Economic analysis of Apple Inc.
The primary purpose of this report is to execute an economic analysis on Apple Inc. We will review the impacts that the competitive market has had on Apple, since it was founded in 1976. This report will detail how Apple Inc. is both a dire example of the adverse effects of monopolistic competition on a company as other companies into the market; as well as an exceptional example the economic rewards yielded by innovation and brand differentiation within a competitive market. An analysis of Apple Inc would be incomplete without reviewing its past and present competitors.
Reviewing these competitors will help the reviewer gain insight into comparative advantages held by other companies and the economic impact this has had on Apple Inc. this report will review the industry as a whole in order to understand the impacts of industry level supply and demand upon Apple Inc.
The report will briefly examine the impact of market prices and international trade as an aspect of this report. More importantly, it will review specialization is undertaken by Apple Inc and the economic benefits gained by this course of action. Essentially, the economic view of Apple Inc is looking a company set within the market structure of monopolistic competition and how it has successfully used innovation and branding to turn itself into a pseudo-oligopoly despite competitors continually entering the market.
Reviewing Apple Inc involves investigating the competitors that almost led to the demise of Apple Computers Inc in 1996, as well as understanding how current competition is allowing Apple Inc to dominate its niche market. In truth, international trade is more of an aspect of the computing industry than a contributing factor. Only the smallest company would fail to market their products internationally. Personal computing is one of the most significant contributors to employing labor abroad because of production costs. Constant technological advancements drive ever-increasing productivity in this industry. Efficiency and output are as a result ever changing the better. Personal computers
Apple Inc continues to produce innovative personal computers. As detailed in the following section on Apple computers, the demand for Apple computers has been diminished by the limitations Apple has on complimentary products. Dell and Hewlett-Packard are the primary competitors in the personal computer market. Both of these companies are substantially larger and offer substitute products that are highly sought after due to the compatibility. Dell made significant inroads by offering easily accessible custom-built personal computers over the phone and online (they overshot the former PC manufacturer giant and have more than double the sales of Apple).
This gave them a comparative advantage at the time. Hewlett-Packard’s advantage (almost five times the annual sales) stems from the market share they have gained by providing their products to corporations. The way Apple creates its market share is by creating product differentiation from these other computer manufacturers within the monopolistic competition market structure. This innovation and brand differentiation of the sole drivers behind the demand for Apple’s personal computers.
As per normal with the demand curve, Apple would be able to sell more if they lowered their prices, thus sliding right on the demand curve to a lower price and a higher quantity. However, such action would not be profitable for Apple as it has a lower profit margin on the personal computers. (Apple Inc 2006 Financial Statements) Computer software
In the simplest terms, Apple’s market share in computer software is limited by two factors. Apple simply lacks the relative size and market share to threaten the near monopoly created by Microsoft (the near-monopoly is evident when you see that Microsoft consistently has a 20 to 30% net profit margin annually).
Secondly, Apple software is limited to its own personal computers. Thereby, its lack of market share in the personal computer market as detailed above limits much of its software sales. That being said, Apple has a distinct niche market when it comes to multimedia software. Typically, individuals working in the multimedia industry (or in education) or having a hobby pertaining to multimedia specifically seek out Apple’s software (even if it requires the procurement of an Apple personal computer). This demand is fundamental to the current and ongoing success in computer software market. iPod and iTunes
Since its launch in 2001, the iPod has dominated the personal music market internationally. Regular updates have driven continued demand for the product line. This innovation has made consumers with adequate cash unwilling to seek substitutes. Nonetheless, due to growing market demand more companies are entering the personal music device market – they simply tend to vie more with each other than with Apple. The typical iPod consumer replaces their iPod with another iPod. This shows how relatively inelastic the demand for iPod is; after all, all the competitors entering the market of bringing the equilibrium markets price of these devices down.
Apple’s innovation does not stop with the iPod, the iTunes service has also undergone constant updates, improvements, and innovations; and thus setting apart from its competitors. In 2006, fifty percent of Apple sales came from the music related products. While companies such as Dell and Napster have attempted to provide some of the supply to the iTunes demand curve, they have not successfully created a substitute for this market, and have thus been unable to steal market share from Apple. There is one distinct differentiation between iPod and iTunes in that the iTunes market is substantially more elastic. Consumers have driven many of the prices iTunes towards market equilibrium to the other companies with substitute offerings. Company analysis
Apple Inc could be considered to have had two life cycles. First as the leading edge personal computer manufacturer it once was, and secondly as the dominant force of personal portable music that it is today. Each of these two cycles carry with it great economic value in being able to recommend future economic actions for Apple Inc to take in order to prosper in today and tomorrow’s economic markets. Apple Computers Inc
The transition from Apple Computers Inc to Apple Inc is significant. It is an exceptional example of what can happen to a company that fails to have a comparative advantage or even meet industry standards within their market. Apple Computers was originally established to fulfill market demand for personal computers. Figure 1a demonstrates how the increase in demand created a shortage in the market for personal computers. Suppliers were initially slow to respond to the increase in market demand. Some felt that the increased demand was temporary and did not choose to pursue the market opportunity. However, a number of companies chose to enter into the market to fulfill the need. Figure1b demonstrates how the increased demand being met by increased supply initially led to increased prices.
However, the influx of additional suppliers drove the figure 1b supply curve to the right causing a return to the initial market equilibrium price. In the computer market however, and additional impetus occurred driving the supply curve even further to the right. Not only did additional suppliers enter the market, technology advances increased the output that each supplier could produce using their inputs. This led to an substantial increase in the supply of personal computers as well as a drop in overall market prices. As we can see in figure 1c the market was ultimately provided with a substantially higher quantity of personal computers as demanded by the market by the lower price.
