This case has been updated to include the Apple iPad.
Principally this is case explores the issue of licensing and how successful firms can become unsuccessful. It is not a case about Apple and why it has become successful.
This case study explores the rise of the Apple Corporation. The Apple iPod is one of the most successful new product launches in recent years, transforming the way the public listens to music, with huge ramifications for major record labels. More than 50 million MP3 players are expected to be sold in 2005; over a third more than last year. Mobile phones have long been regarded as the most credible challengers to MP3 players and iPods. The launch of digital download services via mobile phones illustrates the dramatic speed of convergence between the telecom and media industries, which many observers expect to usher in a new era of growth for mobile phones. Users are willing to pay more for additional services and many analysts predict that mobile phone handsets will eventually emerge as the dominant technology of the age, combining personal organisers, digital music players and games consoles in a single device. Indeed, Microsoft founder Bill Gates has predicted that mobile phones will supersede the iPod as the favoured way of listening to digital music.
The launch of the Apple ipad in 2010 makes this case even more topical.
This should form the basis of supplementary questions at the end of the case: How will the iPhone succeed? What about Android and the rise of HTC and Samsung?
The mobile phone market is very competitive.
The iPhone does not use the latest technology. Indeed it offers no new technology, but it may be, as was the iPod, the simplest technology to use! And this may help it win.
1. Explain how the iPod is helping Apple achieve increased sales of its range of Mac personal computers.
Apple was established in the 1970s and became a pioneer in the 1980s; many iPod owners may not realise Apple was at one time the leading PC manufacturer. This position was lost in the late 1980s and 1990s to HP, Compaq, Dell and generic PC clone manufacturers. Hence, the iPod offers Apple an opportunity to promote its PCs to the iPod generation.
2. What are the potential benefits and limitations of licensing the iPod software to other MP3 manufacturers?
This is the key issue about the case and involves the licensing issue. In the 1980s, Apple refused to licence its operating system software to Microsoft. At that time, Microsoft was a small company compared to Apple. We know what happened. Apple's lead in the PC market was slowly eroded as Microsoft developed competing technology (i.e. Windows) and licenced it to all PC manufacturers. Apple's market share fell to 5% of the PC market. It became a small player. History could repeat itself if Apple again refuses to licence its iTunes software to other MP3 players. On the other hand it may be that this is a different product and the similarities cannot be drawn with PCs?
Apple wants full control over the hardware and software of its MP3 player, the iPod. But already it is possible to get an MP3 player with similar specification to that of an iPod at a fraction of the cost. Can Apple really compete?
Apple has decided to licence its iTunes software to Motorola and one can purchase a Motorola mobile phone with iTunes software. So there may be evidence that Apple is considering the licensing question.
This is a complex issue, one in which students have to consider longer-term strategy and deal with many unknowns such as market changes, competition, the technological frontier where the technology is changing so rapidly. This reflects, quite nicely, difficult business decisions.
3. With sales of the ipod falling and Apple facing fierce competition from all quarters such as Sony, Dell and other electronics firms as well as mobile phone makers who are incorporating MP3 players into their devices, can the ipod survive?
Indeed, when you can get an MP3 player for £15, why pay £99 for an iPod. How much are you prepared to pay for styling when the product specifications are the same?
Sony, which has brought out the Sony Walkman MP3 player, is a big brand competing with Apple.
Also many other manufacturers are bringing out their own MP3 players.
4. If Open Innovation has been so successful for Procter & Gamble and others, why is Apple not adopting this model of innovation?
This case briefly touches upon the unusual level of secrecy that Apple seems to impose on its suppliers. It is true Apple does seem to operate a much closed model of innovation- it always has. What works for Apple may not necessarily work for others, but it would seem that Apple does not need Open innovation at present. Even if others wish to pursue this approach.
5. Can Apple continue to be successful in the long term by adopting a ‘BMW strategy’ (BMW strategy is to target high-premium segments) for its iPod, iPhone and iPad?
This refers to a premium price segment to which BMW successfully provides products. Can we compare an iPod to a car? Will people willingly pay a premium for a product that does exactly the same thing as another? Experience from the PC market shows us that people were not prepared to pay a premium. The car market, on the other hand, shows that people are prepared to pay a premium. So where does that leave MP3 players?
You can ask students to list products for which they are prepared to pay a premium and those they are not. But in many categories the evidence suggests price is the key: VCRs, televisions, camcorders, etc. The evidence shows Sony is struggling to compete with the low cost Koreans in many of its electronics product categories.
6. What are the advantages and disadvantages of the Apple approach to launching a new product at Apple users first and then the larger Microsoft Windows users second?
The advantages of launching iTunes to the smaller but loyal Apple users segment is that they may be more likely to gain acceptance among loyal devoted users. It may be regarded as a less risky approach. However, by doing this Apple runs the risk of competitors seeing what is happening and responding quickly by offering a similar product to the much larger Microsoft Windows users. The difference in the size of the market is significant here: 90% Windows users versus 10% Apple users.
7. Discuss whether Apple’s demands for secrecy from its suppliers may have gone too far.
This builds on Question 4. This darker side of Apple Inc. often goes unnoticed. Some students seem so brand loyal that they tune out negative publicity. This darker side is worth exploring. It is briefly mentioned in the case but there are other ‘stories’ including a desire to keep from the public the true profit margins involved with the products. 500% + margins may start to erode public goodwill if they knew how much profits were involved.