Apple Computer

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Apple Computer
Jonathan Leonard
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The Personal Computer Industry

• Increasingly sophisticated buyers
• Intense price competition/ limited ability to
  differentiate
• Low barriers to entry
• Many potential substitutes
• Strong suppliers, who appropriate much of the
  industrys profits (i.e., think Microsoft and
  Intel)
• Complements have been fueling demand (only bright
  spot)

Tough industry!
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A Better Product

• Windows 95 Apple 85
• So What?

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1996 Hey, We Made the Cover!
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The Icons 1996 Obit

• Today, that Apple--the very icon of a
  post-industrial, high-tech America--is barely
  recognizable in the troubled 11 billion company
  that bears the name. Years of overlooked
  opportunities, flip-flop strategies, and a
  mind-boggling disregard for market realities have
  caught up with Apple. Microsoft Corp.'s Windows
  95 has seriously eroded the Mac's technology
  edge.

Business Week 1996
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Great Tech- Poor Business

• A product advantage does not guarantee a
  competitive advantage
• Product advantage is difficult to sustain, esp.
  in tech. Imitation, reverse engineering,
  inventing around is rampant
• Building competitive advantage requires thinking
  about whole value system, including complements

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Great Tech- Poor Business

• Firms must look broadly at the economics and
  factors driving change in their industries
• Apple was clearly too insularthey believed they
  were insulated from the forces affecting the PC
  industry
• Didnt understand and respond to the broader
  forces affecting PCs

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Death by Substitute

• Lower PC prices reduce customers WTP for Apple
• Windows made PCs a closer substitute to Macintosh
  (i.e., differentiation declined)
• Macs and PCs dont have the same complements
• Apple benefited little from the only bright spot
  in the PC industry

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Should You Agree to a Dominant Standard?

• Niche player High Margins in a Smaller market
• Alliance player Lower Margins in a Larger Market

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Resistance is Futile
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Standards Fundamentally Change the Nature of
Competition

• Expands Network Externalities
• Reduces Uncertainty
• Reduces Consumer Lock-In
• Competition on Price vs. Design
• Components vs. Systems Competition
• Ex Post vs. Ex Ante Competition

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Closed or Open Architecture
Apple Closed Architecture
Wintel Open
Shapiro and Varian
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Multiple Standards?

• Difficult for multiple standards to co-exist
• Must effectively serve different markets.
• Otherwise, compatibility with complements drives
  movement toward a single standard.
• Supporting multiple standards is costly (do you
  want an 8-track player and a CD player?)

14
Network Economics

• Sell first to those with highest WTP.
• Suppose WTP also increases with number of users-
  a network effect.
• Demand curve first increases with network size,
  then falls as hit marginal customers with lower
  WTP (late adopters).

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Network Economics
Willingness to Pay
Network Size
Katz and Shapiro
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3 Decades of PC Industry History in One
Slide
Willingness to Pay
A is for Apple
W is for WinTel
Network Size
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CEO Gilbert Amelio Apple Springs a Leak

• Amelio Apple is a boat. Theres a hole in the
  boat, and its taking on water, but there is
  treasure on board. And the problem is, everyone
  on board is rowing in different directions, so
  the boat is just standing still. My job is to
  get everyone rowing in the same direction so that
  we can save the treasure.
• CFO But what about the hole?
• Source Brent Schlender, Somethings Rotten in
  Cupertino, Fortune, March 3, 1997.

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Worms in the Apple

• A better product does not guarantee a better
  business.
• Better doesnt mean isolated from competition.
• Substitutes (Windows) erode differentiated
  product advantages. As convergence progressed,
  Apples niche position was increasingly
  threatened.

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Worms in the Apple

• The OS market has both huge scale economies and
  important network economies.
• Apple chose to get on the wrong side of both when
  it chose high margin proprietary architecture.

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Worms in the Apple

• Complements Apple failed to appreciate industry
  value system and importance of complementors in
  network markets.
• Proprietary architecture (and resulting smaller
  scale) made them less attractive to ISVs

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Timing is crucial.

• History takes away options. Apples options in
  the late 1990s were vastly different than the
  options available to it in the 1980s.
• Right strategy, wrong time. Licensing the OS
  might have made a huge difference a decade
  earlier. You need to act when the window of
  opportunity is open.

22
Eight years later

• Jobs There really has been a genie locked in
  that bottle! Apples innovation and creativity
  have been unleashed in a way that they havent
  been for 20 years. Look at the results. This
  isnt a company about 5 market share this is a
  company capable of competing with world-class
  competitors and achieving market shares of 65,
  70, and even 90.
• Source Brent Schlender, How Big Can Apple
  Get? Fortune, February 7, 2005.

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90? Just not in PCs.

• Leadership Paint the Bulls-eye Around the Arrow

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BW Best Leader
Business Week 2005
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A New Strategy?

• Apple, Pixar
• No one in techland had a better yearor a
  broader impactthan Apple Computer CEO Steve
  Jobs. Apple continued to set techs fashion
  agenda in 2005 with products such as the iPod
  nano and the video iPod, as well as the Mac mini,
  Apples cheapest computer ever. Indeed, no exec
  sits astride both the technical and creative
  worlds as much as Jobs, who also runs powerhouse
  Pixar Animation Studios, maker of megahits such
  as Finding Nemo and The Incredibles.That helps
  explain why Jobs, 50, was able to persuade Disney
  to make hit TV shows such as Lost available on
  the video iPod. Within weeks of Apples coup, CBS
  and NBC launched their own digital-distribution
  deals. Disney played ball because it wanted to
  extend its partnership with Pixarand because
  iPods are so hot. Some 10 million are expected to
  sell this quarter, many at Apples sleek retail
  stores, where consumers see and play with Macs.
  That helped Apple make its biggest PC market
  share gains in yearsand helped the stock price
  more than double since Jan. 1, to about 73.

Business Week 2005
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IPOD

• Marketing, Interface, and Software create
  differentiation essential for premium pricing.
• Proprietary Software Locks Consumer into
  Hardware. (Where have we seen this move before?)

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Microsofts Response Look Before You Lock-in
And where have we seen this Complementors move
before?
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Apple Computer Today

• Current Market Value 56 Billion (They had a
  good year)
• Operating Margin 12
• Cash Short-Term Investments 8.7 Billion
• Debt 0
• Net Income FY 2005 1.3 Billion
• Sales by segment 2006 Q1
• Macintosh 1.7 B
• IPOD music 3.4 B
• Other (software peripherals) 0.6 B

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Apple 2001-2006
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Apple and an Alternative
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Apple They used to make PCs didnt they?

• How fast is the market for portable music players
  likely to grow? When will growth slow down?
• Is Apples dominant position with iPod/ ITunes
  sustainable?
• Oh yeah, that secondary market theyre in, can
  they break out of their niche in PCs?