Case 14 Apple Computer, Inc.: Maintaining the Music Business While Introducing iPhone and Apple TV*
Robin Chapman
Robert E. Hoskisson
Arizona State University
“This will go down in history as a turning point for the music industry,” said Apple Computer CEO Steve Jobs. “This is landmark stuff. I can't overestimate it!” Jobs was referring to the April 2003 debut of Apple's iTunes Online Music Store, the first legal online music service to have agreements with all five major record labels. Although initially available only for Macintosh users, iTunes sold more than 1 million songs by the end of its first week in operation. Not only did iTunes change the nature of the music industry, it also added greatly to Apple's revenues by way of promoting the purchase of the iPod—a portable digital music device that can store downloaded iTunes songs. In 2007, Apple controlled more than 70 percent of the digital music market,2
and its net income was $3.5 billion (see Exhibits 1 and 2). Jobs hopes further that the success of iTunes will flourish with the launch of Apple TV and iPhone in 2007. In May 2007, Apple was named by
BusinessWeek
as the most innovative company for the third year in a row. Apple's focus on innovation has helped it maintain a competitive advantage and marketing prowess over other industry players that have historically been much stronger than Apple.3
However, Apple must beat the competition on a number of levels. iTunes faces stiff competition from new and existing online music and video download services both legal and illegal. The iPod, Apple TV, and iPhone all face the threat of lower-priced rivals and possible substitutes. Apple's innovative ability and the quality of its marketing strategy will likely determine the outcome of the company's foray into the music, mobile phone, and video-on-demand businesses.
Early Company History
On April 1, 1976, Steve Jobs and Stephen Wozniak began the partnership that would eventually become Apple Computer. Both electronics gurus, Jobs and Wozniak had known each other since high school and had worked together previously on other projects.4
In early 1976, Wozniak had been working on combining video monitors with computers. His idea was to invent a user-friendly computer that ordinary consumers could buy. Wozniak, who worked for Hewlett-Packard (HP) at the time, decided to approach his employer with his idea. HP, however, did not see a future for personal computers (PCs) and soundly rebuffed him. At that point, Steve Jobs told his friend Wozniak that they should go into business together and sell computers themselves.5
Their first computer, the
Apple I, was built in the garage of Jobs's parents (see Exhibit 3). Known as a “kit computer,” the original Apple consisted merely of a circuit board and did not even have an exterior casing. It was intended to be sold to hobbyists only. Jobs called the computer an “Apple” in honor of his days working at an orchard while seeking enlightenment—and because neither he nor Wozniak could come up with a better name.6
The
Apple I
received mixed responses from hobbyists, and the duo decided it was time to expand the market for personal computers by building a more attractive and useful machine, the
Apple
II.7
* This case is intended to be used as the basis for class discussion rather than to illustrate effective or ineffective handling of an administrative or strategic situation. We appreciate the previous input on an earlier case focused only on the music industry by Jeff Berrong, Marilyn Klopp, Max Mishkin, Jimmy Pittman, and Adrian Ray under the direction of Professor Robert E. Hoskisson.
Apple Computer, Inc., by Robin Chapman and Robert E. Hoskisson. Reprinted by permission of the authors.
Growth
After taking on new partners to fund expansion plans, the company officially became Apple Computer, Inc., in early 1977.8
Within months, the recapitalized company introduced the
Apple II, the first computer to come with a sleek plastic casing and color graphics.9
Annual sales increased dramatically to $10 million, and the company began to grow quickly in size, adding thousands of employees.10
On December 12, 1980, Apple became a public company. On the first day of trading, its share price increased from an initial $22 offering to $29.11
By the end of the year, Apple reached $100 million in annual sales.12
The fledgling company, however, soon faced some experienced competition. In 1981, IBM released its first personal computer. IBM's sheer size ensured its domination of the young PC market. Steve Jobs realized that Apple would have to move fast in order to remain a viable company. Over the next few years, the company released several new computer models, most notably the
Apple III
and the
Lisa. Neither of these models sold particularly well.
Exhibit 1 Consolidated Statements of Cash Flows
Source: Apple's 2007 Fiscal Year 10K, www.apple.com/investor.
In 1983, Jobs recruited Pepsi-Cola CEO John Sculley as Apple's president and CEO. Jobs hoped that this change would bring more structure and organization to the young company.13
Apple's biggest computer achievement, the Macintosh (Mac), was released. After initially opposing it, Jobs had personally taken on the task of developing the Mac, which became the first PC featuring a graphical interface and a mouse for navigation. Apple first presented the now-famous Macintosh computer with a riveting January 1984 Super Bowl commercial. The memorable commercial featured an Orwellian
1984
world filled with stoic human zombies, all watching a large-screen image of “Big Brother.” A young woman rushes into the room and dramatically destroys the screen. Apple used this
1984
imagery to depict IBM's computer dominance being destroyed by the new Macintosh.14
With features that made the Mac easy to use for publishing and a marketing strategy that concentrated on universities, the new computer sold very well, pushing Apple's fiscal 1984 sales to an unprecedented $1.5 billion.15
Shake-Up
By 1985, however, Jobs and Sculley began to disagree over the direction they wanted the company to take. After Jobs's attempt to remove Sculley failed, Jobs left Apple in May to start his own new business, NeXT Computers. Meanwhile, Microsoft benefited from Apple's poor negotiation of a contract that cleared the way for successive versions of the Windows operating system to use graphical user interface (GUI) technology similar to that of the Mac. With this agreement, “Apple had effectively lost exclusive rights to its interface design.”16
Exhibit 2 Apple Computer, Fourth-Quarter Fiscal 2007 10Q Report
(a) During the third quarter of 2007, the Company revised the way it measures the Retail Segment's operating results to a manner that is generally consistent with the Company's other operating segments. Prior period results have been reclassified to reflect this change to the Retail Segment's operating results along with the corresponding offsets to the other operating segments. Further information regarding the Company's operating segments may be found in Notes to Condensed Consolidated Financial Statements at Note 7, “Segment Information and Geographic Data.”
