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Apple in 2008
Introduction
In 1997, Apple Computer was in deep trouble. The company that had pioneered the personal computer (PC mar!et with its easy-to-use Apple II in 197" and introduced the #irst $raphical user inter#ace (%&I with the 'acintosh in 19"( was bleedin$ red in!. Apple)s worldwide mar!et share, which had been #luctuatin$ between 7* and 9* since 19"(, had sun! to (*. +ales were declinin$. Apple was on trac! to lose ,-7" million on re.enues o# ,7 billion, on top o# a ,7(/ million loss in 1990. In 1uly 1997, the co#ounder o# the company, +te.e 1obs, who had been #ired #rom Apple in 19"2, returned as C34. At an in.estor con#erence, 'ichael 5ell, C34 o# 5ell Computer, was as!ed what 1obs should do as head o# Apple. 5ell 6uipped 7I)d shut it down and $i.e the money bac! to shareholders.81 9y ://", the situation loo!ed .ery di##erent. Apple was on trac! to boo! record sales o# more than ,-: billion and net pro#its o# close to ,(.7 billion. The stoc! price, which had traded as low as ,0 a share in ://- was about ,17/, with the mar!et capitali;ation at ,1(/ billion, which #ar surpassed that o# 5ell Computer which was about ,(1 billion. 5ri.in$ the trans#ormation were stron$ sales o# Apple)s iPod music player, music downloads #rom the iTunes store, and Apple)s iPhone. In addition, stron$ sales o# Apple)s i'ac laptop and des!top computers had li#ted Apple)s mar!et share in the &nited +tates PC busi- ness to ".2*, up #rom a low o# under -* in ://(.: Apple now ran!ed third in the &nited +tates PC mar!et behind 5ell with -:* and <P :2*. 'oreo.er, analysts were predictin$ that the halo e##ect o# the iPod and iPhone, to$ether with Apple)s adoption o# Intel)s microprocessor architecture, would dri.e stron$ sales $oin$ #orward. To emphasi;e the broadenin$ product port#olio o# the company, Apple had dropped 7computer8 #rom its name. =or the #irst time in :/ years, it loo!ed as i# Apple, the perennial also-ran, mi$ht be sei;in$ the initiati.e. 9ut 6uestions remained. Could the company continue to build on its momentum> Could the company brea! out o# its niche and become a mainstream player in the computer industry> <ow sustainable was the iPod dri.en sales boom> ?ould the iPhone continue to $ain mar!et traction> And with new competitors comin$ alon$, could Apple hold onto its mar!et leadin$ position in the mar!et #or di$ital music players>
Apple 1997
1976
This case was prepared by Charles ?. B. <ill, the &ni.ersity o# ?ashin$ton. Copyri$ht Charles ?. B. <ill C ://". Deprinted by permission.
C13
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to ?o;, but it did to 1obs. 1obs persuaded a reluctant ?o; to #orm a company and sell the machine. The location o# the company was +te.e 1obs) $ara$e. 1obs su$$ested they call the company Apple and their #irst machine, Apple I. They sold about :// computers at ,000 each. The price point was pic!ed as somethin$ o# a pran!. The Apple I had se.eral limitationsE no case, !eyboard, or power supply bein$ ob.ious ones. It also re6uired se.eral hours o# laborious assembly by hand. 9y late 1970, ?o; was wor!in$ on a replacement to the Apple I, the Apple II.( In 4ctober 1970, with the Apple II under de.elopment, 1obs and ?o; were introduced to 'i!e 'ar!!ula. 4nly -(, 'ar!!ula was already a retired millionaire, ha.in$ made a small #ortune at =airchild and Intel. 'ar!!ula had no plans to $et bac! into business anytime soon, but a .isit to 1obs) $ara$e chan$ed all that. <e committed to in.estin$ ,9:,/// #or one-third o# the company and promised that his ultimate in.estment would be ,:2/,///. +tunned, 1obs and ?o; a$reed to let him @oin as a partner. It was a #ate#ul decision. The combination o# ?o;)s technical s!ills, 1obs) entrepreneurial ;eal and .ision, and 'ar!!ula)s business sa..y and connections, was a power#ul one. 'ar!!ula told 1obs and ?o; that neither o# them had the eFperience to run a company and persuaded them to hire a President, 'ichael +cott, who had wor!ed #or 'ar!!ula at =airchild. The Apple II was introduced in 1977 at a price o# ,1,://. The #irst .ersion was an inte$rated computer with a 'otorola microprocessor and included a !eyboard, a power supply, a monitor, and the 9A+IC pro$rammin$ so#tware. It was +te.e 1obs who pushed ?o; to desi$n an inte$rated machineE he wanted somethin$ that was easy to use, not @ust a toy #or $ee!s. 1obs also insisted that the Apple II loo!ed $ood. It had an attracti.e case and no .isible screws or bolts. This di##erentiated it #rom most personal computers at the time that loo!ed as i# they had been assembled by hobbyists at home (as many had . In 197", Apple started to sell a .ersion o# the Apple II that incorporated somethin$ newE a dis! dri.e. The dis! dri.e turned out to be a critical inno.ation, #or it enabled third-party de.elopers to write so#tware pro$rams #or the Apple II that could be loaded .ia #loppy dis!s. +oon pro$rams started to appear, amon$ them 3asy?riter, a basic wordprocessin$ pro$ram, and GisiCalc, a spreadsheet
pro$ram. GisiCalc was an instant hit, and pulled in a new customer set, business types who could use GisiCalc #or #inancial plannin$ and accountin$. 9ecause GisiCalc was only a.ailable #or the Apple II, it helped to dri.e demand #or the machine. 9y the end o# 19"/, Apple had sold more than 1//,/// Apple IIs, ma!in$ the company the leader in the embryonic personal computer industry. The company had success#ully eFecuted an IP4, was $eneratin$ o.er ,:// million in annual sales, and was pro#itable. ?ith the Apple II series sellin$ well, particularly in the education mar!et, Apple introduced its neFt product, the Apple III, in the #all o# 19"/. It was a #ailure. The computer was #illed with bu$s and crashed constantly. The Apple III had been rushed to mar!et too 6uic!ly. Apple reintroduced a reen$ineered Apple III in 19"1, but it continued to be outsold by Apple II. Indeed, successi.e .ersions o# the Apple II #amily, each an impro.ement on the proceedin$ .ersion, continued to be produced by the company until 199-. In total, more than two million Apple II computers were sold. The series became a standard in American classrooms, where it was .alued #or its intuiti.e ease o# use. 'oreo.er, the Apple II was the mainstay o# the company until the late 19"/s, when an impro.ed .ersion o# the 'acintosh started to $arner si$ni#icant sales.
