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Apple (NASDAQ:AAPL) designs, manufactures, and markets smart personal devices addressing the consumer electronics space through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. The company's products include the Macintosh (Mac) family of personal computers, the iconic iPod portable music player, the iPhone, and, the iPad. Additionally, Apple sells a variety accessories and peripherals including application software, printers, storage devices, speakers, and headphones [1] . For the full year 2010, Apple reported a total revenue of $65.2B and a net income of $14.0B. As the cell phone market sees a trend of increased demand for smartphones, Apple has positioned its iPhone as the one of the fastest growing and innovative products in the industry. Apple's continued innovation and annual releases of new versions of existing products have fueled its top line growth.

Business Overview

Headquartered in Cupertino, California, Apple was incorporated in 1976. In the past several years, Apple has been at the forefront of innovation within consumer electronics, launching key products geared towards the high-end mobile market (the iPhone) and the home entertainment industry (Apple TV). Apple is known for its philosophy of aesthetic design to its distinctive advertising campaigns.

Business Segments

Contents

For the full year 2010, Apple reported a total revenue of $65.2B and a net income of $14.0B. The company reported a 88% increase in iPhone and related product sales. Apple's main business segments include the Mac Hardware Products, Music Products and Services, iPhone, Peripheral Products, and iPad. In its first year, 2010, the iPad brought in around $5 billion in sales. In addition, Apple expects its iPhone sales growth to sustain, especially since Apple officially announced its partnership with Verizon Wireless to carry the iPhone 4. [2] .

Like many other technology companies, Apple has directed itself towards a strong commitment to increasing its presence abroad. Apple gets more than half of its sales from outside the US. In FY2010, the Americas has accounted for 29% of total revenues, while Europe rings in second,

contributing 21%. Apple is growing especially fast in Asia, where its Asia-Pacific net sales has grown 160%. 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 gain significant market share.

Mac Hardware Products

Macintosh (Mac) brand desktops, laptops and related hardware/software are traditional mainstays of Apple's business. Mac hardware products include the iMac, MacBook and MacBook Air notebook computers, and a number of peripherals. Its software offerings include its OS X operating system, built on top of a UNIX-based platform which can also be directly accessed. OS X is known for its ease of use and sleek, intuitive design. When Apple recently introduced the Mac App Store, it released more than a thousand applications suited for Mac products [3] .

Music Products and Services

Apple's music offerings include the iPod and its variations (i.e., Nano, Shuffle, Touch) as well as the iTunes media player and distribution system. iTunes has been a great success for Apple, controlling 70% of the online music market and boasting more than 160 million accounts tied to credit cards. [4][5] . In its tenth iteration of the ITunes media player, Apple embedded a social network titled Ping, the company's first attempt at leveraging its content to enter the social networking space [6] . Ping had over a million registered users within two days of its release [4] .

iPhone

Apple launched its iPhone in June 2007. Touted as a device converging communications and media playback, the iPhone combines EDGE mobile technology, a touch-screen system, wireless Internet browsing capability, and iPod functionality. Three models have been launched since its original debut: the iPhone 3G, the iPhone 3GS, and most recently, the iPhone 4. The performance of each release highlights the brand loyalty of iPhone users and the quality of the phone: Piper Jaffray estimates that 77% of iPhone 4 purchasers were previous iPhone owners, compared to 56% and 38% for the 3G S and 3G, respectively [7] . Apple's fastest growing product is currently the iPhone. Consumers have welcomed the Apple's announcement that iPhone service would be available through Verizon Wireless in addition to AT&T. iPhones and related products accounted for 39% of revenues, sold in over 90 countries and 166 carriers. However, the smartphone market is becoming an increasingly competitive industry, with substitute products such as the Google's Android. hi

Peripheral Products

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. The device is constrained by Apple’s

video selection availability, and unlike its other products, lacks portability. Movies, music, and TV shows may be rented or purchased via the Apple TV using the infrared remote and an iTunes account. When the user runs the iTunes application on his/her PC, content bought and downloaded to the Apple TV is synced to the PC. Given its extensive content universe, it has been rumored that Apple may attempt to compete with Netflix and through a cloud computing- based system offering movie and TV rentals for a nominal fee (i.e. 99 cents) in the next iteration of the Apple TV [8] .

iPad

In 2010, Apple unleashed the iPad as part of an effort to transform the way consumers approach personal computing and experience media. At only 1.5 pounds and 0.5-inch thin, the iPad boasts a 9.7 inch high-resolution multi-touch screen with 10 hours of battery life and a relatively simple interface, meant to run more PC-like software than the smaller screen iPhone [9] . A lack of multiprocessing, webcam, HD screen, telephone connectivity, and other features have drawn some criticism [10] but allow Apple to strategically roll out these sorts of features in future generations of the device. The device offers browsing, email, media, gaming, and eBook functions and also features downloadable apps through the iTunes store [11] .