(b) Other Segments include Asia Pacific and FileMaker.
(c) Includes iMac, eMac, Mac mini, Mac Pro, Power Mac, and Xserve product lines.
(d) Includes MacBook, iBook, MacBook Pro, and PowerBook product lines.
(e) Consists of iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories.
(f) Derived from handset sales, carrier agreements, and Apple-branded and third-party iPhone accessories.
(g) Includes sales of Apple-branded and third-party displays, wireless connectivity and networking solutions, and other hardware accessories.
(h) Includes sales of Apple-branded operating system, application software, third-party software, AppleCare, and Internet services.
(i) Derived by dividing total Mac net sales by total Mac unit sales. (j) Derived by dividing total iPod net sales by total iPod unit sales.
Source: Apple Company, 2007 4Q Form 10Q, hwww.apple.com/investor, 22.
In 1990, Microsoft released Windows 3.0, the first universal software that could run on nearly every PC regardless of the manufacturer. Although Apple's worldwide sales had reached $7 billion by 1992, Apple soon found itself fighting an uphill battle against the movement toward standardized software. More and more businesses and consumers wanted compatible operating systems, but the Macintosh still ran exclusively on Mac OS, a system not available to other computers. By 1993, Apple's board of directors replaced Sculley as CEO. Apple moved through two CEOs over the next five years.
Exhibit 3 Select Apple Product Releases
Source: www.apple-history.com.
During this time, Apple partnered with IBM and Motorola to produce the PowerPC chip, which would run the company's new line of PowerMacs, allowing it to outperform computers powered by Intel microproces-sors.17
Despite this and Apple's attempts to reorganize, losses mounted in 1996 and 1997. In December 1996, Apple acquired NeXT, with the plan of using its technology as the basis for a new operating system. After being gone for more than a decade, Jobs returned to the company he had originally cofounded with Wozniak.
Jobs's Return
One of the first problems Steve Jobs moved to fix was the ongoing dispute between Apple and Microsoft over the Windows graphical user interface (GUI). Microsoft not only paid an undisclosed amount to Apple, but also made its Office 98 suite compatible with Macintoshes.18
Jobs then proceeded to change the company's sales strategy in 1997 to encompass direct sales—both online and by phone. In a flurry of product releases, Apple introduced the new generation of PowerMacs, PowerBooks, and the highly anticipated iMac and iBook, which were less expensive computers aimed at the low-end computer market. After an entire year without showing a profit, the first quarter of 1998 began three years of profitable quarters for Apple.19
Jobs stated that he wanted to transform the company by making the Mac “the hub of [the consumers'] digital lifestyle.” To do this, Apple introduced iLife in 2002, a software suite including applications such as iPhoto, iMovie, iTunes, and eventually the iPod. With the advent of Napster and peer-to-peer music sharing, Apple saw a way to capitalize on the emerging trend of cheap music downloads by creating a legal online music distribution network. iTunes would be the key to exploiting this market. Once downloaded by way of iTunes, music could then be transferred only to an iPod (due to encryption). With iTunes, Apple has quite possibly revolutionized the distribution of music and hopes to do the same with the distribution of movies on demand. Similar changes may be expected with the iPhone in the mobile or smartphone industry segments and with Apple TV in the mobile media and set-top box industry segments.
iTunes: Apple's Online Music Store
Apple ventured into the market of legal downloads with the introduction of its iTunes Music Store.20
iTunes offers downloads at a specified price without requiring a subscription or monthly fees. Originally offered exclusively on Apple's own Mac, iTunes can now be installed on PCs as well. The idea behind iTunes was to provide a solution to the illegal pirating of music and software from rival sources such as Kazaa.
iTunes offers its users a selection of more than 6 million songs, with new songs continually added.21
Titles are from just about every genre of music. Users can perform a search by type of music, artist name, or title of track or album. Each song available can be previewed without making a purchase. Purchasers have the option of purchasing an entire album or single songs. Each song is $0.99, and a complete album starts at $9.99. Downloads can be made not only to a Mac or PC, but also directly to an iPod. All new song additions are encoded in AAC format, which many say is superior to MP3, although iTunes does still carry the MP3 format on some of its older selections.
Once songs are downloaded, they are stored as a digital music library. As this collection grows, this list of songs can be arranged in many different ways. Songs can be arranged by personal rating, artist, or genre. This feature allows for a customizable playlist for playback or burning to a CD.
In addition iTunes offers a collection of more than 10,000 audiobooks ranging in price from $2.95 to $15.95, including many different language lessons. Also available are downloadable versions of public radio shows. Gift certificates are also available in different denominations and can be sent electronically through e-mail.
