Professional Documents
Culture Documents
on
Joel West
San José State University
joel.west@sjsu.edu
*Michael Mace
Rubicon Consulting
mike@rubiconconsulting.com
Abstract:
Innovation competencies are valuable in emergent and high-growth phases of the lifetime of a product or
industry segment. For mature industries, researchers have emphasized strengths in operations and execution,
with the implication that innovation-oriented companies must enter early in the product lifecycle or not at all.
Here we examine the decision of Apple Inc. to enter the mobile handset business. We link the iPhone entry
strategy to its historic competencies and the industry context of commodization and convergence. From this
we offer conclusions about openness in mobile phones and prospects for a single dominant design for
convergence devices.
Abstract
Innovation competencies are valuable in emergent and high-growth phases of the lifetime of
a given product or industry segment. For mature industries, researchers have emphasized
strengths in operations and execution, with the implication that innovation-oriented companies
must enter early in the product lifecycle or not at all.
Here we examine the decision of Apple Inc. to enter the mobile handset business. We link the
iPhone entry strategy to its historic competencies and the industry context of commodization and
convergence. From this we offer conclusions about openness in mobile phones and prospects for
a single dominant design for convergence devices.
Few electronics-based industries have both the same scale and the ongoing rate of
The industry was driven initially by rapid adoption in previously unserved major markets —
first in Europe, then Japan, the U.S., and China, such that in 2006 more than 1 billion new
handsets were sold. At the same time, the industry has seen ongoing technological change, both
in the mobile telephone system (through the adoption of new technologies such as SMS, WAP,
3G, camera phones and now mobile TV) and in key component technologies such as LCD
At the same time, developed markets have approached saturation as per capita adoption rates
have exceeded 75% in these major markets. In such markets, network operators face steadily
falling unit prices and must offer new services in hopes of increasing (or maintaining) average
imperative to offer ever more-capable phones to maintain high average selling prices in
developed markets. The few remaining growth markets (such as China and now India) offer little
consolation, as they feature highly price sensitive buyers and strong local competition.
Throughout, handset makers face a unique distribution system, where even the most strongly
branded firm must sell its phones in a given national market through one of three or four local
operators: by one estimate, only 0.5% of the handsets sold in the U.S. are not sold directly an
operator or its agents.1 Manufacturers thus face both high bargaining power by their main
distributors, and the requirement to introduce new technology to align to their distributors’
business models.
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Despite such pressures, leadership in the mobile handset business has remained a remarkably
stable oligopoly, with today’s market share leaders reflecting successful entry decisions made at
the beginning of the cellular era. Motorola invented the portable cell phone in 1973, while both
Nokia and Ericsson rode the rapid adoption of Nordic Mobile Telephones in the 1980s. Other
European makers have come and gone, while Japanese makers have dominated their home
markets but have enjoyed limited export success. The only new firm in the list of 2006 top three
manufacturers is Samsung of Korea, which has been in 3rd place since 2001 (Table 1).
In 2007, a new entrant unveiled its strategy for challenging this stable oligopoly. Unlike the
this niche player has no manufacturing and has never been a high-volume phone producer. It has
pre-announced its product more than a year before entry into the competitive European and
Asian markets, giving competitors plenty of time to match its product features. Customers loyal
to the incumbents and many analysts dismissed the entry strategy as doomed to fail.
However, the new entrant is Apple Inc.,2 and its unreleased iPhone is the industry’s most
talked-about product of the year. Despite a lack of telecommunications experience, the company
can draw upon core competencies in product innovation and marketing developed over its 30
year history. It also hopes to leverage the market-leading ecosystem it has built for online music
distribution.
Here we analyze Apple’s market entry strategy in the light of three key constraints: its own
competencies, the existing industry value network, and the ongoing efforts to deliver a
converged mobile device that equally provides voice, entertainment and the mobile Internet.
From this, we offer observations about Apple’s strategies and the future of the convergence
market.
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Apple’s Differentiation Competencies
Apple Computer has introduced a series of innovative products that changed the industry, of
which the best known are the Apple II, Macintosh and iPod (Table 1). Over the past decade, the
company has combined product innovation with industrial design and clever marketing to gain a
Since its earliest days suing makers of unauthorized Apple II clones, Apple has had a
reputation of aggressively protecting its trademark, copyrights and other intellectual property. Its
IP strategy — particularly its decision (with a brief exception) to ban clones of its computers —
At the same time, the company has long sought to nurture a vibrant ecosystem. Software
developers were crucial to its Macintosh adoption, while both content providers and third-party
Finally, no discussion of Apple’s strategy of the past decade would be complete without
acknowledging the influence of company founder Steve Jobs, who returned to become interim
CEO in 1997 and officially CEO in 2000. Both his perfectionism and his ability to enforce
decisions solved the product execution difficulties that plagued the company during its previous
In its early years, the company’s initial success came from the technical innovation of co-
founder Steven Wozniak, such as his ability to use software and clear hardware design to reduce
chip counts and thus manufacturing parts costs. Apple’s personal computers increasingly
reflected a systems approach, from the Apple III (1979), Lisa (1983) and then the Macintosh
(1984).
