Apple - Mac Business, iPods, iTunes & iPhone

Mac sales remain important for Apple, even though they accounted for only 43% of apples total revenue, in ’07.

Strategic Positioning: Apple put a high premium on creating machines which offered a cutting-edge, tightly integrated user experience.

High Premium , high priced software, hardware & peripheral products
Emphasized ease of use, interoperability with other machines, security, high quality software applications
Apple has become a less closed system, incorporating standard interfaces such as the usb port.

Technology & Innovation
June ’05 – Apple announced that it would move away from PowerPC chips in favor of Intel microprocessors.
The PowerPC chip couldn’t mach Intel’s performance and this was affecting apples ability to compete effectively in the laptop segment. Intel chips also enabled apple to build faster, more powerful laptops, capable of running Windows and other 3rd party operating systems. (this capability offset a longstanding disadvantage to choosing a Mac. By loading software applications such as VMware Fusion, Parallels Desktop - Macintosh users could operate both Windows & Mac-based applications.

Apple introduced a fully overhauled OS in ’01, called the Mac OS X, the new OS offered a more stable environment than previous Mac platforms. Apple introduced updates every 12-18 months with the aim of generating incremental revenue and new interest/awareness about Mac products (thereby driving increased loyalty amongst Mac users). In Oct ‘ 07 – apple launched Leopard, it’s 6th OS release.

Proprietary Software Applications
Apple developed proprietary software applications to support its Mac line. (iLife suite – iPhoto, iTunes, iWeb). In ’03, Apple launched its Safari web browser to compete with Internet Explorer and Firefox

Distribution & Sales
Apple opened it’s first retail store in may ’01. By June ’08, it operated 215 stores and its retail division accounted for almost 20% of total revenue. (Apple has retail stores in U.S and key international markets including Australia, Canada, Japan, Italy, China and the UK.
The retail stores logged over 350M visits in less than a year, many visitors were new to the Mac – over half of the 1.4M maces sold in ’07 were purchased in Mac stores. One key factor which brought people to Mac stores was the popularity of iPods

Results of Job’s strategy
By fiscal year ’07, Mac revenue came to over e$10B, a YoY increase of +40%. Unit sales exceeded 7M, Mac sales grew 3 times as fast as the overall PC market
By mid ’08 – apples US share had grown to 8.5%, yet it’s Worldwide share of the Global PC market – had edged up only slightly and remained in the same 2-3% range for almost a decade

PC Manufacturing
By ’08 PCs consisted of 4 key components (a microprocessor, a motherboard, memory storage & peripherals - monitor, keyboard, mouse, printers).
PC manufacturers also bundled their PCs with an OS

The industry had moved from desktop machines to lap tops, notebooks, netbooks, and work stations (more powerful desktops) & server computers

~$400 to produce a mass-market desktop computer, which would retail at $500. Manufacturers could push down the price by cutting back on hard drive capacity & memory and/or offering lower quality peripherals.
 Microprocessor: $50 - $500
 Motherboard, hard drive, memory, chassis, packaging: $120 - $250
 Peripherals: Keyboard, Mouse, CD-ROM, floppy drives & speakers: $50 - $140
 OS – Windows vista $70

As PC manufacture became standardized – leading manufacturers cut expenditure on R&D and focused on driving innovations & efficiency through distribution, manufacturing and marketing – in order to gain a competitive edge.

PC Supplier Categories (General Products & Key Products)
-> General: memory chips, disk drives, keyboards – several sources, buyer advantage, competitive pricing
Key Products: micro processors and operating systems – only available through Intel & MSFT

Target Audience – PC Buyers fall into 5 Categories
1. Home Buyers: 42%
2. Small & Mid Sized Businesses: 32%
3. Corporate – Business Customers: 12%
4. Education – institutions of learning: 8%
5. Government: 6$

Key buying factors: price, service/support, software availability, product design, mobility and wireless networking capability

By early 2000s, web retailers like Dell, which sold PCs at steep discounts, saw an increase in demand for generic machines. (very popular especially in emerging markets).