company)s C34, 9ill %ates. %ates, still in his early :/s, persuaded I9' to adopt a 10-bit processor (ori$inally I9' had been considerin$ a less-power#ul "-bit processor . <e was also instrumental in pushin$ I9' to adopt an open architecture, ar$uin$ that I9' would bene#it #rom the so#tware and peripherals that other companies could then ma!e. Initially I9' was intent on licensin$ the CPH' operatin$ system, produced by 5i$ital Desearch, #or the I9' PC. <owe.er, the current .ersion o# CPH' was desi$ned to wor! on an "-bit processor, and %ates had persuaded I9' that it needed a 10-bit processor. In a series o# 6uic! mo.es, %ates purchased a 10-bit operatin$ system #rom a local company, +eattle Computer, #or ,2/,///. %ates then hired the desi$ner o# the operatin$ system, Tim Paterson, renamed the system '+-54+ and o##ered to license it to I9'. In what turned out to be a masterstro!e, %ates persuaded I9' to accept a non-eFclusi.e license #or '+-54+ (which I9' called PC-54+ . To sto!e sales, I9' o##ered a number o# applications #or the I9' PC that were sold separately, includin$ a .ersion o# GisiCalc, a word processor called 3asy?riter, and well-!nown series o# business pro$rams #rom Peachtree +o#tware. Introduced in 19"1, the I9' PC was an instant success. 4.er the neFt two years, I9' would sell more than 2//,/// PCs, sei;in$ mar!et leadership #rom Apple. I9' had what Apple lac!ed, an ability to sell into corporate America. As sales o# the I9' PC mounted, two thin$s happened. =irst, independent so#tware de.elopers started to write pro$rams to run on the I9' PC. These included two applications that dro.e adoptions o# the I9' PCA wordprocessin$ pro$rams (?ord Per#ect and spreadsheet pro$rams (Botus 1-:-- . +econd, the success o# I9' $a.e birth to clone manu#acturers who made 7I9'-compatible8 PCs that also utili;ed an Intel microprocessor and 'icroso#t)s '+-54+ operatin$ system. The #irst and most success#ul o# the clone ma!ers was Compa6, which in 19"- introduced its #irst personal computer, a :"-pound 7portable8 PC. In its #irst year, Compa6 boo!ed ,111 million in sales, which at the time was a record #or #irst year sales o# a company. 9e#ore lon$, a pro#usion o# I9' clone ma!ers entered the mar!et, includin$ Tandy, Ienith, Beadin$ 3d$e, and 5ell. The last was established in 19"( by 'ichael 5ell, then a student at the &ni.ersity o# TeFas, who initially ran the company out o# his dorm room.
Andy <ert;#eld, another en$ineer on the 'acintosh pro@ect, thou$ht Tribble was eFa$$eratin$, 7until I obser.ed +te.e in action o.er the neFt #ew wee!s. The reality distortion #ield was a con#oundin$ mLlan$e o# a charismatic rhetorical style, an indomitable will, and an ea$erness to bend any #act to #it the purpose at hand. I# one line o# ar$ument #ailed to persuade, he would de#tly switch to another. +ometimes, he would throw you o## balance by suddenly adoptin$ your position as his own, without ac!nowled$in$ that he e.er thou$ht di##erently.7 9ac! at Apple, thin$s were chan$in$ too. 'i!e +cott had le#t the company a#ter clashes with other eFecuti.es, includin$ 'ar!!ula, who had become chairman. +te.e 1obs persuaded 1ohn +culley to @oin Apple as C34. +culley was the #ormer .ice president o# mar!etin$ at Pepsi, where he had become #amous #or launchin$ the Pepsi Challen$e. 1obs had reportedly as!ed +culley, 75o you want to sell su$ar water #or the rest o# your li#e, or do you want to chan$e the world>8 +culley opted #or chan$in$ the world. A ?harton '9A, +culley had been hired #or his mar!etin$ sa..y, not his technical s!ills. ?hile the Bisa pro@ect su##ered se.eral delays, 1obs pushed the 'acintosh team to #inish the pro@ect and beat the Bisa team to mar!et with a better product. Introduced in 19"(, the 'acintosh certainly captured attention #or its stylish desi$n and utili;ation o# a $raphical user inter#ace, icons, and a mouse, all o# which made the machine easy to use and were not #ound on any other personal computer at the time. 1obs, e.er the per#ectionist, a$ain insisted that not a sin$le screw should be .isible on the case. <e reportedly #ired a desi$ner who presented a moc!up with a screw that could be seen by li#tin$ a handle. 3arly sales were stron$A then they #altered. =or all o# its appeal, the 'acintosh lac!ed some important #eaturesE it had no hard dis! dri.e, only one #loppy dri.e, and insu##icient computer memory. 'oreo.er, there were #ew applications a.ailable to run on the machine, and the 'ac pro.ed to be a more di##icult machine to de.elop applications #or than the I9' PC and its clones. 1obs, howe.er, seemed obli.ious to the problems, and continued to tal! about outsi;ed sales pro@ections, e.en when it was ob.ious to all around him that they were unattainable. In early 19"2, Apple posted its #irst loss. Aware that drastic action was necessary, but could not be ta!en while 1obs was runnin$ the 'acintosh di.ision,
+culley $ot bac!in$ #rom the board o# directors to strip 1obs o# his mana$ement role and o.ersi$ht o# the 'acintosh di.ision. In late 19"2, an embittered 1obs resi$ned #rom Apple, sold all o# his stoc!, and le#t to start another computer company, aptly named KeJT.
