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MBA 502

MICROECONOMIC ANALYSIS PAPER


APPLE IPHONE

Lecturer: Greg Randolph


Linh Nguyen
1/25/2016

A. SUPPLY, DEMAND, AND MARKET EQUILIBRIUM


I. The extent to which the supply and demand of Apple iPhone.
Market structure of Apple iPhone:
Oligopoly:
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A few large firms dominate the market


Lagel barriers prevent the entry of new firms

II. Nonprice factors that impact the demand of Apple iPhone.


1/ Substitute factor:
One of the factors that affects the demand for Apple iPhone is the substitution effect.
Samsung is a major smartphone manufacturer besides Apple. Their products as Galaxy S series
and Galaxy Note are always compared to iPhone. They are alternative products to iPhone. Some
people prefer to buy a Samsung smartphones instead an Apple iPhone. Hence, a change in
quantity demand for the products of Samsung will lead to change in the quantity demand of
iPhone. For example, Samsung discount their product price or introduce a new product to
market, then the demand for the Samsung phones will increase. At that time, quantity demand for
the iPhone will fall. According to the graph below, it is possible to assess the correlation between
the quantity demands of Apple iPhone and Samsung smartphones from the first quarter of 2011
to the 4th quarter 2014. It can be easily found in most of the time, demand for the product of
iPhone and Samsung smartphones changed interchangeably: if iPhones quantity demand
increased, the quantity demand of Samsung smartphone reduced and vice versa.

Figure 1: Samsung and Apple sales of smartphone sales worldwide from 1st Q 2011 to 4th Q
2014 (Lee, 2015)
2/ Ecosystem:
Apple created an ecosystem for all their products included MacBook, iPod, iPad
and iPhone. Users are aiming to buy other Apple products when they already own one.
For example, an user who owns a MacBook and or iPad will likely choose to buy a
iPhone instead a phone which running the Android operating system. Therefore, the
demand of other products of Apple can affect the demand of iPhone and vice versa.
The demand of the products of Apple seems to increase or decrease relative to
each other:

Figure 2: Apples sales of products sales worldwide from 4th Q 2011 to 2nd 2012
(Thompson 2015)
III. Nonprice factors that impact that impact the supply of Apple iPhone.
1/ Technology:
If technology of supplies are more advanced, Apple will have the opportunity to
offer more products. For example, Apple had repeatedly delayed the introducing of
iPhone 4 white version because of a lack of UV protection which effects image quality
(Ben Camm-Jones, 2011). Therefore iPhone 4 white version was deficient in a long time
despite rising demand.
2/ Resources

Resource is a nonprice factor affecting the supply of iPhone. A deficiency can


cause decreased raw material product number. For example, the Home key fingerprint
sensor of the iPhone are manufactured from sapphire (Reed, 2013). Assuming that supply
partner cannot provide enough Sapphire that will lead to a drop in the production of
iPhone.
V. Predict the effect of changes in supply and demand on the market equilibrium.
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Demand curve shift to the right while the price stay the same, causing a shortage.
In the short run; a substitution effect occurs.
In the long run, supply and demand will return to equilibrium.

Figure3: iPhone shortage


VI. Decision.
The number of iPhone sold gradualy increased. Therefore a product shortage of the next
version of iPhone may occur in the future. So, there should be a preparation for a large amount of
product and ensure continuous supply in the early stages after the product launch.

Figure 4: Global Apple iPhone sales from 3rd quarter 2007 to 2nd quarter 2015
B. PRODUCTION AND COST
I. THREE KEY INPUTS OF IPHONE PRODUCTION
1/ COMPONENTS AND MATERIALS
Components and materials used in the iPhone manufacturing process such as: touch
screen, chipsets, camera, battery, etc. These components were bought from many
suppliers such as Samsung, LG, Qualcomm, etc. These components materials used as
ingredients in an iPhone are considered as variable costs because they vary directly with
the number of iPhone that would be produced.

Figure 5: Apple iPhone 6S Plus costs to make. (Chmielewski, 2015)


2/ MANUFACTURING COST
This cost was paid to contract manufacturer (Foxconn). Apple Inc. orders
Foxconn to produce a number of iPhone under contract. For example: Apple has ordered
80 million units of the iPhone 6 4.7 inch and the iPhone 6S 5.5 inch. Foxconn is
expected to initially produce this number of product that have been ordered. (Alan, 2014)
The cost based on the number of products which has been ordered is a specific numbers.
However, the cost will increase if Apple Inc. wants to increase the number of products

that they wish the manufacturing partners to produce or vice versa. This cost is
considered as variable cost.
3/ RESEARCH AND DEVELOPMENT
According to its latest earnings report, Apple spent about $1.18 billion on
Research and Development. (Sherman, 2013)). R&D (Research and Development)
including iOS operating system and software, those were installed by default on the
iPhone before the product is sold in the market. It also including researches about
hardware such as screen, battery, camera, etc. Every iPhone is installed with same
software. This means that Apple does not have to pay more or less for R&D cost in case
they change the number of iPhones being produced. R&D costs is a fixed costs.
II.

