Apple Inc. in 2008 Lou Marino ‘The University of Alabama John Hattaway ‘The University of Alabama 1en the first version of the Apple iPhone was released on Sune 29, 2007, it took 74 days to sell I million units. When Apple released the next gencration of the phone, the iPhone 3 ‘on July 11, 2008, sales reached 1 million units in 3 days—this sales figure easily surpassed analysts" estimates and netted an estimated $330 million ‘Despite multiple problems associated with the launch, inclading Apple's servers being overloaded and key applications being unavailable on launch day, the iPhone 3G quickly sold out in 21 states in the United States, with some customers agreeing to wait up to four wecks for delivery. Mirroring the success of the company’s iPod/iTunes partnership, Apple's newly Iaunched App Store, which allowed users to down- load programs for the iPhone, reported more than 10 million downloads in its first week of operations. Within the same week, Apple’s strength in its PC and iPod divisions was also recognized. Regatd- ing the PC division, Gartner, a leading analyst in the PC industry, announced that in the second quarter of 2008 Apple had overtaken Acer to become the third largest PC maker in the United States, capturing 8.5 percent of the market behind Dell (31.9 percent) and Hewlett-Packard (25.3 percent). Regarding the iPod division, Gene Munster, a seniot research analyst at the leading investment firm Piper Jaffray, noted that there was no evidence that the iPhone would canni- balize iPod sales, and he raised his estimates of the number of iPods sold in the first half of 2008. Despite the encouraging news across all of Apple’ divisions, a growing number of analysts were becoming increasingly concerned. Specific issues Katy Beth Jackson The University of Alabama noted by analysts included gross margins that were not increasing despite falling component prices; cutbacks in education budgets in the United States that could impact Apple’s revenues; the continued problems with the iPhone 3G launch, including a worldwide crash of the iPhone activation system; anda US. economy that did not appear to be gaining, traction heading into the second half of 2008. These challenges, combined with speculation about poten- tial health problems for Apple's CEO, Steve Jobs, had some investors and analysts concerned as to whether the company could continue its impressive perfor. ‘mance and leadership in innovation into the future. HISTORY OF APPLE Steven Wozniak and Steven Jobs founded Apple Computer in 1976 by introducing the initial ver sion of what was to become the firs highly success- fal mass-produced personal computer, the Apple 1 Although the original Apple I needed some refine ‘ment (it lacked a monitor, a Keyboard, and even a case), this idea would influence the computer industry immeasurably. Wozniak and Jobs had attended high school together and maintained contact after gradua- tion despite taking jobs with different Silicon Valley companies (Hewlett-Packard and Atari, respectively) ‘Wozniak was the true designer of the Apple I, but Jobs recognized its commercial potential and insisted thet ‘they sell the computer. Although the Apple T launch Copyright © 2008 by Loe Maio. All sigh ceeeved cascas Part2 Cases in Craftng and Executing Stretegy ‘was not especially successful, Wozniak was already designing the Apple Tl, which was introduced at a local trade show in 1977 and launched in Apr 1978. ‘This second machine included a plastic ease and color ‘graphics and was instantly much more popular than ils predecessor. Apple’ president, Michael Scott, and chairman of the board, Mike Markdala, were happy with the computer's sales: by the end of 1980, Apple had sold more than 10,000 Apple Is While the Apple II was relatively successful, the next revision of the product line, code-named Macintosh (Mac), was already in the works by 1979 under the direction of Jeff Raskin, a former profes- sor at the University of California at San Diego and a researcher at Xerox's Palo Alto Research Center (PARC) who had proposed the project to Marklcula, Raskin's ambitions goal was to design a user-friendly computer that had a graphical user interface (GUI) and would cost less than $500, At Raskin’s urging ‘that year, Jobs visited PARC, were he saw research- ers using & GUI to simplify their computing. Jobs ‘immediately recognized the importance of the inter- face and decided to use itin the project he was speas- heading with project manager Ken Rothmuller: the Apple Lisa, named after Jobs's daughter, However, Jobs's constant drive for innovation and demands for refinements drove up costs for the Lisa, delayed the shipping date, and eventually caused Scott to remove Jobs from the project. Due to excessive cost, the Lisa never performed up to Apple's expectations and was retired from the market soon after it was introduced. Undeterred, Jobs took his passion for the GUL 10 Raskin's Macintosh project. fobs's 1] percent share of Apple's equity helped convince Scott to allow him to take over the project, and eventually personality conflicts between Jobs apd Raskin forced Raskin to leave Apple in 1981. In the same year, Scott resigned as president of Apple and became the vice chairman of the board. Scott was replaced by Matk- laula, who became president and CEO. Jobs became chairman of the board upon Markkula’®s assumption of the presidency, and under Jobs's leadership the Macintosh team was challenged to make something “insanely great”; by many accounts they succeeded. ‘The Macintosh, introduced in 1984, was hailed as a breakthrough in userttiendly computing. It was also the first computer to use a 3.S-inch disk drive, Unfortunately, the Macintosh did not have the speed, power, or software availability to com- pete with the PC that IBM had introduced in 1981 (One of the reasons the Macintosh lacked the neces- sary software was that Apple pot very strict restric- tions on the Apple Certified Developer Program, which made it difficult for softwere developers 10 obtain Macs at a discount and receive informational materials about the operating system. When Scott stepped down in 1981, Jobs began actively working to replace Markkula with John Sculley, then president of Pepsi-Cola. Sculley became president andl CEO of Apple in April 1983, and Markkula became the associate chairman. When Apple introduced the Macintosh the following yeae and it was not as well received as initially expected, Jobs (a volatile individual) and Sculley began to have difficulty working with each other. Finally, in 1985, as Sculley was preparing to visit China, Jobs devised a “boardroom coup” to replace him. Sculley, found out about the plan and canceled his tip. After Apple's board voted unanimously to keep Sculley in his position, Jobs, who was retained as chairman of the company but stripped of all decision-making authority, soon resigned. During the remainder of 1985, Apple continued to encounter problems and laid off one-fifth of its employees while posting its first ever quarterly loss. In addition, Sculley entered into a legal batle with Microsoft’ Bill Gates over the introduction of Windows 1.0, which used simi- lar technology to the Mac’s GUI, Gates eventually signed 2 document that in effect ensured that Micto- soft would not use Mac technology in Windows 1.0 but claimed no such promises for any later versions of Windows. Essentially, Apple had lost the exclu- sive right to use its own GUL Despite these setbacks, Apple kept bringing innovative products to the market, realizing that innovation would have to be the company’s strat- egy against big companies like IBM and Microsoft, especially since Microsoft had made its technology available to any PC company that wanted to incor- Potete it into their own hardware components. In contrast, Apple was well-known for closely guard- ing the seerets behind its own technology. In 1987, Apple released a revamped Macintosh computer; like the Apple II, this second version was & phenom- nal success. This computer was easy to use, making ita favorite at schools and in homes. In addition, the second Macintosh had excellent graphics capa- bilities. However, by 1990, PCs with Microsoft software had flooded the market and Windows tech- ‘nology was far more prevalent than Mac technology becaus on con In book ¢ fal. In comple device Sculley the Ne 1993.) becaus 1993, : operati remov. chose Spindl chance but he afews Al sible k severa release to ince sor co first ti lent, A surpas ler al license to oth ever cl the lic 1995, lion ir those 1995, versio: streng 96,Ap ing its that qu toresi Natior D annow any. each 1 tried ¢ ers 0:because Microsoft had licensed its software for use ‘on computers built by many different companies. In 1991, Apple released its first-generation note~ book computer, the PowerBook, which was success- ful. In the meantime, Sculley began to push for the completion of a project under way to develop a new device called a personal digital assistant (PDA). With, Sculley’s persistence, Apple’s version of the PDA, the Newton, was released to the market in August 1993, However, the Newton did not sell well, parly because it failed to rocognize handwriting, Also in 1993, Sculley began to Tose interest in Apple's daily operations; in June, the board of directors opted to remove Scully from the position of CEO. The board. chose to place the chief operating officer, Michael Spindler, in the vacated spot. Sculley was given the chance to keep his position as chairman of the board, bbut he, chose to resign from the company altogether a few months later ‘Although Spindler was not a personable, acces- sible leader, he did oversee Apple's development of several important products. First, in 1994, Apple released the PowerMac family of PCs, the first Macs to incorporate the PowerPC chip, a very fast proces- sor co-developed with Motorola and IBM. For the first time since Intel technology had become preva- Tent, Apple could compete with, and sometimes even surpass, Intel in the area of processor speed. Spin- ler also made a somewhat halfhearted attempt to license the Macintosh operating system (Mac OS) to other companies. However, very few companies ever chose to license the Mac OS because many felt the licensing agreements were far too restrictive. By 1995, Apple had bigger problems, including SI bil- Jion in back orders and insufficient paris to build those machines. And worse, in the Iste summer of 1995, Microsoft released its infamous Windows ’95 version, which was well suited to compete with the strengths of the Mac OS. During the winter of 1995— 96, Apple made some misguided judgments concern- ing its product line and as a result posted a loss for that quarter. In January 1996, Apple asked Spindler to resign and chose Gil Amelio, former president of ‘National Semiconductor, to take his place. During his first 100 days in office, Ametio announced many sweeping changes for the com- pany. He split Apple into seven distinct divisions, cach responsible for its own profit or loss, and he ttied to better inform the developers and consum= ers of Apple's products and projects. Although Case 7 Apolo lnc. in 2008 cag ‘Apple announced a staggering first-quarter loss of $740 million in 1996, the company brought down its losses to $33 million quarter two, an achievement ‘that financial experis had not imagined Apple could accomplish. And in the third quarter, Apple again beat the best estimates, reporting « $30 million profit, At the end of 1996, the company astonished the industry when it announced that it planned to acquire NeXT, the company Steve Jobs had founded ‘upon his resignation from Apple in 1985; Jobs ‘was to be rehired by Apple as part of the acquisi- tion. The acquisition was chosen in order to control NeXTstep, the basis Apple planned to use for its next-generation operating system, Rhapsody, Dur- ing the summer of 1997, after announcing another ‘ultimillion-dollar quarterly loss, Apple determined that Gil Amelio had made many significant improve- ments in Apple's operations but had done all he could, No permanent replacement wes announced, but Fred Anderson, chief financial officer, was placed in charge of daily operations; Jobs was also given an expanded role in the company. Jobs's “expanded role” soon became more clear in terms of his responsibilities —Apple had no CEO, stock prices were at a five-year low, and important docisions.needed to be made. Jobs soon began to be referred to as “interim CEQ,” and 1997 proved to be a landmark year for his company. MacWorld Boston ‘was held in August, and Jobs was the keynote speaker. He used that event to make several significant announcements that would turn Apple around: there would be an almost entirely new board of directors, an aggressive advertising campaign, and an alliance ‘with Microsoft. Microsof received $150 million in Apple stock, Apple would have @ five-year patent cross-license, and the old legal battle between the two companies would finally be resolved. As part of the resolution tothe legal dispute, Microsoft paid an undisclosed emount to Apple ta quiet the allegations, that it had stolen Apple’s intellectual property (the ‘Mac GUD) and agreed to make Windows °98 avail- able to Mac users by year’s end. Jobs also effectively ‘ended Apple’ licensing agreements with other com- panies, buying out all but one, with the understand~ ing that that company would serve only the low-end market for computers (under $1,000). Ata late-1997 press conference, Jobs announced that Apple would begin selling ditect to consumers over the Web end by phone. Within a week, the Apple store was the third largest e-commerce site on the Web.cade Part2. Cases in Crafeg and Executing Strategy Jobs continued to make several changes dur- ing 1998, a year in which Apple reported a profit in all four quarters. Apple’s stock price was on the tise, and the company had released the iMac, an all-new design for the Macintosh that was meant to serve the lower-end consumer market. The com- puter had more than enough processing capabili- ties than most consumers would ever need snd was priced affordably. In the fall of that year, the iMac ‘was the best-selling computer in the United States. Apple followed up that success by introducing the iBook in 1999, the portable counterpart to the iMac, a laptop meant to be stylish, affordable, and powerful, Throughout 1999, Apple’s stock ‘con- ‘tinued to soar; in the fall it reached a high in the ‘upper $70s, In early 2000, Fobs announced that he was now permanent CEO of Apple. The remainder of that year was a slow one for Apple and for the rest of the computer industry. As a result, Apple reported its frst quarterly loss in three years. In late 2000, the company cut prices across the board; then, in early 2001, it releascd a new set of PowerMacs ‘with optical drives that let consumers both listen to and bum CDs as well as both read and write to DVDs as well. In May 2001, Jobs announced that Apple would open several retail stores that would sell Apple products as well as third-party products, inclading MP3 players, digital cameras, and digital video cameras. In October 2001, Apple released its first non- computer product in years, the iPod. his small machine wes a portable MP3 player that stored songs on a hard drive and could be taken anywhere. Apple took quite a risk in pricing the small machine ‘ata premium, but the gompany felt that consumers ‘would be willing to pay more for the unique style, design, and technology. Over the next few years, Apple made adjust- ‘ments and additions to its product line, on both the software and hardware sides. Although the latter half of 2002 was a poor time forthe entire economy as a whole, Apple did well, with net earnings of S65 nillion. The company’s other products sold well and also enjoyed success, but it was the iPod that would revolutionize the company and the industry, In 2003, when the company released iTunes, the online retail store where consumers could purchase individual songs legally, the success of the venture skyrock- ted. The technology was available only for Macs at first but had since become available for PC users as well. By July 2004, 100 mitlion songs had been sold and iTunes had a 70 percent market share among all legal online music download services. Apple's sue- cess continued to grow, largely thanks to the iPod and iTunes. By 2005, Jobs's leadership had placed Apple at the forefront of the MP3 player industry and had established the company as a player once again in the computer industry. From the moment Jobs retumed to Apple, he had idea after idea for how to improve the company and turn its performance around. He not only consistently pushed for innovative new ideas and products but also enforced several struc- tural changes, including ridding the company of ‘unprofitable segments and divisions. This blended his leadership style, which epitomized the spirit and standards on which Apple was founded, with the business discipline the younger Jobs had lacked. Jobs also credited Apple's success to its skilled man agement team, which included Peter Oppenheimer and Timothy Cook Having started with Apple in 1996 as con- troller for the Americas, Peter Oppenheimer had become senior vice president and chief financial officer. He was promoted to these positions after less than two years, due to his extensive experi- ence in business and finance. Oppenheimer supervised the controller, treasury, investor rela- tions, tax, information systems, internal audit, corporate development, and human resources departments. He