Industries Convergence or Market Divergence? Predicting the future of the iPhone by Apple and its competitors
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- Strategic Profile and Case Analysis Purpose
- Internal Analysis
- Strategic Analysis: Future of IPhone
- Appendix A Appendix B
- Appendix C iPhone Surveys: Methodology
- Appendix D
Industries Convergence or Market Divergence? Predicting the future of the iPhone by Apple and its competitors.
Puneet Kankaria puneetk7@ufl.edu
Apple Inc. designs, manufactures, and markets personal computers, portable digital music players, and mobile communication devices and sells a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third-party Macintosh (Mac), iPod and iPhone compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores. This analysis focuses primarily on Apple’s ability to leverage its product differentiation strategy on the market as it pertains to the iPhone. Users typically pay a higher price for premium services that are available in no other device in the market place. Other firms such as RIM, Nokia, and HTC are currently doing their best to develop devices that are able to provide similar services to that of the iPhone. Until then, iPhone will have the ability to earn above average margins by having a stranglehold on this space in the cell phone market. Apple Inc. and AT&T Inc. announced that the iPhone 3G will be available in the US on July 11, 2008. iPhone 3G combines all the features of iPhone with 3G networking that is twice as fast as the first generation iPhone, built-in GPS for expanded location based mobile services, and iPhone 2.0 software which includes support for Microsoft Exchange ActiveSync and runs the hundreds of third party applications already built with the recently released iPhone SDK. Apple is currently scaling the iPhone footprint as fast as possible, in locations such as Singapore and France. This globalization strategy is very prudent as it allows Apple to remain one step ahead of the competition, yielding higher margins in each successive market prior to the onset of competition. Environmental Analysis The mobile phone industry has had manufacturers competing for market share with business class devices like the Blackberry and also trying to cater to those who needed a better music player experience. This environment was largely influenced in the U.S. by service providers as they were the ones offering these phones at highly discounted prices. The industry is currently undecided about a common platform of data sharing and Internet over Mobile service. The service providers are also classified as GSM and CDMA technologies. The use of different technologies such as 3G, Wi-fi, Edge make it difficult for handset manufacturers to target a consumer segment completely across all service providers. Industry consolidation in terms of similar technology companies merging together and platforms decided on basis of competition is currently taking place. The iPhone is example of the service provider coordinating with the manufacturer to provide a phone to improve usage of its services and therefore increase revenue per user. In other parts of the globe the customer has an option to choose from all available phones. In these places the iPhone may not be as subsidized and therefore not affordable. The iPhone attracted mobile service providers from all across the globe to join the exclusivity race in their respective regions. The advantages include improvement in brand value, better use of services and increased revenue as seen in case of AT&T and therefore they will subsidize the phone. A phone with added features like Internet was looked as a product for business class people like the Blackberry for enterprise usage. Apple has differentiated itself from this typical class by making it user friendly and making it look trendier. The product launch was a big hit as only people who were well educated about the working of iphone bought it and so this resulted into better satisfaction for the Customer. This gave a company like Apple little room to perform differently than the others. Porter’s Five Forces To effectively develop an appropriate strategy, it is helpful to analyze the intensity of competition between firms. Porter’s five forces analysis can provide important insight into the level of competition in a particular industry. Rivalry among competing firms is usually the most powerful of the five forces. The cell phone industry has many players, each attempting to gain competitive advantage over the other. They compete on price and features but this industry is different since for the most part one does not go buy a phone and then get service. In this industry you get you phone choices from what carrier you select and most phones are exclusive to the carrier you select. This is the case with the iPhone. Apple and AT&T have an exclusivity agreement. This is not the normal area that Apple is used to in that the quick response from competitors when one firm makes a change in their price or package features does not happen in the cell industry. The response in this cellular industry allows for competitive advantage based on contracts with phone manufacturers and customers contract lengths. The cellular industry also has new competition entering the market. Although there are a few highly recognized companies that have the majority of the market share, (Nokia, Samsung, Motorola) new smaller firms are still able to enter this industry. The potential for substitute products is also beginning to become a factor. As smart phones become more and more complex and gain abilities they are turning into mini computers capable of watching TV shows and viewing the Internet. The iPhone provides an alternative to using a computer to access the Internet. Thus computer companies must see this threat and attempt to deal with it. Competition in the cellular phone industry is also affected by the bargaining power of suppliers. Because there are many suppliers of component parts in this industry, manufacturers are able to make favorable purchasing agreements allowing their manufacturing cost to be reduced. This puts competitive pressure on manufacturers to pass on these cost savings to consumers. Cell phone prices are always declining in this very competitive market. Most phones are now free with plan or after a mail-in-rebate. The more complex smart phones are deeply discounted when they have been out for a few months. The bargaining power of consumers is also high due to the large number of phone manufacturers and service providers. This requires each cellular firm to constantly offer new features and services to gain customer loyalty. Consumers have many choices and can often bargain with sellers to get the most competitive price. The effectiveness of Apple Computer, Inc. in responding to these forces will determine their future survival. Apple must be extremely aware of these forces and be prepared to respond appropriately if it is to be a major player in this industry.