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Throughout its first decade, Apple demonstrated two key marketing-related competencies
inextricably linked to co-founder Steve Jobs, culminating in the 1984 introduction of the
Macintosh:
Product design. Its Apple II is widely credited as the first personal computer designed as a
consumer product, with a molded plastic case instead of a hobbyist-style metal case. Beginning
with the Macintosh, Jobs pushed Apple engineers to produce “insanely great” products that
Public relations. Apple was able to build excitement with product launch events that were
unmatched in the industry until Microsoft’s launch of Windows 95. Under Jobs, such launches
created suspense through pre-release secrecy and spectacular gestures. The marketing itself
became a news story. This culminated in the “1984” advertisement for the Macintosh, which is
widely remembered as one of the most successful Super Bowl commercials in history.
One criticism of Apple has been that it pursued a “closed” strategy. But as West (2006)
argues, the nature and value of openness differs between various stakeholders: suppliers,
With regards to systems vendors, Apple’s architecture was less open than the “IBM PC”
(later “Wintel” platform) eventually led by Microsoft and Intel.3 Except for a brief period of
system software and hardware, exclusively available from Apple. Meanwhile Microsoft and Intel
gladly sold their technology to systems vendors such as IBM and Dell — but vigorously fought
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However, with regards to third-party complements, as the leader of the Apple II (and later
Macintosh) ecosystem, Apple worked nearly as vigorously to attract a supply of crucial software
and hardware.
For hardware, Apple helped create a market for third-party expansion cards with its Apple II,
which was the largest market for such cards until the 1981 introduction of the IBM PC. Its 1984
promoted external expansion through such industry standard technologies as SCSI, Firewire and
USB. Beginning in 1987, it allowed internal expansion of its desktop computers through the
Unlike Microsoft, Apple sold only a limited range of software applications and aggressively
courted third party suppliers. For the Macintosh, it created a new job category — “software
evangelist” — to attract 500 new titles from independent software vendors (ISVs) in the first
year after the computers’ introduction (Levy 1994). Such complements are in the platform
owner’s interest because they make it more valuable — the “hardware-software paradigm”
In its strategy of controlling the entire platform but encouraging third party software, Apple
was consistent with the longstanding strategy of computer platform developers such as IBM and
Digital Equipment. The Microsoft and Intel role — unintended beneficiaries of IBM’s
longstanding market power — marked an exception where proprietary platform leadership was
divided between multiple firms. (Moschella, 1997; Bresnahan & Greenstein, 1999). As with
nearly all personal computer makers, Apple purchased its microprocessors from third parties
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This computer-centric model of complements is not the only approach towards industry
standardization. For decades, consumer electronics appliances — such as radios, televisions and
CD players —were not user extensible, but communicated with external devices via well-defined
standards.6 Until they were cross-pollinated with handheld computers in 1996, cell phones more
closely followed the appliance model than the computing one. And even today, there’s not a
After the 1987 introduction of the Macintosh II, the first Macintosh with color graphics and
One key problem was losing the loyalty of an ecosystem that turned its attention to the faster-
growing IBM PC platform. Apple had helped launch the ComputerLand franchise chain in the
U.S. with its Apple II product, but after 1981 the retailer increasingly used that nationwide
network to sell IBM PCs (Moritz 1984). In 1985, Apple had used its advertising dollars to
promote the new Aldus PageMaker software package, but in 1986 Aldus released a version for
the IBM PC that bundled Microsoft’s fledgling Windows 1.0 software (Woolf, 2002).
To counter the threat of Windows, Apple in 1988 filed a lawsuit accusing Microsoft of
copying the Macintosh user interface with Windows. Apple lost its lawsuit on the strength of a
1985 GUI license that (Apple partisans charge) was extorted by Microsoft under threat of Apple
losing its right to ship the Microsoft-developed Basic interpreter for the Apple II, then Apple’s
Some (including even Bill Gates) once suggested that Microsoft should license its Macintosh
technology to PC rivals (Carlton, 1997). However, such a shift could have reduced Apple’s
margins and overall revenue stream to support its R&D budget (which was larger than
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Microsoft’s until 1994) (West, 2005). There have been no successful examples of a computer
company shifting from a systems to licensing model (with NeXT, Apple and Palm being notable
failures) and only one major example (Novell) of a hardware company shifting to software —
Whether or not Apple would have done better as a licensing company, from 1987-1997 it
Mobilized to release the Macintosh in 1984, the company drifted after Jobs left in a 1985 power
struggle with successor John Sculley. In the absence of the strong leader, the company’s
freewheeling culture spiraled out of control. From 1987-1997, the company spent about $1.5
billion in R&D for cancelled or failed technologies, and lost another $1 billion in 1997 due to
In particular, Apple failed with two attempts to update its aging operating system. In
desperation, in December 1996 it purchased NeXT — where Jobs was chairman — and six
In Steve Jobs’ second turn as CEO, the company moved dramatically both to fix operational
Some of the changes were straightforward, such as outsourcing manufacturing and improving
inventory turns to match Dell, the industry leader (West, 2002). In doing so, in the formulation of
Moore (2005), Apple put its primary emphasis on marketing innovation but achieved strategic
In minor ways, Apple’s product strategy became more open. Rather than various proprietary
hardware interfaces that it had maintained for 15 years, it moved to embrace de facto or open
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industry standards. These included the VGA video connector, the IEEE-1394 (“Firewire”) bus
standard, and the Intel-created Universal Serial Bus (West, 2002). With its Mac OS X operating
system (released in 2001), it sought to de-emphasize its own AppleTalk networking standard in
favor of TCP/IP and other Internet standards. In 2006, it began shipping computers using the
However, in other ways, Apple became more vertically integrated and (at least as defined by
Distribution. From 1997-2000, Apple created its own online stores in the U.S. and 14 other
countries, shifting distribution away from dealers that primarily sold Wintel machines. In May
2001, Apple opened its first retail stores in the US in May 2001, and six years later has some 170
stores in four countries. In Fiscal Year 2006, 16.7% of its computer unit sales were through the
Applications. Jobs’s first major step as acting CEO in 1997 was to negotiate an agreement
with Microsoft CEO Bill Gates to continue to provide Microsoft Office for the Macintosh. But
since that time, Apple has bundled its own web browser, e-mail program, contact manager and
music player with its OS, and developed separate software for page layout, presentations, photo
Apple also pursued a vertically integrated strategy in its music business, as discussed below.