As previously mentioned, in its first week of existence, the number of downloads from iTunes surpassed the 1 million mark. This feat is amazing considering that at the time of iTunes' introduction, the download service was available only for the Mac. In addition, at that time, Mac users comprised less than 5 percent of U.S. computer users.22
When iTunes became available for use on the PC, sales increased even more rapidly. iTunes PC downloads reached the 1 million mark in three days, less than half the time it took for the Mac version. But the success of iTunes is not measured in number of downloads sold per day or week, since after paying royalties, Apple makes only approximately 10 cents per song. iTunes is simply used as a means to boost the sale of iPods, iPhones, and Apple TVs, which generate a substantial profit per sale. For example, the iPod has been labeled “the profit machine” for Apple, as it tends to produce a 50 percent profit margin, per unit, before marketing and distribution costs.23
iTunes, iPod, iPhone, and Apple TV
iPod
For music lovers, the iPod is the greatest invention since the Walkman. With up to 160 GB of storage, it allows users to carry up to 40,000 songs or 200 hours of video wherever they go.24
There are currently four different iPod styles: the iPod shuffle, iPod classic, iPod nano, and iPod touch. iPod owners can purchase accessories such as the armband, the radio remote, and the universal dock and remote to make using the iPod even more enjoyable. In 2007, with more than 100 million products sold, the closest competitor to Apple's iPod had only 8 percent of the market share, leaving Apple with the vast majority. While others are seeking to simply duplicate the complementary and innovative relationships between iPod and iTunes, Apple continues to innovate with new products such as the iPhone and Apple TV.25
(See Exhibit 4 for more details about the iPod products.)
iPhone
In first-quarter 2007, Apple launched its “revolutionary” product, the iPhone. The iPhone combines three concepts popular with consumers: a mobile phone, a wide-screen iPod, and an Internet communication device. The iPhone brags “an entirely new user interface based on a large multi-touch display and pioneering software,” which users can control with just their fingers.26
The iPhone's default Internet browser will be Apple's own Safari,*
but it is open to other software as well.27
The iPhone allows for 8 hours of talk time, 24 hours of audio playback time, and 10 days of standby time.28
Apple sold 1 million iPhones less than three months after this product was available to consumers. Apple expects this trend to continue during 2008 and to reach sales of 10 million iPhones, stealing 1 percent of the mobile phone market share.29
* Safari is Apple's Internet browser that was introduced in 2003. It is part of Apple's strategy to gain more market share by having both hardware and software products. Apple suggests that Safari is the fastest browser available. It blocks pop-up advertising and has a built-in text reader that reads the site pages aloud. In addition to being the default browser for the iPhone, it is the default browser for the iPod Touch and the Mac computer. Safari's user share was estimated to be 6 percent in early 2008. (P. Festa, 2003, Welcome to the browser jungle, Safari, CNET News, www.news.com, January 7; 2008, Wikipedia, http://en.wikipedia.org.)
Apple TV
In addition to the iPhone, Apple also introduced the Apple TV in 2007. With this product, Apple intends to revolutionize the Internet video industry, as it did with the music download industry. Users can download movies and TV shows via the iTunes online service or via YouTube as well as view digital photos and home videos.30
Some negative hype claims that the Apple TV will be a flop just like the Apple III and the Power Mac Cube. Some of the features that made the first edition unpopular include the following:
• Users are not able to download a movie from iTunes directly to their TV; they have to download it to their PC first.
• It requires an HDTV, but the movies that can be downloaded are of such low resolution that the picture looks fuzzy and old-fashioned.
• It has no DVD drive.
Steve Jobs announced at the Macworld Conference & Expo in January 2008 that the upgraded version of Apple TV will allow owners to order movies directly from the TV rather than having to download to the PC.31
Also, critics do compliment the fact that the Apple TV plays a slideshow of digital photos.32
The price to rent a movie using Apple TV is $2.99 for library titles, $3.99 for new releases, and $1 extra to view the movie in high definition.33
One key component that must be in place to have good media content for the three products mentioned is the relationship that Apple has with each of its media and phone service suppliers.
Service Suppliers: iTunes, Apple TV, and iPhone
iTunes
iTunes has agreements with all five major record labels (BMG, EMI, Sony Music Entertainment, Universal, and Warner Bros.) as well as more than 200 independent labels. These agreements allow iTunes to sell the music owned by these labels and pay the record label each time a song is downloaded. This deal is considered a reseller agreement, meaning that Apple is not licensing content from these labels, but rather buying it wholesale and reselling it to consumers.34
Apple gets to keep its share, while the portion the label receives must be divided among many parties including artists, producers, and publishers. Labels earn approximately 70 cents per song sold on iTunes. This figure may seem small, but it is still greater than losing money to the millions of illegal downloads that nearly crippled the music industry.
The revenues for record label companies have been dropping in the past year due to tough market conditions, and Apple has introduced a strategy that may help increase revenues by at least a small percentage. It has already contracted with EMI to make its entire catalog available to iTunes' users in two formats, the traditional download option, which includes the Fairplay digital rights management (DRM) software and DRM-free versions. The DRM software limits the number of times a song can be copied, which decreases the quality of the song. The DRM-free versions would deliver greater quality music but would require a higher price tag. iTunes will start the DRM-free songs at $1.29 per song versus the traditional $0.99 per song. Other record labels may enter into the same agreement with Apple depending on how successful this strategy is with EMI.35
NBC recently cancelled its agreement with Apple to provide its TV shows on iTunes due to pricing disputes. Walt Disney Studios previously offered its new releases, and Paramount, Metro-Goldwyn-Mayer (MGM), and Lionsgate allowed older library titles to be purchased on iTunes, but the supplier agreements have changed with the launch of Apple TV.36
Apple TV
Apple did not have an easy time finalizing with movie studios contracts that will allow Apple to sell movies on iTunes for use on the iPod and Apple TV. Not only were the studios concerned about losing significant revenues from the sales of DVDs and Blu-ray discs, but some studios urged Apple to require a watermark on digital video for it to play on its devices. Their concern is heightened given the pirating experienced in the music download business. One movie-studio executive said, “Our position is, if you want our content, you have to protect our business.” Apple, however, responded that it trusts its consumers not to play pirated movies.37
The limited number of movie downloads available on iTunes would significantly diminish the success of Apple TV. Thus, Apple's CEO was persistent in his negotiations with the movie studios. Jobs announced at the Macworld Expo in 2008 that Apple had reached agreement with each of the following major studios: Twentieth Century Fox, The Walt Disney Studios, Warner Bros., Paramount, Sony Pictures Entertainment, MGM, Lionsgate, and New Line Cinema.38
Despite NBC's issues with Apple concerning TV shows, Universal Pictures (owned by NBC and General Electric) has agreed to allow Apple to rent its movies via iTunes.
