Case Analysis: Apple Inc. Essay
It is said that luck follows determination and courage in business. Apple Inc. is one of global giants that has proved this correct – it has completely taken a U-turn in the IT business. Renowned around the world for innovation and quality finishing of its products, Apple Inc.’s humble start as a computer manufacturer has not deterred it from ruling the world of technology and entertainment in a market where giant names like IBM and Microsoft also thrive.
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The financial position of Apple has become very strong over the past three years. Growing 15% from 2007 to 2008 and 20% from 2008 to 2009, Apple Inc. has maintained a steady and rapid pace that few other companies as innovative as Apple can match (Annual Report, 2009, p.19). The launch of the iTunes music store, that later expanded into a comprehensive online store for videos, books and audios, was a different business model altogether that reaped success within the first week of its launch. However, the subsequent events that occurred in the market and the various risks that are associated with Apple Inc.’s strategy for iTunes are some of the reasons that warrant a revision of the operational strategy, partially, if not altogether. The issue of digital rights management (DRM) and software piracy propped up and Apple has ever since paid out to artists and record companies more than it has pocketed itself.
There are several lessons that Apple can learn from the launch of iTunes. The decrease in music sales online is an important one that Apple should take into future consideration. This drop forces one to re-evaluate whether Apple’s strategies were really effective or not. A recommendation to Apple for its future strategies would be to re-evaluate its business models keeping into view all aspects of the market and related industries so that after the initial bloom of purchases, there are no immediate issues that spring up like the music crisis.
Apple Inc. is one of global giants in the information technology, information and entertainment business. It has under its one roof, apart from a dynamic CEO, Steve Jobs, a variety of projects that are the result of intense innovation and clever launch strategies (Curtis & Gobham, 2005, p.14). The company is involved in all round operations ranging from designing, manufacturing and retailing its products, expanding from its initial expertise of just selling personal computers the company has successfully explored markets of high quality portable computers, music players and recently launched cellular phones. The breakthrough launch of the iPod in 2001 and the iPhone in 2007 saw Apple going from a “quiet” firm to a giant of the industry seeking all media attention. The launch of iTunes in 2004 was another cap to its feather, which has led to Apple enjoying billions of dollars in revenues and millions in profits (Laudon & Laudon, 2007, p.98). Though Apple Inc. has had great strategies in place for its product launches and follow-ups, there are some important lessons that should be learnt from the experiences of Apple and other companies in the market.
The biggest breakthrough however, was with the advent of the iPod and the opening up of the iTunes store that really got Apple kicking off the ground. This report analyzes Apple’s success in these areas, taking a brief look at the things that went right. It will further discuss the things that could and did go wrong for Apple after the iPod market had taken a saturation stance and how music sales were affected by Apple’s strategies. This will be followed by a set of recommendations that Apple Inc. and its management could follow in order to undertake calculated risks and explore different areas in the consumer market.
The Success of Apple According to Bulik (June 2008, p.9) Apple has had one of the highest streaks of innovation than any other company. Failing several times has not deterred it from taking further risks and testing newer ideas. It was not until 1998 that the iMac was finally a beaming product that transformed Apple’s status from an out-of-the-box faiure to a clever innovator that had the vision and people to thrive ahead and succeed on the basis of innovation.
The success of Apple after a period of two decades exemplified the fact that once again, innovation and competitive breakthroughs are the keys to success and profitability in the technological industry (Russell & Yilmaz, 2006). Apple achieved its iPod sales targets of six months in just six days. This signifies how important it is to innovate and come up with products and services that would be so simple for consumers and yet so important for the company.
The iPod was one of the most innovative products of this decade and rightly so. Apple had the advantage of taking the market by surprise: there was no similar product in the market that provided a comprehensive music solution. Microsoft’s Zune was the next thing that came into the market but was unsuccessful in breaking the monopoly that Apple had procured so easily due to the timing and innovation it had long invested in (iPod and Zune fight for attention, 2008, p.1). What followed in the ensuing competition is all history and documented.
With $1 billion in iPod sales and approximately $1 million from iTunes in just 6 days, there was nothing much that could go wrong for Apple, envisaged analysts. They were proved wrong, when there came a series of issues for online music sellers, album companies and when fresh numbers started coming in regarding music downloads and sales. However, it is important to realize the fact that a short-sighted strategy was used by Apple for its music sales model. The online setup of iTunes was a clever move, however, Apple’s success brought about the failure of many other firms. There are important lessons to learn from this and these should be taken into consideration for future strategies.