mar!et had $rown, stabili;ed at "*. The company had a stron$ balance sheet and was the most pro#itable personal computer manu#acturer in the world. 5urin$ this period eFecuti.es at Apple acti.ely debated the merits o# licensin$ the 'ac operatin$ system to other computer manu#acturers, allowin$ them to ma!e 'ac clones. +culley was in #a.or o# this mo.e. +o was 'icroso#t)s 9ill %ates, who wrote two memos to +culley layin$ out an ar$ument #or licensin$ the 'ac 4+. %ates ar$ued that the closed architecture o# the 'acintosh pre.ented independent in.estment in the standard by third parties, and put Apple at a disad.anta$e a$ainst the I9' PC standard. <owe.er, some senior eFecuti.es at Apple were a$ainst the licensin$ strate$y, ar$uin$ that once Apple licensed its intellectual property, it would be di##icult to protect it. In one .ersion o# e.ents, senior eFecuti.es debated the decision at a meetin$, and too! a .ote on whether to license. %i.en the contro.ersial nature o# the decision, it was decided that the .ote in #a.or had to be unanimous. It was notE a sin$le eFecuti.e .oted a$ainst the licensin$ decision, and it was ne.er pursued." In another .ersion o# e.ents, 1ean-Bouis %assee, head o# DM5 at Apple, .i$orously opposed +culley)s plans to clone, and +culley bac!ed down.9 %assee was deeply distrust#ul o# 'icroso#t and 9ill %ates and belie.ed that %ates) probably had an ulterior moti.e, $i.en how the company bene#ited #rom the I9' standard. Ironically, in 19"2 Apple had licensed its 7.isual displays8 to 'icroso#t. Deportedly %ates had stron$armed +culley, threatenin$ that 'icroso#t would stop de.elopin$ crucial applications #or the 'ac unless Apple $ranted 'icroso#t the license. At the time, 'icroso#t had launched de.elopment o# its own %&I. Called ?indows, it mimic!ed the loo! and #eel o# the 'ac operatin$ system, and 'icroso#t did not want to be stopped by a lawsuit #rom Apple. +e.eral years later, when Apple #iled a lawsuit a$ainst 'icroso#t, ar$uin$ that ?indows -.1 imitated the 7loo! and #eel8 o# the 'ac, 'icroso#t was able to point to the 19"2 license a$reement to de#end its ri$ht to de.elop ?indowsE a position that the @ud$e in the case a$reed with.
1990 199!
9y the early 199/s, the prices o# I9'-compatible PCs were declinin$ rapidly. As lon$ as Apple was the only company to sell machines that utili;ed
%&Is, its di##erential appeal $a.e it an ad.anta$e o.er '+-54+-based PCs with their clun!y teFtbased inter#aces, and the premium price could be @usti#ied. <owe.er, in 199/, 'icroso#t introduced ?indows -.1, its own %&I that sat on top o# '+54+, and Apple)s di##erential appeal be$an to erode. 'oreo.er, the dramatic $rowth o# the PC mar!et had turned Apple into a niche player. =aced with the choice o# writin$ so#tware to wor! with '+-54+H ?indows operatin$ systems and Intel microprocessors (now the dominant standard #ound on 9/* o# all personal computers , or the 'ac 4+ and 'otorola processors, de.elopers lo$ically opted #or the dominant standard (des!top publishin$ remained an eFception to this rule . De#lectin$ on this lo$ic, 5an 3ilers, then .ice president o# strate$ic plannin$ at Apple, reportedly stated that 7The company was on a $lide path to history.81/ +culley too, thou$ht that the company was in trouble. Apple seemed boFed into its niche. Apple had a hi$h cost structure. It spent si$ni#icantly more on DM5 as a percenta$e o# sales than its ri.als. (In 199/, Apple spent "* o# sales on DM5, Compa6 about (*. Its microprocessor supplier, 'otorola, lac!ed the scale o# Intel, which translated into hi$her costs #or Apple. 'oreo.er, Apple)s small mar!et share made it di##icult to recoup the spiralin$ cost o# de.elopin$ a new operatin$ system, which by 199/ amounted to at least ,2// million. +culley)s $ame plan to deal with these problems in.ol.ed a number o# steps.11 =irst, he appointed himsel# chie# technolo$y o##icer in addition to C34Na mo.e that raised some eyebrows $i.en +culley)s mar!etin$ bac!$round. +econd, he committed the company to brin$ out a low-cost .ersion o# the 'acintosh to compete with I9' clones. The result was the 'ac Classic, introduced in 4ctober 199/ and priced at ,999. <e also cut prices #or the 'acs and Apple IIs by -/*. The reward was a 0/* increase in sales .olume, but lower $ross mar$ins. +o, third, he cut costs. The wor!#orce at Apple was reduced by 1/*, the salaries o# top mana$ers (includin$ +culley)s were cut by as much as 12*, and Apple shi#ted much o# its manu#acturin$ to subcontractors (#or eFample, the Power9oo! was built in 1apanNa #irst #or Apple . =ourth, he called #or the company to maintain its technolo$ical lead by brin$in$ out hit products e.ery 0 to 1: months. The results include the #irst Apple