The supplier agreement between Apple and the movie studios is that new movies will not be available for rent until 30 days after the DVD is distributed. Within a 24-hour period, customers will be able to watch a film as many times as they like once the movie is started. Movies that are downloaded but not started will not be available for viewing after 30 days.39
iPhone
Cingular was selected as the exclusive wireless carrier for the iPhone in the United States because, according to Steve Jobs, Cingular is the best and most popular carrier in the United States.40
Together these companies developed the Visual Voicemail feature that allows users to listen to the voicemails they prefer rather than having to listen to all messages in succession. Since the agreement was made between Cingular and Apple, Cingular was acquired by AT&T. iPhone owners are required to sign a two-year service agreement with AT&T. AT&T offers four different plans, with monthly fees ranging from $59.99 to $119.99. All plans include the visual voicemail, unlimited access to the Internet, and rollover minutes.41
Exhibit 4 iPod Product Descriptions
1. 1 GB = 1 billion bytes; actual formatted capacity is less. Music capacity is based on 4 minutes per song and 128-Kpbs AAC encoding; photo capacity is based on iPod-viewable photos transferred from iTunes; video capacity is based on H.264 1.5-Mbps video at 640-by-480 resolution combined with 128-Kbps audio; actual capacity varies by content.
2. Internet access is required; broadband is recommended; fees may apply.
3. Testing was conducted by Apple in August 2007 using preproduction hardware and software. For audio playback, the playlist contained 358 unique audio tracks consisting of content imported from CDs using iTunes (128-Kbps AAC) and content purchased from the iTunes Store (128-Kbps AAC); all settings were default except that Ask to Join Networks was turned off for iPod touch. For video playback, video content was purchased from the iTunes Store; all settings were default except that Ask to Join Networks and Auto-Brightness were turned off for iPod touch. Battery tests are conducted with specific iPod units; actual results may vary. Rechargeable batteries have a limited number of charge cycles and may eventually need to be replaced (see www.apple.com/support/ipod/service/battery). Battery life and number of charge cycles vary by use and settings. See www.apple.com/batteries for more information.
Source: www.apple.com/ipod/whichipod.
Hardware
Concerning its hardware suppliers, Apple is usually not forthcoming with this information. However, a disassembled iPhone reveals that the microprocessor chip is supplied by Samsung; Philips, Texas Instruments, and Linear Technology all play a role in providing the batteries, and many other companies provide chips that are central to the camera, display, and motion sensor.42
Many companies have expressed frustration in working with Apple because Steve Jobs is very clear on his vision for his products and can tend to be controlling. Maintaining good supplier relationships and keeping enough control to provide the quality of products expected of Apple is a balance that Apple will have to find in order to stay ahead of its competitors.
Competitors
iTunes
Since the October 2003 launch of iTunes.com for Windows, Apple has faced a multitude of competitors. During the late 1990s, the emergence of music sharing came about with Napster, a freeware program offering free downloads using peer-to-peer transfers. Peer-to-peer transfers allow users to connect directly with other users without the need for a central point of manage-ment.43
However, in recent years due to legal proceedings, Napster and all other competitors have become a subscription service similar to iTunes.
Napster
In May 1999, 19-year-old Shawn Fanning created Napster while studying at Northeastern University. The name Napster came from the Internet “handle” he had used as a programmer. He created a type of software that allowed music fans anywhere to “share” MP3s in one forum. During the first year of service, Napster was obtaining more than 250,000 new users a week while maintaining a free service.44
This software creation led to the ever-growing controversy of the availability of MP3s on the Internet. Music sharing exploded in the late 1990s, and Napster's servers were overloaded with millions of requests a day for media downloads. Music artists considered this new “sharing” forum to be a continuous copyright violation. Fanning soon became the target of their animosity and became one of the most disliked people in the music industry.
During 2000, Napster was in and out of court and was finally slated to shut down on July 26, 2000. The decision was reversed two days later on July 28, 2000.45
In 2001, Konrad Hilbers, a 38-year-old German, became CEO of the rapidly declining music file-sharing site. In June 2001, Napster had more than 26 million users, but growth was declining fast, going from 6.3 billion to 2.2 billion minutes used a day. On March 7, 2002, Napster closed its servers while opting to implement a fee-based service to comply with the federal judge's decision. On June 3, 2002, Napster filed for Chapter 11 bankruptcy in an effort to secure court-ordered protection from creditors. This move was part of the overall financial restructuring strategy of Bertelsmann AG, which was proceeding with its takeover of the once popular file-sharing system. By July 2003, Roxio, Inc., had acquired Napster and was planning a Napster 2.0 launch for December 2003. Napster 2.0 is a successful, legal fee-based service.46
Through restructuring and quality legal representation, Napster finally has a legal base that is expected to stand. Currently, Napster 4.0 is online with content agreements from five major record labels and hundreds of independent labels; therefore, its library is made up of more than 5 million songs. Members have unlimited access to the library for $12.95 per month. Napster 4.0 now accommodates the use of its software for Mac and Linux users.