Key Manufacturers: HP, Dell, Lenovo & Acer
I. HP became the market leader by emphasizing product design, consumer marketing and improved R&D spending). The company also leveraged its very strong retail channel (110K outlets).
II. Dell has followed suit with an increase in investment in design and a focus on consumer-friendly products. Dell also made deals to sell its PCs through large retailers, (best buy, staples & wal-mart), in addition to its well established online channel.
a. International Revenue: Dell also partnered with retail chains in Europe, China & Japan, to push international sales – this was a new priority, as Dell had focused on the U.S market for some time
III. Acer/Lenovo: focused on emerging markets but also acquired U.S PC manufacturers – Gateway and IBM’s PC business

Operating Systems – Trends
1980’s: Microsoft introduced MS-DOS
1990: Microsoft introduced Windows 3.0 – which featured Macintosh like graphical interface. Although not as good as Apple, it was adopted by corporate managers. MSFT built on that momentum of 3.0, with new releases every few years. (Windows 95, XP, Vista) – revenue per copy was approx $45-$60
Note: value of an os corresponds directly to the quantity and quality of application software, available on that platform.

Apple II – did well because it supported some software applications which were very popular with business users (VisiCalc – spreadsheet application)
Other impt OS segments include – word processing, presentation graphics, desktop publishing, database management, personal finance & internet browsing.

Between 1990 and 2008 – the sheer volume of applications available on PCs, exploded, while ave price of PC’s & PC software, fell. MSFT – was the largest software vendor for Wintel PCs & second largest for Macs, and it benefited immensely from this trend.

Apple’s other products
iPod: portable music player based on MP3 compression standard – launched in Nov ’01 . It was geared towards consumes, offered a variety of devise ranges and ultimately sold at prices ranging from $49 - $499, with margins of 30%-35%

Apple built its share by innovating on the use of flash memory instead of hard drives (which cost more). Maintaining relationships with key suppliers of key components (especially flash drive components), was crucial to its strategy to maintain the low costs of manufacturing iPods. (Samsung: video-audio chip,
Toshiba: hard disk drives). Apple made a strategic decision to pay $500M to Intel/micron to secure output from a new flash-memory joint venture. It also struck deals with Hynix, Samsun & Toshiba for flash components, thereby cornering 25% of the market for flash production – to use in its iPods & iPhone’s (both of which rely on flash memory). Note – key source of competitive advantage

By mid ’08 – apple had sold 150M iPods, commanded 70% of US market for portable music players. Rivals have not developed software which rivals iPods or iTunes offering.

Learning from past mistakes: Initially the iPod could only synch with Macs – in Aug ’02, Apple introduced an iPod for windows. (it’s development of the iPod was also, much more collaborative than was the case with its approach to developing the Macintosh). iPod’s accessory market became very important – primarily because iPods were more widely available to a larger customer base. Apple also licensed its “made for iPod” logo to 3rd parties - who created over 1K iPod accessory items, and over $1B in incremental sales.

iTunes Music Store – Steve Jobs master stroke, in realizing that for the iPod to be successful, it had to have a legit music downloading component and a repository for iPod users to go download music, legally. He created iTunes Music Store in April ’03, to serve that purpose.

By June ’08 – it had sold over 5B songs & claimed 70% of the share of the worldwide digital music market. iTunes became the largest music retailer in the world and drove iPod sales from 113K/quarter to over 733K/quarter.

However, iTunes was a loss leader because apple basically used it as an enabler to move iPod units. Of the $0.99 cents charged for each music downloads, apple got less than $0.10. “the variable element served s a lows leader for a profit0driving durable goods”

iPod’s have since expanded from serving digital music to now included digital video, users can now download and watch TV shows and movies as well, making iTunes the world’s most popular online movie store.

iPhone – Jobs strived to “reinvent the phone” with the launch of the iPhone, in June ’07. iPhone was a multifunction communication device – internet in your pocket.