The iPhones competitors are a collection of other advanced phones, yet none are able to match the quality and features of the iPhone, such as Wi-Fi and talk time for instance. Apple’s competitor’s, Nokia and Samsung, among others are playing catch up when it comes to the advanced phone market. Although these competitors are giants on the balance sheet in comparison to Apple Inc. they are lagging in the phone development sector. Apple is setting the trends and the bar very high. The iPhone also uses 3G technologies for its data networking which is the latest in cell phone tech. Internal Analysis In order to understand the strategic capabilities of the firm, value activities should be identified. Primary Activities Apple’s inbound logistics activities include materials being outsourced by several companies and operations mainly consist of assembly which is outsourced by Foxconn. Outbound logistics is provided by AT&T where Apple and AT&T have an agreement to be exclusive to each other. Marketing and Sales activities include TV advertisements, internet campaigns and AT&T promotions. After sales service activities include multiple year warranties, online support, call centers, online software developer program. Support Activities The infrastructure of the company is that the total debt to equity ratio in last 5 years is 0.01 and Apple had an increasing growth with the innovations they made over last 5 years. As technological development activities Apple have been using innovative product design and ease of use for their products as a competitive advantage. When we look at procurement, the suppliers of the iPhone are Samsung (applications/video processor), Marvell, Infineon (baseband), Broadcom (touch screen controller), Cambridge Silicon Radio (Bluetooth), Foxconn Tech (mechanical parts), Catcher (stainless casing), Cheng Uei (connectors and cable), Entery (Bluetooth module), Unimicron (PCB), Tripod (PCB), Largan Precision (camera lens), Altus (camera module). Apple’s Human Resource Management strategy is to ensure the right people are in the right job to add a value to the company and its future. SWOT Strengths: Apple has a strong brand value because of the success of its music player, iPod. It was only known within the US before iPod became a global product. The continued success of the iPod and its subsequent models has helped Apple to take the risk of venturing into the mobile phone industry. The Strategy Apple has used is to put in all its efforts of R&D into a single product with minimal customization. A single very successful product has advantages of better support, concentration of resources; a customer does have to decide much between two phones in an Apple store today. Everybody is treated with an excellent performance device. Marketing has been a key strength for the past few years for Apple. The capability to exceed customer expectations each year with a magical presentation has attracted all. Improved communication with 3rd party developers with a World Wide Developer Conference each year gives Apple vital inputs for its strategy and also brings them closer to intelligent people who have never before used an Apple product. The breakthrough use of technologies and innovation, which is difficult copy or better, makes iPhone an invincible product in customer's minds. Apple's brand status by product differentiation with being elite and expensive has made it a sought after company. iPhone has attacked major players in the handset making industry, gaming console makers, PDA making companies and GPS. The integration of all these products along with iPod within the iPhone has given an advantage not held by any other company in the business. RIM's Blackberry comes closest to the iPhone in this matter but it is far behind in music quality, gaming and video capabilities. RIM also has no SDK support for 3rd party developers. The outcome of Apple's marketing survey showed that the iphone was too expensive for the majority of customers. Apple's latest strategy of reducing price by 50% has made competition run for cover. This is however a double edged sword and will hamper Apple in the long run as it was never known to offer an inexpensive product. The profit margin will definitely decline. Apple now wants to have more iPhones on the market and make money by selling services for all users from its Apple Store. Weaknesses: As iPhone is an expensive product Apple has to rely on income from services to help boost revenues. Paying for downloading applications is a culture popular in the US but this is not so in Asian countries with large piracy rates. Demand for services cannot be exactly predicted and therefore income may vary significantly from one quarter to the next. Apple also has only one model in the market. It gives the customer little choice and no variety. People who want exclusivity with regards to their phones may not want an iPhone. Opportunities: Emerging markets and Europe are new destinations for the product. The iPhone has been the revolutionary product which gives service providers some hope for increasing revenue in a market where ARPU (Average revenue per user) is dropping every year. Improved data transfer rates of Internet services on the phone provides an opportunity for Apple to increase customer satisfaction and market share. Push Email & Exchange facility with 'MobileMe' also provide more opportunities for iphone. The hand held gaming console market is also on Apple's radar, which can be combining two products into one. Games from reputed developers will give Apple and added advantage with respect to its competitors who conventionally market their games through stores. Regular updates will keep gamers aware of new releases and help bring everyone on the same level. This year Apple has come out with iPhone 3G which is an ideal phone for anyone, which has easy application management for enterprising needs and improved hardware for better performance. The iPhone is a smart-phone and has distanced itself from being called a PDA. A PDA is more useful for business purposes whereas iPhone is not limited to the PDA wagon. It is a phone with trend setting design and services.
