In January 2007, three decades after its incorporation, Apple Computer Inc. shed the second word in its name and became Apple Inc. With this move, the company signaled a fundamental shift away from its historic status as a vendor of the Macintosh personal computer (PC) line. Mac sales remained vital to Apple’s future, but they now accounted for less than half of its total revenue. Apple was no longer just a computer company. Its move into digital music, with the iPod and with iTunes, and into the next generation mobile devices, with the iPhone, had given the company a chance to transcend the constraints of the PC business.
The Evolving PC Industry
From its earliest days in the mid-1970s, the industry has experienced explosive growth. Although Apple pioneered the first usable personal computing devices based on its proprietary design, IBM was the company that brought PCs into the mainstream due to the relatively “open” system and the thenprevailing IBM-compatible standard. IBM’s dominance of the PC industry started to erode in the late 1980s, as buyers increasingly viewed PCs as commodities. By the early 1990s, “Wintel” (Windows operating systems combined with an Intel processor) had replaced “IBM-compatible” as the industry standard. Throughout the 1990s, thousands of manufacturers – ranging from Compaq to Dell to noname clone makers – built PCs around building blocks from Microsoft and Intel.
By 2008, PCs were far easier to use than they had been two decades earlier. They had also begun to enter the price range of consumer electronics (CE) products. As a result, the “digital convergence” of PC and CE products had become a significant factor in the PC marketplace. Various alternative devices – ranging from handheld PDAs to smartphones, from TV set-top boxes to game consoles – had begun to supplement or even to replace PCs. Advanced game devices like Sony PlayStation 3, for example, allowed consumers to not only run traditional video games, but also to play DVDs and CDs, surf the web, and play games directly online.
Apple was one of the most profitable companies in the PC industry in the late 1980s and early 1990s. Apple’s early success can be attributed to its core strengths in design, software development, and software-hardware integration. Apple typically designed its products from scratch, using unique chips, disk drives, and monitors. The company also developed its own proprietary operating systems (OS), its own application software, and many peripherals, including printers. Since Apple controlled all aspects of its computer, it could offer customers a complete desktop solution, including hardware, software, and peripherals that allowed customers to “plug and play”. Apple’s consumers love their Macs. Technological superiority and customer loyalty allow the company to enjoy premium pricing and pursue a “BMW strategy” in the PC industry. Apple was particularly strong in desktop publishing and education sectors.
Over time, Apple’s core business becomes vulnerable to challenges related to industry dynamics – an increase in buyer power within a commoditized market, a collapse in barriers to entry, and the transfer of bargaining power from PC manufacturers to suppliers (Microsoft and Intel). While Macs are not the same as Wintel PCs, they are close substitutes. Within a commoditized market, declining prices throughout the PC businesses put pressure on Apple’s prices and margins. Since 2001, Apple has successfully expanded into non-PC businesses: the iPod, the iTunes online content store, digital video devices such as Apple TV, and the iPhone. These newer businesses represent a fundamental shift in Apple’s positioning and strategy.
Apple launched the iPod, a portable digital music player, in 2001. Thanks to its sleek design, it soon became “an icon of the digital age”. Today, Apple’s iPod line claimed a remarkable 70% share in the MP3-player business, while iTunes had a 70% share of the legal music download market. Apple and its distribution partner, the mobile operator AT&T Mobility, began selling the iPhone in late June 2007. The iPhone was Apple’s bid to unite the iPod with a mobile phone service. The iPhone was a multifunction communication device that shared many qualities with smartphones. It featured email capability, web access, and text messaging, a calendar, an address book, other PDA functions, and a 2- megapixel camera. The entire system ran on a specially adapted version of Apple’s OS X platform. During the first year of availability, consumers paid $399 for an 8GB model and $499 for a 16GB model. The Time magazine named the iPhone “the device of the year” in 2007.
In July 2008, just a year after launching the iPhone, Apple reinvented it. The new offering, called the iPhone 3G, came out not only with faster network service, but also with an entirely new pricing model and with a new platform for adding third-party applications to the device. In the original business model, AT&T did not subsidize iPhone, but the carrier gave Apple 10%-20% of subscription revenues, and there was no distribution through third parties. In the new business model, AT&T heavily subsidizes iPhone so the product is cheaper than the first iPhone. Consumers could buy an 8GB iPhone 3G for $199 or a 16GB model for $299. However, the service plans now start at &69.99 per month, which is $10 higher than before. Apple gave up its claim to a share of iPhone subscription revenue, and in exchange it received from AT&T a fixed premium for each iPhone sold. The restructured agreement between Apple and AT&T was closer to the U.S. mobile industry norm for such deals. Another notable step away from the initial iPhone business model is its broader distribution through third party. Apple opened up a new retail channel for the device: Best Buy announced in August 2008 that Apple had agreed to let it begin selling iPhones in its nearly 1000 stores.
Today, Apple’s three main businesses are Macintosh, iPod-iTunes, and iPhone. In 2008, the sale of Mac computers remains a pivotal business for Apple, notwithstanding the company’s name change. The tremendous success in the consumer electronics markets drove much of Apple’s financial performance. Despite a sharp drop in early 2008, its share price had risen more than 15-fold since 2003 and now hovered near its all-time high.
However, maybe it is still too early to draw a conclusion. Alongside the continuing PC commoditization trend, would-be “iPhone killer” products are rapidly appearing on the market. As Nokia strike back in mobile phones, the music labels weaken Apple in the MP3 market, and Microsoft or Google chip away the advantages now enjoyed by the highly priced Macintoshes, the competition is everywhere. In the fast-evolving industry, was Apple’s recent success just another temporary “up” in its up-and-down history, or had the company finally established a sustainable strategy?