CASE 16

APPLE INC.: STILL TAKING A BITE OUT OF THE COMPETITION?*

On February 11, 2015, Apple Inc. made history by becoming the first U.S. publicly
traded company to close above $700 billion in market value. This put Apple's value
nearly double that of the next three largest companies in the S&P 500 Index, 1 and it
firmly established expectations for future performance. Apple's market value had
grown more than 50,600 percent since its initial public offering in December
1980.2 To satisfy investors, consumers, and company enthusiasts, Apple would have
to continue to deliver, and doing so might not be easy. As Apple had grown, the pace
of innovation had slowed. There were still opportunities, but would Apple be the
company to see them through to fruition?

The year 2015 was not the first time Apple had wowed investors. In September 2012
Apple stock had hit a price high of $702.10, at that time making Apple the most
valuable company in the world, but the company had not been able to sustain that
lofty valuation. September 2012 had also marked Tim Cook's first full year as CEO
and the first full year since the death of Apple's visionary founder, Steve Jobs.
Although most Apple watchers had mourned Steve Jobs's death on October 5, 2011,
most also realized that Jobs's appointed successor, Tim Cook, came to the position
as CEO with an impressive track record. Cook had continued to grow the company,
and the 2012 year-end numbers showed continued financial success across almost
all product lines. However, expectations were still very high, and rumors of a
reduction in Asian supplier component orders for the iPhone for 2013 led investors to
worry about a drop-off in demand for the company's flagship product. This worry led
to a subsequent drop in Apple's stock price of nearly 24 percent. 3

CEO Cook subsequently defused concerns over supply chain issues, but that didn't
stop analysts and media watchers from wondering whether Apple had lost its
luster.4 This posed yet again the unavoidable question that had loomed large over
the then 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 no longer present?5 By 2015, that question appeared to have been
definitively answered: Apple, under CEO Cook, was not only the most valuable
company in the world but was poised to grow even more (see Exhibits 1 and 2).

 Go to library tab in Connect to access Case Financials.

EXHIBIT 1 Apple Sales
 
2014 ($ % 2013 ($ % 2012 ($
millions) Change millions) Change millions)

Product Net Sales

iPhone $ 101,991  12 $ 91,279  16 $  78,692 

iPad 30,283  (5) 31,980  3 30,945 

Mac 24,079  12 21,483  (7) 23,221 

iPod 2,286  (48) 4,411  (21) 5,615 

iTunes, Software & Services* 18,063  13 16,051  25 12,890 

Accessories† 6,093  7 5,706  11 5,145 

Total net sales $182,795  7  $170,910  9  $156,508 

Cost of sales 112,258  106,606  87,846 

 Gross margin $ 70,537  $ 64,304  $ 68,662 

Gross margin % 38.6% 37.6% 43.9%

Research and development $ 6,041  $   4,475  $   3,381 

 Percent of net sales 3% 3% 2%

Selling, general, and $ 11,993  $  10,830  $  10,040 

administrative

 Percent of net sales 7% 6% 6%

Total operating expenses $ 18,034  $  15,305  $  13,421 

 Percent of net sales 10% 9% 9%

Region Net Sales

Americas $ 65,232  4 $  62,739  9 $  57,512 

Europe 40,929  8 37,883  4 36,323 

Greater China 29,846  17 25,417  13 22,533 

Japan 14,982  11 13,462  27 10,571 

Rest of Asia-Pacific 10,344  (7) 11,181  4 10,741 

Retail 21,462  6 20,228  7 18,828 

Source: Apple 10-K SEC filing, 2014.

Go to library tab in Connect to access Case Financials.

EXHIBIT 2 Apple First Quarter 2015 Sales
1st Quarter 2015 ($ 1st Quarter 2014 ($ Percentage
millions) millions) Change
 

Product Net Sales

iPhone* $51,182 $ 32,498 57

iPad* 8,985 11,468 (22)

Mac* 6,944 6,395 9

Services† 4,799 4,397 9

Other products‡ 2,689 2,836 (5)

 Total net sales $74,599 $57,594 30

Region Net Sales

Americas $ 30,566 $ 24,789 23

Europe 17,214 14,335 20

Greater China 16,144 9,496 70

Japan 5,448 5,045 8

Rest of Asia-Pacific 5,227 3,929 33

Source: Apple 10-K SEC filing, 2015.

