Apple (AAPL)
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Apple (AAPL)
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Apple is the consumer electronics
company behind the Macintosh (Mac)
personal computer, the iconic iPod
portable music player, and, most
recently, the iPhone. The company
primarily targets retail consumers rather than
enterprises, and has become known for unique
promotion and distribution strategies. These tactics
have paid off over the past few years - in 2007, Apple
generated revenue approaching US$ 24 billion, growing
market share for its niche of Mac desktops and laptops
and continuing to dominate the PMP market, where it
captured a 50% share that year. [1] The company
continued its growth in the first quarter of 2008, posting
35% revenue growth and the largest profits in company
history.
Apple removed the "Computer" from its corporate name
in early 2007, redefining its identity as a diversified
consumer electronics company. As further proof of this
new broader identity, Apple has recently launched key
products geared towards the high-end mobile market
(the iPhone) and the home entertainment industry
(Apple TV). The expensive, highly touted and publicly
scrutinized iPhone in particular is the wildcard for the
company, whose lifeblood is new product innovation.
The iPhone performed well in 2007, with 2.3 million
units sold worldwide; however, competitors are
increasingly matching the iPhone's features. [2]Other key
new products include movie rentals on iTunes and the
ultra-thin MacBook Air laptop.
Apple has parlayed its powerful brand and end-to-end
control over the design and manufacturing of hardware,
software, and peripherals into a self-reinforcing
business model. The iPod has grown faster than any
other music player in consumer electronics history and
accounts for half of the company's revenue from the
sales of hardware and content; it has also generated a
"halo effect" increase in sales of Mac desktops and
laptops. The company has also opened retail stores,
which feature distinctive designs and emphasize
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encouraging both brand visibility... read more Research in
2. Apple's vertical integration provides seamless Motion (RIMM)
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model that has a unique... read more
of PCs
3. Apple's multi-pronged approach to product
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4. The bubble on Apple's stock price has burst.
This means that traders are moving on and
Apple stock is left as a great... read more
Bears edit
1. Cannibalization. The proliferation of iPhones
will come at the expense of iPod sales, as the
iPhone includes an iPod.
2. Apple's intense reliance on having a steady
stream of new and innovative products forces it
to spend significantly on... read more
3. The prominence of emerging markets in Asia
will be another significant hurdle for Apple. With
market share worldwide... read more
4. Slowing growth in Apple's current core
products, Macs and iPods, will pressure Apple
to turn to other markets for... read more
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Apple will continue to thrive 3/12/2008 5:48 PM
Apple (AAPL) http://www.wikinvest.com/stock/Apple_(AAPL)

product "test drives", customer education, and easily available technical help. As a result of its efforts, the company
generated more revenue per square foot ($4000) than almost any other major retailer in the world, including Tiffany's ($2500),
Best Buy (sub-$1000) and Neiman Marcus ($600) in fiscal 2006.

In 2007, the company continued its rapid growth with a 28% yoy increase in fourth quarter earnings, driven by strong iPod
and iPhone sales. Unlike many other technology companies, Apple has not evinced a strong commitment to increasing its
presence abroad, and the quarterly revenue breakdown by region reflects this. The Americas continue accounting for a hefty
48% of total revenues, while Europe rings in second, contributing just 21%. Apple is especially weak in Asia, where its
Japanese revenues have dropped 10% from 4Q06 levels (the rest of Apple's Asia/Pacific sales have grown by a paltry few
percentage points.) However, strong revenue growth in Apple's retail division (nearly 42%) bodes well for the future. The
company's success in the mobile phone and personal media player markets may carry over into other consumer devices, with
the company using its brand to grab significant market share.

Contents
1 History and Products
2 Trends and Forces
2.1 Dependence on new products
2.1.1 The iPhone Craze
2.1.2 Apple TV: less promising
2.2 The "Apple Halo"
2.2.1 Retail store advantage
2.2.2 iTunes and compatibility
2.3 Weak brand in emerging markets
2.4 Public image
3 Competition Both the iPod and its ads have become iconic hits
4 References

History and Products [edit ]

After a decade of stagnant sales at Apple, original founder Steve Jobs returned as CEO in 1997 and began a period of
reinvention, resulting in the release of several highly innovative products, notably the all-in-one iMac PC (1998) and the iPod
(2001). An aggressive subsequent advertising campaign put Apple squarely into the public eye, and today Apple remains
known for its catchy, clever ads.