Kazaa
Sharman Networks Limited was founded in January 2002 as a private limited company. Sharman Networks develops and markets world-class Internet applications. Kazaa Media Desktop and Kazaa Plus are products of Sharman Networks. Sharman Networks earns revenue by soliciting companies to advertise on its software. Users that prefer ad-free use of the software can purchase an upgrade, Kazaa Plus for $29.95. This upgrade will also allow for greater search capabilities and more download sources.47
Being Australian-based, the company avoided legal intervention in allowing the file sharing, but in 2005, the Federal Court of Australia ruled that Kazaa had knowingly allowed users to illegally download copyrighted songs. The company was charged to change its software to prohibit copyrighted music or videos from being shared.48
Kazaa owners agreed to pay the four major record labels (Universal Music, Sony BMG, EMI, and Warner Music) $100 million.49
Kazaa Media Desktop is a program rumored to be littered with spyware and ad-based programs that “infect” consumer systems; thus many users have become wary of accessing Kazaa's site.50
RealNetworks, Inc.
RealNetworks, through its RealPlayer Music Store, sought a price war with Apple by dropping the price to $0.49 per song and $4.99 per album compared to Apple's price of $0.99 and $9.99, respectively. Analysts indicated that RealNetworks was pricing below the cost of purchasing the music from the record companies, and eventually it did increase its price to $0.99 per song; however, it still offers, select songs for $0.49 a track. As part of its battle to reduce Apple's market share, RealNetworks launched technology called Harmony, which allows RealNetworks users to translate songs purchased from RealPlayer Music Store into a format that can be played on an iPod. It also allows RealNetworks music to be played on Microsoft formats.51
RealPlayer is a RealNetworks medium through which it competes in the video-on-demand market. Video can be downloaded from the Web to an iPod, PC, CD, and DVD. RealPlayer customers can subscribe to its SuperPass membership, which combines the benefits of RealPlayer and the RealPlayer Music Store. The $14.99 monthly fee provides subscribers with $10.00 worth of music downloads and full-length movies per month.
Sony
Sony started a music download service called Connect in the spring of 2004. Despite its efforts to compete in the music downloading market, it did not realize significant success; thus, Connect closed at the end of March 2008.52
Instead, Sony is focusing its attention on gaining market share in the video download segment.53
Virgin Media
Virgin offers more than 15,000 record labels in addition to computer games and videos and Blockbuster movies. Similar to iTunes, customers can listen to a 30-second sample before purchase and download exclusive tracks through Virgin's V2 music label before the tracks are released to the general public.54
Wal-Mart
Wal-Mart launched its own online music store. It is currently the number-one music retailer in the nation, followed by iTunes.55
Initially Wal-Mart offered music in MP3 format for $0.88 per song, $0.11 cheaper than Apple, but currently it offers songs for $0.94 and albums starting at $7.88.56
Yahoo! Music Unlimited
Subscribers to Yahoo! Music Jukebox have access to more than 2 million songs. Users can listen to 150 LAUNCHcast radio stations or download songs to any PC. After paying a monthly $6.00 fee, subscribers pay only $0.79 per song. Nonsubscribers can also download songs for $0.99 each.57
At this time, Yahoo! offers only music on its site; video and TV shows are not available.
Apple TV
Amazon Unbox
The Amazon Unbox was introduced in 2006. Users download films or TV shows to the Amazon Unbox Player or on Windows Media Player. In addition, Amazon established a partnership with TiVo in 2007 that allows consumers to purchase movies or TV shows through Amazon's Unbox and send it to the TiVo machine to view. Amazon's service is similar to its competitors in that once a movie or show is downloaded, it must be viewed within 30 days and once it is started, it must be viewed within 24 hours. Amazon also has agreements with most of the major movie studios such as Paramount Pictures, Universal Studios, Warner Bros., CBS, and Fox.58
NBC contracted with Amazon to offer its TV shows for download after NBC cancelled its agreement with Apple for the iTunes service.59
CinemaNow
This company seemed to have been ahead of the game, entering the video download market in 1999. It was the first to offer pay-per-view movies from the major Hollywood studios, the first to offer Download-to-Own services, and the first distributor of Burn-to-DVD movies. It is headquartered in Marina Del Rey, California, and its library consists of more than 10,000 movie titles, television programs, music concerts, and shorts. It has enabled users to download movies to the Microsoft Xbox 360 video game console as part of its strategy of providing multiple platforms on which to download movies. It has recently been creating joint ventures to differentiate itself in the industry. It originated as a distributor of videos via the Internet and has progressed most recently to wireless Internet “infotainment,” a new feature available in select new car models. Its agreement with USTelematics, Inc. will allow it to offer a package of features and functions, including the creation of a mobile Wi-Fi Internet hotspot to enable online computer usage in the car, as well as DVD, movies, TV, Xbox, and other computer games.60
Disney
Disney, through an agreement made with Microsoft in 2007, offers movie download service for use on the Xbox 360. This service is one of the few that offers movies in high-definition format. Consumers have access to the Walt Disney Studios library, including titles from Walt Disney Pictures, Touchstone Pictures, Hollywood Pictures, and Miramax Films.61
HP
HP announced at the beginning of 2008 that it had reached an agreement with Sony Pictures Home Entertainment (SPHE) to deliver movies on demand. HP's manufactured-on-demand service will produce a DVD of any movie, TV show, or other content offered through SPHE. HP believes this service will aid movie studios in trying to match supply and demand for movies it sells on DVD. The current list of items available for order are classic TV shows never released on DVD, foreign movies, specialty cable programming, independent movies, specialty genres such as religion and education, and recently broadcast TV shows.62
Movielink
Recently acquired by Blockbuster, Movielink began in 2002 and was owned by five of the top movie studios: Universal Studios, Paramount Pictures, Sony Pictures, MGM, and Warner Bros. It operates as a subsidiary of Blockbuster and offers 3,300 movie titles.63
Consumers who purchase a movie from Movielink must view it using a computer, a TV connected to a computer, or an Xbox 360 game console or via a set-top box company.
