Apple's Networking and Supply Chain Mistakes Take

a Bite Out of Its Shine

Apple's self-inflicted wounds during the iPhone 3G, App Store and MobileMe rollouts and
iPhone software upgrade could have been prevented. And while CEO Steve Jobs has
owned up to the mistakes, will they have a lasting effect on Apple?

By Thomas Wailgum

WED, AUGUST 13, 2008 — CIO — In an internal company e-mail obtained by several media
outlets in early August, Apple CEO Steve Jobs confessed up to the problems surrounding the
company's summer product blitz. "It was a mistake to launch MobileMe at the same time as
iPhone 3G, iPhone 2.0 software and the App Store," Jobs wrote in the e-mail, which was
obtained by Macworld.

"We all had more than enough to do," he added, "and MobileMe could have been delayed without
consequence."

MobileMe's initial problems during the launch on Friday, July 11, the subsequent 11-day outage
that roiled Apple's rabid customer base and another service outage on Monday, Aug. 11, have
generated even more pressure and public ire on the company: That's because of iPhone 3G out-
of-stocks and activation nightmares in the U.S. and abroad during the iPhone 3G's launch and
concurrent 2.0 software upgrade.

Coming to a store near you? Maybe.

There are more than technical issues involved in Apple's recent customer service problems. The
company's business practices, and the way it develops and unveils products are key factors.
Analysts, including Ken Dulaney, a vice president at Gartner who closely follows Apple and the
iPhone, contend that Apple's policy of limited beta testing and intense product secrecy, while
helping to generate public interest also may hurt the company in the long run. "If they opened it
up a bit more, I don't think it would hurt them, and it would give them a lot better quality
assurance," he says. "They just can't control everything, and they're losing valuable input that
they could get from lots of people."

But Job's mea culpa (however it eventually came out in public) was a shrewd business move
atypical of most CEOs, notes Dulaney.
"It's OK to have problems as long as you admit to them and fix them. In fact, if you admit to them
and fix them, it turns out to be an effect that creates more intense loyalty than you would expect,"
he says. "I've seen a number of issues [with Apple] that would stop other vendors in their tracks,
and people are willing to give Apple a break there."

Apple's Supply Chain Put to the Test

In late May 2008, AMR Research proclaimed Apple's supply chain and digital distribution
channels as tops in the world. The iconic Mac, iPod and iPhone maker took the number-one
spot due to "an intoxicating mix of brilliant industrial design, transcendent software interfaces and
consumable goods that are purely digital," gushed the AMR analysts in the report ranking the
world's top 25 supply chains.

The analysts saluted Apple's efforts with the original iPhone's introduction to the marketplace in
2007, noting that "Apple could have stumbled meeting demand or failed on quality. It did neither."

Just about a month and a half after AMR published its report, Apple's vaunted supply chain and
networks stumbled and failed under the crush of a complex and multiproduct rollout, beginning on
July 11. Apple Stores quickly ran out of the 3Gs, lines soon elongated and problems with the
iPhone's activation process through iTunes frustrated thousands at Apple stores, whose
associates began sending customers home to activate their new bricks and also for those who
were trying to upgrade to the 2.0 software.

"When the iTunes activation server went down on Friday morning, Apple violated the cardinal
rule: first, do no harm," noted analysts at market research CurrentAnalysis in an Apple report.
"Problems with the activation process were inexcusable."

MobileMe: A source of angst at Apple.

Apple's MobileMe e-mail launch on the same day was "fraught with problems, including large
initial downtime, an extended e-mail outage including lost messages, the inability to contact the
service to sync, corruption of data, time delays in syncing the computer to MobileMe and more,"
reported the Macworld article. The "launch of MobileMe was not our finest hour," Jobs wrote to
the Apple troops. (For more on MobileMe and the enterprise, see "Apple's MobileMe, Designed
for Consumers, Could Be Potential Headache for IT Managers.")

To Gartner's Dulaney, some of Apple's troubles were self-inflicted but, to a degree, a bit out of
executives' and supply chain planners' control. "Apple has always made great products, and they
always expect to be phenomenally successful at launch, but I think the appetite in the public for
this kind of product is probably surprising," he says. "It probably got away from them."

Historically, notes the AMR supply chain report, Apple has had a reputation for poor supply chain
performance and was, at times, unable to handle the demands of its rabid fan base, falling back
on their "forgiveness for mistakes."
But that, according to the analysts, was all supposed to have changed.

What, Apple, Worry?

Even with the highly public failings on the big launch on July 11, just three days later Apple
boasted that it had sold more than 1 million 3G iPhones and customers downloaded 10 million
applications from its new App Store during that first weekend. 3G iPhones were still running low
or were completely out of stock in many locations in the United States and in the other 20 or so
countries where the iPhone was on sale.

And while Apple might have taken a PR hit during the opening weekend considering all the
setbacks, Apple reported record third-quarter earnings on July 21, which excluded any new
revenues from the iPhone 3G, App Store or MobileMe (which, unlike G-Mail, users have to pay
for). Apple's stock price dipped after the launch date but has rebounded to where it was on July
11.

A month after the launch in August, App Store users had downloaded more than 60 million
programs for the iPhone, and Apple has sold an average of $1 million a day in applications for a
total of about $30 million in sales during the month, Jobs told the Wall Street Journal. Though
Apple would not confirm, one analyst stated that Apple had sold 3 million of the 3G iPhones.

On the physical supply chain side, Apple and its provider partner AT&T are struggling to keep up
with demand, which could become even direr when Apple begins selling the 3Gs in 20 new
countries starting on Aug. 22. AT&T stores, for instance, haven't been able to replenish in-store
stocks since the July 11 launch and have a backlog on the devices that is running 13 to 14 days,
Computerworld reported. And Apple just announced a new distribution partnership with Best
Buy, beginning in early September.

To the CurrentAnalysis analysts, Avi Greengart and Kathryn Weldon, snafus like Apple's recent
troubles do not usually have any long-term repercussions, they write in their report, "but this one
may have some effects, thanks to the outsized press coverage [that] Apple launches typically
command."

"Even the most ardent Appleophiles may choose to wait a week or two before purchasing new
products the next time around," note Greengart and Weldon. "This would not only spread out
sales, it could actually weaken them; the initial product rush would be less of an event, the PR
impact and press coverage would be muted, and thus, Apple's brand would not enjoy quite the
same status and some sales could be lost."