Ironically, recent trends have seen increasing convergence in strategies between Apple and
Microsoft. For its video game business, like its rivals Sony and Nintendo, Microsoft buys its
microprocessors but designs its own software and hardware, and does not license them to others.
Meanwhile, Microsoft’s “Zune” music players emulate Apple’s iPod vertically integrated
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Successful Entry into Music
Jobs’ largest strategic change was to engineer a successful related diversification into the
music industry, beginning with a PC-based MP3 player application, then its iPod portable music
player, and finally with its iTunes Music Store. The diversification has been crucial to Apple’s
success, with music-related products accounting for 49.5% of $19.3 billion in 2006 revenues
(Apple Computer, 2006). It has also had a major impact on the industry:
It’s hard to overstate the impact of the iPod on the computer, consumer
electronics and music industries since it was introduced in 2001. The iPod,
genuinely caught on with music and video buffs. It’s shown how a computer
One key to Apple’s success has been the iPod family of products — designed by Apple but
2002).7 The iPods have won praise for elegance and ease of use, as have its iTunes software and
music store download sites. As a result, in 2006 Apple held roughly 62% unit share in the US
market for music players, and 29% of the global market, with a greater share of revenues
(Wolverton, 2006; “A High Point for Apple”, 2007). The widespread adoption has brought a
broad supply of complementary hardware and accessories, such as cases, home stereos and
automobile adapters.
Apple also successfully navigated the content landmines that plague any new entertainment
media — in this case the “Big Six” (now “Big Four”) music labels. In the unfamiliar situation of
high supplier power, Apple was still able to complete its catalog by attracting all the majors and
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many independents, while capping the retail prices for individual songs at $0.99 or €0.99 in the
• Systems innovation. As with its computers, Apple designed an entire system to work
well together, including the player and music store. This was a contrast to most other
manufacturers, which concentrated on either the store or the player, and could not
coordinate their interaction as closely as Apple could. Even when Apple’s music
players did not have the best price or features, the overall system capabilities and
• Platform agnostic. Apple made its entire system work equally well on Windows as
on the Mac — something that it did with its QuickTime media software of the 1990s
but not with its LaserWriter laser printers of the 1980s. The latter was later cited by
• Closed design. Apple used a proprietary encryption system for encoding its music
downloads, which meant that songs purchased from Apple could only be used on
Apple players. On the one hand, as Jobs argued in an open letter to record companies,
the secrecy made it less likely that the encryption would be cracked by hackers (Jobs,
2007). On the other hand, the decision created switching costs and helped protect
computing — is credited to a 1977 speech by NEC chairman Koji Kobayashi (cf. Kobayashi,
1986). During the 1980s and early 1990s, key aspects of the convergence idea were developed
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and popularized by futurist Nicholas Negroponte and Apple CEO John Sculley (Sculley, 1987;
“From Idiot Box to Information Appliance,” 1994; Gordon, 2003). By the mid-1990s,
convergence was a reality, and strategists like David Yoffie (1997) were offering broad strategies
A variety of different approaches towards convergence devices have been tried (Table 3).
Over time, both the optimism and the technology of convergence devices have affected the
product design strategies of mobile phone makers, particular for the more expensive (and more
Even before mobile phones, convergence has been a recurring theme in the technology
industry for years, with decidedly mixed results. In the late 1980s, Canon offered a converged
personal computer called the Navi which incorporated a PC, fax machine, phone, answering
machine, and printer into a single case. It died quickly (Johnstone, 1994). Converged GPS - PDA
systems were popular in Europe for several years, but were supplanted by dedicated car
navigation systems (Canalys, 2006). On the other hand, converged printer-scanner-fax devices
The appeal of convergence to the mobile phone industry is grounded in economics. With
Europe’s mobile markets saturated, and the US close behind, the operators’ best hope to increase
billings in those countries is to drive more revenue per user. That means people must be
convinced to do more than just talk and send text messages with their mobile phones.
Handset vendors, too, feel substantial pressure to add more features to their phones. A
company that gets an edge in a new feature can gain a substantial margin and share advantage.