The iPad comes in 16GB, 32GB, and 64B, all of them also functioning in 3G. The iPad is compatible with most of the 200,000 apps in the App Store, as well as those already purchased by iPhone and iPod Touch users. According to Steve Jobs, 1 million iPads were sold within 28 days of its April 3, 2010 release, accompanied by the download of over 12 million apps from the App Store and over 1.5 million ebooks from the new iBookstore [12] . In June 2010, Apple declared that it had sold three million iPads within the first eighty days of its release, or about "an iPad every two seconds [13] .

iAd

Apple's 2010 launch of the iAd mobile advertisement platform allows developers to incorporate advertisements into their applications. The technology became available in 2010 after Apple acquired Quattro Wireless, which held 9% of the mobile advertising market at the time [14] . and incorporated it into its mobile phones. Through iAd, Apple receives 40% of the advertising revenue, leaving the rest to the app developers. Since its launch, the firm has forged large ad contracts with firms such as Unilever and Nissan [15] .

Trends and Forces

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.

Product Cannibalization

Since the establishment of the iPod as the leading MP3 player in the market, each new addition to Apple's product portfolio has included and expanded upon the features of the previous generation. For example, the IPod Touch offered the same features as the original IPod but with a larger display, WiFi, PDA applications, and a virtual QWERTY keyboard to enhance functionality. Although the evolution of the iPod line creates the possibility that an iPod owner would want more than one model, the coexistence of these products allows for the possibility of cannibalization across the portfolio. Since the iPad is arguably a hybrid of Apple's Mac and iPod products, many fear that its introduction would cannibalize the rest of Apple's product portfolio.

iTunes and compatibility

iTunes Music Store is the world-wide leader for music sales. 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. In addition, music labels have agreed to drop the DRM requirements meaning that Apple will no longer sell protected audio formats.

Vulnerability of brand in emerging markets

The emergence of China and India as key players in PC sales and general technology consumption is troubling for the generic PC manufacturers, but considerably less so for Apple. With relatively light presence in lower-margin, higher-growth geographic areas, Apple will experience little impact. With China and India estimated to make up about 66% of PC market growth, this could be a significant challenge for Apple's competitors.

Competition

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.

iTunes/Apple TV:

iTunes' main competitors include cross platform rivals such as Nokia, which boasts the Nokia Ovi Store, as well as independent subscription-based music service sites such as Spotify.

Apple TV, on the other hand, faces much stiffer competition, as it competes 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.

iPhone:

Apple's iPhone must compete with established mobile phone and PDA companies, including the likes of Samsung , Motorola, Nokia, and Sony, many of which have significantly larger R&D budgets than Apple. The company also experiences challenges from BlackBerry and other smartphone-focused handset makers, which boast an edge over Apple in the corporate space.

Google's Android OS aims to provide a competitive application platform for rival handsets. Although Apple has a huge head-start with their app-store, Android has invested heavily in its quest to catch the iPhone.

iPad:

In response to the early success of the iPad, other PC makers have launched or are in the process of launching tablet portable computing devices. Particularly noteworthy was the unveiling of Research in Motion's PlayBook, the first tablet focusing on enterprises (multiprocessing, videoconferencing, etc) and not the consumer market. The PlayBook was built with a simpler, more web-based operating system different than that in its BlackBerry phones to facilitate app development [16] . Dell's Streak, HP's Slate, Cisco's Cius, and Samsung's Galaxy Tab have also been released, and tablets by Sony, Toshiba, Acer and LG have been announced [17] .

Relative to its competitors, the iPad benefits from well-established distribution channels and first mover advantage [18] . However, competitors could offer attractive products in the form of smaller tablets with added features and at a lower price (like the pocket-sized Galaxy Tab, which has two cameras) [18] . Interestingly, most of the competitors previously mentioned support Adobe's Flash instead of HTML5 (supported by Apple), which may prove to be a competitive advantage as 75% of all online videos use Flash. Although Apple does not support Flash in its webpages, but allows mobile app developers to code using Flash [19] .

The iPad also competes in the e-reader market, which includes the black-and-white screened Amazon's Kindle and the Barnes & Noble Nook. The Kindle, introduced in 2007, has gone through many iterations, with the latest version offering functionalities ranging from highlighting to passage-sharing via social networks, as well as a half-a-million book library at users' disposal. The Nook, only available since October 2009, offers 3G and Wi-Fi connectivity, a color touchscreen with improved contrast, more font colors, and the ability to lend an ebook to a friend for up to two weeks [20] .