Apple, Fortune magazine's “world's most admired company” since 2008,6 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 over 30 percent). Founded as a computer company in 1976 and known
early on for its intuitive adaptation of the graphical user interface, or GUI (via the
first mouse and the first on-screen “windows”),7 Apple dropped the
word computer from its corporate name in 2007. Apple Inc. in 2015 wasknown 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
and “app” services (iTunes and App Store), 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), tablet computers
(iPad), and online services(iCloud), and the company was poised to enter and
dominate the market of wearable technology (Apple Watch) and mobile payment
systems (Apple Pay) (see Exhibit 3).
EXHIBIT 3 Apple Innovation Timeline
Date Product Events

1976 Apple I Steve Jobs, Steve Wozniak, and Ronald Wayne found Apple Computer.

1977 Apple II Apple logo first used.

1979 Apple II1 Apple employs 250 people; the first personal computer spreadsheet
software, VisiCalc, is written by Dan Bricklin on an Apple II.

1980 Apple III Apple goes public with 4.6 million shares; IBM personal computer
announced.

1983 Lisa John Sculley becomes CEO.

1984 Mac 128K, Apple IIc Super Bowl ad introduces the Mac desktop computer.

1985 Jobs resigns and forms NeXT Software; Windows 1.01 released.

1986 Mac Plus

 
Jobs establishes Pixar.

1987 Mac II, Mac SE Apple sues Microsoft over GUI.

1989 Mac Portable Apple sued by Xerox over GUI.

1990 Mac LC Apple listed on Tokyo Stock Exchange.

1991 PowerBook 100, System 7 operating-system upgrade released, the first Mac OS to support
System 7 PowerPC-based computers.

1993 Newton Message Pad Sculley resigns; Spindler becomes CEO; PowerBook sales reach 1
(one of the first million units.
PDAs)

1996 Spindler is out; Amelio becomes CEO; Apple acquires NeXT Software,
with Jobs as adviser.

1997 Amelio is out; Jobs returns as interim CEO; online retail Apple Store
opened.

1998 iMac iMac colorful design introduced, including USB interface; Newton
scrapped.

1999 iMovie, Final Cut iBook (part of PowerBook line) becomes best-selling retail notebook in
Pro (video editing October; Apple has 11% share of notebook market.
software)

2000 G4Cube Jobs becomes permanent CEO.

2001 iPod, OS X First retail store opens, in Virginia.

2002 iMac G4 Apple releases iLife software suite.

2003 iTunes Apple reaches 25 million iTunes downloads.

  iMac G5 Jobs undergoes successful surgery for pancreatic cancer.
2004

2005 iPod Nano, iPod First video iPod released; video downloads available from iTunes.
Shuffle, Mac Mini

2006 MacBook Pro Apple computers use Intel's Core Duo CPU and can run Windows
software; iWork software competes with Microsoft Office.

2007 iPhone, Apple TV, Apple Computer changes name to Apple Inc.; Microsoft Vista released.
iPod Touch

2008 iPhone 3G, MacBook App Store launched for third-party applications for iPhone and iPod
Air, App Store Touch and brings in $1million in one day.

2009 17-inch MacBook iTunes Plus provides DRM-free music, with variable pricing; Jobs takes
Pro, iLife, iWork '09 medical leave.

2010 iPad, iPhone 4, Mac iPhone 4 provides FaceTime feature; iTunes reaches 10 billion songs
App Store sold.

2011 iPad2, iPhone 4S, iPhone available on Verizon Wireless; Jobs resigns as CEO, dies on
iCloud October 5th. Tim Cook becomes CEO.

2012 iBook Author, iBook supports textbook creation on iPad. Apple becomes world's most
iPhone5, iPad Mini valuable company (market cap). Mac Retina displays and skinny Macs
introduced.

2013 Mega Mac, iPad Air Workstation in a small aluminum cylinder.

2014 iPhone 6 Plus, Apple Biggest iPhone yet; Apple Watch—computer on your wrist— introduced
Watch, Apple Pay in 2014, actual delivery in 2015; Apple Pay mobile payment service;
acquisition of Beats Electronic for streaming digital content.
Source: http://en.wikipedia.org/wiki/Timeline_of_Apple_Inc._products .

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 systems, hardware, application software, and
services to provide its customers new products and solutions with superior ease-of-
use, seamless integration and innovative industrial design.”8 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 CEO Tim Cook be able to
sustain the level of innovation the company had been known for? In the coming
years, would Apple still be able to take a bite out of all competition?

