5.2 Apple inc. iphone: can iphone maintain its initial momentum?

Case Studies Part 5

Case 5.2 Apple Inc.’s iPhone: Can iPhone Maintain its Initial Momentum?

‘When Apple's iPhone first went on sale in Europe six months ago, hopes were high that the device would be just as big chit there as it had been in the U.S. But analysts are now raising concerns that the iPhone may not translate as well overseas, with sales sluggish in Europe because of the device's high price and strong competition from Nokia (NOK) and others.?

• Business Week, in 2008.

‘When you consider that it launched part way through the year, with limited operator and country coverage, and essentially just one product, Apple has shown very clearly that it can make a difference and has sent a wakeup call to the market leaders.?

• Pete Cunningham, Senior Analyst, Canalys,? in 2008.

Introduction

For the quarter ending June 2008, Apple Inc. (Apple) announced that it had posted revenues of USS/.46 billion and a net profit of US#1.07 billion. The company attrib- uted these results primarily to the sales of Macintosh computers and iPhones. Apple sold 717 000 units of the iPhone in the third quarter of June 2008 compared to 270000 units in the third quarter of June 2007. Commenting on the results, Steven Paul Jobs (Jobs), CEO, Apple, said, ‘We're proud to report the best June quarter

e for both revenue and earnings in Apple's e

history!4

Ever since Apple announced its plans to launch the iPhone in January 2007, it had created a buzz among con- sumers who sought to buy the product as soon as it was launched. The craze for the iPhone was evident from the fact that Apple's fans formed long queues outside Apple’s stores to ensure that they got it immediately after the launch. iPhone was a revolutionary mobile phone, the first from Apple, and it featured some advanced features like a multi-touch screen and high memory capacity (refer to Exhibit 1 for the key features of the iPhone). Some ana- lysts said that it was one of the best launches of a new product. ;

However, a controversy erupted when Jobs announced a steep price cut on the iPhone in September 2007, barely two months after the product was launched. The announce- ment left early adopters who had purchased the iPhone ata premium, seething. While the company justified slashing the prices within LO weeks of its launch, some analysts opined that the price cut was nothing short of a public rela- tions (PR) fiasco for the company. Other growing concerns for Apple were the discrepancy in the number of units sold by Apple and number of connections activated by telecom major, ATQT Wireless Services Inc?

In addition to capturing a share in the US mobile phone market, Apple aimed to tap other markets for its iPhone. In November 2007 Apple launched the iPhone in three European markets, Germany, France, and the UK. Though Apple initially received a good response in these markets, sales later slumped due to reasons such as high price, lack of 3G capability, and carrier exclusivity. In an attempt to control its declining sales, Apple reduced the price of the iPhone by £100 in April 2008,

Despite facing several challenges and analysts’ predic- tions that Apple would face difficulties in cracking the mobile phone market as it was a late entrant, the company emerged

Exhibit 1 The key features of iPhone

Screen size — 3.5 inch (8.9 centimeter) Resolution - 320 x 480 pixels

Memory ~ 4GB/8GB

Wireless ~ Quad-band GSM-EDGE/Wi-Fi/ Bluetooth

Camera — 2 megapixels

Battery life — 5 hours talk/16 hours playback Size -115 x 61 x 11.6 milimeter

Weight — 135 grams

Operating System ~ MAC OS X

Input - Multi-touch screen

CPU - 620 MHz ARM 1176

Dense a ~ . 5.2 Apple inc.’s iPhone

c le ad

a successful player in the US. Analysts opined that with its third quarter results, Apple might not be too far from achiev- ing its target of selling 1 million iPhones by 2008. On the other hand, a few industry observers opined that it remained to be seen whether Apple would be able to maintain its initial momentum in future since the mobile phone market was already dominated by established players. Analysts also raised doubts about whether iPhone would succeed in the intensely competitive Asian market where Apple launched the product in the second half of 2008.

Background Note

Apple was founded on 1 April 1976, by Jobs, Steve Wozniak, and Ronald Wayne in Jobs’ garage. It was incorporated as Apple Computers Inc. on 3 January 1977, and was head- quartered in Cupertino, California, USA.