portable, the Power9oo! noteboo!, which was shipped in late 1991 and $arnered .ery #a.orable re.iews, and the Apple Kewton handheld computer, which bombed. =i#th, Apple entered into an alliance with I9', whose mana$ers reali;ed that it had lost its hold on the PC mar!et to companies such as Intel, 'icroso#t, and Compa6. The I9' alliance had se.eral elements. 4ne was the decision to adopt I9')s Power PC microprocessor architecture, which I9' would also use in its own o##erin$s. A second was the establishment o# two @oint .enturesE Tali$ent to create a new operatin$ system, and Oaleida to de.elop multimedia applications. A third was a pro@ect to help I9' and Apple machines wor! better to$ether. Althou$h +culley)s $ame plan helped to boost the top line, the bottom line shrun! in 199- due to a combination o# low $ross mar$ins and continuin$ hi$h costs. In 199(, +culley le#t Apple. <e was replaced by 'ichael +pindler, a %erman en$ineer who had $ained prominence as head o# Apple 3urope. In 199(, +pindler #inally too! the step that had been lon$ debated in the companyE he decided to license the 'ac-4+ to a hand#ul o# companies, allowin$ them to ma!e 'ac clones. The 'ac-4+ would be licensed #or ,(/ a copy. It was too little too lateNthe industry was already waitin$ #or the introduction o# 'icroso#t)s ?indows 92. ?hen it came, it became clear that Apple was in serious trouble. ?indows 92 was a bi$ impro.ement o.er ?indows -.1, and it closed the $ap between ?indows and the 'ac. ?hile many commentators critici;ed Apple #or not licensin$ the 'ac-4+ in the 19"/s, when it still had a bi$ lead o.er 'icroso#t, ironically 9ill %ates disa$reed. In a 1990 inter.iew with Fortune, %ates notedE As Apple has declined, the basic criticism seems to be that Apple)s strate$y o# doin$ a uni6ue hardwareHso#tware combination was doomed to #ail. I disa$ree. Bi!e all strate$ies, this one #ails i# you eFecute poorly. 9ut the strate$y can wor!, i# Apple pic!s its mar!ets and renews the inno.ation in the 'acintosh. 1: +pindler responded to ?indows 92 by committin$ Apple to de.elop a neFt-$eneration operatin$ system #or the 'acintoshNsomethin$ that raised 6uestions about the Tali$ent alliance with I9'. At
the end o# 1992, I9' and Apple parted ways, endin$ Tali$ent, which a#ter ,2// million in in.estments, had produced little. 9y then, +pindler had other issues on his mind. The latter hal# o# 1992 pro.ed to be a disaster #or Apple. The company seemed unable to predict demand #or its products. It o.erestimated demand #or its low-end 'acintosh Per#orma computers and was le#t with eFcess in.entory, while underestimatin$ demand #or its hi$h end machines. To compound matters, its new Power9oo!s had to be recalled a#ter batteries started to catch #ire, and a price war in 1apan cut mar$ins in one o# its best mar!ets. As a conse6uence, in the last 6uarter o# 1992, $ross mar$ins slumped to 12*, down #rom :9* in 199(, and Apple lost ,0" million. +pindler responded in 1anuary 1990 by announcin$ 1,-// layo##s. <e su$$ested that up to (,/// mi$ht ultimately $oNsome :-* o# the wor!#orce.1- That was his last si$ni#icant act. <e was replaced in =ebruary by %ilbert Amelio. Amelio, who @oined Apple #rom Kational +emiconductor where he had $ained a reputation #or his turnaround s!ills, lasted @ust 17 months. <e #ollowed throu$h on +pindler)s plans to cut personnel and stated that Apple would return to its di##erentiation strate$y. <is hope was that the new 'ac operatin$ system would help, but wor! on that was in total disarray. <e too! the decision to scrap the pro@ect a#ter an in.estment o# more than ,2// million. Instead, Apple purchased KeJT, the computer company #ounded by none other than +te.e 1obs, #or ,(:2 million. The KeJT machines had recei.ed stron$ re.iews but had $ained no mar!et traction due to a lac! o# supportin$ applications. Amelio #elt that the KeJT 4+ could be adapted to run on the 'ac. <e also hired +te.e 1obs as a consultant, but 1obs was rarely seen at AppleA he was too busy runnin$ PiFar, his computer animation com- pany that was ridin$ a wa.e o# success a#ter a hu$e hit with the animated mo.ie, Toy Story.1( Amelio)s mo.es did nothin$ to stop the slide in Apple)s #ortunes. 9y mid-1997, mar!et share had slumped to -*, #rom 9* when Amelio too! the helm. The company boo!ed a loss o# ,7(: million in 1990 and was on trac! to lose another ,(// million in 1997. It was too much #or the board. In 1uly 1997, Amelio was #ired. ?ith mar!et share #allin$, third- party de.elopers and distributors were rethin!in$ their commitments to Apple. ?ithout them, the company would be dead.