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 the company went
public in December of that year.
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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 through the now-
famous Super Bowl television ad based on George Orwell's novel Nineteen Eighty-
Four,9 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 its performance was slow and available compatible software was
limited. That meant the product as designed at the time 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.
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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 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 became 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), 10 this was not a sustainable
scenario.
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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 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.”11 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.

Also introduced in 2007, the iPod Touch incorporated Wi-Fi connectivity,allowing

users to purchase and download music directly from iTunes without a computer.
Then, in 2008, Apple 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
becoming a competitor in the gaming market.

In 2010 Apple launched the large-screen touch-based tablet called the iPad and sold
over 2 million of these devices in the first two months. 12That same year, Apple's
stock value increased to the extent that the company's market cap exceeded
Microsoft's, making it the biggest tech company in the world. 13 In 2011 Steve Jobs
made his last product launch appearance to introduce iCloud, an online storage and
syncing service. On October 4, 2011, Apple announced the iPhone 4S, which included
“Siri,” the “intelligent software assistant.” The next day, on October 5, came the
announcement that Steve Jobs had died.

Apple continued to innovate, however, and on September 21, 2012, Apple had its
biggest iPhone launch ever, with the iPhone 5. Over 2 million preorders for this larger
and more powerful phone pushed the delivery date back to late October. 14 Later in
the fall, Apple released the iPad Mini with a smaller screen. On September 19, 2012,
Apple stock reached $702.10, its highest level to date, which made Apple the most
valuable company in the world. The year 2013 saw the iPhone5C and the high-range
iPhone5S, which introduced the Touch ID fingerprint recognition system. The iPhone
6 and 6 Plus, with larger displays, faster processors, and support for mobile
payments, were released in September 2014 and allowed Apple to extend its already-
strong market position with a record-setting sales performance over the 2014
holiday season.15 The prototype of the Apple Watch was unveiled in 2014, with
production scheduled to begin in 2015. Also introduced in 2014 was Apple Pay, a
mobile payment system meant to augment all Apple mobile products. February 2015
saw Apple reach the highest market cap of any U.S.-traded company, indicating
investor support and confidence in the company's innovative output.

Apple had become a diversified digital entertainment corporation. All the way back
in 2005, analysts had 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.”16 On top of steady sales increases on its computers, the
iPod, and iTunes, the added categories of iPhone and iPad had shown substantial
growth. Apple had taken bites out of the competition on all fronts (see Exhibit 4).
However, by 2013, Samsung had outperformed Apple in worldwide smartphone
sales,17 and Google's Android had captured the largest market share of cell phone
operating systems. At the same time, both the Amazon Kindle Fire HD tablet and
Microsoft's Surface tablet were nipping at the iPad's heels. The year 2015 was
marked by competition in the wearable-tech space, and some were wondering if
Apple had gotten too big to be nimble. Could Apple continue to grow and, if so, in
what categories?
EXHIBIT 4 Apple's Product Lines and Major Competitors
 
 

Product Category Apple Products Major Competitors

Computers iMac, Mac Pro, Mac Mini, HP, Dell, Toshiba, Lenovo in the laptop; Acer and
MacBook, MacBook Pro, ASUS in the netbook form factor
MacBook Air

Portable iPod Shuffle, iPod Nano, iPod Samsung, SanDisk, Archos, Microsoft Zune
music/media Classic, iPod Touch
players

Smartphones iPhone Nokia, RIM, Samsung, ZTE, LG, Google/Motorola,

HTC

Music/media iTunes, the App Store Amazon, Google Android apps

downloads

Handheld gaming iPod Touch, iPhone Nintendo, Sony

devices

Software* Safari web browser, QuickTime, Microsoft IE, Mozilla Firefox, Google Chrome,
iCloud Windows Media Player, RealNetworks, Dropbox,
Google Drive

Home theater Apple TV Roku, possibly Tivo

downloads

Tablet computers iPad Samsung Galaxy Tab, Amazon Kindle Fire, Google
 Nexus, Windows Surface

Wearable Apple Watch Samsung Gear, Pebble, Sony SmartWatch, Motorola

technology Moto 360
Page C-122

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 customers better than could third-party retailers. By the end of 2014, Apple
had 437 stores open, including 178 international locations, with average store
revenue of about $50.6 million, and had received trademark protection for its retail
stores' “distinctive design and layout.”18

In further operational matters, regarding a head-to-head competition against Dell in

the computer market, for instance, while Dell's perceived early dominance might
have been partly the result of its efficient supply chain management, Apple had
outperformed Dell in inventory and other metrics since 2001.19 To solidify its own
supply chain, Apple entered into multiyear agreements with suppliers of key
components. In addition, Apple had historically had the best margins, partly because
of its simpler product line, leading to lower manufacturing costs. 20 Also, Apple had
been outsourcing manufacturing and final assembly to its Asian partners, paying
close attention to scheduling and quality issues.