ANALYSING THREE INPUTS OF IPHONE PRODUCTION


1/ COMPONENT AND MATERIALS
Over the years, Apple has pushed hard to decrease its reliance on third-party
companies for its iPhone and iPad components. IPhone alone makes up about 60
percent of the company's revenues. (Whittaker, 2015).Apples dependence on
suppliers is making trouble to them when suppliers want to raise prices for their
products. A typical example was in 2012, Samsung raised the price of iPhone chipset
supplied to Apple by 20%. Initially, Apple has refused, but because they could not
find alternative supplier, it should be accepted (the increase). Approving this contract
means that iPhone production costs would increase and affect the amount of iPhone
consumed. Besides getting more money from new contracts, Samsungs smartphone
will have a good opportunity to compete with iPhone- costs rose due to higher
production. This is absolutely not good for Apple and their products.

2/ MANUFACTURING COST
Foxconn is the manufacturing partner for the Apple iPhone. Cheap labor in China
and not having invest in factories help Apple cut down iPhone production costs.
3/ RESEARCH AND DEVELOPMENT
IOS is the operating system of the iPhone's top strengths compared with its
competitors. Besides the maximum support in the ecosystem that Apple has created
for their products. The program also prioritizes applications written for the iPhone
ahead of other operating systems.
The top concern of customers about a new phone is the battery life. (Versace, 2013)
This can be temporary resolved through updated OS versions. In a longer term, the
solution is a new battery technology. Both methods require investment in R&D. what
would happen if Apple introduce the next iPhone generation with a battery life of
more than 2 or 3 times compare to competitors products? Perhaps Apple will usher in
a new era as it unveiled the first generation iPhone in 2008. At the same time, it
would be a bad ending to their competitors. However, the same thing will happen to
Apple if its opponents can do that before them.
III.

DECISIONS
1/ COMPONENT AND MATERIALS
TSMC and Samsung are 2 suppliers who produce A9 chipset on iPhone 6s and 6s
Plus. This means Samsung is no longer the sole manufacturer and Apple have
alternatives choice if Samsung request to rise their chipset price. The competition
between the two providers can also help to reduce the cost of the chipset or not
increase unexpectedly.

Figure 6: Apple A9 chipset suppliers. (Zafar, 2015)


2/ MANUFACTURING COST
Outsourcing iPhone is an extremely attractive work for companies worldwide.
Therefore, Foxconn do not want to lose their contract to another company. Apple is such
an important customer for Foxconn, that the company has its chairman, Terry Gou,
overseeing production lines to make sure that everything is running smoothly.(Alan,
2014)
3/ RESEARCH AND DEVELOPMENT
Investing in R & D is a top priority in the iPhone production process.

C. MICRO ANALYSIS PAPER


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I. MARKET STRUCTURE:

Figure 7: (Worldwide Smartphone Sales to End Users by Vendor in 2Q15 Thousands of


Units) (Gartner, 2015)
In smartphone market, more than 55% of the sales comes from 5 firms: Samsung, Apple,
Huawei, Lenovo, and Xiaomi. Each of them holding a significant proportion percentage of the
market share, with Apple (12.2%) and Samsung (26.2%) are the dominant players.
Barriers to entry exist in the industry and they are very high. These barriers include:
existing patents, control of raw materials and market needs, the cost of high customer conversion
and customer loyalty for the existing brands. (Wekit, 2013). Besides, advanced technology and a
developed production line is also needed. Finally, the new firm will also have to spend a huge
amount of capital in marketing to have an opportunity to compete with established firms.
Very small number of sellers that firms have to anticipate the reaction of their competitors
before deciding on prices. There is evidence of the kinked demand curve when a new model of a
smart phone is released. Firms are forced to adhere to the prices which are set on the market, or
have to face of losing demand of their product. When one company discount their smartphone
prices, the demand will increase and thus increase profit. This is because non price competition
is occurring within the market. (Wekit, 2013). Android phone market share is more than 80%
(Figure 8) meaning they are the price leaders that can decide the majority of the prices. In
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smartphone market, non-price competition does occur. This is because products are sold base on
branded or the way they are made not the cost.

Figure
8:
Worldwide Smartphone Sales to End Users by Operating System in 2Q15 (Thousands of Units)
(Gartner, 2015).
Mergers also exists in the smartphone market. As enterprises face the danger from
competitors and emerging companies. They choose to merge to survive. For example, Tech
giant Microsoft recently merged with Nokia in an effort to leverage its position in the
smartphone market " (The Bottom Line, 2014)
From the above factors: the small number firms, barriers to entry, non-price competition,
kinked curve, mergers; it can be concluded the smartphone market structure is oligopoly.
II.