Priced at ,1,:99, i'ac sales were stron$, with orders placed #or 1//,/// units e.en be#ore the machine was a.ailable. 'oreo.er, accordin$ to Apple)s research, one-third o# i'ac purchases were by #irst-time buyers accordin$ to Apple)s research.10 The i'ac line was continually updated, with #aster processors, more memory, and bi$$er hard dri.es bein$ added. The product was also soon a.ailable in many di##erent colors. In 1999, Apple #ollowed up the i'ac with introduction o# the i9oo! portable. Aimed at consumers and students, the i9oo! had the same desi$n theme as the i'ac and was priced a$$ressi.ely at ,1,299. +ales o# the i'ac and i9oo! helped push Apple bac! into pro#itability. In 1999, the company earned ,(:/ million on sales o# ,0.1 billion. In :///, it made ,011 million on sales o# almost ," billion. To !eep sales $rowin$, Apple continued to in.est in the de.elopment o# a new operatin$ system, based on the technolo$y ac6uired #rom KeJT. A#ter three years wor! by nearly 1,/// so#tware en$ineers and a cost o# approFimately ,1 billion, the #irst .ersion o# Apple)s new operatin$ systems was introduced in ://1. Onown as 4+ J, it $arnered ra.e re.iews #rom analysts who saw the &KIJ-based pro$ram as o##erin$ superior sta- bility and #aster speed than the old 'ac 4+. 4+ J also had an enhanced ability to run multiple pro$rams at once, to support multiple users, connected easily to other de.ices such as di$ital camcorders, and was easier #or de.elopers to write applications #or. In typi- cal Apple #ashion, 4+ J also sported a well-desi$ned and intuiti.ely appealin$ inter#ace. +ince ://1, new .ersions o# 4+ J ha.e been introduced almost once a year. The most recent .ersion, 4+ J Beopard, was introduced in ://" and retailed #or ,1:9. To $et the installed base o# 'ac users to up$rade to 4+ J, who at the time numbered :2 million, Apple had to o##er applications. The deal with 'icroso#t ensured that its popular 4##ice pro$ram would be a.ailable #or the 4+ J. +te.e 1obs had assumed that the .ote o# con#idence by 'icroso#t would encoura$e other third-party de.elopers to write pro$rams #or 4+ J, but it did not always happen. 'ost si$ni#icantly, in 199", Adobe +ystems re#used to de.elop a 'ac .ersion o# their consumer .ideo-editin$ pro$ram, which was already a.ailable #or ?indows PCs. +hoc!ed, 1obs directed Apple to start wor!in$ on its own applications. The #irst #ruits o# this e##ort were two .ideo-editin$ pro$ramsE =inal Cut Pro #or
pro#essionals and i'o.ie #or consumers. KeFt was iBi#e, a bundle o# multimedia pro$rams preinstalled on e.ery 'ac, which included i'o.ie, i5G5, iPhoto, %ar$a$e 9and, and the iTunes di$ital @u!eboF. Apple also de.eloped its own ?eb browser, +a#ari. 'eanwhile, Apple continued to update its computer lines with eye-catchin$ o##erin$s. In ://1, Apple introduced its Titanium Power9oo! %( noteboo!s. Cased in Titanium, these ultrali$ht and #ast noteboo!s #eatured a clean post-industrial loo! that mar!ed a distinct shi#t #rom the whimsical loo! o# the i'ac and i9oo!. As with the i'ac, 1onathan I.e)s desi$n team played a central part in the products de.elopment. A core team o# desi$ners set up a desi$n studio in a +an =rancisco warehouse, #ar away #rom Apple)s main campus. They wor!ed #or siF wee!s on the basic desi$n, and then headed to Asia to ne$otiate #or widescreen #lat panel displays and to wor! with tool ma!ers.17 The Titanium noteboo!s were #ollowed by a redesi$ned des!top line that appealed to the company)s $raphic desi$n customers, includin$ the o##erin$ o# ele$antly desi$ned .ery wide screen cinema displays. In ://(, I.e)s desi$n team came out with yet another ele$ant o##erin$, the i'ac %2 computer, which PC Magazine described as a 7simple stunnin$ all in one desi$n.81" This was #ollowed in ://" with the release o# yet another stron$ desi$n, the ultra-thin 'ac9oo! Air that wei$hed @ust - pounds and was only /.70 o# an inch thic! at its widest point. =or all o# Apple)s undisputed desi$n eFcellence and the loyalty o# its core user base, $raphic artists and students, durin$ the early :///s Apple)s $lobal mar!et share remained anemic, trailin$ #ar behind industry leaders 5ell, <P, and I9'HBeno.o. ?ea! demand, combined with its low mar!et share, translated into another loss #or Apple in ://1, leadin$ some to 6uestion the permanence o# +te.e 1ob)s turnaround. <owe.er, while Apple)s share in its core &.+. mar!et #ell to less than -* in ://(, it started to pic! up a$ain in ://2, and the company made stron$ share $ains in ://0P://" (see 3Fhibit 1 . 'omentum was particularly stron$ in the &nited +tates, where Apple shipments sur$ed. 5urin$ the second 6uarter o# ://", #or eFample, Apple)s shipments were up o.er (/* compared to the prior year, and its $rowth rate was three times that o# the industry. 5ri.in$ $rowth durin$ the ://2P://" period, accordin$ to many analysts, was the sur$in$ popularity o# Apple)s iPod music
3Fhibit 1 ?orldwide 'ar!et +hare and &nited +tates 'ar!et +hare, +econd Quarter ://"
Com$any <P 5ell Acer Beno.a Toshiba Apple 4ther Total Glo(al Mar)et ,hare -./ 1".1* 12.0* 9.(* 7."* (.(* 1.9* (:.9* 1//* *+,+ Mar)et ,hare -./ :2.-* -1.9* ".1* (./* 2.2* ".2* 10."* 1//*
,o%rce0 %artner Press releaseE 7?orldwide PC 'ar!et %rew 10* in +econd Quarter o# ://",8 1uly 10, ://".
