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Apple Inc. in 2020 9 -720-454 A P R I L 6 , 2 0 2 0 Professor David B. Yoffie and Research Associate Daniel Fisher prepared this case. This case derives from earlier cases, including "Apple Computer, 2006," HBS No. 706-496, by Professor David B. Yoffie and Research Associate Michael Slind; "Apple Inc., 2008," HBS No. 708-480, by Professor David B. Yoffie and Research Associate Michael Slind; "Apple Inc. in 2010," HBS No. 710-467, by Professor David B. Yoffie and Research Associate Renee Kim; "Apple Inc. in 2012," HBS No. 712-490, by Professor David B. Yoffie and Research Associate Penelope Rossano; "Apple Inc. in 2015," HBS No. 715-456, by Professor David B. Yoffie and Research Associate Eric Baldwin; and "Apple Inc. in 2018," HBS No. 718-439, by Professor David B. Yoffie and Research Associate Eric Baldwin. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. Professor Yoffie serves as a director of HTC. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright ©2020 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. D A V I D B . Y O F F I E D A N I E L F I S H E R Apple Inc. in 2020 After almost a decade as CEO, Tim Cook could look back at his record at Apple with enormous pride. During his tenure, Apple became the world’s first trillion dollar market cap company. The firm’s iconic iPhone has grown almost 5X under Cook, while Apple introduced new hardware products, such as the Apple Watch and AirPods (see Exhibits 1a, 1b, 1c and 2 for Apple financials and stock price). Yet 2020 could be a defining year for Apple and Cook. Apple’s core hardware businesses had slowed dramatically or declined in the last several years. iPhones, iPads and Macs had become mature products, with sales largely driven by user upgrades. A new generation of phones, using 5G technologies, might stimulate iPhone replacement demand, but the rollout was expected to be slow. Emerging markets also offered some hope for growth, but most Apple products were perceived as too expensive for many lower income countries. Finally, China had been one of the bright spots for Apple in the prior five years, but it, too, showed signs of strain. The combination of a Trump-led trade war and the coronavirus pandemic put a serious damper on Apple’s prospects in China. Seeing the writing on the wall, Cook prepared Apple for one of its largest strategic shifts in more than a decade. While hardware sales would still be critical, Cook was betting that Apple could become a major force in technology-related services. Apple’s installed base of iPhone users exceeded one billion people in early 2020.1 This gave Apple a unique opportunity to cross-sell services to existing, loyal customers. Ranging from insurance (Apple Care) and music (Apple Music) to payments (Apple Pay), video content (Apple TV+), gaming (Apple Arcade) and news subscriptions (Apple News+), Cook was hoping to catapult the company into its next phase of growth. Indeed, Apple reported a $50 billion run- rate for services in Q4, 2019 – almost 20% of gross revenue. Services were a big opportunity for Apple, but so were Cook’s challenges. First, the company’s profits and valuation heavily depended on the iPhone and other hardware. The COVID-19 pandemic would severely dampen demand in the short run. And in the longer run, Cook pondered whether growing sales of Apple Watch and AirPods could compensate for stagnating sales in other categories. What actions were open to Cook to improve hardware volumes and margins? Second, it might seem obvious that Apple had a built-in customer base for services, but pushing hardware vs. pushing services involved trade-offs. Should Apple be a ‘hardware-first’ company or a ‘service-first’ company? Should it enable Apple services on everyone’s hardware (for example, like Netflix), or tie services to A ut ho riz ed fo r us e on ly in th e co ur se S G M A 5 91 L 01 a t U ni ve rs ity o f C al ga ry ta ug ht b y H ee ch un K im fr om 9 /6 /2 02 1 to 1 2/ 9/ 20 21 . U se o ut si de th es e pa ra m et er s is a c op yr ig ht v io la tio n. 720-454 Apple Inc. in 2020 2 grow Apple hardware? Moreover, what made Apple’s services distinct? Apple Music was very similar to Spotify; Apple TV+ had a similar strategy to Netflix; and Apple Pay was similar to many credit cards and payment services. How far could a me-too strategy take