Outsourcing to Asian manufacturers was not without its problems, however. In

2012, headlines worldwide accompanied the exposure of China's
Foxconn manufacturing facility for labor abuses that led to worker suicide threats.
Apple, as well as most other technology companies, used Foxconn facilities to
assemble products, including the iPad and iPhone. After the story broke, Apple CEO
Tim Cook visited the Foxconn plant and reviewed an audit of working conditions that
found violations in wages, overtime, and environmental standards. Apple stated that
it remained “committed to the highest standards of social responsibility across our
worldwide supply chain,”21 and Cook announced that Apple might be bringing some
of the production of Mac computers back to the U.S., starting in 2013. Apple could do
this without affecting its profitability, because of automation cost savings. As one
supply chain expert said, “Apple's product line is highly standardized, with a very
small number of products and very few configurations, and that makes it much
easier to do automation.”22

Supply chain, 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 the first quarter of 2015, Apple spent $1.9 billion on R&D, an increase of 42
percent from the previous year. Among its current rivals, Apple's R&D investment
had previously been beaten only by Microsoft (number one), Google, Hewlett-
Packard, and Amazon.23
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As one of Steve Jobs's legacies, Apple had traditionally kept the specifics of its
research and development a closely guarded secret and fiercely protected its
innovative patents. A well-publicized series of lawsuits in 2012 highlighted rifts
between Apple and Samsung, both a rival and a supplier. Samsung smartphones had
captured more market share than Apple's iPhones in the beginning of 2012, and
Apple argued that Samsung had succeeded with both its phones and tablets only by
copying Apple's designs. Samsung replied by claiming that Apple had infringed on
Samsung's patents.24 U.S. intellectual property courts found in favor of Apple, but
Japanese courts found in favor of Samsung. The ongoing battle meant Apple needed
to look for other suppliers of chips and displays. In November 2014, supply chain
watchers pointed out that Apple still had a major challenge ahead finding reliable
suppliers for increasingly scarce components and that the continued reliance on
Foxconn as the sole manufacturer of the iPhone 6 Plus meant that any disruption
there could have major consequences for delivery. 25

Status of Apple's Business Units in 2015

The Apple Computer Business

In the computer market, Apple had always refused to compete on price, relying
instead on its products' reliability, design elegance, ease of use, and integrated
features to win customers. From the beginning, some analysts had believed Apple
had the opportunity to steal PC market share as long as its system was compatible,
no longer proprietary, and offered upgrades at a reasonable cost. 26 This opportunity
for increased market share was realized when Apple began using Intel processors in
the iMac desktop and the MacBook portables, which allowed them to run Microsoft
Office and other business software.

Apple's worldwide Mac computer sales during the first quarter of 2015 increased 9
percent over the same quarter in the previous year. Although there had been fears
that sales of desktop computers, especially, would slow worldwide as the tablet and
smartphone markets grew, the introduction of the MacBook Air allowed Apple to
compete favorably even in the face of overall contraction. Apple computers had been
able to gain market share for 33 of the 34 quarters since 2007. Sales of Apple
computers worldwide during the third quarter of 2014 did see an increase over the
previous year, consistently outgrowing the market and allowing Apple to take over
the number-five slot from ASUS (Exhibit 5). According to market analysis done by
IDC, the Mac's domestic market share grew from 12.4 to 13 percent, putting the Mac
in third place overall in IDC's survey of PC vendor units shipped in the third quarter of
2014.27 This was up substantially from 2010, when Apple had only 7.4 percent of the
U.S. market.28
EXHIBIT 5 Worldwide PC Market Share, Third Quarter 2014 (units in
thousands)
3Q14 3Q14 Market Share 3Q13 3Q13 Market Share 3Q14–3Q13 Growth
Company Shipments (%) Shipments (%) (%)

Lenovo 15,707 20.0 14,130 17.7 11.2

HP 14,729 18.8 14,016 17.5 5.1

Dell 10,442 13.3 9,517 11.9 9.7

Acer 6,632 8.4 5,952 7.4 11.4

Group

Apple 4,982 6.3 4,577 5.7 8.9

Others 26,026 33.1 31,714 39.7 −17.9

Total 78,519 100.0 79,905 100.0 − 1.7

Source: IDC, Worldwide Quarterly PC Tracker, October 8, 2014, www.idc.com/getdoc.jsp?
containerId=prUS25187214.