player and, in ://7, the iPhone. These two products had raised Apple)s pro#ile amon$ youn$er consumers and was ha.in$ a spill-o.er e##ect on 'ac sales.19
C41
older applications on Intel-based 'acs. 'oreo.er, Apple went a step #arther by issuin$ a utility pro$ram, !nown as 9oot Camp, which enabled 'ac owners to run ?indows JP on their machines. 9oot Camp was included was part o# 4+ J Beopard, and allows 'ac owners to run ?indows JP or Gista i# they should so chose. De.iews o# Apple)s Intel-based machines were $enerally #a.orable, with many re.iewers notin$ the speed impro.ement o.er the older PowerPC 'acs.:/ In the #all o# ://0, Apple reported that its transition to an Intel-based architecture was complete, some siF months ahead o# schedule. The mo.e to Intel architecture may ha.e helped Apple to close the price di##erential that had lon$ eFisted between ?indowsbased PCs and Apple)s o##erin$s. Accordin$ to one analysis, by +eptember ://0, Apple)s products were sellin$ at a discount to comparable product o##erin$s #rom 5ell and <P.:1
=rom the start, Apple)s stores eFhibited the same stylish desi$n that characteri;ed its productsE clean lines, attracti.e displays, and postindustrial #eel (see 3Fhibit : . +te.e 1obs himsel# was intimately in.ol.ed in the desi$n process. Indeed, he is one o# the named in.entors on a patent Apple secured #or the desi$n o# the si$nature $lass staircase #ound in many stores, and he was apparently personally in.ol.ed in the desi$n o# a $lass cube atop a store on Kew Ror!)s =i#th A.enue that opened in ://0. In an inter.iew, 1obs noted that 7?e spent a loto# time desi$nin$ the store, and it deser.es to be built per#ectly.8:: Customers and analysts were immediately impressed by the product #luency that employees in Apple stores eFhibited. Indeed, one hallmar! o# Apple stores seems to be the personal attention paid to customers by smilin$ sales sta##, an approach that is remonstrant o# upscale retailers li!e Kordstrom. They also li!ed the hi$hli$ht o# many stores, a 7$enius bar8 where technical eFperts helped customers #iF problems with their Apple products. The wide-open interior space, howe.er, did nothin$ to allay the #ears o# critics that Apple)s product port#olio was @ust too narrow to $enerate the tra##ic re6uired to support premium space. The critics could not ha.e been more wron$. +purred on by boomin$ sales o# the iPod, Apple)s stores did eFceptionally well. 9y early ://", Apple had some :// stores in upscale locations that $enerated some :/* o# the company)s total re.enues, and the company was plannin$ to open another (/ stores. +ales per s6uare #oot are apparently now si$ni#icantly in eFcess o# ,(,///, ma!in$ Apple the en.y o# other retailers.:-
3Fhibit :
,(,(91 , -(2 , -0
, 0(( , 091
Then alon$ came the iPod and iTunes. These products were born out o# an o.ersi$htE in the late 199/s, when consumers were startin$ to burn their #a.orite C5s, 'acs did not ha.e C5 burners, or so#tware to mana$e their di$ital music collections. Deali;in$ the mista!e, C34 +te.e 1obs ordered Apple)s so#tware de.elopers to create the iTunes pro$ram to help 'ac users mana$e their $rowin$ di$ital music collections. The #irst iTunes pro$ram led to the concept o# the iPod. I# people were $oin$ to maintain the bul! o# their music collection on a computer, they needed portable 'P- players to ta!e music with themNa +ony ?al!man #or the di$ital a$e. ?hile there were such de.ices on the mar!et already, they could only hold a #ew do;en son$s each. To run the iPod, Apple licensed so#tware #rom PortalPlayer. Apple also learned that Toshiba was buildin$ a tiny 1."-inch hard dri.e that could hold more than 1,/// son$s. Apple 6uic!ly cut a deal with Toshiba, $i.in$ it eFclusi.e ri$hts to the dri.e #or 1" months. 'eanwhile, Apple #ocused on desi$nin$ the user inter#ace, the eFterior stylin$, and the synchroni;ation so#tware to ma!e it wor! with the 'ac. As with so many product o##erin$s un.eiled since 1obs had returned to the helm, the desi$n team led by 1onathan I.e played a pi.otal role in $i.in$ birth to the iPod. I.e)s team wor!ed in secrecy in +an =rancisco. The members, all paid eFtremely well by industry standards, wor!ed to$ether in a lar$e open studio with little personal space. The team was able to #i$ure out how to put a layer o# clear plastic o.er the white and blac! core o# an iPod, $i.in$ it tremendous depth o# teFture. The #inish was superior to other 'P- players, with no .isible screws or ob.ious @oins between parts. The serial number o# the iPod was not on a stic!er, as with most products, it was ele$antly etched onto the bac! o# the de.ice. This attention to detail and desi$n ele$ance, althou$h not with cost implications, was to turn the iPod into a #ashion accessory.:0 The iPod was un.eiled in 4ctober ://1 to miFed re.iews. The price o# ,-99 was si$ni#icantly abo.e that o# competin$ de.ices, and because the iPod only wor!ed with Apple computers, it seemed destined to be a niche product. <owe.er, initial sales were stron$. It turned out that consumers were willin$ to pay a premium price #or the iPod)s hu$e stora$e capacity. 'oreo.er, 1obs made the call to de.elop a .ersion o# the iPod that would be compatible with