Apple builds its product portfolio with vertical integration to provide seamless compatibility between hardware, software and
peripheral products. The company's ecosystem of products--closely related by design and functionality--has allowed it build
significant brand equity, and Apple products are especially popular with middle- to high-end consumers as well as the
graphics/design industry. Apple's current products can be divided into two main categories:

Computers and Software: Macintosh (Mac) brand desktops, laptops and related hardware/software are a traditional
mainstay of Apple's business. While these products accounted for about 50% of revenue and two-thirds of operating profit
in 2007, their contribution ratios have declined in recent years. Mac hardware products include the iMac, MacBook and
PowerBook notebook computers, and a number of peripherals. Its software offerings include its OS X operating system, a
"UNIX-like" system known for ease of use and sleek, intuitive design.
Apple's computers boast unusually high profit margins, especially when compared to companies like Dell and Toshiba.
Fewer sales can generate significantly more profit for Apple than the same number would for its big-business
competitors, both because of Apple's carefully monitored stiff pricing and the extra revenue captured from the sale of
accessories in Apple's retail stores.

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Music: Apple's music offerings include the iPod and its variations (i.e., Nano, Shuffle, Video) as well as the iTunes media
player and distribution system. Though not the first entrant into this arena, the iPod accelerated the growth of the PMP
market since its 2001 introduction and now owns a dominant market share around 70%. Over 100 million units have been
sold worldwide as of April 2007, making it the fastest selling music player ever.

Revenue Contribution

2006 Q1 2006 Q3 2007 Q1 2007 Q3

Mac 40% 43% 34% 47%

desktop 16% 16% 13% 18%

notebook 24% 27% 21% 29%

Peripherals, Other
5% 5% 4% 6%
Hardware

Software and
6% 7% 5% 7%
Services

Total Computers
51% 55% 43% 60%
and Software

iPod 40% 34% 48% 29%

Other Music Sales 9% 11% 9% 10%

Total Music 49% 45% 57% 40%

Source: Company Data

As demonstrated in the table above, Apple's revenue has shifted away from its traditional Mac hardware and software
towards iPod, iTunes, and related Music products. Compounding this trend is the
company's most recent products which expand their portfolio beyond these two
categories:

Mobile Communication: Apple launched its iPhone in June 2007. Touted as a device
converging communications and media playback, the iPhone combines CDMA/EDGE
mobile technology with widescreen PMP ability as well as internet browsing.

Home Entertainment: In 2007, Apple introduced its Apple TV product for the home
entertainment center. Apple TV allows digital media from a user's computer to be played
on entertainment systems and digital televisions such as high-definition LCDs and
plasmas.

Apple Inc. has already Trends and Forces [edit ]

transcended usual corporate
boundaries to become a
powerful cultural--some would
even say artistic--phenomenon.
Apple's current primary strategy is a shift away from computers towards diversified
consumer electronics. The company's intention to move from a Mac/ iPod-driven business
model to one that includes many different product lines puts a spotlight on Apple's forays
into several new markets.

Dependence on new products [edit ]

Apple's products traditionally have a short life span, and the company can only maintain its unusual but highly profitable

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system of product pricing (not lowering prices until a new version is released) through the consistent release of new products.
While the company is notoriously tight-lipped about new products, Apple has made public several upcoming releases.

The iPhone Craze [edit ]

The subject of intense media scrutiny and hype, Apple's iPhone is the newest home run of its product lineup. Apple first
dipped its toe into the immense mobile phone market in 2005 with the ROKR, a Motorola-made phone that licensed Apple's
iTunes and yielded disappointing sales. This time, Apple designed and produced the iPhone hardware and software in-house
in its second attempt at tackling the massive $300 billion global market for mobile phones. A company known for deep
integration across its own products, Apple launched the iPhone with AT&T, the largest mobile phone service provider in the
U.S, on June 29th, 2007.

The iPhone includes a touch-screen system, wireless Internet browsing capability, and iPod functionality. These advances
come at a hefty price--approximately US$ 400--and target the decidedly high-end
smartphone market. Apple's focus on the high-end market limits its growth and market
capture opportunities in several key respects:

The iPhone uses enhanced 2G EDGE technology instead of the much faster 3G
infrastructure.
EDGE's slower data transfer can be sidestepped if local wireless (i.e., WiFi) is used, but
WiFi is expensive and far from available everywhere.
Apple's strength lies in marketing to end-consumers rather than business users, a
segment with a much higher penetration into smartphones and expensive data plans.
For instance, a two-year Cingular plan for the iPhone could exceed US $2000 in
charges, even considering Cingular's subsidies of US$ 100-200.
The iPhone may "cannibalize" some sales of iPods.
The iPhone completely utilizes touch screen technology. This could be a potential iPhone

problem for the less tech savvy phone user.