Personal Digital Entertainment Devices: iPod

Although many analysts at the time felt that 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.29 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 fifth-generation iPod Touch in September
2012, with upgraded features like support for recording 1080p video and panoramic
still photos and support for Apple's “Siri.” A new version, the sixth generation of this
product, debuted in 2015.

Apple reported selling 6 million of the iPod MP3 players over the 2013 holiday
season, down from over 12 million iPod units during the previous season, and in the
2014 year-end report iPod sales were not singled out as a separate category. As with
desktop computer sales, the MP3 player market was contracting overall as
smartphone and tablet devices took over many music-related tasks. Even with the
decline in iPod sales, Apple was still leading well over its rivals. Traditionally, the
iPod had had a 70 percent share of the MP3 player market in the United States, and
it was the top-selling player in the world.30 Microsoft's entry into this space, the
Zune, was discontinued in October 2011. Its market share never exceeded 1
percent.31
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Mobile Communication Devices: iPhone

In 2007 further competition for the iPod had come from the blurring of lines between
digital music players and other consumer electronic devices. While others may have
seen the computer as central to the future of digital music, telecom companies
worked to make the mobile phone a center of the digital world. Apple's entry, the
iPhone, 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. More recent smartphone models increased the quality of the
photo and video components to make even the digital camera or camcorder appear
obsolete. The smartphone market in 2007 had been estimated at 10 percent of all
mobile phone sales, or 100 million devices a year. Steve Jobs had said he “would like
to see the iPhone represent 1 percent of all mobile phone sales by the end of
2008.”32 This proved to be a conservative estimate, and by 2015 Apple had achieved
almost 20 percent, in a close tie with Samsung (see Exhibit 6).
EXHIBIT 6 Worldwide Market Share—Cell Phones, Fourth Quarter 2014

Manufacturer Market Share, 4Q 2014 Market Share, 4Q 2013

Samsung 20.0% 28.8%

Apple 19.9 17.4

Lenovo + Motorola  6.6  4.8

Huawei  6.3  5.7

Xiaomi  4.4  2.0

Others 42.9 41.3

Source: IDC, Worldwide Quarterly Mobile Phone Tracker, January 29,
2015,www.idc.com/getdoc.jsp?containerId=prUS25407215.

By 2015, smartphones had become the device of choice for most manufacturers.
Smartphones were also often the electronic data consumers' device of choice, with
multiple features, including cameras and the ability to surf the Internet while being
held in the hand, rather than taking up the space of a tablet or ultra-thin computer.
However, the smartphone market was increasingly turning into a battle between
mobile operating systems (OSs).

Apple's iPhone, running on iOS, had had considerable competition from Samsung's
Galaxy smartphones. This was partly due to Samsung's use of Google's Android
operating system. Historical worldwide leader Nokia had stumbled badly with its
outdated Symbian operating system and was trying to regain a foothold by partnering
with Microsoft, using the Windows Phone operating system. Although Research In
Motion (RIM) still had some long-term BlackBerry fans, RIM had had problems
updating its BlackBerry line of phones. The market share by operating-system map
was now worth watching, with Android devices expected to continue to capture the
majority of market share through 2016 (see Exhibit 7).33
EXHIBIT 7 Smartphone Operating-System Market Share, Third Quarter 2014

Smartphone OS Market Share, Q3 2014 Market Share, Q3 2013

Google Android 84.4% 81.2%

Apple iOS 11.7 12.8

Microsoft Windows Phone  2.9

 
 3.6

RIM BlackBerry OS  0.5  1.7

Others  0.6  0.6

Source: IDC, Smartphone OS Market Share, Q3 2014,www.idc.com/prodserv/smartphone-os-market-
share.jsp.