For example, the Razr slim phone helped rescue Motorola’s leadership in the US market, while
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Nokia’s lead in cameraphones in Europe helped it solidify its position there. Meanwhile, Nokia’s
Converging a personal computer and a mobile phone seems like a logical way to get a new
feature advantage. It ought to create new (data transmission) revenue streams for the operators as
users browse the web wirelessly. And presumably a well converged phone might give the
Market Experiments
The first five years of convergence mobile phones brought a series of failures and no true
marketplace successes. Some of the problems were — as with the Newton PDA — due to an
incomplete understanding of the product category by both producers and users. The products
were also limited by the available hardware, including LCD screens, computing-capable
What is widely considered to be the first convergence phone came in 1996, when Nokia
introduced the Nokia 9000, a mobile phone with built-in QWERTY keyboard marked in Europe
as a replacement for a small laptop. However, the computer weighed 397 grams (about 3.5
iPhones), and was not a major sales success. For the US market, in 1998 Qualcomm shipped the
pdQ, the first converged mobile phone based on Palm OS. Like the Nokia 9000 it was too large
and heavy (285 grams) for a cellphone, and found only a small audience, as did Qualcomm’s 208
gram follow-on product, sold as the Kyocera 6035 two years later.
In 1998, Nokia, Psion, Motorola, and Ericsson banded together to create Symbian, a joint
venture to adapt Psion’s EPOC PDA operating system for use in mobile phones. The next year,
Ericsson shipped the first mobile phone based on Symbian, the r380, which did not sell well.
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However, by 2001, both the device size and the design choices began to more closely match
what customers wanted. The first such product was the Handspring Treo 180, the best-integrated
(and almost immediately the most popular) Palm OS-based smartphone. In 2002, two other
important smartphones came to market. The RIM Blackberry 5810 was the first RIM e-mail
device to include a built-in phone. And Ericsson released the p800, a touchscreen-based
smartphone whose early sales in Europe were comparable to what the Treo was doing in the US.
The year 2002 also saw the first shipments of smartphones based on Windows Mobile (called
Pocket PC at the time). As with other device makers who witnessed the rents extracted by
Microsoft from PC makers, the major mobile phone vendors were leery of partnering with
Microsoft, so it focused on working with second-tier Asian manufacturers eager to gain market
RIM smartphone sales quickly surpassed those of both Palm and Ericsson (later
SonyEricsson), but its dominance in North America had little impact elsewhere in the world,
garnering only 8% of overall 2006 smartphone shipments. The leading smartphone vendor in
2006 was Nokia, with 50.2% of the world market, while Symbian OS is the leading smartphone
OS, with 67% share (Canalys 2007). Since its initial Nokia 9000 smartphone, Nokia has
developed 10 subsequent models in its Communicator family, cutting the weight nearly in half
with the 9300/9500 and the planned E90. However, most of its smartphone sales come either
from phones in more traditional form factors or those (such as the E61/E62) that resemble the
RIM BlackBerry.
Canalys (2007) estimates 2006 smartphone sales as 64 million units — less than 7% of the
total market. Even that figure is misleading, because it includes all mobile phones that have a
“smartphone” operating system in them, regardless of whether the customer uses its features.
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Market research conducted by Palm in 2004 showed that the vast majority of Symbian customers
were unaware that the OS was built into their phones and were not making substantial use of its
data features.8 This is more than an academic distinction, since the motivation for the industry's
investment in smartphones was to drive more use of mobile data. If the customers don’t use the
data features, the investment in smartphone software and hardware was largely wasted.
As of 2007, the most successful converged phones in terms of actual data usage in the US
and Europe are the e-mail devices, led by the RIM Blackberry. The Blackberry’s basic screen
and keyboard layout has been copied by a wide range of competitors, including the Palm Treo,
Efforts to create a converged entertainment device have been much less successful. The
Nokia N-Gage gaming phone, launched in 2003, was a spectacular failure,9 as was (on a much
smaller scale) the TapWave Zodiac, a converged PDA and game device. The Danger Hiptop
youth communicator has been a mild success in the US and several other countries, but is offered
by only a single operator and shows no signs of rapid growth. In 2005, Motorola launched the
Rokr, a merged iPod and a mobile phone. It could hold only about 100 songs, and disappeared
from the market quickly. Steve Jobs said later that his experience with the Rokr made him realize
that Apple needed to completely control the mobile phone’s design in order to be successful —
although critics at the time argued that the phone’s music capabilities were deliberately crippled
As of early 2007, the most successful entertainment phones are probably the SonyEricsson
Walkman phones. They are not widely available in the US, but in Europe they have helped
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Apple’s iPhone Strategy
Product Concept
While the existence (and name) of the iPhone had been anticipated, Steve Jobs nonetheless
enjoyed tremendous interest when he announced the iPhone at the annual Macworld trade show
on January 9, 2007. If the goal was creating interest, Jobs was successful: less than two months
later, the term “iPhone” could be found (by Google) on some 60 million pages on the World
Wide Web.10
Compared to earlier generations of convergence phones, the main difference in the iPhone’s
features was the screen. The iPhone featured the largest screen (8.9cm diagonal, 320x480) of any
standard-sized cellphone.11 To make room for the larger screen, the phone deleted a dialing
keypad, and instead uses a touchscreen for dialing and other input functions. Under this screen
specific user interface that’s claimed to match the ease of use of the Macintosh and iPod.
Despite an overwhelming avalanche of free publicity, the phone was not without its
detractors. As with the original iPod, many analysts proclaimed the product overpriced, too big,
or a niche product. Others questioned the lack of tactile feedback from the touchscreen keyboard,
lack of a user-replaceable battery, lack of support for 3G networks, absence of an expansion slot,
The greatest criticism about Apple’s strategy was that the phone was “closed”. The most
user-visible way was that (the initial model of) the iPhone was restricted to a single carrier,
Cingular (which was renamed AT&T in January 2007). While new phones in the U.S. are
typically “locked” to a single carrier to assure payback of an initial handset subsidy by the
carrier, Apple used its iPod success to demand unprecedented control of iPhone distribution.