Netflix
Like many of its competitors, Netflix has teamed up with a technology company, LG, to become a stronger player in the video-on-demand market. In January 2008, Netflix announced that through LG's settop box, customers can stream movies directly on their TVs. The device is expected to be available in the second half of 2008.64
In the meantime, Netflix subscribers can stream to their PC an unlimited number of movies per month, unconstrained by hourly limits, for a monthly fee with plans starting at $8.99 per month. The on-demand library offers viewers the option of 6,000 titles of movies and TV shows.65
Sony
In the United Kingdom and Ireland, Sony offers video-on-demand service through its PlayStation Portable device. It has partnered with British Sky Broadcasting to provide the movies.66
It also offers this service in Japan, but it is currently not available in the United States.
Vudu
Vudu, headquartered in Santa Clara, California, entered the video-on-demand market in April 2007.67
Vudu's black box connects to the TV and Internet, and the built-in hard drive gives users the option of viewing 5,000 movie titles instantly. The box costs $400. The service has no monthly service charge, but a rental costs $2.00 to $4.00 per movie. As such, Vudu claims to be the cure-all for the movie rental business; it saves customers from running back and forth from the video store or waiting for the movie to come in the mail from Netflix or Blockbuster; it offers more movie titles than video-on-demand providers; and it is more functional than Internet download services because it does not require a PC. Similar to Vudu's competitors, once a movie is downloaded, it must be viewed within 24 hours.
Vudu offers movies from all major Hollywood studios. But since it is subject to the distribution windows, the time frame in which select movies are available may not match consumer demand. Only some movies have previews, and some are available only for purchase and not for rent.68
Wal-Mart
In December 2006, Wal-Mart entered the movie download segment of the entertainment industry, but only a year later it exited the business because it had not caught on with consumers. Raul Vasquez, Wal-Mart's CEO for walmart.com, stated that the download service was an experiment. “We want to understand what the customers want. And I think what we learned is that the initial experience of buying and downloading content needs to be better. We thought it was going to be easier for the customer to understand.”
iPhone
Motorola
Motorola has been a long-time leader in mobile phone sales in the United States. However, since Apple's iPhone and Research In Motion's (RIM) Blackberry have been gaining ground, the leader is falling hard and fast. Motorola's RAZR phone has lost its popularity, and its smartphone made in partnership with Microsoft, the Motorola Q, has not performed as expected. Motorola announced in January 2008 that it is seeking alternatives for its handset business, most likely a divestiture.69
Palm
Despite the fact that Palm sold 689,000 Treos in the first quarter of 2007, a 21 percent increase from the previous year, Palm is struggling to remain a major player in the smartphone market amid the success of the Blackberry and the iPhone. The competition with the iPhone is especially fierce since AT&T is the phone service provider for both products. Palm introduced its Centro in October 2007 as a low-cost strategy to increase market share. Although the Centro sells for $99, it does not have all of the features of the iPhone. But cost-conscious consumers may choose it over the iPhone given the iPhone's $399 price tag.70
Research In Motion
The Blackberry created by Research In Motion (RIM) has been a popular product among corporate consumers who mainly needed e-mail service and a calendar. To stay in the competitive game, however, RIM has been adding features to make its product more appealing to users who want the fun features in addition to the features that aid in their work. Blackberrys now have cameras and can play music. There is a rumor that RIM is going to introduce a Blackberry 9000, which will have a touch-sensitive screen, making it similar to the iPhone.71
Conversely, Apple has recently released tools that make its iPhone more corporate-user friendly, and it will now be compatible with Microsoft's Exchange platform.72
Exhibit 5 illustrates a comparison of the product features for the iPhone relative to its key competitors.
Exhibit 5 iPhone properties and its competitors
iPod
Some of the iPod's major competitors include Rio Karma, Dell Digital Jukebox DJ, Samsung Napster YP-910GS, and the Gateway Jukebox Player DMP-X20 (see Exhibit 6).73
Some of the differences from the iPod include a longer battery life, such as a 16-hour battery life for the Dell MP3 player. The weight also varies from one competitor to the next, ranging from 7.7 ounces to 5.5 ounces. (For a detailed list of the major competitors' specifications, see Exhibit 7.)
The Microsoft Zune premiered in the fall of 2006. Due to its lack of tremendous success, in the fall of 2007, Microsoft exerted great energy in combating the success of the iPod with its improved Zune. The Zune offers options of 4, 8, or 80 gigabytes of storage with prices ranging from $150 to $300. The newest edition of the Zune is smaller, has a better viewing screen, and allows users to wirelessly synchronize the gadget with the music on their computers. It also includes a touch-sensitive pad that allows users to navigate through songs with more precise control than the iPod, according to Microsoft executives.74
But critics suggest that the Zune does not pose a significant threat to the iPod because it does not offer any significant technological breakthroughs.75
Only 1.2 million Zunes sold during 2007 while Apple sold more than 41 million iPods. Apple's success can likely be attributed to its marketing competency.