Apple? Finally, after 9 years at the helm, Cook had to start thinking about succession. Cook, of course, was very different from Steve Jobs. What type of leader did Cook want to develop for Apple’s next act? Apple’s History Steve Jobs and Steve Wozniak, a pair of 20-something college dropouts, founded Apple Computer on April Fool’s Day, 1976.2 Working out of the Jobs family garage in Los Altos, California, they built a computer circuit board that they named the Apple I. Within several months, they had made 200 units and had taken on a new partner—A. C. “Mike” Markkula Jr., who as the experienced businessman on the team was instrumental in attracting venture capital. Jobs’s mission was to bring an easy-to-use computer to market, which led to the release of the Apple II in April 1978. It sparked a computing revolution that drove the personal computer (PC) industry to $1 billion in annual sales in less than three years.3 Apple quickly became the industry leader, selling more than 100,000 Apple IIs by the end of 1980. In December 1980, Apple launched a successful initial public offering (IPO). Apple’s competitive position changed fundamentally in 1981 when IBM entered the PC market. The IBM PC, which used Microsoft’s disk operating system (DOS) and a microprocessor—also called a central processing unit (CPU)—from Intel, was a relatively “open” system that other producers could clone. Apple, in contrast, practiced horizontal and vertical integration. It relied on its own proprietary designs and refused to license its software to third parties. IBM PCs not only gained more market share but also emerged as the new standard for the industry. Apple responded by introducing the Macintosh in 1984. The Mac marked a breakthrough in ease of use, industrial design, and technical elegance. However, the Mac’s slow processor speed and lack of compatible software limited sales. Apple’s net income fell by 62% between 1981 and 1984, sending the company into a crisis. Jobs, who was often referred to as the “soul” of the company, was forced out in 1985.4 The boardroom coup left John Sculley, the executive whom Jobs had recruited from Pepsi-Cola, alone at the helm. The Sculley Years, 1985–1993 Sculley pushed the Mac into new markets, most notably in desktop publishing and education. Apple’s worldwide market share recovered and stabilized at around 8% (see Exhibit 3a). By 1990, Apple had $1 billion in cash and was the most profitable PC company in the world. Apple offered its customers a complete desktop solution, including hardware, software, and peripherals that allowed them to simply “plug and play.” Apple also stood out for typically designing its products from scratch, using unique components. IBM compatibles narrowed the gap in ease of use in 1990 when Microsoft released Windows 3.0. Still, as one analyst noted, “[T]he majority of IBM and compatible users ‘put up’ with their machines, but Apple’s customers ‘love’ their Macs.”5 Macintosh’s loyal customers allowed Apple to sell its products at a premium price. Top-of-the-line Macs went for as much as $10,000, and gross profit hovered around 50%. However, as IBM-compatible prices dropped, Macs appeared overpriced. As the volume leader, IBM compatibles were also attracting the vast majority of new applications. Moreover, Apple devoted 9% of sales to research and development (R&D), compared with 5% at Compaq and only 1% at many other IBM-clone manufacturers. After taking on the Chief Technology Officer title in 1990, Sculley tried to move Apple into the mainstream by becoming a low-cost producer of computers with mass-market appeal. A ut ho riz ed fo r us e on ly in th e co ur se S G M A 5 91 L 01 a t U ni ve rs ity o f C al ga ry ta ug ht b y H ee ch un K im fr om 9 /6 /2 02 1 to 1 2/ 9/ 20 21 . U se o ut si de th es e pa ra m et er s is a c op yr ig ht v io la tio n. Apple Inc. in 2020 720-454 3 Sculley also chose to forge an alliance with Apple’s foremost rival, IBM. They worked on two joint ventures, one to create a new PC operating system (OS) and one aimed at multimedia applications. Apple undertook another cooperative project involving Novell and Intel to rework the Mac OS to run on Intel chips that boasted faster processing speed. These projects, coupled with an ambition to bring out new “hit” products every 6 to 12 months, led to a full-scale assault on the PC industry. But profits dropped, and