reported to the CEO and helped return a healthy fiscal discipline to the company. ‘Timothy D. Cook was Apple's executive vice presi- dont of worldwide sales and operations. Cook, who also reported to the CEO, managed Apple’s supply chain, sales activities, and service and sup- port in all markets and countries. His position was accountable for maintaining Apple's flexibility in serving more demanding consumers. Cook had ‘worked first for IBM and then for Compaq, gaining extensive experience in technological industries. While Jobs provided the vision for the organiza- tion, Oppenheimer, Cook, and the other members, of the executive'staff and the board of directors ‘were responsible for ensuring that all operations of Apple ran efficiently and smoothly, Together they ‘worked to ensure that Apple could continue to be a vital, innovative company in the face of a very competitive environment Al IN Ini tory bil net mil tos Et pom umzvsa0 e v ce N s ° R % Ie 6 F Bea_ APPLE'S SITUATION iN 2008 Inits fiscal 2008 third quarter ending June 28, Apple seported the best third quarter in the company’s his- tory, with revenues of $7.646 billion, up from $5.41 billion for the same quarter the previous year, and a net quarterly profit of $1.07 billion, up from $818 | million. Apple shipped a record 2,496,000 Macia- | tosh units (up 41 percent from the same quarter the Exhibit 1 Income statement data Net sales | Domestic | International | Total net sales. Cost sales esearch and development Seling, genera, and administrative “otal operating expenses Operating income: (Other income and expense ‘Income before pravision for income taxes Provision for income taxes Net income Earnings per common share—diuted Balance sheet data as of September of year Cash, cash equivalents, and short-torm investments Accounts receivable, net Inventories Property, plant, and equipment, net Total assets (Current labiittes Noneurent labios ‘Shareholders’ equity Other data Regular employees. “Temporary employees and contractors Intemational net sales as a percentago of total net sales Gross margin as a percentage of not sales RAD as a porcentage of net sales. Shares used in computing earnings per share—diuted (in thousands) ase 7 Apple Ine. in 2008 cass provious year) and 11,011,000 iPods (up 12 percent fiom the same quarter the previous year). But the company’s gross margin for the 2008 third-quarter was only 34.8 percent, down from 36,9 percent the previous year, and the company's stock price dropped by more than 10 percent, to below $155, in response. to Apple's statement that it expected the company’s gross margin to fall to 31 percent in the 2008 fourth quarter due to a future product transition. Apple’s financial performance for fiscal years 2005-2007 is shown in Exhibit |. Financial Performance for Apple, Fiscal Years 2005-2007 (in millions, except | share amounts, employees, and contractors) Baar add gaia $1486. 9,878 7.829 24,006 19s 15,982 13717 782 712 2,963 2.433, 3,748 3.145, 4,408 2.453, 599 365 5,008 2818 1808, 1512 29 480 $3495 $1,989 $1,928 $3.93 $227 $155 09202 © «877,528 856,878 $15286 $10,110. $ 8261 1,697 1.252 805 346 270 165 e320, 1281 ai7 28347 17208 11516 9299 6443 3.487 1516 778 01 si4sse $ 9.9B4 $7,428 21.560 w78r 14,806 2316 2,998 2,020 an% 41% 40% 34% 29% 20% 3% 4% % ‘Saurse: Fr Aggie Iver Pao, iano Sapocaiene nea Real 1O/T073S7/AAPL SVR. Qe07 pol accessed My 18, 2008caso According io Apple, the company’s “business strategy leverages its ability, through the design and development of its own operating system, hardware, and many software applications and technologies, to bring to its customers around the world com” pelting new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design.” Most of the actions Apple had taken over its history were consistent with its under- 'ying philosophy on innovation. Since 2002, Apple had determined that the digital electronics market was converging with the computer market and that consumers would begin to demand more synchro- nization and harmony between the two. That belief hnad Jed Apple to release the iPod and iTunes, and ‘more recently the iPhone and the App Store, as well 5 to improve the software and available options on its computers. Apple managed its businesses largely on a ‘geographic basis. Its primary geographic segments included the Americas (North America and South America); Burope, Affica, and the Middle East; and Japan. It also had @ Retail division that oper. ated the Apple-owned stores in the United States, aly, Japan, Canada, and the United Kingdom. The ‘company’s primary product lines were Macintosh products (including desktops and portables), iPods, Phones, iTunes (including other music-related products and services), peripherals (including other hardware), and software, service, and other sales. In fiscal year 2007, Apple had more than $24 billion in sales, with about $10.3 billion of that from sales of Macintosh computers and approximately $8 billion from iPod sales—see Exhibit 2. Apple's unit sales for the same fiscal yeas, broken down by product, revealed that approximately 7 milion Mac ‘units were sold in 200%, while aporoximately 51.6 million iPods (all typés) and approximately 1.3 mil- Tion iPhones were sold over the same period. One other impressive feature of Apple's finan- cial statements was that although the company had seme minimal long-term debt in recent years, in February 2004 it retited the $300 million of out- standing debt (unsecured notes) it held, resulting in reporting long-term liabilities of $0. In retiring this debt, Apple did not deprive key operating areas of the necessary levels of funding and much of Apple’s operating budget was poured into research Part 2. Casas in Crating and Executing Strategy and development. These investments were consis- tent with the company’s philosophy that its contin- ued achievement would depend heavily on research and development, innovative products and services, and competitive prices. Perhaps even more impor. tant, Apple's investments were intended to convince investors and consumers that the company offered 4 real advantage over the abundant competition in personal computers, MP3 players, and mobile communications. Heading into the fourth quarter of 2008, Apple had much to be excited about. Besides the company just baving reported record revenues and Mac sales, Apple's new iPhone 3G was receiv- ‘nig rave reviews from many analysts, The com- any had quickly recovered from the worldwide crash of the computer servers used to activate the phones, allowing Apple to sell more than 1 mail- lion phones over the Jaunch weekend. In recogni- tion of the company’s competence in design, the Industrial Designers Society of America, sponsor of the 2008 Industrial Design Excellence Awards, resented gold awards to the iPhone, MacBook Air, and Apple’ Wireless Keyboard, while it gave the iMac a silver award. However, Apple also faced some significant challenges in its core personal computer and digital ‘music player businesses. In July 2008, the struggling US. economy was on the verge of slipping into a recession. While Apple's international sales contin- ued to grow, the United States remained the compe ay’ single largest revenue source, Putther, analysts were concermed that the slumping US. economy would significantly reduce back-to-school spend. ing (traditionally a key revenue source for Apple’ ‘computer business) in the fall of 2008. Additionally, several large, well-fmded competitors had made significant investments to eater the online digital ‘media distribution chapnel, which was becoming increasingly crowded. For example, Ainazon.com had begun to offer digital music downloads as well 45 movie and television show downloads through its ‘Amazon Unbox service and had developed a service ‘0 provide live video downloads. Finally, while iPods had been a significant portion of Apple's revenue, they were coming under increasing pressure from competitors and from mobile phones that included MP3 players.Case 7 Apple In. in 2008 cast Exhibit 2 Apple's Net Sales by Operating Segment, Net Sales by Product, and Unit Sales by Product, Fiscal Years 2003-2007 (S in millions) Net Sales by Operating Segment ‘Americas Europe pan Rol Other segments* Total Not Sales by Product Docktops® Portables Total Macintosh IPod (Other music-related products and servioos® Peripherals and other hardware® Sofware, service, and other sales! Total Unit Sales by Product Deskiops* Portables * Total Macintosh Nat sales per Macintosh unit sold® \Pos Nt sales por iPod unit sold” iPhone 2007 $11,596 5,460 7,051 $1,463 51,690 sitet 1,989 mo Ea $0,415 36.950 4,096 3073 tait 920 3.266 2,350 4367 990) Sies1s $48,931 sat 4,058 1326 _1091 Sige 2494 2820 2969 _2014 5.208 4504 sis $1384 soaoo 22.407 $195 s202 Eo santo 