Marketing
Up until this point, Apple's marketing endeavors have earned it awards, product sales, and a devoted base of customers, both new and old. In 2003, Apple was awarded
Advertising Age's
Marketer of the Year for its upbeat, original, and (most importantly) memorable advertisements for both its iPod and iTunes.76
Apple has been hailed as one of the best marketers by many different sources and has had a reputation over the years of being a brand that can gain customers through its well-thought-out and carefully executed marketing strategies.
Marketing has been one of Apple's strengths; however, staying on top of the game will become more difficult as Apple develops a broader range of products and markets them to the mainstream customer rather than just the “tech-savvy fanatics” in fields such as education and design.77
“The customer base is now more diverse, including students and mainstream consumers, and it's harder to satisfy as a whole,” says Lopo L. Rego, a marketing professor at the University of Iowa.78
Business leaders today have a daunting job in balancing shareholder demands and running a successful company. Businesses want to market new products aggressively to try and ensure their products' success. Apple heavily promoted the iPhone when it was introduced in July 2007. Customer and investor expectations, due to Apple's reputation, boosted the stock price. But when customers don't believe that the marketing promises have been delivered, stock price, brand equity, and investor confidence are significantly affected.79
Apple's success lies in a carefully thought-out plan.
Marketing Plan
A marketing plan begins with design of the product.80
In an industry of low profit margins and cost cutting, Apple takes a different approach to the design of its products. While competitors are doing everything they can to keep costs down, Apple does what it can to make its product different. In 2007, for the third year in a row, Apple was named as the Most Innovative Company by
BusinessWeek.8
Its CEO, Steve Jobs is “a legend for his design sense.”82
Even employees of one of Apple's biggest competitors, Microsoft, have recognized Apple's dominance in the design of eye-catching products. The employees created a mock promotion for the iPod had it been created by Microsoft and circulated it on YouTube.83
Steve Jobs is essential to the public relations and promotional aspect of Apple, especially with the iPod.84
He maintains relationships with the media and has been called the “public face and champion of the brand.”85
He is an expert when it comes to talking with the press, maintaining relationships with magazine editors, and continually creating new relationships.86
Because of his dynamic, high-energy personality, he usually holds a new idea that he is energetic about and is always ready and willing to share the idea to gain exposure.
Jobs also takes action in response to customer feedback to show that he is listening and concerned. For example, three months after the iPhone was available in stores, Apple cut the price of this product by one-third. This was a strategic move to increase demand and meet sales goals; it was not the result of a faulty product. Consumers who had purchased the iPhone in the first three months for the higher price expressed great dissatisfaction. Jobs responded by promising these consumers a $100 Apple store credit.87
A more recent advantage in Apple's marketing strategy is its retail stores. Apple has opened more than 200 retail stores located worldwide. At the time that Apple opened its first retail store in 2001, analysts predicted that Apple would report huge losses and shut the store within two years. At the time, no computer manufacturer had proved profitable in running its own branded store.88
However, Apple's retail stores contributed an estimated $200 million, 15 to 16 percent of its profits during the past two years (see Exhibit 8).89
Apple's philosophy behind the stores is brand exposure. Apple believes that the more people can touch an Apple product and see what it can do with their own eyes, the greater the potential market share.90
In addition, the stores provide free group workshops, personal training, and personal assistance for Apple customers.91
Exhibit 6 Products of Competitors to iPod
Source: http://reviews.cnet.com/4520-6497-5093864.html.
Apple offers a One-to-One program for an annual fee of $99; subscribers can attend a tutorial session with an Apple expert for an hour once a week for one year. Apple customers can also consult with the staff at the “Genius Bar” by appointment. The Genius Bar is where Apple product users meet face-to-face with Apple's “geniuses” for answers to technical questions and for problem troubleshooting. In addition, customers wanting to purchase a new computer or other equipment can schedule an appointment with a shopping assistant, who helps ensure that the customer selects the right equipment for his or her needs. Apple has apparently struck a chord with customers because its staff conducts more than 50,000 training sessions per week.92
“Apple has become the new gathering place,” said Steven Addis, chief executive of Addis Creson, a brand strategy and design firm in Berkeley. “You can't help but get caught up with it when you first walk in.”93
As so eloquently stated in a
USA Today
article, “Apple's arsenal of attention-getting tools holds lessons for any company: design cool, innovative products. Have a streamlined product line. Invest in memorable ads. Work your customer base to make customers feel special and create word-of-mouth agents. Most important: keep the world and media surprised, to generate gobs of attention.”94
Exhibit 7 Details of Products of Competitors to iPod
Source: http://reviews.cnet.com/4520-6497-5093864.html.
Finally, Apple has garnered major success for iPod and iTunes by way of strategic partnerships with other well-known brands. Apple has created marketing agreements with Volkswagen of America, Burton Snowboards, Nike, and Starbucks. By affiliating itself with different brands, Apple gains consumer confidence as well as exposure through marketing partner advertisements.
Strategic Agreements
All of the strategic agreements that are currently known by the public are agreements related to the iPod. It remains to be seen what alliances or joint ventures Apple enters in order to create awareness for the iPhone and Apple TV.
Volkswagen
In early 2003, Volkswagen of America (VW) offered a free iPod to customers who purchased a 2003 hardtop Beetle 10. The ad campaign was aptly named “Pods Unite.”95
The deal brought iPod enthusiasts (and people who just wanted to learn more about the iPod) into the Volkswagen stores, and both products benefited from the advertisement. For three months, iPods were shown in Volkswagen showrooms.96
Also, the Volkswagen sold iPod connectivity wiring and a cradle for the iPod to be used in the new VW Beetle.97
Because both brands are known for unique design, it is likely that the promotion brought in consumers who highly value the design aspect of a product, whether it is a car or a digital music player.
