The Apple iPhone idis 619 Capstone Assignment By
Value & Cost Drivers: Please refer to earlier Section II (D) 1 – Part B
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- Please see Exhibit III (D) 3c
Value & Cost Drivers: Please refer to earlier Section II (D) 1 – Part BIII (D) 3b: Resources & Capabilities – How V-C will change based on strategic move With the introduction of iPhone available exclusively on Cingular network, this significantly increases the value of Cingular with minimal increase in cost. Overall iPhone should work on Cingular network with no changes to Cingular’s network. However, with iPhone’s Visual Voicemail, Cingular will need to provide Voicemail services that users can see the list of voicemail that is in their mailbox. This is quite different from today’s voicemail system, where users must listen/skip through each message in sequence. III (D) 3c: Resources & Capabilities – Value Chain exhibit Please see Exhibit III (D) 3cIII (D) 3d: Resources & Capabilities – VRIO Analysis Please see earlier section Exhibit II (D) 4 aIII (D) 3e: Resources & Capabilities – How is the firm retaining customers? Most wireless service providers, including Cingular, try to retain customers through product differentiation, but because of the high competitiveness of the wireless service industry, the best method of retaining customers is having the customers to sign a service contract that typically last 2 years. This locks the users to the service provider for the length of the contract. Any breach of the contract, the user is required to pay heavy penalty. As an incentive to sign a lengthy contract, the service provider would offer subsidized handsets. So times, the provider will offer the most popular handset for free to ensure a 2-year commitment. IV: ANALYSIS OF THE EFFECTIVENESS OF THE STRATEGY (Refer to Exhibit V for a decision tree analysis of options available to Apple in regard to the iPhone offering) IV (A): Will Strategic move allow the firm to address or change industry conditions? From the Five Forces Analysis of the handset industry we see that although the handset industry as a whole is a moderately unattractive industry, we do see a great growth potential in the high end smartphone segment of this industry, in US and Europe. Apple's iPhone catalyzes this growth rate due to its keen appeal to the non-corporate segment of the smartphone industry. This catalysis shall happen by appealing to a new consumer space comprising of people who were either unhappy with the user experience on the current spectrum of smartphones or were just not in the high end smartphone segment, daunted by the multitude of non-intuitive features available on the current smartphones (consisting of consumers seeking use of advanced features, fashion conscious consumers, consumers looking for convenience and music lovers, from customer analysis done as part of competitor analysis section) . From the "Cost Advantage Independent of Scale" perspective this move creates a higher bar for the smartphone manufacturers by creating this cost advantage in terms of expertise in creating multi-functional but simpler handsets. This move by Apple further accentuates the fact that there are profits to be potentially made in this seemingly unfavorable industry, not necessarily on volume basis, but on "differentiation" basis. This would also further strengthen the importance of "complements" like iTunes as a solid platform for long term competitiveness of any firm competing in this industry, especially with iPhone's exceptional user interface and its appeal to the end consumer for using the device to view photos, videos and listening to music, besides making and/or listening to phone calls. As discussed in the paper before with Nokia's move to introduce the mobile tablet N800, we also may see "boundaries disappearing" between handset manufactures and computer industry, in order to curtail moves by firms into each other's market space. This also opens up firms like RIM and Palm to potential market erosion due to these new breed of fancy, easy to use smartphones, and as discussed in the competitor analysis, they need to leverage their expertise and experience in this business with regards to corporate users and extend it to provide smartphones in the new consumer space. There is already a move in this direction, as discussed in the implications section of the competitor analysis, with RIM introducing its Blackberry 8800 and Palm hiring design engineer from Apple to help them with the design of their next generation smartphones. Both from the perspective of handset manufacturers and wireless service providers, the strategic move by Apple to control the overall design of the handset, independent of Cingular, setups up a new dynamic in the mobile industry as a whole. It needs to be seen how the dynamics of other handset manufacturers' control over the handset design evolves, but we already see the need for service providers to "partner" closely with handset manufacturers to be able to come up with innovative handset designs in order to gain market share, which is increasingly becoming more critical, with heavy infrastructure investments by the wireless firms, as has been discussed in the competitor and financial analysis sections earlier. Hence from the Five Forces perspective, there is increasing role for "complements" in the wireless industry, with