stocks, Compass, and Messages. Devices running iOS were compatible with both Mac and Windows personal computers and Apple’s iCloud services.
OS X: OS X, the Company’s Mac operating system, was built on an open-source UNIX-based foundation and provides an intuitive and integrated computer experience. OS X Mavericks, released in October 2013, was the tenth major release of OS X. Support for iCloud was built into OS X so users can access content and information from their other Macs, their iOS devices and other supported devices and access downloaded content and apps from the iTunes Store. In addition to Mail, Safari web browser, Messages, Calendars, Reminders, Contacts and theiLife® suite of software apps, Mavericks also included a new Maps app and a new iBooks app that both work with their iOS counterparts.
Application Software included: iLife, iWork and Other Application Software

Footnotes 1Yerram, Siddarth, “Google Inc. (GOOG)Is Capturing U.S. Smartphone Market Faster Than Apple,” Info: Report: September 11, 2013
2“The Latest Market Research Shows that Android Smartphones rule the World,” February 16, 2014
3Gallagher, Dan, “Apple’s Cook Can’t Afford to Miss a Beat,” Wall Street Journal May 29, 2014
4Isaacson, Walter Steve Jobs, Simon & Schuster: New York 2011, p.513
5Ibid., Issaacson, Steve Jobs, p:514
6Ibid., Issaacson, Steve Jobs, p:514
7Smith, Dave, “Apple Labor Issues Continue: iPhone Supplier Jabil Circuit Accused Of Major Violations,” International Business Times, September 5, 2013; Downloaded at: http://www.ibtimes.com/apple-labor-issues-continue-iphone-supplier-jabil-circuit- accused-major-violations-1402951; Accessed: July 23, 2014
8Smith, Dave, “Foxconn Riot: Largest Apple Supplier Suffers Another Violent Outbreak,” September 24, 2013 International Business Times, Downloaded at: http://www.ibtimes.com/foxconn-riot-largest-apple-supplier-suffers-another-violent- outbreak-1410316; Accessed August 7, 2014
9Elliott, Stuart “Apple Passes Coca-Cola as Most Valuable Brand,” New York Times September 29, 2013
10Elmer-DeWitt, Philip, “Google's jumps to No. 3, after Apple and Exxon, in market cap,” Fortune, October 19, 2013: Downloaded at: http://fortune.com/2013/10/19/googles-jumps-to-no-3-after-apple-and-exxon- in-market-cap/; Accessed August 7, 2014
11 Apple, Inc., 10K Report September 28, 2013: Downloaded at: http://investor.apple.com/financials.cfm; Accessed: July 30, 2014
12Elmer-DeWitt, Philip, “Apple cracks the Fortune 10,” Fortune: May 6, 201; Downloaded at: http://fortune.com/2013/05/06/apple-cracks-the-fortune-10/; Accessed August 7, 2014.
13Isaacson, Walter Steve Jobs, Simon & Schuster: New York 2011, p.102
14Ibid., Issaacson, Steve Jobs, p. 103
15Isaacson, Walter Steve Jobs, Simon & Schuster: New York 2011, p.217
16Ibid., Issaacson, Steve Jobs, p. 217
17Ibid., Issaacson, Steve Jobs, pp. 221-222
18Ibid., Issaacson, Steve Jobs, p. 295
19Millian, Mark, “14 years later, Dell founder backtracks on Apple attack” CNN Tech: October 18, 2011, Downloaded at: http://www.cnn.com/2011/10/18/tech/web/michael- dell-apple/; Accessed July 24, 2014
20Wikipedia, Steve Jobs Downloaded at: http://en.wikipedia.org/wiki/Steve_Jobs Accessed: June 20, 2014
21Wikipedia, Steve Jobs D
22Ibid., Issaacson, Steve Jobs, p.