In recent years it appeared that some of the “cool” factor had disappeared from the
iPhone. In Asian markets, especially, Apple's shares of mobile devices had fallen
sharply, losing considerable ground to Samsung and HTC smartphones. Younger
users, the 20-something college students and recent graduates, were looking for the
next new thing, and that was increasingly an Android-driven device. A social media
expert in Singapore noted, “Apple is still viewed as a prestigious brand, but there are
just so many other cool smartphones out there now that the competition is just much
stiffer.” This was a problem, because, starting in 2012, this Asian market was also
where consumers were adopting very quickly.34 In addition, CEO Tim Cook's visit to
China in the fall of 2012, presumably to woo China Mobile's chief executive into
subsidizing the iPhone, hadn't had the expected result. China Mobile's wireless
network, the world's largest, wouldn't be adding the iPhone without better terms
from Apple. Instead, it offered its subscribers the Nokia Lumia Windows 8
phone.35 Given all these challenges, could Apple continue to ride the success of the
iPhone to greater profits? Many were skeptical.
Page C-125

However, during 2014, Apple's new iPhone with its larger screen size, in the 6 and 6
Plus models, was able to capture the consumer's attention, allowing Apple to close
the gap with Samsung. This was especially notable in China, where Apple's refusal to
drop the price allowed it to achieve almost a luxury status with the growing middle
class in that country. Sales in China had grown substantially—achieving $38 billion in
2014, up from only $1 billion in 2009.36 Elsewhere in 2014, iPhone sales had grown
by 44 percent in the United States and were up more than 96 percent in Brazil,
Russia, India and China, but by 2015 the overall smartphone market was slowing
down as mature markets were increasingly dependent on replacement purchases
and emerging markets appeared more interested in low-cost devices.37

However, in 2015, Apple was poised to capture market share in two distinct areas:
among those consumers who had previously been “inhibited” by the smaller screen
size of older phones and therefore were unwilling to go completely mobile until the
iPhone 6/6 Plus appeared; and within the enterprise market, as corporate users
began to appreciate Apple's interactivity and the robustness of the iOS. Also,
although a “staggering” 1.06 billion Android-based smartphones were shipped in
2014, while the iOS market share declined slightly (until the fourth quarter, when the
iPhone 6 began shipping), according to data from industry watchers the difference in
operating profit per phone was equally staggering: Android OS profit per phone was
$2.26, while iOS phones yielded $97.50. In the Android/iOS war, “strangling” profits in
the quest for increased market share might not have been the best long-term
strategy. Apple had the resources to grow and win. 38

Tablet Computer: iPad

In April 2010 Apple released the iPad, a tablet computer, as a platform for
audiovisual 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. Weighing only 1.5 pounds, this lightweight,
portable touch-screen device was seen as a gigantic iPod Touch.39

Considering that previous tablet computers had failed to catch on in the mass
market, Apple made a bold move by introducing the iPad. Upon its release, some
users criticized the iPad for a lack of features, such as a physical keyboard, a
webcam, USB ports, and Flash support, and for its inability to multitask, share files,
and print. However, features like the sleek design, touch screen, multiple apps, and
fast and easy-to-navigate software made the iPad popular in business, education,
and the entertainment industry. The iPad was selected by Time magazine as one of
the “50 Best Inventions of the Year 2010.” 40

Until September 2010, Apple iPads accounted for 95 percent of tablet computer
sales, according to research firm Strategy Analytics. 41 But by the end of 2012, that
figure had fallen to 78.9 percent. The loss of share was due to the arrival of new
tablet devices, such as Samsung's Galaxy, based on Google's open-source Android
system. Other platforms and devices had also begun to appear, including Google's
Nexus, Amazon's Kindle Fire HD, and Microsoft's Windows 8 Surface tablet. 42 By
2015, devices running the Android operating system had achieved a market share of
66 percent of new tablet shipments.43
In October 2014 Apple released the iPad Air 2, the fifth-generation iPad. With
similarities to the iPad Mini, the Air was thinner, with a smaller screen bezel, yet still
used the same 9.7-inch Retina Display as the previous iPad model. In addition to the
physical redesign, the Air had more powerful cameras and slightly increased
processing speed, but it was otherwise only a slight improvement over previous iPad
versions.44 Going into 2015 there were signs that the iPad models' sales, as well as
the entire tablet industry, were “going downhill,” partly due to the “jumbo” phones
coming from the likes of Samsung (and Apple) and the low-cost Google-based
Chromebook laptops (Exhibit 8).45
EXHIBIT 8 Worldwide Quarterly Tablet Market Share, Fourth Quarter 2014
 
Smartphone OS Market Share, Q4 2014 Market Share, Q4 2013 Year-Over-Year Growth

Apple 28.1% 33.1% −17.8%

Samsung 14.5 17.2 −18.4

Lenovo  4.8  4.3  9.1

ASUS  4.0  5.1 −24.9

Amazon  2.3  7.4 −69.9

Others 46.2 32.8 36.2

Source: IDC, Worldwide Quarterly Tablet Tracker, February 2,
2015, http://seekingalpha.com/article/2944766-apple-ipad-sales-may-surprise-in-fy-2016.