regards to the need for better designed handsets. Also in the not so long term, wireless firms would also need to ramp up their infrastructure in the US, from 2G and 2.5G to 3G in order to extend the usability of these new smartphones, as they become more popular with consumers who are beyond the traditional corporate user. This is especially attractive customer space for wireless service provider as unlike corporate users, there are much higher profits to be made here especially if there are increased partnership synergies between the handset manufacturers, wireless service industry and the content providers. Wireless firms would also like to leverage resources like iTunes to provide the content necessary to attract the consumers in this new space, to upgrade them from medium and high end phones to high end smartphones. Apple’s move to introduce iPhone will create a new consumer segment for smartphones – a place that was traditionally held by enterprise users. Data usage has been increasing in US and international markets and there has been an increasing demand for converged devices. Apple with its new offering caters to these needs to consumers and offers a product to enhance the user experience. It will drive the current handset manufacturers to enhance the user experience, tie up with complementary services and change their handset designs. Currently a lot of handset manufacturers are changing their product designs to offer wide screen displays, touch screens instead of keypad, offering white color blackberries and trying to imitate by speculating what an iPhone will look like. Traditional handset firms are getting handheld computing such as Nokia’s N800 Internet Tabletcxvi and considering options such as acquiring Palm to gain a stronger foothold in smartphone industrycxvii. Handset manufactures’ with weak design skills are tying up with fashion houses such as Prada (LG Prada). As Apple offers this integrated device, consumers’ perceptions may change and consumers may be interested in trying new features such as email on the go that may peak up the data usage and open a whole new revenue stream for the service providers. Apple may also tie up with the service providers to deliver content directly to the smartphones instead of using a PC in between (currently iTunes works with PC and audio/video are then downloaded to iPod/iPhone).All these implications suggest that Apple entered a mature handset industry and caused a disruption in the industry. This disruption can be categorized as “sustaining innovations or technology” disruption. There will be a period of disruption and disequilibrium as other handset manufacturers try to catch up with Apple on design and delivering user experience (Please see Exhibit IV (A)). Apple’s financial analysis and scenario analysis suggests that it is extremely important for Apple to maintain content in its iTunes store and also reduce the COGS. By partnering with Cingular, Apple may be making this move to increase the content offering through streaming audio video from service providers and/or reducing its COGS by bypassing the credit card processing fee that is normally involved with every purchase of content on iTunes. IV (B): Does firm have sufficient resources to implement the strategic move and satisfy objectives? From an exhaustive industry, competitor, comparative financial and internal analysis we can conclude that Apple possesses financial and non financial resources to aggressively execute its strategy. Apple’s deliberate move from its traditional computer hardware and software business to focus on digital lifestyle of the consumer is very well supported by its introduction of iPhone in partnership with Cingular. Apple’s recent success with its iPod has provided it with the much needed financial and market leverage to enter the competitive landscape of handset manufacturers and face stiff challenge from the traditionalists in this industry like Motorola and Nokia, besides from strong niche players like Palm and RIM. Its increased spending year over year in R&D along with an attractive liquid position provides Apple the stable platform to compete in the short run. It’s attractive long term ratios in terms of operational and management performance including its financial leverage, profitability ratios and growth rate provide it the much needed operational and management competence to be successful in the handset industry. We believe that due to increased convergence of mobile phone, music player, video player, online browsing capabilities, and similar technological competence of the major players like Apple, Motorola, RIM, Palm and Nokia, a firm that can provide a better user experience shall have a position of sustainable competitive advantage in this market space. From the VRIO analysis of all the major firms, we see that aside from the corporate niche, Apple has the skill sets and a history of providing products and software with an outstanding degree of ease of use, whether it is their Macintosh platform or its more recent music and video iPod. From the product and competitor analysis we conclude that with iPhone, Apple has strategically positioned its product as a smartphone for the tech savvy, high end consumer but not necessarily for a corporate user. We believe this helps Apple carve out a new consumer space for its iPhone, without directly competing in the “traditional