Exhibit 8 Retail Sales as a Contribution to Overall Apple Revenue
Source: 2007, Retail Stores' Importance Highlighted, http://ifoapplestore.com, August 17.
In the fall of 2007, rumors came out that Apple and VW were in discussions about furthering their relationship to create an iCar. This car would feature products that Steve Jobs fashioned. No details have been specified by either company's leaders.98
Burton Snowboards
In January 2004, Burton released a snowboarding/snow-skiing jacket made especially for use with the iPod (Exhibit 9). The jacket has a built-in iPod control electronic system on the sleeve of the jacket so that the wearer can operate the iPod without removing gloves, digging in pockets, or fumbling with zippers.99
The iPod rests in a protected chest pocket in the inner lining of the jacket. With this jacket, Apple places a product into the hands of those who use iPods and creates exposure for the iPod by way of young snowboarders and skiers showing off and wearing the special jacket.
Nike
Nike and Apple have teamed up to create a smart running shoe. When runners combine a pair of Nike athletic shoes, an iPod nano, and the iPod Sport Kit, they are able to track their run in real time, with time, distance, pace, and calories burned displayed on the iPod. The iPod Sport Kit became available in 2006. Users' playlists can be selected based on the desired workout. If runners need a sudden burst of energy, they can press the Power Song button. An additional feature is the voice feedback that tells runners when they reach a personal best, whether it is in regard to pace, distance, time, or calories burned.100
The personal data can be uploaded to Nike's Web site, and runners can compete virtually against one another.101
The most recent partnership between Nike and Apple will shift to the gym. Teaming up with gym equipment makers and 24-Hour Fitness and Virgin Athletic Clubs, Apple and Nike will allow club members to plug their iPod nanos into the cardio equipment to track workouts, upload the information to Nike's Web site, and set goals based on personal history or to compete with others tracked on the Web site.102
Starbucks
In September 2007, Starbucks and Apple announced a joint venture that allows Starbucks customers to access (at no cost) the iTunes Wi-Fi Music store at more than 600 participating Starbucks locations. Customers can browse, search, and preview all songs available on the iTunes store, including the “Now Playing” service, which displays the name of the song playing at that moment in Starbucks. “Getting free access to the iTunes Wi-Fi Music Store and the ‘Now Playing’ service at Starbucks is a great way for customers to discover new music,” said Steve Jobs.103
If customers have to leave the Starbucks store before the download of a song is complete, their personal computer will complete the download automatically at a later time. Every song purchased in a Starbucks participating location syncs back to the users' computer the next time they connect.
In addition to these agreements with domestic companies, Apple is seeking opportunities to create demand for its products in the global market.
Going Global
To stay on top of its game, Apple is pursuing opportunities to sell the iPhone globally. Apple has a goal of capturing 1 percent of the global cell phone business by the end of 2008. It already has partnership agreements with cell phone carriers in France, Germany, and Great Britain. It has also entered the Middle East and Africa regions, ranking fifth next to Nokia, Research In Motion, HTC, and Motorola.104
Considering that Japan is one of the world's largest and most demanding mobile phone markets with almost 100 million mobile phone users, Steve Jobs has been meeting with officials in Japan in hopes of making a partnership agreement with some of the major telecommunications companies in Japan. This market will be difficult to penetrate, as many other foreign companies have tried unsuccessfully to compete with the 10 domestic handset makers in Japan. Some analysts wonder whether Apple will be able to develop a relationship with the Japanese carriers due to Apple's tight control over the design of the phone, but others believe Apple will succeed. Apple already has a positive brand image in Japan related to the Macintosh computer and the iPod and has seven Apple retail stores already in place.105
Exhibit 9 Complementary Product Advertised with iPods
Source: www.burton.com/Burton/gear/products.asp?productID=728.
Stephen Kobrin, a Wharton Multinational management professor explained in a recent interview that companies that are high-tech and driven by technology that demands that they expand into many countries simultaneously are “born global.” He clarifies by further stating, “Companies that are born global ‘tend to have high-tech products that immediately find acceptance in many different cultures and societies.’“106
Thus, it is likely that the iPhone will experience success in many different markets, as will the Apple TV and other new products that Apple may launch when they become part of its global strategy.
Future Opportunities and Challenges
As Apple tries to expand its product line to include media and software in addition to hardware and as it tries to reach many different consumers rather than its traditional niche of “cult followers,” the tech-savvy consumers who work in fields such as education and design, the company will find it more difficult to keep a positive brand image among all consumers. The technology and entertainment industries are constantly and rapidly changing. Will Apple be able to keep its reputation related to innovative design and continually launch products that will be the “latest hit”? Competition has become extremely fierce in the technology sector, and Apple needs to be concerned not only about major competitors, but also about start-up companies. For example, in relation to the iPhone, GotVoice is a Web-based company that allows subscribers to record voicemail messages in MP3 format and send those messages to their e-mail account to view the subject line and the message length. This capability rivals Apple's Visual Voicemail on the iPhone, and the service is free unless users prefer to pay $10 to avoid ad pop-ups.107
Interestingly, GotVoice has an advantage over Apple's Visual Voicemail in that it works not only with cell phones, but also with home and work phones.108
It will be a challenge for Apple to maintain its competitive advantage in new product hardware and to create strong relationships with powerful suppliers of media and other services as well as fend off startups such as GotVoice in software and other areas.
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(Hitt 188)
Hitt, Michael A., R. Duane Ireland, Robert E. Hoskisson.
Strategic Management: Concepts and Cases: Competitiveness and Globalization, 9th Edition. Cengage Learning, 2010-01-01. .