1799 677 4,185, 599, e279 $273 2.550 4,923 1,308 278 951 2 S8279 1928 1865 3.200 $1498 aai6 $296 Bn $9,181 1309 598 eat 398 36.207 $2,475 2016 44ot 1,761 4.251 $1,491 998 $907 “Gir sngmonts include Asa Pac and FileMaker. pcs Meo, eMao, Mac ii, Power Mae, and XServe product nes. includes Macbook, Macook Pr, IBeok and PowerBook product ines. Consist of Tunea sie Stoo soles, [Pod zeroes, and Apple-branded ar tN-paty Pod accessories. tincudes sales of Apple-brandod and third-party displays, wirsless connectivity and networking solutions, and thor hardware aocessoris. ‘inoues sales of Apple rand opratng system, application software, thipary softwere, ApleCare, and inset eevee Deis by didng total Macrtoen not sales by total Maciosh unt sles perned by dividing total Pod net slos by total Po unt sls. Source: Appi Ine, 10K report fi wth he SEC on November 15, 2007 PERSONAL COMPUTER INDUSTRY In the second quarter of 2008, the worldwide PC market grew by 16 percent over the second quar- ter of 2007, to 71.9 million units, with growth led by mobile PCs. In the US. anarket, total shipments grew by only 4.2 percent, with Apple having the ‘highest growth rate, 38.1 percent, from the second ‘quarter of 2007. The PC industry was relatively con- solidated. As shown in Exhibit 3, the US. market ‘was dominated by five main players, who controlled 79 percent of the market, Internationally, the top fiveExhibit 3 U.S. PC Market Shares Second Quarter 2007 and 2008 ed 02 2008 ed Det n. 319% 279% Hiewiot-Packard 253, 258 pole 35 64 Acer BA 106 “Toshiba 55 58 Others 207 237 ‘Scarcz www gatnarenn, Oxtabor 2008, controlled more than 55.2 percent ofthe market, and Apple accounted for only 2 percent of international volume. While the PC market had experienced sub- stantial growth over the last decade, IDC, a lead- ing expert, predicted that the market in the United Slates, as well as the market throughout the world, with the exception of Asia, would experience dou- Dle-digit growth in terms of unit shipments through 2010 but would then slow down to high-single-digit growth through 2012. However, the dollar value of PC shipments was expected to grow at a rate of only $6 percent to reach $354 billion by 2012.2 Apple’s Computer Operations Even though Apple’ revenues were increasingly coming from noncomputer products, primarily the Pod. the company still saw computers as its core business. Apple's approach of handling every facet of the computer in-house differentiated it from its primary competitors in the PC market but left out many of the synergies that Wintel PC makers bene- Sited from. Many analysts still projected that Apple's sreatest opportunity for growth would come from the projected halo effect of iPods and iPhozes. That is, consumers were expected to switch to Apple com- puters after being exposed to the Apple brand through the iPod/iTunes combination or through the iPhone. Apple's computer product line consisted of sev- eral models in various configurations. Its desktop lines included the Mac Pro (eimed at professional and business users); the iMac (targeted toward consumer, educational, and business use); and Mac mini (made specifically for consumer use). Apple had three note- book product lines as well: MacBook Pro (for profes- sional and advanced consumer users), the MacBook (Gesigned for education users and consumers), and 52 Part2 Cases in Crafting and Executing Strategy the MacBook Aix (designed for professional and cov- sumer users) In both the desktop and notebook lines, the “Power” products were higher-end and offered ‘more computing power ata premium price. The other models were lower on the price scale but still priced high relative to Wintel sellers ‘The MacBook Air was Apple's most recent note- ‘book introduction. The MacBook Air was designed {to target users who valued both portability and power. ‘The notebook featured a 13.3-inch screen, a full-size keyboard, a builtin video camera, and cutting-edge wireless connectivity. This sleck notebook was only 0.76 inches at its maximum height when closed and ‘weighed only three pounds. The MacBook Air had ‘won critical acclaim for both its design and its ease of use, and was one of the products helping Apple gain ground in the competitive computer industry. + Competitors in the PE Market Dell Dell posted revenues of $61.1 billion for the fiscal year ending February 1, 2008. Dell’s revenues bad been consistently growing, and this trend was expected to continue. Roughly 32 percent of Dell's revenues came fiom sales of desktop PCs (se Exhibit 4). These PCs ranged from low-end bargain desktops to high-end gaming setups with the latest hardware and software. However, competition in the desktop market was lowering the profitability of desktop sales. Dell, a company that attempted to be a low-cost provider through supply chain and distribution logistics, was beginning to sce a shift in consumer demand toward mobility, products: leptops/notebooks, MP3 players, and PDAs. Dell’: notebook computers, like its desktops, ranged from low-end, low-priced models to state-of-the-art, high- priced models. This segment showed promising rev- ‘enue growth for Dell. The company also marketed peripherals such as printers, TVs, GPS devices, and cameras in an cffort to supply a broader array of customers’ needs for electronic products. Hewlett-Packard Hewlett-Packard’s Personal Systems Group (PSG) accounted for about 35 per- cent of the company’s revenues in fiscal year 2007. Imaging and various services accounted for the sec- ond largest percentage of the company's revenues, a 2 percent. From fiscal year 2006 to fiscal year 2007, the PSG experienced double-digit revenue growth and 28 percent increase in unit volume sales. HP attrib- luted the growth to increased sales of notebooks and Exhi De Mc scExhibit 4 Dell's Revenues by Product Category (% of total revenues) Gee February 1, Eo Pry eto an Bu Desktop PCS: 82% 34% ‘Mobity products {potebooks etc) 28 er Software and peripherals 6 16 Servers and networking haraware " 10 ‘Professional consuiting ‘and support services 9 9 Storage products 4 Totals 100% 00% ‘Sauna: Bazad on irtormation in Dae 10 report fed on March 31,2008, nipfecbn Wena caren p87 181 1 a Taction= ShowabledentSipage 657101 lack 226083 (acossed Jy 13, 2008) sales in emerging markets. The group provided half of the-company’s net revenue growth from 2003 to 2004; however, earnings from the division were only 0.9 percent of net revenues ($210 million earnings on $24 6billion in net revenues). Overall eveaue growth in the PSG broke down as shown in Exhibit 5 ‘The desktop and notebook lines were the key growth areas for Hewlett-Packard. At one point, HP offered a branded version of Apple's iPod, but that relationship ended because the partnership wasn’t Exhibit § Hewlett-Packérd Personal Systems Group, Net Revenue Gin millions) a Eee md Notebooks «$17,642 «$12,000 ‘$9,763 Desktop PCs 15850 1461314408 Workstations == 17211988 1.195 Handhelds 490 620 36 Otter 708 585 sat Total Saea0g | Fates Sebsrat “Source: Based on iriomaion n HowettPacards ical year ‘2007 104 repens! media corpocteienatmedia, Flee! lro/71/71087/0R2007!pafhp. sus ceport 2007 pal (cessed July 18,2008). Case 7 Apple ln. in 2008 cass helping HP as much as had been hoped. HP then moved to Microsofi-compatible devices but did not develop its own product for this market. Like Dell, HD offered desktops and notebooks in various con- figurations, with prices determined by the features ‘offered and hardware contained in the systems. LHP also offered peripherals such as televisions and related media devices, and was well-known in the imaging and printer markets. ‘Acer Acer, a multinational manufacturer based in ‘Taiwan, was founded in 1976 as Multitech, with 11 employees. In 1979, Acer designed the first mass- ‘produced computer for export from Taiwan; in 1985, it founded Taiwan's first and largest franchised retail ‘computer chain. The company was renamed Acer ia 1987, and a decade later it purchased the mobile PC division of Texas Instruments. By 2008, Acer was cone of the leading computer manufacturers in the ‘world. In fiscal year 2607, which ended December 31, Acer’s consolidated revenues rose by 25 percent fom the previous year, to $14.07 billion, while oper- ating income increased by 30 percent, to $310.63 rnil- Jion, and global shipments were up over 50 percent. ‘The company’s largest and one of its fastest-growing. geographic segments was the Furope/Middle East! ‘Africa segment, which accounted for 54.3 percent of the company’s PC, desktop, and notebook sales. Acer was one of the fastest-growing vendors in the United States, due in part to its acquisitions of Packard Bell and Gateway. The company based its competitive strat- egy on its four pillars of success: a winning