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Cingular, the largest US carrier (26.6% market share), was more willing to agreed to Apple’s
The other major criticism was that Apple’s phone — unlike its PCs and even its iPods —
allowed almost no user-installable software. In this regard, Apple was following a platform
strategy distinct from both its own PC and other convergence phones.
Platform Strategy
Most of the earlier attempts at making convergence phones— as well as other convergence
devices such as PDAs and handheld game players — have utilized the general-purpose
computing platform strategy, first developed by IBM and adapted for minicomputers,
Successful platform strategies have been shown to have three key attributes. New platforms
identify a need (i.e. customer market segment) not met by prior platforms —and win adoption by
serving that segment better than other existing alternatives (Bresnahan & Greenstein, 1999).
Over time, winning platforms have shifted from vertically integrated strategies (e.g., the IBM
S/360) in which a single firm controlled the entire platform, to divided technical leadership
where different firms control different parts of the platform (Bresnahan & Greenstein, 1999).
And controlling the value provided by the platform requires control of the complements (e.g.,
through application programming interfaces) that make the platform valuable (West and Dedrick,
2000).
The leading cell phone vendors have adopted inconsistent and changing strategies in
operating systems. At first they embraced a business model styled after the PC market. Several
vendors — including Nokia and Motorola — banded together to create Symbian, a shared
operating system that they were all to use. Palm licensed its operating system to a spinout
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company, PalmSource, and it was adopted by several major vendors including Sony and
companies as possible, with its biggest successes coming from HP, Dell, and a series of
companies in Asia.
But recently the handset vendors’ OS strategies have become more proprietary. Nokia runs a
proprietary software layer, called S60, on top of its Symbian based phones. SonyEricsson runs an
incompatible layer called UIQ on its Symbian devices. Palm now has regained rights to its OS,
and can make proprietary changes to it. Motorola is a Microsoft and Symbian licensee, but is
investing heavily in its own version of Linux. As of early 2007, the mobile phone market appears
to be headed toward a situation where the leading vendors will each have their own incompatible
Apple’s strategy is even more proprietary. It adapted its desktop operating system — in this
case an unspecified subset of its Mac OS X desktop operating system — to run the iPhone. This
lets Apple leverage some of its desktop software, including TCP/IP, web browser, and its
Apple claims this will let the iPhone display standard HTML and http websites that were
created for personal computers. This could be a substantial advantage, as most mobile device
browsers have trouble displaying some websites designed for PCs. Although mobile browsers
have made substantial progress, differences between the mobile web and the PC web have been
an ongoing source of confusion for users, dating back to the introduction of the Wireless
Application Protocol, which (among other problems) promised a mobile internet experience that
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However, Apple’s overall platform strategy is more akin to a consumer electronics appliance
than a general-purpose computer. Unlike Symbian, Palm, and Microsoft, Apple is not allowing
open development of third party applications for the iPhone,13 which has generated considerable
The idea of providing new functionality through software has been a common thread for
computers and video games, but not for televisions, radios or (pre-”smartphone”) mobile phones.
The utility of the home consumer electronics device has been provided by the content — whether
pre-recorded or broadcast — and thus such platforms have evolved only rarely due to the high
switching costs for infrastructure (or consumer library) investments to support a fixed standard.
The different pattern of technological change has meant a different strategy for the adoption of
new platforms.
As with computing platforms, one entry opportunity for appliances is the unmet need, as with
video recorder or MP3 format. Another option is superior performance — which is less often
used for computing platforms, because all competing platforms will incorporate incremental
improvements on an ongoing basis. However, the fixed standards of consumer appliance make
improvements episodic: to compete with vinyl records, the compact cassette offered portability
while the CD offered sound quality (cf. Grindley, 1995). In parallel, to improve sound quality
broadcast audio progressed from AM to FM to digital (via the Internet, satellite, or over-the-air).
Segmentation Strategy
Despite predictions of convergence devices taking over the entire electronics industry, many
of the results thus far has been disappointing. The Apple strategy illustrates the controversy
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On the one hand is the goal of producing the device that converges the maximum number of
functions for a broad mass market. This has been fueled by both the Kobayashi and Sculley
utopian visions, and the product strategies of many firms offering convergence devices —
whether it is MP3 players in cell phones, DVD (or Blu-ray or HD DVD) players built into
videogame consoles, or Sony’s UMD movie format for its PlayStation Portable.
With this market conception, the ideal mobile device would span the various possible roles:
function that could be offered in a portable device. In this case, the device supplants the need for
a phone, an MP3 or video player, a laptop computer, handheld game console, and any other
similar function. Both the Microsoft Windows Mobile phones and many of the Symbian phones
The Apple strategy of an appliance device allows for an Internet-enabled web appliance, but
believe this has doomed the iPhone; as venture capitalist Paul Kedrosky wrote:
Is Apple serious that it won’t let third-party developers build software for
the thing? If so, and put simply, the device will fail. A closed-box consumer
electronics mentality will work in music players, but the future of mobile
Others have argued that the design tradeoffs in making devices means that no one product
can be optimal on all dimensions. Strategy consultant Michael Mace (2007) argues that there are
three distinct drivers for mobile devices: communications (as with a mobile phone),
entertainment (as with an MP3 player or handheld game console) and information access (such
as provided by a PDA). Each driver serves a different, distinct group of customers who don’t
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want the other drivers. Under this typology, the iPhone would be an entertainment device with
some communication and information capabilities — as with some of the Sony Ericsson
Walkman phones — while most smart phones are more focused on communication (Figure 1).