23Nair, Smita, “Apple’s premium pricing strategy and product differentiation Yahoo Finance, Market Realist , January 28, 2014; Downloaded at: http://finance.yahoo.com/news/apple-premium-pricing-strategy-product- 191247308.html; Accessed August 7, 2014
24Apple, Inc., 10K Report September 28, 2013: Downloaded at: http://investor.apple.com/financials.cfm; Accessed: July 30, 2014
25Zino Angelo, CFA Report: “Current Environment:
Mobility to drive hardware, as personal computer spending contracts.” Standard & Poor Advantage: Industry Surveys; Computer Equipment: April, 2014: Downloaded at:http://www.netadvantage.standardandpoors.com.libproxy.unh.edu/NASApp/NetAdvantage/showIndustrySurvey.do?code=coh; Accessed July 24, 2014
26Ibid., Zino Angelo, Standard & Poor Advantage: Industry Surveys; Computer Equipment
27Ibid., Zino Angelo, Standard & Poor Advantage: Industry Surveys; Computer Equipment
28Ibid., Zino Angelo, Standard & Poor Advantage: Industry Surveys; Computer Equipment
29Ibid., Zino Angelo, Standard & Poor Advantage: Industry Surveys; Computer Equipment
30Ibid., Zino Angelo, Standard & Poor Advantage: Industry Surveys; Computer Equipment
31Train, Phi, “Inequality Between iOS and Android Market Shares,” Infographic: Social Times, March 26, 2014
34Train, Phi, “Inequality Between iOS and Android Market Shares,” Infographic: Social Times, March 26, 2014
32Yerram, Siddarth, “Google Inc. (GOOG) Is Capturing U.S. Smartphone Market Faster Than Apple,” Info: Report: September 11, 2013
33Lee, Tyler, “Apple is the Leading Smartphone Vendor in U.S.” Ubergizmo: May 21, 2014
34Train, Phi, “Inequality Between iOS and Android Market Shares,” Infographic: Social Times, March 26, 2014
35Yerram, Siddarth, “Google Inc. (GOOG) Is Capturing U.S. Smartphone Market Faster Than Apple,” Info: Report: September 11, 2013
36Luk, Lorraine, “Apple Readies a Big Bet on Big Screen Phones,” Wall Street Journal July 22, 2014: Downloaded at: http://online.wsj.com/articles/apple-suppliers- gear-up-for-large-screen-iphones- 1405985788?KEYWORDS=Apple+Luk; Accessed July 22, 2014
37“The Latest Market Research Shows that Android Smartphones rule the World,” February 16, 2014
38“The Latest Market Research Shows that Android Smartphones rule the World,” February 16, 2014
39Vogelstein, Fred “The Android Explosion,” Wired, p.
40Ibid, Vogelstein, Fred “The Android Explosion,” p.
41Gallagher, Dan, “Apple Takes Its Business Seriously,” Wall Street Journal, July 16, 2014, p.C10
42Bensinger, Gregg, “Amazon Fires Up a Smartphone for Shopping,” Wall Street Journal, June 19, 2014, p.B5
43Gottfried, Miriam and Gallagher, Dan, “Amazon’s Smartphone: Where There’s Fire There’s Smoke,” Wall Street Journal June 19, 2014, p. C10
44Apple, Inc. http://investor.apple.com; Accessed: June 19, 2014
45Fisher, Dan, “Apple and the Fear of Flopping,” News.cnet.com: July 18, 2013
46 Ibid., Fisher,“Apple and the Fear of Flopping”
47Wakabayashi, Daisuke, “Tim Cook's Vision for 'His' Apple Begins to Emerge” Wall Street Journal: July 7, 2014 Downloaded at: http://online.wsj.com/articles/tim-cooks-apple-takes-shape- 1404757939?KEYWORDS=Apple%27s+Cook Accessed July 7, 2014
48Ibid.,Wakabayashi, “Tim Cook's Vision for 'His' Apple Begins to Emerge”
49Ibid.,Wakabayashi, “Tim Cook's Vision for 'His' Apple Begins to Emerge”
50Ibid.,Wakabayashi, “Tim Cook's Vision for 'His' Apple Begins to Emerge”
51Gallagher, Dan, “Apple’s Cook Can’t Afford to Miss a Beat,” Wall Street Journal May 29, 2014
52Wakabayashi, Daisuke, “Apple, IBM in Deal to Create Apps, Sell Phones Tech Firms Plan to Create Business Apps and Sell iPhones, iPads to IBM's Corporate Customers,” Wall Street Journal, July 15, 2014
53Luk, Lorraine, “Apple Readies a Big Bet on Big Screen Phones,” Wall Street Journal July 22, 2014: C10; Downloaded at: http://online.wsj.com/articles/apple-suppliers- gear-up-for-large-screen-iphones- 1405985788?KEYWORDS=Apple+Luk; Accessed July 22, 2014
54Ibid., Luk, “Apple Readies a Big Bet on Big Screen Phones,” Wall Street Journal July 22, 2014
55Wakabayashi, Daisuke, “Tim Cook's Vision for 'His' Apple Begins to Emerge” Wall Street Journal: July 7, 2014
56Fisher, Dan, “Apple and the Fear of Flopping,” News.cnet.com: July 18, 2013
57Ibid., Fisher, “Apple and the Fear of Flopping,”