Apple Inc. has been one of the most unique firms in the world: it has never focused on following others in the market. Almost 75% of Apple’s products and businesses are market leaders and innovative solutions that have been the first of their kind in the market – or at least the first in the global market. The iPod, iPhone, iTunes and iMac are some of the examples that corroborate for this fact.
Thus, innovation and market leadership has always been a competitive edge for Apple. Being inherently running a culture of innovation that Apple Inc. has traditionally inherited from Steve Jobs, the employees at the company are paid to innovate, not work. Innovation has been the major reason behind Apple’s success as it has created breath-taking products and taken the market by storm more than four times in the past decade. It is Apple’s belief that high-quality purchases and adequate market knowledge is an important competitive edge that it can have over the independent small firms in the market selling at cheaper rates substitutes of Apple’s products. “The company sells many of its products and resells certain third-party products in most of its major markets directly to consumers and businesses through its retail and online stores (Annual Report, 2009, p.1)”.
The Current Situation
The net income of Apple Inc. for the year ended 2009 stood at $5.7 billion. This was a direct increase of approximately 20% over the previous year, 2008. The rise in net income was very much higher than the rise in revenues, which stood at roughly 10%. There was virtually no rise in the research and development costs and this was one major factor that contributed to the higher net operating income. There are various innovative projects currently in the pipeline at Apple Inc. which provides a source of speculation for investors wishing to buy the stocks of Apple Inc. (Annual Report, 2009, p.14). The current situation is very stable for Apple Inc. in terms of growth and revenues. It has gone over the stages of explosive growth and is now moving ahead at a fairly good and constant rate.
The global operations of Apple Inc. make it very possible for sales revenues to diminish in value and costs to rise. There is the element of financial risk and business risk inherent in the company’s operations. While the CFO, Peter Oppenheimer manages this section of the business taking care of the financial risks associated with the company, it is the responsibility of Steve Job and his set of analysts to analyze and manage the market risks associated with the company.
Apple Inc. has contracts with third parties allowing it the right to offer digital content, such as music, to its customers. These contracts are all through the iTunes store and there is a significant portion of the revenues from iTunes sales that goes into these license purchases and contract arrangements. However, majority of these contracts are short-term and limited in scope. Renewal of contracts is not necessarily a guarantee – this is a significant business risk that could threaten the very existence of iTunes in future in case of any unexpected contractual issues. Further, most third parties require Apple to guarantee digital rights management (DRM) before they enter into a contract with Apple Inc. (Annual Report, 2009, p.17). This makes the game even more risky where a greater part of the revenues are spent on licensing and DRM solutions.
The music CD industry is under siege – mainly by Apple’s iTunes. This creates a very valid reason for the third party contractors to open up businesses similar to There could be other third parties that would like to use their position to strike a higher bargain with Apple thus increasing the costs for Apple. “In addition, certain countries have passed or may propose legislation that would force the Company to license its DRM, reducing content protection and subjecting it to piracy and also could affect arrangements with Apple’s content providers (Annual Report, 2009, p.17)”.
Apple has hit the mobile market recently with its launch of the iPhone in 2007. The mobile market has a dynamic competitive structure It can be remarked without any doubt that the competition Apple faces is stiff and experience-ridden.
The work structure of Apple may be highly innovative, but it not necessarily may be low cost – the revenues of Apple offset the big costs involved. These high production and innovation costs can be an incentive for smaller firms, mainly the contractors and suppliers of Apple to get the innovation from Apple and emulate them through cheaper product development. Though the brand would be different, these companies can then target a large segment of the lower middle class. There could be infringement and piracy issues, but then those would all require a great deal of time and energy on the part of Apple to sort out and by the time any rulings would be finalized, the small companies would have had taken their share of the market and exited from the market. Reliance on the mobile entertainment industry is something that Apple is doing right at the moment in order to diversify its risks.
Apple Inc. expects that in the near future, the mobile market will be one area that will present competitive challenges to the company – one reason for this is the growingly integrated structure of technology making it very easy to combine entertainment, communication, mobility and computing power into one gadget. Thus, there are huge market challenges for Apple Inc. in the near future that it needs to survive and overcome by intelligent market strategies and a cutting edge competitive edge.