Consumer demand is always an inverse relationship between price and quantity, as typically consumers would prefer more normal goods as the price decreases. However, it is important to realize that the playing field was not equal for Apple Computers Inc. Their initial branding created by unique and technologically advanced offerings was quickly eroded as time passed and other manufacturers gained a comparative advantage by offering products they had more compatible economic compliments (such as Microsoft, printers, and other peripherals) as offered by the increasing number of software and peripheral suppliers. Failing to have the compliments offered by other computer suppliers would lead to significant reduction in quantity demanded of their products, as consumers chose personal computers substitutes offered by other manufacturers that were more compatible with the ever-increasing offering of complimentary add-ons and software. Apple Inc
have stated before, Apple Inc continues to produce innovative personal computers. However, fifty percent of Apple’s 2006 sales were music related products. There is no doubt that this is where Apple’s comparative and competitive advantage in the market lays. In fact, the name iPod has become synonymous with a personal music player. Although the manufacturer of personal music players is considered monopolistic competition due to the number of firms and the differentiation of products, Apple has created a pseudo-oligopoly for itself by being able to create a service offering (i.e. iPod) that is in such high demand, and is considered by consumers to be so unique and innovative that the price is set more by Apple then by the market. While other manufacturers continue to produce personal music players in higher quantities and lower prices, the Apple iPod has not been subject to this price reduction. T
he iPod line is therefore relatively price inelastic (up to a point), as consumers typically will not accept substitutes despite the fact no competitor offers a product as expensive as the iPod. Innovation
Apple creates a substantial amount of the demand for its products through innovation. Not only did they embrace updating the product line, they are also renowned for tapping into human capital to facilitate their innovation. This allows them to constantly be innovative unlike many companies that need to specifically purchase innovation developed by smaller companies.
They also create substantial efficiencies by hiring people that are the best in their fields. This can be evidenced in the 2006 growth: with 25% growth in human capital Apple managed to achieve a 49% growth in net income despite only a 38% growth in sales. This shows how the efficiency and innovation have also help facilitate their economic profitability by bringing down their average total cost. Profitability
The loyal consumer base helps Apple maximize their profits. Typically, in monopolistic competition, companies have to accept the price set by the market. However, due to brand differentiation and relatively inelastic consumer demand, Apple is not forced to set their output to win their marginal revenue equals their marginal cost. There are currently in the short run position of being able to generate economic profits. They are allowed to set their price and the level whereby average total cast at their output level is lower than the marginal cost and marginal revenue.
Without this brand differentiation, they would be forced to drop their prices to zero economic profit, by producing only to where the price level marginal costs an average total costs were equal. Apple also uses price discrimination to help its bottom line. Ten percent of its 2006 revenues came from the education field. Apple not only offers products specifically geared towards educational institutions, it also offers them much of its product line at reduced prices. This is always been a productive and profitable area for Apple. However, companies such as Dell are beginning to erode this market for Apple.
If Apple continues its price discrimination along with unique product offerings it may be able to hold onto this profitable area. However as other companies enter into this market it may no longer be profitable for them to continue with these practices. Profitability will begin to erode as other companies with suitable substitute products enter into the market dropping Apple’s economic profits. There is a clear distinction between competitors was simply enter the market versus those that enter the market and offer a suitable substitute. Until a suitable substitute for the iPod product line is brought to the market, Apple will continue to be able to drive their prices higher than the market equilibrium their competitors are being forced to accept.
The only way they can continue to maintain their short run economic profitability is by continuing to drive their innovation such that the demand for their products tends towards being less elastic thereby allowing them to someone inflate their prices and thus increase the short run economic profitability. Recommendations
Moving forward Apple Inc should embrace that which has made it successful today, while paying heed to the lessons it learned in the past. Personal computing Apple has found great success creating in niche market with its innovation – this makes them hard to find an exact substitute for when consumers seek out their brand’s innovations.
Conversely, they have also failed to gain significant market share due to the comparative advantage held by the competitors owing to the fact that they lack the interoperability with other computing compliments – most notably Microsoft, which dominates the personal computing world with an almost monopoly like hold. Moving forward, I would recommend that Apple continue to find integration points with existing hardware compliments (such as printers and other peripheral devices) as well as developing a computer line there is able to run the Microsoft line of software.
They need to do this without compromising the technology and innovation that has set them apart to date. In order to do this, I believe that it is vital that not all of the Apple products switch to using the Microsoft operating system. Ideally, the Macintosh operating system should be enhanced to support of the Microsoft office suite without Apple actually switching to the Microsoft operating system. Conclusions
Apple is definitely headed in the right direction with its focus on its economically key profit generators. The expansion of the retail shops has proven in winning strategy, and moving forward will be crucial in creating market demand for the Apple line of products. Apple has already started making strides towards interoperability. Since 2005, they have begun working with Intel in order to create a more standardized platform that would allow for greater utilization of available personal computer compliments. They need to continue working on this while retaining their innovative design standard, as this set them apart and creates demand for their products.
Already the market share in profitability of other personal computer suppliers is waning. If Apple and create an opportunity for itself it will create specific demand for its products. It has to do this before the decline of the primary competitors in this market, or other suppliers will step up and fulfill current market demand thereby usurping the place that Apple is striving to fill in the market. Finally, Apple will continue to build upon their unprecedented success in the personal portable music market. They need to continue to develop and expand their line. New, innovative, original and unique iPod and iTunes offerings will continue to draw in consumers. Competition will continue to grow stiffer is more suppliers attempt to grab part of Apple’s $9,561,000,000 music related pie. Innovation and brand differentiation will be the only way to maintain their market share. With these three focuses, Apple is poised to remain in market leader in coming years.