In this category, Microsoft's Surface Pro 3 was the only tablet that appeared to be
growing: 24 percent increase in sales, year over year, during the fourth quarter of
2014. This indicated that a performance-oriented tablet appealed to users. 46 Apple
needed to consider an upgrade.

The Software Market

Although Apple had always created innovative hardware, software development was
also an important goal. Software had increasingly become Apple's core strength,
especially in its computers, due to its reliability and resistance to virus infections
and resulting crashes.47 The premier piece of Apple software was the operating
system. The iOS 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 was 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.
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Apple's web browser, Safari, was upgraded in 2009 to 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,” 48 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.” 49 Browser
market share data at the end of 2014 showed Chrome in the top spot, with a 45
percent global market share. Internet Explorer held a slim second place with 20
percent, and Firefox was a close third with 18 percent. Safari had a 10 percent
share.50

In 2011 iCloud was introduced during one of Steve Jobs's last public appearances.
The web-based storage service initially struggled to get traction, but in 2014 it was
upgraded to iCloud Drive, allowing users to interoperate with Windows and connect
all iOS devices. As an alternative to Google Drive and Dropbox, iCloud Drive gave
Apple an intro into the enterprise/corporate user space, a market CEO Tim Cook had
begun to target.51

In other software development areas, Apple had not been that successful. In 2012
Apple stumbled badly with its Maps software. Released in iOS6, Apple Maps was
meant to replace Google Maps on the iPhone but instead produced distorted images
and gave very bad directions. CEO Tim Cook had to apologize that Apple had fallen
short of its commitment to making “world-class products,” and he suggested
customers go back to using its competitor's mapping software. 52

iTunes
Arguably, Apple's most innovative software product was iTunes, a free downloadable
software program for consumers that ran on either Mac or Windows operating
systems. It was bundled with all Mac computers and iPods and connected with the
iTunes Music Store, enabling purchases of digital music and movie files that could be
downloaded and played by iPods, iPads, and the iPhone and, on PCs, by iTunes.

Although the volume was there, iTunes had not necessarily been a profitable
venture. Traditionally, 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. 53 However, even if not wildly
profitable, iTunes was still considered a media giant, especially with over 43 million
DRM-free songs available in its database as of 2015.54
Several competitors had tried to compete with the iTunes service. RealNetworks'
Rhapsody subscription service, Yahoo MusicMatch, and AOL music downloads had
all competed for the remaining market share, using the potentially buggy Microsoft
Windows Media format, and all subsequently failed.55 Even though one commentator
said in 2004 that “ultimately someone will build a piece of software that matches
iTunes,”56as of 2015 the only serious competition was from Amazon.

At the start of 2013, iTunes accounted for over 60 percent of all digital music sales.
In second place was Amazon's MP3 store, with 16 percent market share. Google
Play, eMusic, Zune Music Pass, Rhapsody, and a few others each captured 5 percent
or less of the remaining sales. Growth, however, was occurring in the streaming
service market, especially with the rising popularity of online radio and Internet
streaming providers Pandora and Spotify, and by 2015 music sales on iTunes had
fallen by over 14 percent worldwide. This trend helped explain why Apple acquired
the monthly subscription streaming service Beats Music in 2014. The $3 billion
acquisition included headphone maker Beats Electronics. 57
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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 iTunes, and it was directly available from the iPhone,
iPad, 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 the
applications to be sold in the App Store. Developers received 70 percent of the
download fee that iPhone or iPod Touch customers paid to the App Store, and Apple
got 30 percent of the revenue.

