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Apple Computer

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IPOD. Marketing, Interface, and Software create differentiation essential for premium pricing. ... Is Apple's dominant position with iPod/ ITunes sustainable? ... – PowerPoint PPT presentation

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Title: Apple Computer


1
Apple Computer
Jonathan Leonard
2
The Personal Computer Industry
  • Increasingly sophisticated buyers
  • Intense price competition/ limited ability to
    differentiate
  • Low barriers to entry
  • Many potential substitutes
  • Strong suppliers, who appropriate much of the
    industrys profits (i.e., think Microsoft and
    Intel)
  • Complements have been fueling demand (only bright
    spot)

Tough industry!
3
A Better Product
  • Windows 95 Apple 85
  • So What?

4
1996 Hey, We Made the Cover!
5
The Icons 1996 Obit
  • Today, that Apple--the very icon of a
    post-industrial, high-tech America--is barely
    recognizable in the troubled 11 billion company
    that bears the name. Years of overlooked
    opportunities, flip-flop strategies, and a
    mind-boggling disregard for market realities have
    caught up with Apple. Microsoft Corp.'s Windows
    95 has seriously eroded the Mac's technology
    edge.

Business Week 1996
6
Great Tech- Poor Business
  • A product advantage does not guarantee a
    competitive advantage
  • Product advantage is difficult to sustain, esp.
    in tech. Imitation, reverse engineering,
    inventing around is rampant
  • Building competitive advantage requires thinking
    about whole value system, including complements

7
Great Tech- Poor Business
  • Firms must look broadly at the economics and
    factors driving change in their industries
  • Apple was clearly too insularthey believed they
    were insulated from the forces affecting the PC
    industry
  • Didnt understand and respond to the broader
    forces affecting PCs

8
Death by Substitute
  • Lower PC prices reduce customers WTP for Apple
  • Windows made PCs a closer substitute to Macintosh
    (i.e., differentiation declined)
  • Macs and PCs dont have the same complements
  • Apple benefited little from the only bright spot
    in the PC industry

9
Should You Agree to a Dominant Standard?
  • Niche player High Margins in a Smaller market
  • Alliance player Lower Margins in a Larger Market

10
Resistance is Futile
11
Standards Fundamentally Change the Nature of
Competition
  • Expands Network Externalities
  • Reduces Uncertainty
  • Reduces Consumer Lock-In
  • Competition on Price vs. Design
  • Components vs. Systems Competition
  • Ex Post vs. Ex Ante Competition

12
Closed or Open Architecture
Apple Closed Architecture
Wintel Open
Shapiro and Varian
13
Multiple Standards?
  • Difficult for multiple standards to co-exist
  • Must effectively serve different markets.
  • Otherwise, compatibility with complements drives
    movement toward a single standard.
  • Supporting multiple standards is costly (do you
    want an 8-track player and a CD player?)

14
Network Economics
  • Sell first to those with highest WTP.
  • Suppose WTP also increases with number of users-
    a network effect.
  • Demand curve first increases with network size,
    then falls as hit marginal customers with lower
    WTP (late adopters).

15
Network Economics
Willingness to Pay
Network Size
Katz and Shapiro
16
3 Decades of PC Industry History in One
Slide
Willingness to Pay
A is for Apple
W is for WinTel
Network Size
17
CEO Gilbert Amelio Apple Springs a Leak
  • Amelio Apple is a boat. Theres a hole in the
    boat, and its taking on water, but there is
    treasure on board. And the problem is, everyone
    on board is rowing in different directions, so
    the boat is just standing still. My job is to
    get everyone rowing in the same direction so that
    we can save the treasure.
  • CFO But what about the hole?
  • Source Brent Schlender, Somethings Rotten in
    Cupertino, Fortune, March 3, 1997.

18
Worms in the Apple
  • A better product does not guarantee a better
    business.
  • Better doesnt mean isolated from competition.
  • Substitutes (Windows) erode differentiated
    product advantages. As convergence progressed,
    Apples niche position was increasingly
    threatened.

19
Worms in the Apple
  • The OS market has both huge scale economies and
    important network economies.
  • Apple chose to get on the wrong side of both when
    it chose high margin proprietary architecture.

20
Worms in the Apple
  • Complements Apple failed to appreciate industry
    value system and importance of complementors in
    network markets.
  • Proprietary architecture (and resulting smaller
    scale) made them less attractive to ISVs

21
Timing is crucial.
  • History takes away options. Apples options in
    the late 1990s were vastly different than the
    options available to it in the 1980s.
  • Right strategy, wrong time. Licensing the OS
    might have made a huge difference a decade
    earlier. You need to act when the window of
    opportunity is open.

22
Eight years later
  • Jobs There really has been a genie locked in
    that bottle! Apples innovation and creativity
    have been unleashed in a way that they havent
    been for 20 years. Look at the results. This
    isnt a company about 5 market share this is a
    company capable of competing with world-class
    competitors and achieving market shares of 65,
    70, and even 90.
  • Source Brent Schlender, How Big Can Apple
    Get? Fortune, February 7, 2005.

23
90? Just not in PCs.
  • Leadership Paint the Bulls-eye Around the Arrow

24
BW Best Leader
Business Week 2005
25
A New Strategy?
  • Apple, Pixar
  • No one in techland had a better yearor a
    broader impactthan Apple Computer CEO Steve
    Jobs. Apple continued to set techs fashion
    agenda in 2005 with products such as the iPod
    nano and the video iPod, as well as the Mac mini,
    Apples cheapest computer ever. Indeed, no exec
    sits astride both the technical and creative
    worlds as much as Jobs, who also runs powerhouse
    Pixar Animation Studios, maker of megahits such
    as Finding Nemo and The Incredibles.That helps
    explain why Jobs, 50, was able to persuade Disney
    to make hit TV shows such as Lost available on
    the video iPod. Within weeks of Apples coup, CBS
    and NBC launched their own digital-distribution
    deals. Disney played ball because it wanted to
    extend its partnership with Pixarand because
    iPods are so hot. Some 10 million are expected to
    sell this quarter, many at Apples sleek retail
    stores, where consumers see and play with Macs.
    That helped Apple make its biggest PC market
    share gains in yearsand helped the stock price
    more than double since Jan. 1, to about 73.

Business Week 2005
26
IPOD
  • Marketing, Interface, and Software create
    differentiation essential for premium pricing.
  • Proprietary Software Locks Consumer into
    Hardware. (Where have we seen this move before?)

27
Microsofts Response Look Before You Lock-in
And where have we seen this Complementors move
before?
28
Apple Computer Today
  • Current Market Value 56 Billion (They had a
    good year)
  • Operating Margin 12
  • Cash Short-Term Investments 8.7 Billion
  • Debt 0
  • Net Income FY 2005 1.3 Billion
  • Sales by segment 2006 Q1
  • Macintosh 1.7 B
  • IPOD music 3.4 B
  • Other (software peripherals) 0.6 B

29
Apple 2001-2006
30
Apple and an Alternative
31
Apple They used to make PCs didnt they?
  • How fast is the market for portable music players
    likely to grow? When will growth slow down?
  • Is Apples dominant position with iPod/ ITunes
    sustainable?
  • Oh yeah, that secondary market theyre in, can
    they break out of their niche in PCs?
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