business ‘model, competitive products, an innovative marketing, strategy, and an efficient operation model. The compa ny’s PC-centric offering included desktop and ntobile PCs, LCD monitors, srvers and storage, and high- definition TVs and projectors. The company’s distri bution of sales is provided in Exhibit 6. Heading into Exhibit 6 Acer's Segment Salos as a Percentage of Total Revenue foes Ean 2007 Mobie Pos 605% 53.8% Deskiop POs 152 164 Displays 185 160 Others* 58 At Tota 100% 100% "Others clude server, projector, and porpheral products. ‘Source: Information from Acer 2007 annual reportcast Pat2 Cases in Crafting and Executing Strategy 2008, the company expecied to be able to continue to grow unit total notebook shipments by 40 percent and. total PC unit shipments by more than 30 percent. PERSONAL MEDIA PLAYER INDUSTRY The personal electronics industry existed long before the iPod was popular. However, much of the history of the industry was related to the iPod's ancestors: portable music devices. Sony, with its Wallaman product line, was one of the carly giants in this sec- tor. The first Walkman appeared in 1979 in Japan, ‘The tape player, which notably did not have a record function, was an innovative gamble by Sony's man- agement. After a slow start, sales skyrocketed and music history was made, By 1995, more than 150 million Walkman products had been sold world- wide, The Walkman line eventually included tape- and CD-playing devices. The history of personal digital assistants (PDAs) reaches back almost as far as the history of portable music players. While Apple is often credited with making and distributing the first true PDA, there Were many forerunners to Apple's Newton. Shatp, ‘Toshiba, and Casio, among others, had products ‘whose functions mimicked those included in PDAs, However, Apple's Newton was the first product to successfully bring such functionality into a package for mass marketing? Tn more recent years, PDAs had become more and more functional, blurring the line between PDAs and portable computers. Microsofts special- ized edition of Windowg for PDAs further blurred this line. PDAs could. syne with PC software and hold calendar events tak lists, and even documents However, despite this increase in functionality, pure PDA sales had been declining since their peak in the eatly 2000s, According to IDC, sales of PDAS in the fourth quacter of 2007 fell 53.2 percent from the same quarter in 2006. This decline was due not to a lack of demand for portable devices but to a conver- gence between PDAS and other devices—particu- larly the cell phone. ‘The other major consumer electronics product of the past 25 years was the cellular telephone, The First public testing of cell phones was in Chicago in 1977. However, a successful demonstration of cell phone technology had occurred as carly as 1973, In 1982, the Federal Communications Commission, (FCC) authorized commercial cellular service in the United States. By 1987, demand was so high (more than 1 million users) that the original allocations for bandwidth were no longer sufficient. Changes and improvements were made to the technology, and the FCC allowed broader innovation in the indus- tty, According to the CTIA (which describes itself as an association representing all sectors of wireless communications), there were more than 250 million cell phone uscrs in the United States in 2008, and the Central Intelligence Agency's 2008 World Fact- ‘ook reported that there were more than 2.4 billion worldwide The past 30 years of consumer electronics his- tory were filled with companies expanding function ality and portability in products. At the same time, personal computers were getting smaller and creep” ing toward the market that these portable electronies products had historically filled. Apple's foray into ‘the consumer clectronics market with its Pod was a perfect example of this movement. While a number of the major computer manufacturers had entered the MP3 player industry, there were more than 100 manufacturers offering digital music players. and personal media players (PMP), devices that played video and music, in the United States in 2008, Apple vwas ihe undisputed leader of the market. In fact, it ‘was the introduction of the user-friendly iPod in 2001 ‘that spurred growth in the digital music industry. By 2004, sales of digital music players had reached 27.8, ‘million units and the tesearch firm Gartner predicted that more than 150 million units would beshipped in 2010. However, market growth was expected fo slow, especially ia developed countries, given the number of people who had already purchased the devices and the increasing number of cell phones that had the ability to play digitalanusic and Videos. Apple iPod In fiscal year 2003, Apple Computer, Inc. reported net revenues of $6.2 billion (up 8.1 percent from 2002) and net income of $69 million. For much of the company’s history, Apple had excelled at being the first company to introduce a concept or a new Product, but then struggled to maintain control of its market share in that product line, Although Apple didn’t introduce the first portable MP3 player ere ind Wy styl(CigerLabs did in 1998), the iPod, introduced in October 2001, was the first to gain widespread attention and popularity ‘When Apple launched its iPod, many critics did not give the product much of a chance for success a5 its lannch came about one month after the Septem- ber 11 terrorist attacks and it carried a fairly hefty price tag of $399, However, the success of the iPod Thad reached such phenomenal proportions that onc observer said, “Itis now a fashion statement, and any other MP3 player is considered “Brand X° for many consumers.” Industry experts agreed that the iPod's successhad revolutionized the portable music industry ina manner similar to the Sony Wallenan in 1980. By June 2005, Apple controlled well over 70 percent of the hard drive MP3 player market and more thin 40 percent of the flash memory player market. In July 2008, Apple offered four basie styles in the iPod product line and controlled an estimated 70 percent of the MP3 player market, The four iPod styles were as follows: + TheiPod Shuffle, abasic flash-based player with no screen, FM radio, or voice recorder. It came in 1GB and 2G, and provided up to 12 hours of battery life + The iPod Nano multimedia player, offered in AGB (4 hours of video or 1,000 songs) and 8GB (8 hours of video or 2,000 songs) sizes, that sed a click whee! interface to navigate the player's controls. It allowed users to view pho- tos and videos a3 well as to listen to music (in ‘Apple's AC format). It provided up t0 24 hours ‘of music playback and 5 hours of video play back on a single charge. + The iPod Classic, 2 hard-drive-based click- wheel-controlled multimedia player offered in 80GB and 160GB sizes that, similar to the smaller Nano, played music in Apple's AAC format and showed videos and photos. The 80GB player held up to 20,000 songs or 100 hours of video and provided up to 30 hours of audio playback or 5 hours of video playback on ‘single charge. The 160GB player held 40,000 songs or 200 hours of video and provided up to 40 hours of audio playback or 7 hours of video playback on @ single charge. + ‘The iPod Touch, 2 multimedia flash-based player controlled though an innovative touch screen interface. It was offered in 8GB (1,750 Case 7 Apple. in 2008 cass, songs, 10 hours of video), 16GB (3,500 songs, 20 hours of video) and 32GB (7,000 songs, 40 hhouts of video) sizes, and provided up to 22 hhouts of music playback and 5 hours of video playback on a single charge. This multimedia player featured a wide 3.5 inch-screen and built- in WieFi, which allowed users to connect «0 the Internet nd access e-mail, buy music fom the iTunes store, and surf the Web from wire- less hotspots. Touch users also had access to maps, the weather, and stocks, and the ability to write notes to themselves. The Touch featured ‘an aocelerometer that detected when the Touch rotated and automatically changed the display from portrait to landscape. While cach new version of the iPod offered ‘innovative technology, the new product introductions ‘were not without their challenges. The original iPods ‘were criticized for short battery life and eventually ledo a class action lawsuit against Apple, with users claiming that Apple had misrepresented the life of the rechargeable battery used in the iPod. While “Apple denied this claim, the company offered a bat- tery replacement service for $99.00 and offered to settle the class action suit in June 2005, offering pur- ‘chasers of fist-, second, and third-generation iPods an extended warranty and a $50 voucher. Apple also experienced problems with the launch of the Nano in 2005, with customers complaining