If this latter view is correct, then the mobile device market — like many other product
categories — would be segmented into different types of users and user needs. The iPhone might
be a poor substitute for a Nokia E90 (which seeks to be a laptop replacement), but instead would
be competing with the Walkman phones and other entertainment devices. Mace concluded:
Rather than looking for the mobile market to “converge” the way that most
diverge into different segments. The right analogy for the mobile market isn’t
PCs, it’s cars. As the car market grew in the 1900s, it stratified into trucks and
minivans and SUVs and sports cars and so on. (Mace 2007)
allows the manager to choose strategies that maximize a firm’s success (e.g., Finkelstein &
Hambrick, 1996). More recent research has emphasized the durable interfirm differences that
drive both strategies and the success of these strategies — either from scarce, inimitable and
valuable resources, or from a firm’s capabilities and competencies derived from those resources
Here we suggest the complex inter-dependencies of Apple’s iPhone strategy with its existing
iPod. If resources are valuable, rare and inimitable, then clearly Apple’s greatest asset in
entering the convergence phone business relates to the iPod. That includes not only its
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innovation competencies, but brand awareness, reputation and distribution. In particular, the
market-leading iTunes Music Store is an asset that none of the competing hardware vendors (or
Existing business model. The leveraging of the iPod ecosystem (particularly music and
video downloads) directed Apple towards an iPhone business model, as would concerns about
cannibalizing the existing iPod and download sales that comprise half the company’s revenues.
Entertainment segment. Leveraging the iPod and iPod ecosystem would mean that Apple’s
best opportunity for market entry lay in addressing what Mace (2007) terms as the entertainment
segment of the device market that most closely matched existing resources and capabilities. This
segment also had a strong affinity with the Macintosh market, which has traditionally been
Entertainment-centric phone. From its segmentation and capabilities — including the lack
of phone competencies — the device would be more oriented towards entertainment than a
phone.
Appliance. As with the iPod or a CD player, the device would be more like an appliance
than a computer.
switching costs created by the copy-protection of its music store — encouraged the choice of a
closed business model. The company appears to believe that the choice of an entertainment
segment and an appliance concept allows it to use a more closed model, and by doing so it can
avoid the price wars and commodization facing other mobile phone makers,
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Lack of a software ecosystem. The choice of a closed strategy (for applications) makes
Apple independent of the need to build an ecosystem of third-party software developers, as have
Power of the network operators. The oligopoly power of the mobile phone operators both
supports and allows Apple’s model. As Claburn (2007) wrote: “Only the phone and cable
Need to acquire phone competencies. Although software is often a problem for electronics
makers — as with the HP and IBM examples reported by Leonard-Barton (1992) — Apple has
long been strong in software. With the iPod, it has developed capabilities for designing portable
battery-powered devices. However, even with help from experienced manufacturers, Apple may
need several years to develop and integrate the necessary competencies for selling world-class
phones — including radio engineering, regulatory compliance and working with network
operators. For example, in 2000 PDA maker Handspring sought to become a mobile phone
company by releasing an expansion card for its PDA, but more than six years (and 10 Treo
models) later, its phones have still have disadvantages compared to the top four phone makers
Discussion
Firms face an inherent trade-off in choosing the level of openness in their platform strategies.
A completely open strategy will not capture value, while a completely closed one will not create
While Apple’s strategy for the iPhone was criticized as being “closed,” the relevant questions
operating systems available for license —Windows and Unix — there were many entry
opportunities for both systems vendors and markets of application software, increasing
competition and presumably reducing buyer prices. However, such licensing did not facilitate
entry by competing operating systems vendors (Bresnahan and Greenstein, 1999; West, 2006).
At the other extreme, the most popular computerized entertainment device — videogame
consoles — have a largely closed system. Since the 2001 exit by Sega, the home console market
has been a cozy oligopoly with only three firms: Sony, Microsoft, Nintendo. Meanwhile, console
makers use intellectual property law both to decide which complements will be provided, and to
extract royalties from complement makers (Sheff, 1993; Gallagher and Park, 2002).
Console makers today attract new adoption by setting a low initial hardware price, which is
cross-subsidized by the subsequent revenue stream of videogame sales. But this “razor and razor
blade” strategy was actually initiated by US cell phone carriers (and later imitated by their
overseas counterparts), in which phones were “locked” to a specific network in order to recover
Apple’s decision to lock the first model of a popular phone series to a single carrier is
comparable to the rollout strategies of many earlier phone families. Its decision to block (or at
least restrict) the addition of third party software is unusual for a convergence phone, but would
not be considered unusual for an appliance phone or a home electronics product. This raises the
question as to whether iPhone users will see the complement that adds the most value as being
software (which is not allowed) or content (which is encouraged). Finally, its locking of its copy-
protected music downloads to its own product is consistent with its current iPod strategy (later
- 23 -
imitated by Microsoft), and thus far consumers have favored Apple’s integrated (but high-
Apple’s Strategy
It would be silly to judge a company on the success of a single product strategy — or, even
more so, to judge the success of such a strategy before a single product had been shipped.