corporate” smart phones consumer segment where RIM and Palm have a solid market presence. This kind of a position allows Apple to attract a new segment of consumers, in addition to some corporate users with its initial launch and establish a strong position, and at the same time not directly compete with RIM and Palm. It is also a move in line with the fact that Apple’s iPod product offering was facing some stiff competition with music and video playing capabilities becoming a standard feature in the high end handset segment. This strategic move accentuates the fact that Apple has made a long-term commitment to move into the digital lifestyle consumer space, and away from its computer hardware and software business, by changing its name from Apple Computers Inc., to Apple Inc.cxviii in an effort to align its business objectives and resources towards this new direction. Apple also believes that to be successful in this consumer space, consumer experience shall be a critical element, and all facets of the iPhone offering seem to complement that focal point. It has strategically partnered with Cingular with the largest subscriber base in the United States and leverage the use of GSM network which is the most widely used network across the globe. Its partnership is further strengthened by the fact that Cingular was behind the popular introduction of Motorola RAZR in Nov 2004cxix, which set the precedence of attractive looking handsets with a seamless integration of music and video capabilities. Hence Apple can leverage that success of Cingular’s, to promote the iPhone in the US. Comparing the financials for Apple and Cingular with their respective competitors, it is evident that Apple is the dominant partner in the partnership due to the current business dynamics between Cingular and Verizon. Although Cingular has the largest subscriber base in the US, Verizon has been shrinking this gap successfully and has outperformed Cingular in terms of its gross profit margins, ROA, ROE, control on cost of sales, debt ratio and subscriber churn rate. Finally, Cingular’s effort to compete in the long term by increasing its subscriber base, as stated in its recent annual reportcxx, further makes the need for a product like iPhone for Cingular, more obvious. The partnership with Cingular has also provided Apple, an unprecedented control over the design of the handset, unlike its competitorscxxi. By initially restricting third party software products’ access to the iPhone’s OSX platform, Apple seeks a great user experience, by ensuring there are no software integration glitches with its initial product launch. We already see competitors like Nokia, RIM and Palm becoming wary of Apple’s entry in this market space. Nokia is trying to send a strong retaliatory signal to Apple by entering Apple’s traditional industry with its introduction of N800 mobile computing internet tabletcxxii. RIM partnered with Cingular’s rival T-Mobile to launch Blackberry Pearl last September, which is its first consumer focused high end smartphonecxxiii, and has more recently partnered with AT&T to launch Blackberry 8800 as the next generation Pearl at a much lower price than iPhone, although this particular offering has been reviewed by some as a smartphone with a crammed keyboard and smaller screencxxiv, bringing to the forefront again, the importance of user experience. Palm on the other hand, has been much more defensive and has in fact been in the news recently potentially looking for buyers or private equity investors, in face of increased challenges from Nokia and Motorola, with Apple as the new entrantcxxv. The presence of Apple as a strong player in this segment is further highlighted by the fact the Palm has recently hired a software design engineer from Apple, who helped design the iPodcxxvi. IV (C): Define overall effectiveness of the firm’s strategy. Apple has never been a technology pioneer. Its strategy has been that of being second to the market with products based on established technology but with a much better user interface than currently available. It decision of moving into smartphone market makes perfect sense from the perspective of the ongoing mobile computing device convergence, proliferation of multi function and multi feature smartphone devices, and smartphones slowly replacing laptops as the mobile computing device of preference. Smartphones are integral to the emerging trend of the digital lifestyle. The market opportunity for such devices is large and continues to grow. Apple has had tremendous success with its iPod product line. However, phone manufacturers have begun to bundle MP3 players into their phones. Apple may have perceived this as a medium to long term threat. Its introduction of iPhone could be construed as its retaliatory response to mobile phone manufacturers by invading their turf. Most of the phones from the current smartphone makers have been geared more towards corporate users than consumers. Apple’s approach of targeting consumers first is novel from that perspective, and aims to essentially create a smartphone consumer space in line with its vision of the digital lifestyle. iTunes is likely continue as a complement to iPhone. With its renowned R&D and industrial engineering teams and its large cash reserves, Apple certainly possesses the human as well as financial means to execute its iPhone strategy. These resources would