about the device freezing, and the ease with which the device (espe- cially the screen) could be scratched or would stop fonctioning. Apple offered a repair and replacement service for these devices, but it was expected to face ‘class action suit as a result ofthese problems, simi- lar to the one filed over the battery life problem. Regardless of these challenges, a 2007 customer survey by PC Magazine showed that Apple iPods ranked significantly higher than other brands in terms of overall quality, sound Quality, ease of use, ‘and overall reliability (see Exhibit 7). By the end of 2008, many iPod fans were eagerly awaiting the next, Version of the iPod, and rivals were striving to take a bite out of Apple's market share iTunes Aside from the iPod's ease of use, one of the pri- ‘ary factors that contributed to the popularity of the iPod was Apple's iPod/iTunes combination. In fact,C56 Part2 Cases in Craftng and Executing Strategy Exhibit 7 Comparative Customer Satisfaction Scores for MPS Players—2007 PC Magazine Reader Survey ees Overall Sec rs fe rope 3 a7 26 33 Microsoft a4 a7 ea 82 Creative 78 a4 75 as ‘ichos 78 a1 78 80 ‘River 78 84 72 a1 Toshiba 78 85 at 80 SanDisk 75 80 75 79 Samsung 74 80 7s 19 Sony 13 80 14 78 Industry averago* 74 as 76 78 “includes scores fom Del, Ro, Panasonic, Pipe and ROA as wal The maxim posse Soave was 700) Sours: Basedon a PC Magazine cuetomes survey, ctaber 21,2007, ww pemag com, despite the acclaim that had been heaped on it, many industry observers believed that the iPod would not have achieved its dominant position without ‘Tunes Apple first released the iTunes digital music management software for Macintosh computers in 2001. It was innovative but not alone. Originally, the software was intended to allow users to store their Aigital (CD) music to their computer hard drives and make the content easily accessible. As features such as the ability to bum custom CDs were added to the software, iTunes became more and more useful to consumers. When the iPod was released in 2001, iTunes was quickly adjusted to allow for syncing between the music management software and the new music player. This interface made it easy for consumers to move content from tyeir computer to their iPod, an essential part of the product valuo of the iPod While the iTunes software was a key component in Apple's strategy, it would not have a significant impact on iPod sales until the iTunes fourth edition was released in April 2003. With the releasc ofthe fourth edition, Steve Jobs announced that he had reached a deal with the five Iajor music labels to sell their content in a copy- protected form from the iTunes Music Store on the Internet, and the world took notice. It marked the first time that such a large library of popular music ‘Was available in one place via a simple method. Jobs was able to negotiate the agreement with the labels for two main reasons. First, the Iabels were eager to offer a legitimate online source for their music that ‘would reduce the flow of pirated music. Second, the music Apple provided from the {Tunes Music Store was compressed using Apple’s proprietary Advaniced Audio Coding (AAC) and the music was protected with Apple's Fairplay Digital Rights Management system, one of the strongest in the country. In October 2003, a version of iTunes, including the iTunes Music Store, was released for Windows users. This immediately opened up Apple's music, store to millions of users who hed previously been shut out, By October 2005 Apple had introduced a new version of ‘Tunes that sold not only music but video as well. This version of ‘Tunes was released in conjunction with Apple's video iPod. As in the origi- nal launch of iTunes, Apple formed partnerships with major networks such as ABC, NBC, ESPN, and Disney to make content such as television shows, sports programming, news, and children's shows available in a secure, encoded format Tn 2008, iTunes allowed customers not only to purchase music, videos, movies, and television shows that could be played on any of the iPods (with the exception of the Shuffle and the iPhone) but also to rent movies that could be played on the Apple evices. Apple advertised that with a catalog of ‘more than 8 million songs, and with more than 5 bil- lion songs downloaded from the iTunes store since its introduction in 2001, iTunes was the number one music retailer in the United Ststes. Additionally, Apple advertised iTunes as the world’s most popular onlin rentitvaline movie store, with customers purchasing and ‘ling more than $0,000 movies a day COMPETITION IN THE MP3 PLAYER INDUSTRY More than 100 companies manufactured MP3 play- 2rs in 2008, but only 4 of them legitimately claimed veal importance in this market: Apple, Creative, SanDisk, and Microsoft ‘A looming recession in North America and a ‘naburing market (analysts estimated that as many as 34 percent of the U.S. market currently owned a cell shone) were taking a toll on US. sales. The NPD Group estimated that shipments in the first quarter of 2008 were down 22 percent from the first quarter of 2007, However, worldwide shipments of cell phones stew 14 percent year-over-year in the first quarter of 2008, "The growth rate was higher than at any time in 2007, with nearly 282 million cell phones shipping in the first quarter of 2008, compared to 247.2 mil- \iow in the same quarter of 2007. ‘The MP3 market was clearly dominated by Apple, with it closest rival, SanDisk, capturing only 10 percent of the market (see Exhibit 8). The lead- ing companies in the industry realized that their con- tinued success depended not only on how well they could satisfy their current customers but also on their ability to attract new customers. Research indicated that most buyers based their choice of player on song capacity, multimedia capabilities, unit battery life, physical size and weight, and ease of use. Apple's sue- cess had proved that many consumers were willing to pay 2 premium for some perceived benefit, whether it was higher quality, more technological sophistica- tion, or greater ease of use. Flash-based players were Exhibit 8 MP3 Player Market Shares in Units, Q1 2007 vs. Q1 2008 Cea Ge Apple R 7 ‘SanDisk 10 " Crestve 4 2 Microsot 3 4 “Saurca:NPO Group, May 12,2008, Case 7 Apple ro. n 2008 cas? becoming increasingly popular with consumers, as ‘were touch screens and Bluetooth connectivity. How- ever, as the market matured, price was becoming an ‘increasingly important factor in consumer decisions. Creative Creative Labs (Creative) first became famous for its Sound Blaster sound cards, which set the standard in PC audio in 1989. Since that time, Creative had been an industry leader in PC audio technotogy and had built a largo user base and strong brand name in this area, Leveraging this postion, Creative offered the MP3 industry's broadest and most diverse proguct line: + The Zen, a credit-card-sized multimedia flash- based player offered in sizes from 2GB to 32GB that featured 2 2.5-inch screen and allowed users to listen to music in Apple's AAC format as well as MP3 and WMA formats; to view video, including movies rented from online services; and to view photos. This innovative product was rated as one of the 100 best products of 2008 by PC World, + ‘The Zen Stone line, which included the Zen Stone, the Zen Stone with Speaker, the Zen Stone Plus, andthe Zen Stone Plus with Speaker. ‘The Zen Stone line included flash-based play- os, from IGB to 4GB, that were positioned to compete against Apple's iPod Shue. The most basic player, the Zen Stone, was a 1GB playet that did not have a screen but was offered in six colors and provided 10 hours of playback on ‘one charge. The Zen Stone with Speaker was offered in IGB and 2GB sizes and offered a bat- tery life superior to that of the Zen Stone while also offering an external speaker so the device could be used without earphones. The Zen Stone Plus, offered in 2GB and 4GB fizes, had signifi- cantly more features, including a small screen, an FM radio, a voice recorder, # clock; and a stopwatch. The 2GB vetsion provided 9.5 hours ‘of playback per charge, while the AGB offered 12 hours. The Zen Stone Plus with Speaker was essentially identical to the Zen Storie Plus, with the addition of an external speaker anda longer battery life (of up to 20 hours) Creative was acknowledged as one of the lead- crs in innovation in the industry, having won thecss Part2. Cases in Crfting and Executing Strategy prestigious Consumer Electronics Show's Best of CES ‘Avvard three years ina row with its Zen Portable Media ‘Center in 2004, the Zen Microphoto in 2005, and the Zen Vision: M in 2006. In 2008, Creative introduced the Zen X-Fi (8GB), which used Creative proprietary X-Fi Xtreme Fidelity Audio technology to enhance sound