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Legal Environments and Business Decision Making

Course 8 – iPhone Case


Profs O. Beddeleem, C. Collard, E. Deglaire, F. Fagan, B. Fasterling, C. Roquilly, A. Sharkatli

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Creating value through legal resources: the iPhone case
Please note that this case is based on the “historical business model” when the first iPhone was
released, in 2007. Therefore, the data are a little bit “old”, but they are still very interesting and
relevant from strategic and legal perspectives.

Macworld Convention, San Francisco — January 9,


2007: Apple CEO Steve Jobs announces the
imminent release of a new product: “iPhone®”,
presented as a small and lightweight handheld
device combining three products — a revolutionary
mobile phone, a widescreen “iPod®” with touch
controls, and a breakthrough Internet
communications device with desktop-class email,
web browsing, searching and maps.

Without any presumption of the product’s success, or the strategy of which it forms a part, this announcement
was perceived as a new example of the so-called “disruptive orientation” of Apple Inc. – a real capacity to
satisfy the future needs of consumers – with a certain number of criteria for what constitutes an innovative
firm: development in an uncertain technological environment, management by an entrepreneurial team,
advantage of extensive social networks, and an organizational capacity to transform knowledge into new
technology. While the (unsuccessful) launch by Apple in 1993 of the Newton Pad (miniature computer with
tactile screen) was an example of radical innovation, the iPhone belongs to the category of incremental
innovation, characterized by slow development relative to the current trajectory of technological advances. It
was nonetheless difficult to identify the precise nature of the iPhone product. Was it a mobile telephone?
A portable reader for audio and video files? An Internet access terminal? In
fact, as stated in the press-released issued by Apple in January 2007, following
the Macworld Convention, iPhone’s main characteristic was its ability to
combine various functions, a characteristic that is actually considered to be a
dominant paradigm in the electronics sector, particularly with regard to the
interaction between computing and communications.

The difficulty in categorizing the iPhone as a particular product type was in fact its
primary innovative quality. The combination of different functions was supported by
successful design and marketing, which Apple had already shown itself capable of
with its launch of the iPod or, in 1998, the iMac, which actually offered few
substantial technological modifications but managed to differentiate itself from
existing personal computers with its radical design. Innovation can of course depend
on a product’s aesthetic appeal. This aesthetic approach is likely to create — or
even capture — value for consumers. Indeed, Steve Jobs himself used to insist more
on the importance of marketing than on the inventive dimension of product success.

Beyond its own individual characteristics, the iPhone could be seen as part of an ecosystem of sorts, aimed at
true digital convergence. This no longer refers to the convergence of different functions within the same
product, but the convergence of various products, services and content created by Apple (or provided by its
partners): iMac, iBook, iPod, iPod touch, iPhone, Apple TV, iTunes, Safari, and content released by Disney Corp.,
EMI, etc., applications created by developers. They all had to compete towards the development of a new

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digital lifestyle, as value is added reciprocally by products, accessories, systems, platforms and content. This
convergence favored an increase in the network effect, whether direct, indirect, or two-sided.

Apple’s business strategy is based on this interconnection between products and services, whereby the
network value increases along with consumer demand for complementary products and services (iTunes for an
iPhone user, for example) and inversely. The involvement of the community of users in this context is crucial, in
particular with regard to collecting user opinions about the products, possible improvements, and even t he
development of new applications, as in the case of iPhone and SDK. The Figure below summarizes this concept
of “digital convergence”.

Source: Roquilly (2009)

Question 1: What are the different types of legal resources used and coordinated by Apple Inc. in
order to ensure this digital convergence? To help you, follow these indicia: some legal resources
have to be put in each square of the above scheme, knowing that these legal resources belong to
the same broad category. The other legal resources must be identified at the core of the figure.

Apple required partners to ensure the success of the iPhone on the market, both in order to access a mobile
telephone network and to provide its users with the necessary content. While it may have been difficult to
define exactly what the iPhone was as a product, it was above all a mobile telephone. And because Apple did

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not manage any cell phone network, it needed to enter into partnership with an operator: a specific asset
cannot be acquired quickly, especially when the sector concerned is regulated, as is the case in
telecommunications. Apple chose a partnership model based on dual exclusivity: the partner carrier could
benefit from exclusivity over the territory concerned (for example, AT&T was the exclusive iPhone carrier in the
US from 2007 to 2012) and be the product’s exclusive distributor for the same territory. The only exception to
this “dual exclusivity” model was France. Orange was the exclusive iPhone distributor on the French market,
but not the only operator. An external constraint within the legal sphere was the reason behind this exception
to Apple’s economic model. The French Code de la consommation prohibits tying, and this includes sales that
are tied to the provision of services. Consumers interested in the iPhone was given the opportunity to purchase
it from the exclusive distributor (Orange) without having to take out a subscription. The table below contains
some information about the contracts drafted in 2008 to allow the distribution of the iPhone on several
national markets.

Roquilly (2009)

Question 2: Explain to what extent does this type of contract constitutes a complementary legal
resource? Identify the main problem which could happen because of this policy and the iPhone
distribution issues in the different countries.

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Consumers interested in the product but who had a subscription with a carrier outside of Apple’s partners
would have liked to be able to use the iPhone, which was locked in such a way that it could only operate on the
network used by these partners. Numerous programs were developed to unlock the iPhone and were easily
accessible on the Internet. Unlocking programs made it possible to use the iPhone in countries where no
partnership existed with a carrier, and therefore increased Apple’s sales figures (the Chinese market was an
illustration of this).

Question 3: Explain what kind of legal resources Apple used to struggle against the software
programmes built to circumvent their economic model.

Until recently, the iPhone has been the number one phone for the number
of applications that customers can download to enrich their “iPhone
experience”.

Question 4: What legal resource is used by Apple to coordinate its relationships with the
developers? Explain to what extent this legal resource sustained the iPhone strategy and was
coordinated with the other legal resources.

Readings, materials
- http://fishtrain.com/2007/08/15/steve-jobs-master-plan/

- http://www.unwiredview.com/2007/01/16/apples-iphone-is-it-really-well-protected-by-patents/

- http://www.apple.com/legal/trademark/guidelinesfor3rdparties.html

- http://ip.honegeek.com/2007/06/22/all-good-iphone-domain-names-taken/

- http://techcrunch.com/2009/08/15/the-35-best-iphone-apps-of-the-year-so-far/

- http://www.emigroup.com/Press/2007/press18.htm

- https://www.ft.com/content/04959354-c7b0-11e6-9043-7e34c07b46ef
- http://www.apple.com/legal/warranty/products/uk-ireland-universal-warranty.html

- http://images.apple.com/legal/sla/docs/iOS10.pdf

- Reitzig M. 2004. Strategic management of intellectual property. MIT Sloan Management Review 45(3): 35-40

- Pisano G.P., Teece D.J. 2007. How to Capture Value from Innovation: Shaping Intellectual Property and Industry Architecture.
California Management Review 50(1) : 278-296

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