However, Apple’s iPhone strategy is of huge importance to Apple, marking only its fourth
industry entry after personal computers (1977), PDAs (1993) and portable music players
(2001).14
Many of the strategies are dictated by the core competencies that the company has acquired
over its thirty year history — notably in product marketing and innovation. It also reflects the
competencies not available to Apple — but to its competitors — such as the financial assets and
market power of Microsoft and the mobile phone distribution channels of Nokia and Motorola.
Still, there have been important changes in Apple’s strategies over the years. To use the
typology developed by Leonard-Barton (1992) in her study of Hewlett-Packard and IBM, Apple
had a consistently high level of technical skills, the effectiveness of the managerial systems
varied dramatically between the two reigns of Steve Jobs as CEO and the intervening period of
ineffective leadership. Absent strong leadership, the innovation empowerment culture became an
Meanwhile, although Apple has sought to both nurture and control its ecosystem since the
Apple II days, the iPhone reflects the least nurturing and most controlling strategy to date.
Whether this is because of organizational learning (the use of Macintosh complements to support
rival platforms) or the product model (a music appliance) is hard to determine from outside the
- 24 -
unusually secretive company. A third possible explanation is that the iPhone reflects the
product category that has seen disappointing third-party software sales. Still, the decision to
break from the PC-centric model of platform and application software — to an appliance-centric
entertainment device — suggests that Apple is less constrained by the “dominant logic” (in the
terms of Prahalad and Bettis, 1986) of PC platform competition than its non-PC rivals.
The Apple strategy might appear to match the Bresnahan & Greenstein (1999) typology of
indirect entry of a new platform into a contested market, by using the iPod to first serve an
untapped need and then extend to cover the convergence device market. The problem with such a
characterization is that this assigns an intentionality (or strategic foresight) to the 2001 market
entry strategy that appears to be absent from both accounts of the iPod’s development (Kahney,
2004) and accounts that the decision to enter the phone market dated only from 2005 (Sharma et
al, 2007). Instead, the utilization of the iPod as a beachhead to convergence devices fits
Mintzberg’s (1978: 946) classic definition of an emergent strategy, in which the absence of
perfect a priori information, “Strategy formation then becomes a learning process, whereby so-
called implementation feeds back to formulation and intentions get modified en route.” As with
the Mintzberg critique, it would appear that the indirect entry can be subdivided into the a priori
Dominant Design
An extensive literature has postulated that new technologies converge onto a single
“dominant design” (Anderson & Tushman, 1990; Utterback, 1994). But even supporters have
questioned whether some definitions of a dominant design are tautological — i.e. the design that
dominates is the one that gets dominant market share (Suárez and Uttterback, 1995).
- 25 -
The current trajectory of the convergence device market raises a more fundamental question:
is it reasonable to assume a priori the emergence of a single converged design? And, if the
definition of a “dominant” design is the common subset across multiple successful product
approaches, then is it possible for managers to anticipate which features will be common to the
ultimate winner and which ones will allow for firm variation and market experimentation?
As of today, neither the unified nor segmented model of convergence devices has been
proven (or disproven). But there are more example of the latter — multiple winning designs —
Take the typewriter, a product category commoditized by the mid-20th century but still
subject to product variation. Prior research posits the design was crystallized by the beginning of
the 20th century, with the Underwood manual desk typewriter. But does this allow for the
portable variant, or the electric typewriter? If the dominant design includes typebars, then how
does that allow for the main office typewriters of the 1970s , the typeball (from IBM) and
Closer to the convergence example, broadcast radios tended to have a volume and tuning
knob and some sort of dial — but these are merely examples of form following function. Within
radios, there are a variety of form factors — desktop radios, pocket radio, portable “boom box,”
clock radio, component and min-component stereos: are these all reflecting a single dominant
design? Among home phones, three models emerged: desk phones, wall phones and cordless
phones, while personal computers had different desktop and laptop designs. So if firms stop
experimenting when a design takes the lead, are they conforming to the dominant design or
- 26 -
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Figures and Tables
Table 1: Durability of global market share by leading mobile phone makers
Company 1994 2000 2006
Nokia 21.0% 30.6% 34.1%
Motorola 32.5% 14.6% 21.3%
Sony Ericsson§ 10.9% 10.0% 7.3%
Samsung < 5% 5.0% 11.6%
LG < 5% < 5% 5.8%
NEC 8.9% < 5% < 5%
Matsushita 5.4% 5.2% < 5%
Source: Dataquest (1994, 2000) and IDC (2006)
§ 1994, 2000: Combined share of Sony Ericsson joint venture partners.
Table 2: Key milestones in Apple product strategies
Date Segment Milestone
April 1976 corporate Steve Wozniak demonstrates Apple I circuit board
April 1977 PC Apple introduces Apple II
Jan. 1983 PC Lisa introduced with $10,000 list price
Jan. 1984 PC Macintosh introduced at $2,500
Sept. 1985 corporate Co-founder Steve Jobs leaves Apple to found NeXT
March PC First Macintosh with color and built-in expansion slots
1987
Oct. 1991 PC First PowerBook laptop computer
1987 PDA John Sculley touts “Knowledge Navigator” product concept
Aug. 1993 PDA Newton MessagePad introduced
Dec. 1996 corporate Apple purchases NeXT for NextStep operating system; Jobs
returns to Apple
Sept. 1997 corporate Jobs named interim CEO
May 1998 PC Jobs introduces iMac
Nov. 1997 distribution Apple opens first online store, serving U.S. customers
May 1998 distribution Apple U.K. opens first online store outside US
Jan. 1999 distribution Apple Store extended to France, Germany and five other
countries
March PC Apple ships Mac OS X based on NextStep and BSD Unix, its
2001 first all-new PC operating system in 17 years
May 2001 distribution First Apple-owned retail stores open near Los Angeles and
D.C.