The Music Crisis
The fall in music CD sales by 6.7% in the first half of 2005 was a big blow to the industry. Contraction of almost one-fifteenth of such a large industry in 6 months was definitely an eyebrow-raiser. Apple had envisaged that its iTune sales would reach 1 million songs in the first six months. Its estimates were well below the response of the market which saw the target being achieved in the first week. However, this also created a void for other music companies and CD companies selling music (Curtis & Gobham, 2005, p.112).
Market research shows that iTunes had introduced its songs for $0.99 initially and it used a pay-per-download model in the beginning. Though there were other models for song downloads introduced later, but that only meant that song downloads became cheaper and bulk downloads were only encouraged. The quick sales of songs from iTunes online stores only meant that the idea had taken off and it required only a little hindsight from the geniuses at Apple to introduce other products for sale online. Subsequently iTunes was loaded with books, videos, podcasts and audio books apart from songs which gave consumers a wider range of products to choose from. The key was to attract consumers for the product they were interested in. Apple realized that there were many people like Eneka Iriondo-Cyosh who did not purchase any downloadable songs online.
The business strategy at the iTunes back office was to somehow get these people to visit iTunes and download other products (Chaffey & Wood, 2005, p.97). Though iTunes was successful in luring a great number of visitors to its online portal, there were issues cropping up in the neighborhood that always needed to be addressed.
The decline in CD music sales was repeatedly signifying warnings for the music CD industry. Since iTunes had entered the market without any competition, there were very few reasons why consumers should continue buying CDs when there were cheap downloads available from a reliable and quality store such as iTunes. The behavior of many iPod owners began to take a shift. iPod owners who had previously been enthusiastic about CD purchases of their favorite albums found it more convenient to stock songs in heir iPods which had capacities of up to 10,000 songs! This change in behavior meant that CD companies had already reached the beginning of their end in the global market and that singers and record companies were beginning to face low royalties for the same albums in comparison to a few years earlier (Laudon & Laudon, 2007, p.16).
It is fascinating to note the strategy that iTunes had inked with artists and their record companies. It dictated that for the sale of each song i.e. each download from iTunes, the singer would get almost 80% of the revenues through the records company. Apple’s share was mainly the customer loyalty that it generated and the quick sales that was part of the customer response.
However, this resulted in a rise in software piracy and bootlegged CDs in the market. Listeners found their way to copying their downloaded songs onto CDs – it is said that there is virtually no security feature in the world of information technology that cannot be cracked or broken. All it takes is a couple of tech buffs to operate their technical tools to reveal the nuts and bolts of “security”. And this was all done with great zeal by music pirates so that there were thousands of bootlegged CDs running in the music market (Russel & Yilmaz, 2006, p.56).
The vision of iTunes to become the premier music company succeeded well, however, in the process led to several software piracy problems. Apart from bootlegged CDs, artists demanded a higher royalty from iTunes since the downloads were huge in number, but were stagnant after a while. This meant that once an iPod user had downloaded a song, they never needed to re-download it again as they had it saved in their iPods. A year or so earlier, the same artists had been able to make millions out of copyrights from record companies that made song CDs in millions. Today the same record companies were facing hard times to keep their CDs on the shelves of bookstores and music stores. DVDs had paved the way for their space and it was all a matter of time as to when music CDs would become history (Boddy & Boonstra, 2005, p.118).
Apple’s strategy for an e-song store was a gigantic success; it reaped the company millions in revenues eventually translating into good profits from an online store business. However, Apple’s strategies were short-sighted. Though Apple supported technological innovations and as mentioned in the case, gave support to entrepreneurs like Jeff Robbin, the iTunes strategy had no plan “B” for the CD music industry – which was its direct competitor (Beynon-Davies, 2002).
iTunes complete eroded the music CD industry by late 2007 and established itself as the premium music re-seller housing several payment and download options. It can be concluded from the actions of Apple that the strategy was short-sighted and was the death blow to the music CD industry that eventually collapsed under the pressure of low demand and staggering prices to remain in competition with the iTunes offers.
owever, it would be safe to say that Apple learned from this strategy that its breakthrough innovations were not only as successful in the products it manufactured, but also in the business model and services it came up with. The iTunes idea was an innovative one that resulted in quick sales but lower margins for Apple in the beginning however resulted in sustainable sales for the future (Curtis & Gobham, 2005, p.54).
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