The iPhone does not allow third party software to be used without unlocking the phone,
an act Apple frowns upon. Steve Jobs has announced, however, that early 2008 will
give rise to SDK applications for the iPhone.

Apple TV: less promising [edit ]

Touted as the future of digital entertainment, the Apple TV nevertheless faces significant competition from on-demand and
traditional TV/video offerings. At a hefty US $299 (US $399 for 160GB model), Apple TV targets a consumer group that
probably already has access to either cable TV, on-demand, or a DVR/ TiVo. The long download times and spotty video
selections (fewer than 300 titles were available on iTunes as of April 2007) could be significant downsides for many buyers.
Because the Apple TV has no optical drive, all media content must come from the user's computer (through iTunes or
YouTube[3]).

Despite numerous comparisons between Apple TV and the iPod, a number of vital differences cast doubt on any anticipation
of iPod-like success. For one, Apple TV lacks portability, a defining feature of and reason for iPod's success. For another,
most consumers do not have a large pre-existing collection of high-quality digital movies/shows, while in the iPod's case,
digital music use had been prominent and widespread for a number of years before launch--thus Apple TV's market is not
primed for success as the iPod's was. Finally, although Apple TV can support HD technology and actually requires a
widescreen TV[3], the image quality of most iTunes videos are significantly inferior to that of traditional DVDs. Long download
times may also pose a problem.

The "Apple Halo" [edit ]

Apple's self-reinforcing business model leverages the technological integration of products to turn new buyers into loyal Apple
fans. End-to-end control over the design and manufacture of hardware, software, and peripherals alike allows for high

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compatibility between products, and high-quality customer support ensures satisfaction and loyalty. Apple's encouragement
of differentiation between product designs and its promotion of secrecy around new product launches also heightens the
Apple mystique. Together, these combine to create the Apple "halo effect," where a buyer of one Apple product has a high
probability of returning to Apple for other products as well.

Retail store advantage [edit ]

Apple opened its first retail stores in 2001 and have since expanded to over 180 stores in 4 countries (U.S., Japan, U.K. and
Canada). Their retail outlets have contributed to about 10% of overall sales in
2006, but the overall impact of these stores may be much higher in terms of
brand presence and building long-term customer relationships.

Apple's has emphasized its unique retail stores through design for several
of its flagship locations as well as tailoring the retail experience to include
product "test drives", classes and workshops geared teaching users
about its products, and the Genius Bar--a computer help service similar to
Best Buy's Geek Squad. The company estimates that its retail presence
equals about US$ 60 million's worth of annual traditional advertising.

Apple's generated over $4000 per square foot of retail, one of the highest
rates of any major retailer in any industry. In comparison, Tiffany's rate
Dubbed the Glass Cube, the entrance to
was $2500, Best Buy was under $1000 and Neiman Marcus was about
Apple's 5th Avenue flagship sits above an
$600. underground store that "never closes."

Studies have shown that Apple stores don't actually boost sales
themselves, but the company has increased its rate of direct sales (as
opposed to sales through third-party retailers), which have a higher
eventual margin for Apple

iTunes and compatibility [edit ]

iTunes is the third largest music retailer in the United States. Its airtight compatibility with the iPod, along with Apple's refusal
to license its FairPlay DRM security encoding technology, meant that iTunes has reinforced iPod sales -- anything bought off
of iTunes can only be played on the iPod, meaning that switching costs are high for iPod users who have already spend
hundreds of dollars building up their music libraries at iTunes. Apple's recent announcement that it would begin selling
DRM-free media on iTunes is a potential risk for the company as DRM has worked in Apple's favor by creating an
iTunes-iPod virtuous cycle that has been hard for competitors to crack.

Weak brand in emerging markets [edit ]

The emergence of China and India as key players in PC sales and general technology consumption is troubling for Apple.
With relatively light presence in lower-margin, higher-growth geographic areas, Apple will experience less of its halo effect
and reduced product/brand recognition, lowering sales potential. With China and India estimated to make up about 66% of
PC market growth through 2010, this could be a significant challenge for Apple.

Public image [edit ]

Apple's sales have always been dependent in large part on its perceived image of being user-friendly, sleek, and simply
"cool." To maintain this kind of brand recognition and association, Apple has to spend copiously on advertising.
In the public eye, Steve Jobs' role in Apple is absolutely integral. This means that if Jobs leaves the company, is
implicated in legal proceedings, or even experiences substantial health issues, Apple may be negatively influenced.
Steve Jobs' perceived image as a "competitive deal-broker" may also prove to be a company liability, however. Many

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of Apple's previous partners are increasingly reluctant to sign on, often holding out for a better deal (if any) or, like
Universal Music Group, are seeking alterations to agreed terms. The Motorola (MOT) partnership to develop the
flopped ROKR is perhaps the most notorious example of Apple's questionable partnering behavior--critics accuse
Apple of burying ROKR's launch to reduce cannibalization of iPod sales, and worse yet, using the ROKR collaboration
as a front to gain much of the technology now used in the iPhone.