?indows. A#ter it was introduced in mid-://:, sales too! o##. 9y this time, 1obs was dealin$ with a bi$$er strate$ic issueNhow to persuade the music companies to ma!e their music a.ailable #or le$al downloads. 1obs met with eFecuti.es #rom the ma@or labels. <e persuaded them that it was in their best interest to support a le$al music download business as an alternati.e to widespread ille$al downloadin$ o# music o.er peer-to-peer networ!s that the music industry had not been able to shut down. People would pay to download music o.er the Internet, he ar$ued. Althou$h all o# the labels were settin$ up their own online businesses, 1obs #elt that because they were limited to sellin$ music owned by the parent companies, demand would also be limited. ?hat was needed was a reputable independent online music retailer, and Apple #it the bill. I# it was $oin$ to wor!, howe.er, all o# the labels needed to $et on board. &nder 1obs) scheme, iTunes #iles would be downloaded #or ,/.99 each. The only portable di$ital player that the #iles could be stored and played on was an iPod. 1ob)s ar$ument was that this closed world made it easier to protect copyri$hted material #rom unauthori;ed distribution. 1obs also meet with :/ o# the world)s top recordin$ artists, includin$ &:)s 9ono, +heryl Crow, and 'ic! 1a$$er. <is pitch to them was that di$ital distribution is $oin$ to happen, and the best way to protect your interests is to support a le$al online music distribution business. ?ooed by 1obs, these power#ul sta!eholders encoura$ed the music recordin$ companies to ta!e Apple)s proposal seriously.:7 9y early ://-, 1obs had all o# the ma@or labels onboard. Baunched in April ://-, within days it was clear that Apple had a ma@or hit on its hands. A million son$s were sold in the #irst wee!. In mid://(, iTunes passed the 1// million-download mar!, and sales !ept acceleratin$, hittin$ the 12/ milliondownload mar! in 4ctober ://(. At that point, customers were downloadin$ more than ( million son$s per wee!, which represented a run rate o# more than :// million a year. ?hile +te.e 1obs admitted that Apple did not ma!e much money #rom iTunes downloads, probably only ,/.1/ a son$, it did ma!e $ood mar$ins on sales o# the iPodNand sales o# the iPod ballooned (see 3Fhibit : . As the installed base o# iPods eFpanded, an ecosystem o# companies sellin$ iPod accessories emer$ed. The accessories include spea!ers, headphones, and
add-on peripherals that allowed iPods to record .oice, char$e on the $o, play tunes o.er the radio, or use the iPod wirelessly with a remote. There are also cases, nec! straps, belt clips, and so on. 9y ://0, it was estimated that there were more than 1// companies in this system. Apple collects an unspeci#ied royalty #rom companies whose products access the iPod)s ports and bene#its indirectly #rom the pre#erence o# buyers #or the iPod o.er competin$ products that lac! the same accessories.:" +uccess such as this attracts competitors. DealKetwor!s, ?almart, RahooS, Kapster, and Ama;on all set up le$al downloadin$ ser.ices to compete with iTunes. <owe.er, iTunes continued to outsell its ri.als by a wide mar$in. In mid-://", iTunes was accountin$ #or about 9/* o# all le$al music downloads.:9 iTunes was also the lar$est music retailer in the &nited +tatesNthe other three all had physical stores. The iPod also had plenty o# competition includin$ o##erin$s #rom +an5is! and 'icroso#t (Iune . 'any o# these were priced a$$ressi.ely, well desi$ned, and had as much stora$e capacity as the iPod. =ew, howe.er, mana$e to $ain share a$ainst the iPod, which accounted #or 7-.2* o# all unit sales in the &nited +tates in 1uly ://" and ""* o# total dollar sales. +an5is! was second with an "* share o# unit sales, and 'icroso#t was third with a :.0* share o# unit sales. 'oreo.er, Apple)s seems to ha.e yet a$ain stolen a march on its competitors in late ://7 when it introduced the iPod touch, which had ?eb-browsin$ capability and 6uic!ly $enerated stron$ sales .olume. <owe.er, the o.erall mar!et #or di$ital music players was maturin$ by ://7, with $rowth rates droppin$ into the low sin$le di$its. Apple needed another new product dri.er to !eep sales eFpandin$.
The iPhone
In 1une ://7, Apple introduced the iPhone. =irst announced in 1anuary ://7, the iPhone was essentially a smartphone that was also able to browse the ?eb, ta!e pictures, and #unction as a di$ital music player. The iPhone was di##erentiated #rom established smartphone o##erin$s by re.olutionary touch screen desi$n that replaced the traditional mechanical !eypad and allowed users to 6uic!ly and easily switch between #unctions. The phone used a .ersion o# Apple)s
4+ J operatin$ system and the company)s +a#ari ?eb browser. Apple struc! a deal with ATMT, under which it was to be the eFclusi.e pro.ider o# wireless ser.ice #or the iPhone. &nder the deal, ATMT would share a percenta$e o# its ser.ice #ees #rom iPhone users with Apple (the percenta$e was rumored to be -/*, but neither company would con#irm this . Priced between ,(99 and ,299 dependin$ on the model, the iPhone was positioned at the hi$h end o# the smartphone mar!et. +ome were s!eptical that the de.ice would be able to $ain share #rom established smartphones such as Desearch in 'otion with its 9lac!berry and o##erin$s #rom Palm, 'otorola, and Ko!ia, all o# which had $ained a #ollowin$ amon$ business users. +te.e 1obs announced that the $oal was to try and $rab 1* o# the total $lobal mar!et #or cell phones in the #irst #ull year that the iPhone was on the mar!et. ?ith a total mar!et in eFcess o# 1 billion units, most o# which were not smartphones, this su$$ested a $oal o# sellin$ 1/ million iPhones in #iscal ://" (which ended +eptember ://" . There was some disappointment that the iPhone would use ATMT)s slower data networ!, rather than the #aster -% networ! that was more suited to ?eb browsin$. There was also disappointment that the iPhone did not contain a %P+ location-#indin$ #unction. 5espite the hi$h price and percei.ed limitations, early demand #or the iPhone was stron$, with lon$ lines #ormin$ outside Apple stores on the day the de.ice was released. Althou$h some consumers eFperienced acti.ation problems, most were happy with their purchase. The de.ice $ot ra.e re.iews #or its desi$n ele$ance, ease o# use, and compellin$ touch screen inter#ace. Apple sold more than :2/,/// iPhones in the #irst two days the de.ice was on the mar!etA it soon became clear that the company had another hit on its hands. In 1une ://", Apple introduced a second .ersion o# its iPhone, the iPhone -%. 5esi$ned to run on a #aster -% networ!s, the new phone also incorporated %P+ #unctionality. ATMT was a$ain pic!ed as the eFclusi.e ser.ice pro.ider in the &nited +tates. <owe.er, Apple shi#ted the business model. Instead o# $i.in$ a share o# ser.ice #ees to Apple, ATMT a$reed to pay a subsidy to Apple #or each iPhone sold. The subsidy allowed Apple to drop the price #or the iPhone to as low as ,199 #or an entryle.el model. Ret a$ain, lon$ lines #ormed outside