quality. This multimedia player featured a buit- in speaker, @ memory expansion slot, an FM radio, and voice recorder, also, it allowed uscrs to watch movies, view photos, and play music in Apple's AAC fortaat as weli 2s in MPS and the Windows WMA for. ‘mat. A significant edition to the X-Fi line was the Zen X-Fi with wireless, available in both 16GB and 32GB, which allowed users to stream music and photos as part of a home network and include Yihoo Messenger and Windows Live Messenger to allow users to stayin touch with their friends on the go. In Creative's fiscal year ending June 30, 2008, the company reported an operating loss of $61 mil- Jion but 2 net income of $28 million due to a $100 million payment from Apple for use of the Zen pat- ent, This compared to an operating loss of $145 mil- lion in fiscal year 2006 and loss in net income of $126 million. The struggling company was volun- tarily delisted from the NASDAQ stock exchange in 2007, and in March 2008 agreed to sell and lease- back its headquarters building for $280 million in an effort to increase cash flows. iRiver ‘River Inc. was owned by Reigncom Ltd. based in South Korea. The company entered the digital music player market relatively ea:ly and offered a wide ‘vatiety of MP3 players worldwide. The brand was especially strong in Korga, where it controlled more than 50 percent of the Korean MP3 player market at cone time. However, in 2008 iRiver only offered four styles of players in the U.S. market: the E100, the iRiver Clix, the 60, and the L Series. Leading the company’s product line was the popular and critically acclaimed iRiver Clix, which had won multiple awards, such as an Editor’ Choice ‘Award and a World Class Award from PC Horld, and ‘was featured 2s one of PC World's Top 100 Products of the Year for 2006. Consumer Reports (a leading consumer advocate magazine that regularly rated and ranked products) rated the Clix as its top flash player as of April 1, 2007, placing it above players from Apple and SanDisk, among other manufacturers. In 2008, iRiver offered the second-generation Clix in 2GB, 4GB, and 8GB models, The Clix GEN? offered 24 hours of battery life; played musi, videos, and photos; supported subscription musie services; and featured a built-in digital FM tuner The iRiver T60 was a relatively basic flash- ‘based player that was offered in 1GB, 2GB, and 4GB sizes, The T60 series played music files (including MP3, WMA, and OMG) and featured a sinall screen, an FM tuner and recorder, and a voice recorder ‘The €100 flash-based player was launched in April 2008 and was offered in 4GB and 8GB sizes. This multimedia player featured a sleek, sophisticated design, high-quality playback, an FM radio, and a voice recorder, and offered up to 5 houts of video playback and up'to 18 hours of audio. 10 was a flash-based, ultraportable digital music player that, depending on its size, held up to 64 hours of music: ‘The player was offered in 2GB ($149.93), 1GB (8119.99), and 512MB ($99.99) sizes and featured an FM tuner and recorder, a color display, and up to 45 hours of battery life. While the player did not support video or photos, it did support subscription ‘music services and audio conteat from Audible.com. ‘The iRiver offerings were rounded out by the iRiver Lplayer. The Lplayer was offered in both 4GB and 8GB sizes and resembled a smaller version of the Clix. The Lplayer played audio and video files, and featured high-quality graphics, touch screen naviga- tion, FM radio and recording, and voice recording. Microsoft Microsoft Corporation, one of te best known com- panies in the world, was a late entrant into the MP3 Player market, not releasing its Zune brand until November 2006. In 2008, the Zune flash-based play- ets were offered in 4GB and 8GB sizes, and the Zane hard-disk players came in'30GB and 80GB sizes. The Zame flash-based players played both audio and video files and featured a 1.8-inch glass screen, the ability to wirelessly syne music with the user's home network, ‘builtin FM radio, and access to the Zune Market. place, an online store that was Microsofts answer to the iTunes store. The Zune could also be plugged into an Xbox 360 to customize the sound track of games played on the systema, The 80GB player offered all of the features of the flash-based pliyers but also offered 3.2-inch sercen. The larger player held up to 20,000 songs, 25,000 pictures, or 250 hours of video. One ofthe primary distinguishing characteristics of the Zune ‘was its wireless connectivity, which allowed users to share music and photos with other users within 30 feet, A user who received “beamed” songs could lis- ten to tbe song three times before the Zune’s built-in digital rights management (DRM) software prohib- ited access to the song, Photos had no such limita- tion. To highlight the song-sharing capability of the Zone, Microsoft marketed the product with the tog Tine “Weleome to the Social.” Microsoft viewed the Zune’s networking fea~ ture as a critical element ofits strategy for the Zane brand. According to J. Allard, who was charged with ‘overseeing the development of the Zune, Microsoft intended to place this player, and future Zume prod ‘ucts at the center ofan “ecosystem” that “helps bring, artists closer to their audience and helps people find new music and develop social connections.” To fur- ther support the ecosystem, Microsoft enlisted more than 100 partners to aid in product development, to offer accessories for the Zune, and to provide con~ tent on the Zuse Marketplace. Users could access the Zune Marketplace through the software included with the Zune. At the Ziune Marketplace, they could purchaso accessories for their Zune or select from ‘more than 2 million songs, which they could buy ‘outright or access through an “all you can cat” sub- scription service known as Zune Pass. For $14.95 a ‘month, the Zune Pass allowed users to download as ‘many songs as they wanted from the Zune Mazket- place, but once the subscription expired, users could no longer access the downloaded songs. Sandisk Like Microsoft, SanDisk was @ relatively new entrant in the MP3 player industry. SanDisk was founded in 1988 and beadquartered in Milpitas, California ‘The company was the leading worldwide supplier of innovative flash memory storage products and lever- ‘aged this market position when it integrated forward and shipped its first flash-based players in May 2005, By June 2005, the company had captured 8.9 percent of the flash memory digital music player market By July 2008, the company’s digital music player portfolio featured more than 8 players. Four of the more notable offerings were the following: + The Sansa View, available in 8GB, 16GB, and 32GB sizes, was introduced in January 2007 Case 7 Apple Ine. in 2008, cass and was considered to be the flagship product from SanDisk. The Sansa View players fea- tured a 24-inch screen, a built-in FM radio, an expandable memory slot, and a built-in micro- phone for recording. The 32GB player offered up to 35 hours of audio playback on a single battery charge and could hold up to 48 two-hour movies, 8,000 MP3 songs, ot 16,000 photos. + The Sansa Connect MP3 player was a 4GB ($249.99) flash-based player that won two CNET Best of CES Avvards in 2007 and was introduced to the US, market in March 2007. The player held 1,000 songs and played music, photos, and Internet radio. The higblight of the Sansa Con- ect was that it was a Wi-Fi-enabled MP3 player that allowed users to connect to their content through any open wireless hot spot. Through a partnership with Yahoo, Sansa Connect users could listen to LAUNCHcast Internet radio and browse Flickr albums and photos. Those users with a Yahoo Music Unlimited subscription could share song recommendations with friends ‘and download tracks and albums. + The Sansa Fuze was a multimedia player that played videos, music, and sudiobooks. The Sansa Fuze was zvailable in 2GB, 4GB, and 8GB sizes and featured a digital FM radio, voice recording with a builtin microphone, an expandable memory slot, and up to 24 hours of audio playback on a single battery charge +The Sansa Clip was a compact, wearable flash- based MP3 player that included a small screen and vwas offered in IGB, 2GB, and-4GB capacities This relatively basic player featured an FM tuner, 2 voice recorder with a builtin microphone, and upto 15 hours of play time on a single charge. + The Sansa Express MP3 player was a flash- Dased player introduced in January 2007. “The Sansa Express was offered in only a 1GB (859.99) size. The player held up to 250 songs in MP3 format o S00 in WMA format. The Sansa Express was billed as the first cableless player that connected directly to a user's PC and included a microSD expansion slot as well as an FM tuner with an FM recorder and