Oct. 2001 music First iPod models introduced at $400 and $500
Apr. 2003 music iTunes Music Store opens in U.S
Oct. 2003 music iPod, iTunes Music Service add Windows support
Jan. 2004 music Apple, Motorola begin phone collaboration
Sep. 2005 music Motorola introduces ROKR mobile phone with iTunes
Oct. 2005 music Apple adds video to iPod, iTunes Music Store; featured on
cover of Time magazine
Jan. 2007 music iPhone announced; company renamed from “Apple
Computer” to “Apple”
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Table 3: Evolution of convergence phones
- 34 -
Table 4: Comparison of mobile device platforms
Research in
Vendor Apple Samsung Sony Ericsson Nokia Nokia Motion Palm Motorola
Model iPhone SGH-F700 W950 E90 E61i BlackBerry 8800 Treo 700p Q
Intro date 7-Jan-2007 12-Feb-2007 13-Feb-2006 7-Feb-2007 12-Feb-2007 12-Feb-2007 15-May-2006 16-May-2006
Weight 135 g n.r. 112 g 210 g 150 g 134 g 180 g 115 g
Height 114mm 104mm 106mm 132mm 117mm 114mm 112mm 116mm
Width 61mm 50mm 54mm 57mm 70mm 66mm 58mm 64mm
Thickness 11.7mm 16mm 15mm 20mm 13.9mm 14mm 23mm 11.5mm
Screen size 3.5” 2.8” 2.6” 4.0” 2.8” 2.5” 2.8” 2.4”
Screen
480x320 440x240 240x320 800x352 320x240 320x240 320x320 320x240
resolution
Form factor Tablet Slide-out Candy bar Clamshell BlackBerry BlackBerry BlackBerry BlackBerry
Mini Mini Thumb Thumb Thumb Thumb
Input mode Touchscreen 10 key
keyboard keyboard keyboard keyboard keyboard keyboard
GSM; GSM; GSM; GSM; CDMA; CDMA;
Network GSM+GPRS GSM+EDGE
HSDPA WCDMA HSDPA WCDMA EvDO EvDO
WiFi X - - X X - - -
Modified Symbian OS Symbian Symbian OS Windows
OS proprietary proprietary Palm OS 5.4
Mac OS X 9.1 OS 9.2 9.1a Mobile 5.0
Downloadable Windows
- n.r. UIQ S60 S60 BlackBerry Palm OS
apps CE
Memory
4GB,8GB n.r. 4GB n.r. n.r. 64mb 128mb 192 mb
capacity
Memory card - microSD - microSD microSD microSD SD MiniSD
MP3 X X X X X X X X
Java - X - X X X X -
Camera 2.0 mp 5.0 mp - 3.2 mp - - 1.3 mp 1.3 mp
- 35 -
Figure 1: Contrasting segments for convergence devices
- 36 -
Figure 2: Linkages of Apple’s iPhone strategy
Notes
1
A higher proportion of handsets are independently sold in Europe, but operators still strongly
Jan. 9, 2007, when (concurrent with the iPhone introduction) it filed papers with the state and
computers would be available from competitors, and thus fiercely protected the BIOS code
on its ROMs. However, it lost key copyright cases in the 1980s, opening the door to reverse-
- 37 -
engineered and rapid adoption of fully-compatible “IBM PC clones” (Chposky & Leonsis
instead of third-party competitors. But in most cases, such competitors faced few competitive
(Kobayashi 1986); Motorola was a maker of Macintosh clones using its PowerPC chip from
1996-1997. Ironically, both IBM (with its PowerPC chips) and Acorn (with its Acron RISC
Microprocessor — ARM) never used teir own chips in their own PC models.
6
While the VCR standards competition is fresh in the minds of middle-aged researchers, most
forget that proprietary standards were the norm in the 20th century consumer electronics
industry, with both color television and vinyl record standards defined as the result of
hired to lead the hardware design team after bringing the idea to Apple (e.g., Kahney, 2004).
In 2004, Fadell was promoted to VP of iPod Engineering and in 2006, Senior VP of the iPod
Division.
8
Personal correspondence, former Palm marketing manager, February 26, 2007.
9
“The N-Gage was not as commercially popular as Nokia [predicted], having sold, by the end
of 2005, less than half of the minimum six million units that had been Nokia's target.” (“N-
Gage”, 2007). One problem Nokia faced was attracting video games to a new gaming
- 38 -
platform in competition with three major consoles and one (soon to be two) portable game
settled six weeks later on undisclosed terms. Less than one-forth of the 60 million pages
Cingular reported 61 million subscribers, followed by Verizon with 56.8 million, Sprint-
Nextel with 53.1 million (23.1%) and T-Mobile with 25.0 million (10.9%), with the
remaining 14.6% split between various smaller carriers. Cingular and T-Mobile used the
European GSM standard, while Verizon and Sprint used Qualcomm’s CDMA standard.
13
Application downloading for competitors is not unlimited. For example, to combat computer
sold a wide range of accessory hardware and software (including printers, hard disks,
monitors and applications) for its personal computers, but these were almost entirely to
- 39 -