also allow it to adjust its strategy in response to any changes in market dynamics with regard to smartphones. The GSM technology seems more widespread and is growing faster in the US as well as internationally. Apple’s decision to produce a GSM-compatible phone makes sense from that perspective. However, the CDMA technology is more suited to high bandwidth mobile computing applications, therefore, Apple may have to introduce a CDMA version of iPhone is future. Apple’s choice of Cingular as the exclusive retailer in the US for the iPhone makes sense initially, since Cingular is the largest mobile phone service provider in the US. However, in the long run, especially when (and if) it decide to introduce a CDMA version, it may have to tie up with Verizon Wireless which is a CDMA shop. From the perspective of Cingular, its status as the initial exclusive retailer of iPhone, would be a great opportunity for it to lure customers towards its higher end data services, and help drive its revenue up. However, there are varying opinions on the length of this period of exclusivity , and therefore, it is not very clear as to how long Cingular would be able to capitalize on the iPhone buzz. IV (D): Highlight any other critical issues The following some other critical issues that could potentially impact the iPhone:
IV (D): Highlight any other critical issues Apple and Cingular’s partnership is bound to take the handset industry and service provider industry to new levels. Apple’s entry into the handset industry has already signaled the competition to put their act together and to put user experience at the forefront of their design. Competitors such as RIM are trying to increase the reach of their devices and competitors of Cingular may be willing to encourage that move as there is no certainty in the kind of response the partnership with Cingular and Apple will generate in the consumer space. There has been no specific move by the competitors of Cingular in response to iPhone introduction and they may be willing to wait and see if their consumers will break the contract and go to Cingular or switch to Cingular after their contract ends. Short Term Recommendations:
Competitors will find it tough to compete with this model since handset manufacturers lack the iTunes capability. However, service providers such as Verizon, T-Mobile and Sprint-Nextel will be forced to partner to companies like Omnifone to provide music on the go. The handset manufacturers will have to make their handsets capable of handling streaming music. There will a lot of consolidation or partnerships in the service provider industry and mobile music companies to match up to what iTunes provides for consumers. This will increase the added pressure on the handset manufacturers as they will have to address the handset subsidization along with feature enhancements of their handsets. For this model to be successful, Apple has to work with media companies to keep iTunes up to date with media and increase the media content in terms of TV shows being offered or new songs being available. iTunes can only be profitable when it addresses the question of scalability and consumers will be willing to buy the value proposition of “music on the go” that is tied to their cellular network plan.
Long Term Recommendations:
This will also increase how iPhone compares with existing smartphones in the corporate world. However, this will only generate a way to enter the corporate world but it will not set Apple apart from other smartphones manufacturers except for “user experience” which the handset manufacturers are anyway trying to catch up to.
International Recommendations:
V (B) 1: Implementation of 1 short-term and 1 long-term recommendation Short term recommendation: “Facilitate streaming content on iPhone from iTunes” As explained in section V-A above, this feature would allow iPhone users to download content from iTunes without going through a credit card billing transaction. To enable this mechanism, Apple would need to setup a billing arrangement with the service provider (which currently is Cingular) wherein the latter would add the iTunes content purchase price to the subscriber’s bill, and pay that amount to Apple. Cingular would need to setup a payment gateway at its end for this. The suggested timeline for introduction of this feature is six months to a year. The implementation of this “streaming” feature would result in tighter integration between iPhone and iTunes, and produce higher customer satisfaction. This would enhance the buyers surplus. This feature would, in essence, open another channel for iTunes sales and increase revenues. Additionally, avoiding the 22 cents credit card fee due to billing routed via Cingular would also add to Apple’s bottom line. Some issues may potentially arise from the introduction of this feature. Cingular may insist on sharing a part of the iTunes revenue. However, Apple is the ‘stronger’ partner in the exclusive service provider deal with Cingular. Apple can use that leverage to convey that Cingular is already benefiting by iPhone users downloading iTunes content using (and paying for) Cingular’s data services. Apple can, however, agree to share a small portion of its 22 cents savings with Cingular, in exchange for exclusivity (i.e. Cingular would not provide this billing service to any other online music/entertainment content distribution