As of January 2015, over 75 billion apps had been downloaded from Apple's App
Store, but Google Play, the app store for Android users, was gaining ground,
indicating that Google might be attracting more top-tier developers and quality titles
to its marketplace. However, downloads for both platforms slowed in 2014, causing
market watchers to wonder if a plateau was coming. This might mean diminishing
returns and a less prosperous business model for all concerned.58

Apple Pay
Introduced in late 2014, Apple Pay allowed iPhone 6 and 6 Plus users in the U.S. to
make secure payments for goods and services using their phones. With over 1 million
credit and debit card activations within the first 72 hours of its release, Apple Pay
was intended to replace the user's wallet and, according to CEO Tim Cook, would
“forever change the way all of us buy things,” primarily because the process was
more secure than a traditional card-based transaction. As of 2015, major retailers
such as Macy's, Walgreens, McDonald's, Whole Foods, and Disney had all agreed to
accept Apple Pay. Apple reportedly received 0.15 percent of each purchase price,
making the service a potentially lucrative venture. Major competition was coming
from Google Wallet, especially given Google's 2015 acquisition of technology from
Softcard.59 Google Wallet had also seen an increase in usage as the Apple Pay
system was launched, indicating that 2015 might become an interesting year for
alternative types of transactions to occur.60

New Products: Apple Watch and Apple Car

Apple Watch was the first all-new product since the iPad, and therefore CEO Tim
Cook's most ambitious gamble. Once again, Apple was not the first company to enter
the wearable-tech space; it was following the lead of Samsung, Sony, and Motorola
and competing against fitness trackers produced by Nike, FitBit, and others.
However, Apple's preorders for the launch in 2015 indicated demand would run to a
combined 5 to 6 million units of the three watch models. 61 This product category
was a bit of a departure for Apple as the company positioned the Watch as a
personalized device, with the market segmented between mass market and luxury.
The features on all three models were the same, but status was indicated by
differences in the precious metals and craftsmanship of the cases, therefore
justifying the price range from $349 for the sports model to $20,000 for the Apple
Watch Edition.62

Rumors surfaced in 2015 that Apple had acquired resources, primarily engineers and
related technology, that would enable it to develop an automobile, ready for market
by 2020. Speculation was that Apple would not do the actual assembly but, as with
its other products, would use its sophisticated supply chain expertise to outsource
manufacturing, focusing its considerable innovation skills on the design and sale of a
product that incorporated Apple technology in multiple configurations. As one
observer said, “In this strategy, Apple's current products would act as building
blocks and core components of future, more important products. The ecosystem
would become much larger,” therefore enabling Apple to continue to grow and
dominate the innovation landscape.63

The Future of Apple

In 2012, during Tim Cook's first year as CEO, he had to deal with a flat economy,
supplier troubles, increasing competition, investor panic, and possibly unrealistic
expectations in the wake of Steve Jobs's demise, and yet the company still grew by
60 percent. By 2015, Apple's value had more than doubled. Although many observers
feared that Apple would have to yield to the “law of large numbers”—the concept
that companies which grow rapidly cannot maintain that growth pace over time—
CEO Cook rejected this view as being “dogma” and believed that Apple still had
major opportunities ahead.64 And many of those opportunities existed because of
Steve Jobs's and now Tim Cook's single-minded emphasis on pursuing only those
projects where Apple could be the best at making a “significant, lasting difference”
(and never “cheapening” the product offering), where Apple could use this philosophy
and vision to attract the best and brightest key personnel, and where it could
leverage its considerable skill in managing its distribution and supply chain while
simultaneously delivering a complete customer experience. 65

As Cook explained, in each of the markets Apple had entered, it was not the first to
market. It was not the first to produce MP3 players, smartphones, or tablets, and it
was not the first with wearable technology or a mobile pay system. Apple's strategy
had always been to carefully analyze each market and then design products that
were more attractive to users than any competitor's products could be.66 Under
Cook, Apple had transitioned itself “from being a hypergrowth company to being a
premium, branded consumer company.”67 Apple was becoming “a wildly profitable
company that continues to be a major (or dominant) player in various product
categories,”68 and those categories appeared to be expanding beyond consumer
electronics. Apple was becoming a truly vertically integrated designer and marketer
of products that increasingly inhabited a world “dominated by the Internet of
Things”—Apple just loved “designing great stuff,” and it could use its current
products as “building blocks and core components of future, more important
products.”69 Some of those future products might include enterprise software,
magnetic locks, automobiles, solar power systems, and anything else that could take
advantage of the Apple ecosystem. As one commentator said, “Tim Cook has a
dream. Apple Everywhere. Coming to a world near you. In time.”70Why not?