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FINANCIAL PERFORMANCE:

Figure 9: Share of Apples revenue by product category from the first quarter of 2012 to the
first quarter of 2016 (Statista, 2016)
IPhone sales contributed more than 50% of the total revenue of Apple Inc in the last 4 years.
Thus, based on Apple's financial statistics, it can assess how the smartphone market impact
Apple. However, iPhone is only partially affected by oligopoly market due to several reasons:
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Firstly, iOS operating system makes a difference: Last year, Android and iOS accounted
for over 96% market share of smartphones market. Although the market share gap
between the two is large (82.2% and 14.6%), Apple still holds more advantages over

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competitors. The reason lies in Android is opened source and iOS closed source operating
system:
+ Difference in OS was the biggest strengths of the iPhone. When consumers
choose iOS, they could only choose iPhone, but when they choose Android, they
have a lot of choices. This means the other firms have a greater competitive
pressure, if their products do not make a breakthrough feature difference from
competitors, failure is certain. For consumers, the iPhone has always been
different because of the operating system. Therefore, there is a guarantee of
success for the iPhone compared to its rivals.
+ IOS bring a large number of loyalty customers to Apple because of some
features that their main rivals - Android never achieved before: the better support
of the 3th application programmer, updating new version is fast and easy,
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heterogeneous ecosystem of Apple products.


Secondly, Apple has a very strong marketing campaign which makes Apple's products

appear to be fun despite the steep prices. (Verini, 2014)


Thirdly, this reason is about the trust. Consumers are willing to pay a high price for
iPhone because they think Apple's products are more durable than other competitors.
(Knight, 2011)
However, Apple still be impacted by oligopolistic market.
1/ Marketing:
Huge advertising cost are one of the impact of the oligopoly market. The marketing
battle between two biggest smartphone manufacturers Samsung and Apple was and still
ongoing. This can be explained in a simple way, under the effect of oligopoly market,
Apple and Samsung were forced to spend huge amounts of money for advertising costs,
this does not help them to get more customers, but ensure they will not lose their

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customers to other competitors.

Figure 10: Samsungs and Apples ad budgets dwarf those of the five other largest
spenders. (Triggs, 2014)
2/ Price exceeds the average cost:
Under oligopoly, Apple iphone always fixed iPhone prices are much higher than
production costs (Ha, 2015). Besides, the advantages from software caused iPhone prices
not being dependent on other Android competitors. IPhone price reduction only when
they launch new products - this speaks to the absolute superiority of the iPhone compared
to their rivals. Apple iPhone pricing with a high cost and high profits since people are
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willing to pay for it because of the prestige that they get by owning it, even if there are
products with similar properties with prices lower.

Figure 11: iPhone prices without contract at released. (Aaplinvestors, 2015)


3/ Barriers to entry:
IPhone sales increasing does not really tell the improvement of iPhone. Apple's
iPhone sales is guaranteed by the characteristics of the oligopolistic market; although the
recent generations of the iPhone is not revolutionary as the few first generations, and the
latest features that they offer were already existed on rivals products. What is the reason?
For new manufacturers, high barriers to entry: existing patents, control of raw
materials and market needs, the cost of high customer conversion and customer loyalty
for the existing brands, cost of marketing, etc, make them very difficult to break into the
smartphone market share.
For existing Android phone manufacturers, there is a high pressure from the
disadvantage that the Android operating system gives them: the features that Google
provides on Android are also provided on iOS, but the special features of iOS do not
appear on Android. Besides, mutual competition also makes the share of android
manufacturers cannot be guaranteed. It is more difficult to an iOS loyal customer switch
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from iPhone to an Android phone than an android loyal customers switch to a different
brand Android phone.
For other operating systems smartphone manufacturers such as Windows Phone
or BlackBerry OS, they do not receive the support from third party application
developers. RIM Inc. launched their first Android smartphone marks the end of
Blackberry OS. A gloomy future can be predicted for Windows Phone.
Based on these difficulties of the competition, sales of the iPhone will be
guaranteed for the generation iPhone in the near future. The new generation iPhone had
always had higher sales than the older one is a testament to this

III.

POSSIBLE CHANGES:
In the future, it's hard to compete with the Android operating system on
smartphone market share. A lot of major vendors such as Samsung, LG, Huawei, Xiaomi,
Lenovo, HTC, Sony and many other vendors use Android for their devices. While Google

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strives to provide its operating system for as many manufacturers as possible, Apple keep
iOS for their own, which continued ensure a stable position for Apple in the near future.
Apple decided to offer larger screen iPhones and it is their good decisions. The
amount of products sold by the iPhone 6 and 6 Plus increased 23% compare to the last
version. Moreover, if Apple continues to provide devices with larger screen sizes, the
research firm believes that Apple's profit last year in sales will overtake the entire
market. (Reisinger, 2015)
While iPhone shipments are going to grow, the world's shipments are expected to
decline. The main reason is because of China. This market is moving towards saturation
in the next few years. This also directly affects Android - direct competitor of iOS. "This
has implications for Android because China is an important market for smart phone
shipments Android in recent years, accounting for 36 percent of total production in
2014," (Reisinger, 2015)
Apple may not encounter many difficulties in the near future and achieve many
more advantages in competing with its rivals. But Apple needs to do more to develop
their own operating system and is not inferior to the rivals from Google. Then Apple will
be guaranteed their first position in a long time.
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