service). Another potential issues could be slow download speeds on iPhone, since iPhone is not 3G compliant. However, despite this handicap, this feature still allows the iPhone user to download the content “on-the-go” without having to enter the credit card number for the transaction. Additionally, Cingular could be persuaded to improve its data services infrastructure to provide better download speeds, since faster downloads would allow more wireless iTunes downloads and consequently, more revenues for Cingular. The iTunes website would have to be modified to allow this kind of “streaming” content for iPhones, and that would cause Apple to incur additional costs. However, Apple does have resources and capabilities on hand to be able to provide this feature. However, the cost of this retrofit can be recovered from the savings on the credit card transaction fees which are 22 cents for a 99 cents download. Long term recommendation: “Deepening the relationship with Cisco to enter the corporate users space” Building on the momentum generated with the settlement of Cisco’s lawsuitcxxviii against it, Apple should further strengthen its relationship with Cisco. Per this settlement cxxix, both Apple and Cisco can use the iPhone moniker on their products worldwide and “will explore opportunities for making their products work better together in the areas of security, and consumer and enterprise communications.” Security features on iPhone are believed to be inadequate for its use as a client device for applications of interest to business users. Data security is a big concern for corporations. Accessing corporate information via an unsecured client device (like a mobile phone) can potentially cause this data to be compromised. Additionally, there are very few productivity applications (word processor, spreadsheet, PDF viewer etc.) available on iPhone. These issues are likely to impede iPhone’s adoption by business users due to corporations’ concerns with data security. Apple’s collaboration with Cisco would help it address these shortcomings of the iPhone. In order to realize the benefits of this settlement, Apple would need to initiate the formation of a task force with representation from Apple’s iPod engineering team and Cisco’s security and communication engineering teams. A higher level coordination committee, involving both companies’ directors and VPs of engineering, should be setup to settle any disputes that might arise out of discussions on the features and applications and on sharing pertinent intellectual property. The task force and the coordination committees should be setup immediately. However, the outcome of the collaboration, namely a ‘smarter’ iPhone with better security and enterprise application capability, would be available only in the long term- in more than about a year. This arrangement would involve allocation of engineering as well as management resources on Apple’s side, and would therefore, add to the cost. This may require Apple to potentially invest more than the current R&D expense of 13% its sales. This would reduce Apple’s surplus. However, there are several benefits to this collaboration. This arrangement in essence would augment Apple’s in house product development team via greater resource complementarity with Cisco’s resources. The exposure to Cisco’s engineers would also allow Apple’s engineers and product designers to gain more expertise on computer networking and internet technology. iPhone’s security features would be improved, thereby encouraging and accelerating its adoption by business users. This would result in higher revenues and profits for Apple. Due to the high reputation of Cisco in the internet devices arena, Apple’s association with it would create a more positive image for iPhone and help position it as a business-feature-friendly secure mobile computing device. Due to Cisco’s strengths in networking area, collaboration with it would also help Apple address the recommendation on seamless Wi-Fi and cellular network switchover which has been discussed above. If Apple manages to convert this collaboration with Cisco into an exclusive arrangement, this would create barriers to imitation for other smartphone manufacturers. Due to Apple’s existing relationship with Cingular Wireless, the exclusive service provider in the US for iPhones, there is a potential for this collaboration to evolve into a three way alliance. If that happens, iPhone features could be tuned and enhanced further for corporate use. These benefits would raise the value of iPhone to corporate users, and would allow Apple to justify the current prices which are deemed high. It may also allow Apple to change higher prices, thereby increasing its surplus. V (B) 2: Changes that should be made to firm’s V-C position to support recommendation The short term recommendation of streaming iTunes content on iPhone is in line with Apple’s current value drivers of technology, delivery, brand reputation, network externalities and complements. The streaming feature requires an extension to its iTunes technology as the online delivery channel. Providing this user friendly feature would enhance the usability of iPhone with respect to iTunes and strengthen appeal of iTunes as a complement and a (positive) network externality for iPhone. As described above, this recommendation would enhance the value to the customer as well