a micro- phone for voice recording. SanDisk was considered by many analysts to be the second strongest competitor in the MP3 playerC160 industry and the strongest in the Windows-based segment. SanDisk had made significant strides in the market by offering more features at a lower price than its rivals. For example, the Connect was positioned to compete directly with the iPod Nano, suiven the Connect’s WiFi capabilites, lager scteen, expansion slot, and lower price point. The com- pany also attributed its success to aggressive mar- keting campaigns and retailers who were looking to improve on the razor-thin profit margins Apple allowed its retailers. However, the company was sig nificantly affected by the fierce competition in the MP3 player industry and the volatile flash memory market. In response to falling profits, the company took measures to reduce production costs and oper- ating expenses. Even with this temporary setback, saany analysts viewed SanDisk as the leading chal. lenger to Apple and the main rival for Microsoft to overtake in the fiercely competitive Windows-based ‘MP3 player market. APPLE iPHONE The iPhone, Apple's-{ntemet-enabled multimedia cellular phone, was considered to be a key product in the future of the company’s product portfolio. The first version of the iPhone was released on June 29, 2007. It had a multitouch screen with a virtual key. board and buttons but a minimal amount of hardware input. The iPhone's fimctions included those of 2 camera phone and portable media player (equivalent 10 the iPod) in addition to text messaging and visual ‘Voice mail. Italso offered Internet services including " e-mail, Web browsing (using access to Apple's Safari Web browser), and local Wi-Fi connectivity. Apple first announced the iPhone on January 9, 2007. The ‘announcement was preceded by rumors and specula- tions that circulated for several months and was fol- lowed by additional rumors of its features until its anticipated release. After its worldwide release, the iPhone was named Time magazine's Invention of the ‘Year in 2007 The iPhone began with Apple CEO Steve Jobs's direction that Apple engineers investigate touch sereens. Apple created the device during a secre- tive and unprecedented collaboration with AT&T Mobility (which was Cingular Wireless at the time of the phone's inception), at a development cost of $150 million by one estimate. During development, Past2 Cases in Crafting and Executing Sttegy the iPhone was code-named Purple 2. The company rejected an early “design by committee” built with Motorola in favor of engineering a custom operat- ing system and interface and building custom hard- ware. The iPhone went on sale in the United States on June 29, 2007. Apple closed its stores at 2:00 ‘pm. local time to prepare for the 6:00 p.m. iPhone Jaunch, while hundreds of customers lined up at stores nationwide. Apple sold 270,000 iPhones in the first 30 hours on launch weekend. ‘On September 5, 2007, the 4GB model was discontinued and the 8GB model price reduced to $399. Those who had purchased an iPhone in the I4-day period before the September 5, 2007, ‘announcement were eligible for a $200 “price pro” tection” rebate from Apple or AT&T. However, it ‘was widely reported that some who bought between the June 29, 2007, launch and the August 22, 2007, price protection kick-in date complained that this ‘was a larger-than-normal price drop for such 2 rela- tively short period aad accused Apple of unfair pric ing. In response to the controversy, on September 6, 2007, Apple CEO Steve Jobs wrote in an open letter to iPhonc customers that everyone who purchased an iPhone at the higher price “and who is not receiv- ing a rebate or other consideration,” would receive a {$100 credit toward the purchase of any product sold in Apple's retail or online stores. While the cell phone handset industry in the United States was experiencing slowing growth over- all, two segments—the smartphone segment and the low-cost handset market—were expected to expand. Jn the first quarter of 2008, the iPhone controlled 19.2 percent of the sinartphone segment, down from 26.7 percent in the fourth quarter of 2007. However, analysts attributed this drop in demand, at least par: tially, to the impending launch of the iPhone 3G. ‘The iPhone 3G was released in 70 countries on July 11, 2008, and was available in the United States exclusively on AT&T Mobility with a two-year con: tract.'The new Apple iPhone 3G combined the fine tionality ofa wireless phone and an iPod and allowed users to acoess the Internet wirelessly at twice the speed of the previous version of the iPhone. Apple’ ‘ew phone also featured a built-in GPS and, in an effort to increase adoption by corporate users, was compatible with Microsoft Exchange. Similar to the iTunesiPod partnership, Apple launched the App Store for the iPhone. The App Store allowed developers to build applications forthe iPhone and to offer them either for free or for a fee. On launch day, there were more than 800 applications available, Two hundred of these were available for free, while 90 percent of the applica- tions cost less than $10. By the end of the launch ‘weekend, the App Store reported more than 10 rail- lion downloads, To further expand the interconnec- tivity between its product offerings, including the iPhone, Apple launched its MobileMe service on June 9, 2008. Like Microsoft Exchange, this ser- ‘vice delivered push e-mail, contacts, and calendars to applications on the iPhone, iPod touch, Macs, and PCs. However, the launch of MobileMe had not, gone smoothly for Apple, leading Apple to post an apology to customers who had lost e-mail access and service as a result of some problems with the new MobileMe Web applications. Despite the June 9, 2008, launch, the problems with MobileMe were slll not completely resolved as of July 23, 2008. ‘The 8GB iPhone 3G was priced at $199, and the 16GB iPhone 3G cost $299. These prices repre- sented 2 drop of $200 each over the previous geneta- tion. However, the consumer data plan forthe iPhone. 3G edst $30 per month, aprice increase of $10. In an. interview with technology writer Om Malik, AT&T Mobility president and CEO Ralph de la Vega stated, “The SMS messages are not bundled anymore, and ‘you payfor what you want.” The voice plan for the first-generation iPhone included 200 text messages; AT&T currently charged $5 per month for 200 text ‘messages. Several sources, including CNET, Engad- ‘get, Gizmodo, MacWorld, Time, and Yaboo!, pointed ‘out that this would be an increase of $240 to $360 over the span of the two-year contract, which was greater than the $200 price discount. Regardless of these price increases, and despite some systemic problems with activations of the Endnotes Case 7 Apple Ine. ia 2008 cso sPhone, demand for the iPhone 3G exceeded expec- tations, with many stores still sold out two weeks after the phone's launch. THE FUTURE In assessing Apple's future, most analysts agreed that Apple would undoubtedly continue its well- cstablished track record of introducing innovative, high-quality consumer electronics to the masses However, many believed that it would be very dif- ficult for Apple to maintain its substantial operating profit margins given increasing competition in its core markets. In 2 conference call discussing its thifd-quarter operating results, Apple acknowledged that it expected its operating profit margin to fall from 34.1 percent to 31.5 pereent over the next quar- ter. While Apple offered no details, it atributed this fall in margin at least partially to a product tra tion that would result in “state-of-the-art products at price points our competitors can’t match”? ‘Analysts were also concerned with Steve Jobs's health (be had previously been treated for cancer), Apple's succession plan, falling demand in tbe personal media player market, and an increasing number of iPhone killers being offered by power- ful competitors such as Nokia and Samsung in the mobile phone industry. Most analysts believed that with Jobs at the helm, Apple could overcome the competition and continue to offer innovative market leading products. However, with Apple maintain- ing strict secrecy regarding its succession plan, it ‘was not clear that the company could continue its success without Jobs, especially if it experienced challenges expanding into new markets as it did in Jaunching its MobileMe service, {poplar For 10K, Sed Novem 18,2007, 26, «Dan tysted, “DC Raees Global PC Sheen! Forcasy 106 News ‘Sore, Juno 12,2008 5 She wan ante net psn et hs accosted May 27, 2008) “Sve Sah eds Lassen Thc New York 19, 90.18 (ly 28, 200m. 2 torent, “ing Arle Toe’ Nowaack onins, Sets 17, 2006 wr mre men con a2 anne asoeae onto. 2007) Rope earings conference al uly 21,2008, wv 2pne cart