Apple stores, and in the #irst three days, the iPhone -% was on the mar!et, more than 1 million units were sold. 9y Au$ust, analysts were issuin$ #orecasts callin$ #or Apple to sell 11 million iPhones in #iscal ://", and :2 million in ://9, with much o# the $rowth comin$ #rom rapidly eFpandin$ sales in (/ other countries. ?hile the :2 million still only represented only a small slice o# the 1.: billion wireless handsets #orecast to be sold $lobally in ://9, it would ma!e Apple one o# the top-three ma!ers o# smartphones in the world and the only one with a stron$ position amon$ consumers as opposed to business users. -/ 4ne #eature o# the iPhone -% that started to $arner a lot o# attention was the rapid $rowth in third-party applications #or the phone. In 1uly ://", Apple opened an online store #or applications that were written to run on the iPhone. In the #irst month, the phone was on the mar!et, more than 0/ million pro$rams were downloaded. ?hile many applications were #ree, Apple was sellin$ ,1 million worth o# applications a day and su$$ested that sales could reach a ,2// million annual run rate #airly 6uic!ly. Apple !ept -/* o# the proceeds #rom application sales, @ust about enou$h to co.er the costs o# the store, lettin$ pro$ram creators !eep the other 7/*. Amon$ the bi$ sellers were some $ames applications, such as +uper 'on!eyball #rom +e$a, which sold -//,/// copies in :/ days at ,9.99 a copy.-1
mar!et, and a lon$ tail o# small enterprises that produce unbranded or locally branded 7white boF8 computers, o#ten sellin$ their machines at a si$ni#icant discount to $lobally branded products. Amon$ the lar$er players, consolidation has been a theme #or se.eral years. In ://:, <P ac6uired Compa6, %ateway and e'achines mer$ed in ://(, and the Chinese #irm Beno.o ac6uired the personal computer business o# I9' in ://2. The lar$e PC #irms compete a$$ressi.ely by o##erin$ e.er-more power#ul machines, producin$ them as e##iciently as possible and lowerin$ prices to sell more .olume. The a.era$e sellin$ price o# a PC has #allen #rom approFimately ,1,7// in 1999 to less than ,1,/// in ://0, and pro@ections are that it may continued to #all, #ueled in part by a$$ressi.e competition between 5ell Computer and <P.-All o# these players #ocus on the desi$n, assembly, and sales o# personal computers, while purchasin$ the .ast ma@ority o# component parts #rom independent companies. In recent years, the top personal computer companies ha.e reduced their DM5 spendin$ as a percenta$e o# sales, as the industry has transitioned toward a commodity business. The eFistence o# the lon$ tail o# white boF ma!ers is made possible by the open architecture o# the dominant PC standard based on Intel-compatible microprocessors, and a 'icroso#t operatin$ system, and the low-tech nature o# the assembly process. The components #or these boFes, which are themsel.es commodities, can be purchased cheaply o## the shel#. ?hite boF ma!ers ha.e a stron$ position in many de.elopin$ nations. In 'eFico, #or eFample, domestic brands accounted #or 0/* o# all sales in ://2, up #rom ((* in :///. In Batin America as a whole, 7/* o# personal computers are produced locally. ?hite boF ma!ers ha.e a much wea!er position in the &nited +tates, ?estern 3urope, and 1apan, where consumers display a stron$er pre#erence #or branded 3ndnotes
1. Quoted in Pete 9urrows, 7+te.e 1obs8 'a$ic Oin$dom, BusinessWeek, =ebruary 0, ://0, 0:P0". :. K. ?in$#ield, 7Apple &n.eils Kew Computers,8 Wall Street Journal, Au$ust ", ://0, 9-. 7Apple Increases PC 'ar!et +hare, Dan!s Third 9ehind 5ell and <P,8 Chattah9oF.com. -. 'uch o# this section is drawn #rom P. =reiber$er and '. +waine, Fire in the Valley (Kew Ror!E 'c%raw-<ill, :/// .
products that incorporate leadin$-ed$e technolo$y. In contrast, in the de.elopin$ world, consumers are willin$ to accept older components i# it sa.es a #ew hundred dollars.-( 5urin$ the 199/s and early :///s, 5ell $rew rapidly to capture the mar!et lead. 5ell)s success was based on the in.entory mana$ement e##iciencies associated with its direct sellin$ model (5ell could build machines to order, which reduced its need to hold in.entory . 5ell was also helped by the problems <P #aced when it mer$ed with Compa6. 9y ://2, howe.er, a resur$ent <P had lowered its costs, could price more a$$ressi.ely, and was startin$ to $ain $round a$ainst 5ell. Apple continued to be the odd man out in this industry, and was the only ma@or manu#acturer that did not adhere to the ?indows architecture.
(. =or a detailed history o# the de.elopment o# the Apple II, see +te.e ?eyhrich, A le !! "istory, httpEHHapple:history .or$HhistoryHah/1.html. 2. P. =reiber$er and '. +waine, Fire in the Valley, -27. 0. Andy <ert;#eld, 7Deality 5istortion =ield,8 httpEHHwww .#ol!lore.or$HPro@ectGiew.py>pro@ect 'acintosh. 7. Ibid. ". This .ersion o# e.ents was told to the author by a senior eFecuti.e who was present in the room at the time.