Apple (AAPL)

TOP CONTRIBUTORS

Jane Jiang

Matthew Martos

William Papolis

Apple (NASDAQ:AAPL) designs, manufactures, and markets smart personal devices addressing the consumer electronics space through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. The company's products include the Macintosh (Mac) family of personal computers, the iconic iPod portable music player, the iPhone, and, the iPad. Additionally, Apple sells a variety accessories and peripherals including application software, printers, storage devices, speakers, and headphones^[1]. Under the leadership of Steve Jobs, Apple's co-founder who returned to head the company in 1996, Apple has demonstrated considerable acumen in implementing high-technology in product design and marketing, generating sustained enthusiasm and substantial growth.

Trends and Forces

Apple's current primary strategy is a shift away from computers towards diversified consumer electronics. The company's intention to move from a Mac/iPod-driven business model to one that includes many different product lines puts a spotlight on Apple's forays into several new markets.

Product Cannibalization

Since the establishment of the iPod as the leading MP3 player in the market, each new addition to Apple's product portfolio has included and expanded upon the features of the previous generation. For example, the IPod Touch offered the same features as the original IPod but with a larger display, WiFi, PDA applications, and a virtual QWERTY keyboard to enhance functionality. Although the evolution of the iPod line creates the possibility that an iPod owner would want more than one model, the coexistence of these products allows for the possibility of cannibalization across the portfolio. Since the iPad is arguably a hybrid of Apple's Mac and iPod products, many feared that its introduction would cannibalize the rest of Apple's product portfolio; however, according to market research firm NPD Macs were up 39% YoY in April 2010 while iPod sales were down 17% during the same span, meeting expectations given consumer substitution towards the more versatile iPhone^[2].

Dependence on new products

Apple's maintains an aggressive product innovation cycle which permits the company to maintain its unusual but highly profitable system of product pricing (not lowering prices until a new version is released). The company is notoriously tight-lipped about new products, carefully controlling the release of new product announcements.

Among the new products released at the 2009 Macworld conference, is the new MacBook Pro that Apple claims is the thinnest and lightest 17-inch notebook computer available. Its new battery can run for up to eight hours on a charge and can be recharged up to 1,000 times, the company said^[3]. However, being the first Mac laptop with a non-user serviceable battery, when the battery eventually fails, users will be submitted to a service intervention. While inconvenient, the cost is comparable to previous battery replacements.

Contrary to expectations, no news of an upgrade or a replacement for the MacMini, Apple's only headless consumer model (sold without a monitor, as opposed to the traditional Apple concept of 'all-in-one' computers); the extremely powerful 8-core MacPro is designed exclusively for the professional user, and Apple shows no signs of intending to bridge this gap.

The "Apple Halo"

Apple's self-reinforcing virtuous business model takes advantage of the technological integration of its products to transform new buyers into loyal Apple fans across the broader product line. End-to-end control over the design and manufacture of hardware, software, and peripherals alike makes high compatibility between products possible, and high-quality customer support ensures satisfaction and loyalty. Apple's differentiation between product designs and the secrecy surrounding new product launches also reinforces the Apple mystique. These factors combine to create the Apple "halo effect," where a buyer of one Apple product has a high probability of returning to Apple for other products as well.

Public image

• Apple's reception in the marketplace (more sales = higher profits) has always been closely intertwined with its perception as user-friendly, sleek, and simply "cool." Apple enjoys copious amounts of free advertising from staunch loyalists and media buzz that generate "word of mouth". Apple's customer satisfaction ratings repeatedly top the charts. This is beneficial since many highly satisfied users, in effect, become quasi-Apple salespeople as they recommend products to friends. If this level of high customer satisfaction and/or Apple's brand image start to suffer, it would unquestionably dramatically undermine sales.
• In the public eye, Steve Jobs' role in Apple is absolutely integral. This means that if Jobs is no longer available to lead the company, is implicated in legal proceedings, or even experiences substantial health issues, Apple would in all likelihood be negatively impacted. Certainly that would be the initial effect on the stock price. On January 14, 2009, Apple announce that Mr Jobs was taking a medical leave of absence until June to deal with health issues which were more complex than originally described. He plans to remain involved in major strategic decisions as CEO. How this all plays out is problematic, given Mr Jobs reputation as a hands-on manager as well as the real possibility of serious health complications.
• To the extent that it is a part of his overall public personality, Steve Jobs' perceived reputation as a "competitive deal-broker" may also prove to be a company liability, however. Many of Apple's previous partners are increasingly reluctant to sign on, often holding out for a better deal (if any) or, like Universal Music Group, are seeking alterations to agreed terms. The Motorola partnership to develop the flopped ROKR is perhaps the most notorious example of Apple's questionable partnering behavior--critics accuse Apple of burying ROKR's launch to reduce cannibalization of iPod sales, and worse yet, using the ROKR collaboration as a front to gain much of the technology now used in the iPhone.
• It is worth noting that these very factors which have the potential to hurt Apple fortunes, exist precisely because the company has been so successful in differentiating themselves in the marketplace in precisely these ways, having brilliantly translated these dynamics to market share and bottom line profitability as no other technology company in recent memory.