as, eventually, reduce Apple’s costs. This would result in higher buyer’s surplus as well as higher firms’ surplus. Apple’s existing resources and capabilities (e.g. its industrial design, marketing, engineering and sales infrastructure) can be leveraged for introducing the streaming feature. This streaming feature itself, as well as its seamless design would help retain (i.e. encourage download of iTunes content from iPhone) customers. Also, this feature does not call for any changes to Apple’s organizational structure, reward systems, culture or leadership. However, the value chain interactions would change slightly since the iTunes revenues resulting from the streaming feature would be collected by the service provider and paid back to Apple. In the existing model, the payment for iTunes is made directly to Apple via credit cards or the PayPal service. Apple’s relationship of exclusive service provider for iPhone in the US can be extended to this iTunes delivery model as well, as described above. To extend this model (of delivering the iTunes content through the service providers) globally, Apple would have to establish such relationships (preferably exclusive) with service providers in the international market as well. Such exclusive arrangements with service providers would server as the barriers to entry. The cost of building and maintaining these relationships would consume some of the extra revenues earned with the streaming model. Apple’s cost driver of its negotiation skills/power would need to be leveraged in its relationship with the service providers in the US as well as internationally. For the long term recommendation of collaboration with Cisco, Apple would have to leverage its existing value drivers of technology, quality, brand reputation and complements. Apple deals with multiple external partners, especially in the manufacturing, supply chain and fulfillment domains. It has added service providers to this list via its exclusive relationship with Cingular. However, Apple has not had much exposure to working in an environment of ‘equal’ partnership in a technology-sharing setting. The Cisco partnership would also figure in Apple’s value chain. Apple would have to develop another value driver of partnership skills to make this settlement with Cisco fruitful. This partnership would require Apple to dilute its culture of secrecy in favor of a win-win technological collaboration with Cisco. This deal does not necessarily call for a major organizational change. However, Apple may have to hire people skilled in the external collaboration management to run this partnership. It would need to implement mechanisms to measure the success of the partnership and to provide suitable rewards. If Cisco can be persuaded to make this collaboration and exclusive arrangement with Apple, then that would serve as a barrier to imitation by other smartphone manufacturers (since building those features would require the competitors to invest in such technology themselves or partner with one of Cisco’s smaller rivals like Juniper or Extreme Networks). Since the features built in collaboration with Cisco would be targeted mainly towards business users, these features themselves as well as Cisco’s and Apple’s combined reputation would serve as a customer retention tool. VI. CONCLUSIONS Apple has made a strategic choice to re-align its market position from a true computer hardware and software firm towards a firm which would focus on understanding the needs of the consumer electronics industry, and leverage its resources towards establishing itself as a leading provider of consumer friendly devices. Apple has taken the first steps in this direction by successfully establishing itself in this new dimension with its iPod and iTunes offering, and is striving to repeat that success manifold with its iPhone offering. With all the analysis we have done, we believe that iPhone should be a successful product for Apple and its success can be further extended by Apple’s ability to identify and work with critical partners and allies towards developing a platform of consumer solutions and not just consumer devices. Having analyzed its historic successes and organizational excellence, it is important to point out that Apple today finds itself in a new industry dynamics space where it needs to collaborate its innovative efforts with external firm like Cingular and Cisco to remain competitive in this landscape in the long run. Hence Apple will need to develop skills to work closely with its partners to identify and leverage synergies towards developing an entire platform of consumer solutions, which it has not had to do in its past. Apple has all the resources and skills to do well as a stand-alone firm, but it is yet to be seen how successful it is in developing and leveraging strategic partnerships and alliances in this highly competitive consumer market place. Also as our analysis indicates, Steve Jobs has a strong influence in Apple’s current success and in the long run, it would be interesting to see how Apple handles itself as an innovative firm in absence of Steve Jobs at its helm. So to conclude, as of today, we would recommend Apple as a good investment, based on its past success, current market position, organizational skills and of course, a strong leader such as Steve Jobs as its dynamic CEO. 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