In 1980 Apple went public. In the same year, the com- pany netted over USS100 million and had 1000 employ- ees.® However, after its initial success, it faced some stiff competition from the market leader International Business Machine Corporation (IBM),” when IBM introduced its own personal computers such as IBM PC (model 5150) on 12 August 1981, powered by MS-DOS (Microsoft disk oper- ating system) along with the revolutionary spreadsheet application Lotus 1-2-3. As a result of this, Apple lost the business users who formed the most lucrative market seg- ment for computers at that time.

In 1985 the last remaining founder in Apple, Jobs, was expelled from the company by the then CEO John Schulley (Schulley) after a boardroom dispute. The reasons cited for Jobs’ sacking were the low sales of Mac and bad leadership.

However, in 1996 Apple still remained a marginal player in the computer industry and was losing a lot of money. Many analysts believed that the company would be wound up or sold off. In late 1996 Apple's CEO Gil Amelio (Gil) con- vinced Jobs to work as an ‘informal advisor’ at Apple, with no contractual commitments. Apple also purchased NeXT for USS 400 million. In a year’s time, Apple posted profits in three consecutive quarters starting from the last quarter of 1997. In 1998, Apple's board appointed Jobs as the ‘interim CEQ!

The first step that Jobs took after re-joining Apple was to launch the new operating system Mac OSX based on the NeXT operating system. The next groundbreaking step was Apple's foray into the retail business with the establish- ment of Apple Retail Stores. Jobs cut many loss-making projects, which were in the implementation phase, and started efforts to make Apple profitable again. The com- pany’s emphasis on design received a further boost under him. In 1998 Apple introduced one of its important prod- ucts, the revolutionary iMac.

According to analysts, the defining moment in the com- pany’s transition came with the introduction of the portable digital music player, the iPod, in 2001. The second coming of Apple as a maker of consumer electronics goods was attributed to the charismatic leadership of Jobs. The iPod went on to become a hugely successful product.

On 28 April 2003 Apple started the iTunes Music Store (iTMS),8a paid online music service available only in the US.

However, it was later modified and made available to con- sumers in other countries also, including users of Microsoft Windows.

On 11 January 2005, Apple introduced the iPod Shuffle, a digital audio player, which used a flash memory. The iPod Shuffle became popular and captured 58 per cenit of the flash player market in the US by May 2005.9 :

On 9 January 2007, in a symbolic gesture, the company dropped the word ‘Computer’ from its name and became Apple Inc. On the same day, Jobs announced the introduc- tion of another revolutionary product. This was the first mobile phone from the company, the ‘iPhone’ This, coupled with the earlier launch of a set-top box called Apple TV (also called iTV) in September 2006, completed the com- pany’s transformation from being a computer manufacturer to a full-fledged manufacturer of consumer electronics goods.

Launching the iPhone

On 29 January 2007 Jobs announced Apple's plans to launch the iPhone at Macworld Conference & Expo.!° Apple's entry into the mobile phone market with a revolutionary product called the ‘iPhone’ generated a lot of excitement among consumers. Apple created a buzz for its iPhone by slowly releasing details about the product. Much of the hype cre- ated was through word-of-mouth marketing. Analysts felt that to succeed in the highly competitive mobile phone market, Apple had had to come out with something that was truly category-defying, and the company had managed to do just that. In addition to this, some analysts felt that a lot of credit for the success of the iPhone should go to Jobs, who, they believed, had mastered the art of generating tons of free publicity, thereby creating a buzz around Apple's product launches. Rob Enderle, principal analyst with the Enderle Group,!! said, ‘What Jobs does is he focuses like a laser on what makes the thing cool, they [Apple] keep the fervor up. They are very good at managing demand and keeping people excited:12

In May 2007 Andy Neff, an analyst at Bear Stearns,!3 revealed Apple’s marketing strategy for its iPhone during the Academy Awards!4 ceremony in February 2007. Apple launched a teaser campaign on television that had a ‘hello’ tagline (refer to Box 1 for Apple's initial teaser campaign). The adsimply mentioned the word ‘hello’ and featured many eminent personalities from the film as well as television fraternity answering their calls. The commercial lasted for 30 seconds and ended with a brief glimpse of the iPhone, followed by the word ‘Hello’ and ‘Coming in June’!> followed by the company logo. The ad campaign was created by TBWA,!© an Omnicom Group agency.!”

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