Competition [edit ]

Against the Mac: Apple's position is improving in the worldwide PC market, growing 40% in 2007, compared to 13% global
growth during the same period. [4] However, the Mac still represents a small fraction of the overall PC market.

Apple's main competitors remain HP and Dell, both of which have experienced significantly lower growth rates than Apple
recently. Apple enjoys a unique advantage of having something of a niche market without needing to compete directly with
Hewlett-Packard Company (HPQ) and Dell (DELL) and Microsoft (MSFT) operating systems for enterprise endorsement.

Against the iPod: Although Apple remains the industry leader in PMPs, the competition is making significant gains. The
popularity of flash-based PMPs is problematic for Apple, which has much stronger market presence in hard-drive based
(HDD) players. To combat this, Apple may release a new flash-based line of players, in addition to a souped-up and rehauled
version of HDD iPods. Apple's main competitors in this area include:

SanDisk's Sansa players, one model of which beat the Nano to market, with more GB and a lower price point.
Creative's Zen, which has a strong grounding in flash-based players--including the first true widescreen video PMP with
the Zen Vision W.
Microsoft's Zune, currently uninspiring, but with the potential for significant growth and the ability to leverage unique file
transfer technology.

The table below compares some of the top-level product offerings of Apple and its main PMP competitors.

iPod Video iPod Nano Sansa e280 Zune Zen Vision:W

Market Share of
75.6% 75.6% 9.7% --- 4.3%
Parent Company

Price (est. end 2006) US$ 250 US$ 250 US$ 190 US$ 250 US$ 300

Storage Capacity 30 GB 8 GB 8 GB 30 GB 30 GB

Storage Type HDD Flash Flash HDD HDD

Screen Size (dia.

2.5 1.5 1.8 3 4.3
inches)

Display Resolution high low medium high very high

Apprx. Dimensions 4.0 x 2.5 x 0.5 3.5 x 1.5 x 0.5 3.5 x 1.5 x 0.5 4.5 x 2.5 x 0.5 5.5 x 3.0 x 1.0

Weight 5 oz 1.5 oz 2.5 oz 5.5 oz 9.5 oz

Battery Life (hours,

14 24 20 12 13
playing music)

Video Playback yes no yes yes yes

FM Radio Tuner no no yes yes no

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Media Download Real Zune Amazon

iTunes iTunes
Source Rhapsody Marketplace Unbox

Source: Company Data

Against iTunes and Apple TV iTunes' main competitors are Napster and Rhapsody/Real Player, but the service far outstrips
both of these in market share. To combat the rise of a wave of new subscription music services, iTunes may launch one of its
own in the near future.

Apple TV, on the other hand, may face much stiffer competition. While the concept of digital media played on the TV initially
seems very promising, Apple TV actually has rather limited functionality--especially against established and well-received
sources of media, from Video On-Demand to Netflix to recordable cable programming. All three of these distribution channels
offer significantly higher image quality than much of what is available on Apple TV.

Against the iPhone Apple's iPhone must compete with established mobile phone and PDA companies, including the likes of
Motorola, Nokia, and Sony, many of which have significantly larger R&D budgets than Apple. The company also experiencez
challenges from BlackBerry and similar high-end PDA-phone combinations. Because it is unlikely that the iPhone will be
issued by corporations as a productivity tool, the BlackBerry and similar devices may enjoy a significant edge in the corporate
market.

While there has been talk of a Google "G-Phone," this possibility is slim. Google's recent new hires from Sidekick are
reported to come from its software section, making it probable that Google is developing new applications for mobile phones.
This would put Google in a position to work with, not against, the iPhone.

References [edit ]

1. ↑ Kurokawa, Shigeki. "Sony is trying to bite into Apple's iPod market share." Ventura Country Star. 26 November 2007
2. ↑ AOL Switched http://www.switched.com/2008/01/25/1-1-billion-cell-phones-sold-worldwide-in-2007-says-study
3. ↑ 3.0 3.1 http://www.apple.com/appletv/specs.html
4. ↑ Apple 2007 Annual Report. Section 7 pg. 43 www.sec.gov, "Gartner Says Worldwide PC Market Grew 13 Percent in
2007." http://www.gartner.com/it/page.jsp?id=584210

Categories: Technology | Consumer Products | Mature

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