Competition

Mac:

Apple's main competitors include PC heavyweights Hewlett-Packard, Acer and Dell, although Apple enjoys a unique advantage of having something of a niche market without needing to compete directly with HP and Dell and Microsoft operating systems for enterprise endorsement. Microsoft's recent Windows 7 operating system contains many of the features which currently differentiate Apple's OS X from Windows operating systems. While some of the hand gestures may be replicated in the new Windows system and other screen presentation features from Apple may also be borrowed, Apple's underlying operating system, built upon a version of Unix, may still prove considerably superior. The superior physical and electrical design of the Apple products must also be given consideration.

IPod:

Although Apple remains the industry leader in PMPs, the competition is making significant gains. The popularity of flash-based PMPs is problematic for Apple, which has much stronger market presence in hard-drive based (HDD) players. To combat this, Apple may release a new flash-based line of players, in addition to a souped-up and rehauled version of HDD iPods. Apple's main competitors in this area include:

• SanDisk's Sansa players, one model of which beat the Nano to market, with more GB and a lower price point.
• Creative's Zen, which has a strong grounding in flash-based players--including the first true widescreen video PMP with the Zen Vision W.

iTunes/Apple TV:

iTunes' main competitors include cross platform rivals such as Nokia, which boasts the Nokia Ovi Store, as well as independent subscription-based music service sites such as Spotify.

Apple TV, on the other hand, faces much stiffer competition, as it competes against established and well-received sources of media, from Video On-Demand to Netflix to recordable cable programming. All three of these distribution channels offer significantly higher image quality than much of what is available on Apple TV.

iPhone:

Apple's iPhone must compete with established mobile phone and PDA companies, including the likes of Samsung , Motorola, Nokia, and Sony, many of which have significantly larger R&D budgets than Apple. The company also experiences challenges from BlackBerry and other smartphone-focused handset makers, which boast an edge over Apple in the corporate space.

Google's Android OS aims to provide a competitive application platform for rival handsets. Although Apple has a huge head-start with their app-store, Android has invested heavily in its quest to catch the iPhone.

iPad:

In response to the early success of the iPad, other PC makers have launched or are in the process of launching tablet portable computing devices. Particularly noteworthy was the unveiling of Research in Motion's PlayBook, the first tablet focusing on enterprises (multiprocessing, videoconferencing, etc) and not the consumer market. The PlayBook was built with a simpler, more web-based operating system different than that in its BlackBerry phones to facilitate app development^[4]. Dell's Streak, HP's Slate, Cisco's Cius, and Samsung's Galaxy Tab have also been released, and tablets by Sony, Toshiba, Acer and LG have been announced ^[5].

Relative to its competitors, the iPad benefits from well-established distribution channels and first mover advantage^[6]. However, competitors could offer attractive products in the form of smaller tablets with added features and at a lower price (like the pocket-sized Galaxy Tab, which has two cameras)^[6]. Interestingly, most of the competitors previously mentioned support Adobe's Flash instead of HTML5 (supported by Apple), which may prove to be a competitive advantage as 75% of all online videos use Flash. Although Apple does not support Flash in its webpages, but allows mobile app developers to code using Flash ^[7].

The iPad also competes in the e-reader market, which includes the black-and-white screened Amazon's Kindle and the Barnes & Noble Nook. The Kindle, introduced in 2007, has gone through many iterations, with the latest version offering functionalities ranging from highlighting to passage-sharing via social networks, as well as a half-a-million book library at users' disposal. The Nook, only available since October 2009, offers 3G and Wi-Fi connectivity, a color touchscreen with improved contrast, more font colors, and the ability to lend an ebook to a friend for up to two weeks^[8].

References

1. ↑ "Apple (AAPL): Description," Google Finance
2. ↑ "Is the iPad Cannibalizing Other Apple Products?" Wall Street Journal 05/17/2010
3. ↑ [www.bizjournals.com/albuquerque/stories/2009/01/05/daily24.html "Apple updates iTunes, iLife, unveils 17-inch MacBook," New Mexico Business Weekly, 1/7/09]
4. ↑ "Can RIM's PlayBook Compete with the iPad?" Wall Street Journal, 09/29/2010
5. ↑ "Acer, Sony Rev E-Reader Race," Wall Street Journal, 05/27/2010
6. ↑ ^{6.0 6.1} "iPad’s Challenge for Next Year," Trefis Investment Research, November 22, 2010
7. ↑ "Adobe's Creative Suite Sells Despite Threat of HTML5," 06/25/2010
8. ↑ "Nook vs. Kindle: The e-Reader Battle Joined," BrandChannel, 08/03/2010