Roll out of 3G services is not uniform across markets and is a concern as new iPhone features may require these services. Strategic Analysis: Future of IPhone Apple’s strategy for the iPhone during the past 4 months has been to create an open platform for 3rd parties to develop and run applications on the iPhone. Apple has done this to avoid alienating users as it did in the initial years of its Mac OS by not sharing it with 3rd party developers for creation of applications. The benefits of these applications are tremendous and this is Apple's opportunity to obtain a dominant position in the mobile software market. With this strategy iPhone will be the standard for developing mobile content, as it’s the first company to do so by also helping these developers with an advanced SDK. Apple's competitors are far behind in this regard. Many have used windows mobile OS, in which a software development kit is not available. The only close competitor would be RIM which has a large market share in enterprise mobile networks with its 'Blackberry' brand, but RIM lacks the flexibility provided by Apple’s SDK. The SDK works efficiently on Mac machines and this is definitely going to help Apple in the long run as the Kernel code is shared between iPhone and OS X 'Leopard'. This compatibility between products may lead iPhone customers to buy Mac machines and vise versa. The applications developed for the iPhone can be made available to the public through Apple’s App Store coming online next month. Developers can choose to charge customers for downloading their apps or offer them for free. If developers charge for their apps, Apple will take 30% of all sales revenues, providing increased profits to Apple. The App Store also provides an opportunity for companies and private developers to reach new customers making it a true win-win situation. There will be available applications in every category, from games to business, education to entertainment, finance to health and fitness, productivity to social networking. These applications are designed to take advantage of iPhone technologies such as Multi-Touch, the accelerometer, wireless, and GPS. Users can download these applications wirelessly and be able to use them right away. An example of an application created using the SDK is a game called “Super Monkey Ball” which was developed by Sega. This application takes advantage of the iPhone’s superior computing power and features and will sell for $9.99 on the App Store. eBay has also created an application for the iPhone which simplifies shopping on their online marketplace and will be available for free to iPhone customers. Loopt is another free application developed for iPhone users, which uses the phone’s core location features to find the physical location of contacts on a user’s social network. Strategic Alliance: Apple has a strategic alliance with AT&T which provides the AT&T to remain the exclusive U.S. carrier of the iPhone 3G with a two-year contract. The deal with AT&T gives Apple an added edge over competitors as the customers make ongoing purchases of 3rd party applications, music, video, TV shows, software updates, & product support. Before the new agreement they used to share the revenues where AT&T shared a portion of monthly service revenue with Apple. However, under the revised agreement, there is no revenue sharing and in order to increase the market potential, iPhone 3G models are offered at significantly attractive prices so that the sales volume would increase among high quality data-centric customers. The new strategic agreement is consistent with traditional equipment manufacturer-carrier arrangements. The iPhone is offered with a two-year contract and a lower price because of the premiums customers pay each month for web and data services. This low price strategy and increased number of sales consequently will lead Apple to have growth in its total revenue and strengthen the leadership in long term. Conclusion Apple has done a tremendous job in creating a strategy that will help to mitigate any of Porter’s five competitive forces that may have a negative impact on the firm. Buyers for now are forced to deal with AT&T if they want access to the iPhone. Until other service providers and cell phone firms catch up, buyers’ power is neutralized. There are many component suppliers on the market, so Apple has leverage in that area. Substitute products will have to overcome iPhone’s brand awareness and quality, which may prove to be a difficult task. New entrants are unlikely due to capital requirements and the clear advantages that incumbent firms possess. Rivalry amongst firms is linked to the nature of the substitute products as stated above. The shrewdest move may have been Apple’s decision to make the OS available to 3rd party software developers moving forward. This will take some strain off of in house R&D and may yield several great applications that increase demand for the iPhone moving forward. All in all, Apple and other firms in the market need to continue to produce such innovative products in order to compete in short cycle markets such as the cell phone/PDA industry.
iPhone suppliers revealed. http://www.evertiq.com/news/read.do?news=6355&cat=4 Apple Company Website. http://www.apple.com/iPhone/ Apple Company Website. http://www.apple.com/procurement/ Apple Company Website. http://www.apple.com/supplierresponsibility/ Apple Company Website. http://www.apple.com/jobs/us/pro/legal/ Apple corrects iPhone competitiive date chart.
March 2008. The sample was provided by a national sampling service. The margin of error for the survey is approximately plus or minus 3.8 percentage points at the 90% confidence level. 
Appendix D Carrier Preference 
Appendix E What did the iPhone Replace? 
Appendix F iPhone use replacing notebook computers? 
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