Apple Inc background

Paper instructions:
write the apple Inc background,and identify three key issues in the situation.Every situation has a number of issues and your task is to identify the major issues

that you will focus your analysis on.

9-708-480
REV: SEPTEMBER 8, 2008

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Professor David B. Yoffie and Research Associate Michael Slind prep ared this case. This case was developed from published sourc es. This case
derives from earlier cases, including “Apple Computer 2002,” HBS No. 702-469, by Professor David B. Yoffie and Research Associate Yusi Wang,
and “Apple Computer, 2006,” HBS No. 706-496, by Professor David B. Yoffie. HBS cases are developed solely as the basis for clas s discussion.
Cases are not intended to serve as endorsements, sources of primary data, or illustrations of ef fective or ineffective management.

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write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
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photocopying, recording, or otherwise—without the permission of Harvard Business School.

DAVID B. YOFFIE
MICHAEL SLIND
Apple Inc., 2008

In January 2007, three decades after its incorporat ion, Apple Computer shed the second word in
its name and became Apple Inc.
1
With that move, the company signaled a fundamental shift away
from its historic status as a vendor of the Macint osh personal computer (PC) line. Mac sales remained
vital to Apple’s future, but they now accounted for less than half of its total revenue. A year and a
half later, in June 2008, the company posted results that ratified the success of its leap beyond the PC
business: In its third quarter, Apple earned a net profit of $1.07 billion on $7.46 billion in revenue, for
a 38% increase on year-ago quarterly sales. Annual results were also impressive. Sales in the 2007
fiscal year topped $24 billion, up 24% from the previous year. (See Exhibit 1a —Apple Inc.: Selected
Financial Information, plus Exhibit 1b and Exhibit 1c .) Investors, meanwhile, sent Apple’s stock to
new heights: Despite a sharp drop in early 2008, its share price had risen more than 15-fold since 2003
and now hovered near it s all-time high. (See Exhibit 2—Apple Inc.: Daily Closing Share Price.)
Non-PC product lines drove much of Apple’s financial performance. The company’s iPod line of
portable music players, together with its iTunes Store, had upended the music business. With the
iPhone, a multifunction handheld device released in June 2007, Apple aimed to do the same for the
mobile phone market. The launch of the iPhone 3G , in July 2008, involved major changes to the
offering—a revamped pricing model, a new retail channel advanced, and a platform for third-party
applications, along with 3G network service—that promised to make it still more competitive.
“Apple Inc.” was thriving to a degree that was seemingly far beyond the capacity of “Apple
Computer.” Yet critical aspects of the company’s strategic profile had changed rather little. Although
Mac sales had surged in recent years, for example, Apple’s share of the worldwide PC market
consistently failed to rise above a 3% ceiling. (See Exhibit 3—Apple Inc.: Worldwide PC Share.) CEO
Steve Jobs, therefore, faced a new variation on an old question: Was Apple’s recent success just
another temporary “up” in its up-and-down histor y, or had he finally established a sustainable
strategy for the company?
Apple’s History
Steve Jobs and Steve Wozniak, a pair of 20-something college dr opouts, founded Apple Computer
on April Fool’s Day, 1976.
2
Working out of the Jobs family’s garage in Los Altos, California, they built
a computer circuit board that they named the Apple I. Within several months, they had made 200
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708-480 Apple Inc., 2008
2
sales and taken on a new partner—A.C. “Mike” Mar kkula, Jr., a freshly minted millionaire who had
retired from Intel at the age of 33. Markkula, who wa s instrumental in attracti ng venture capital, was
the experienced businessman on the team; Woznia k was the technical genius; and Jobs was the
visionary who sought “to change the world through technology.”
Jobs made it Apple’s mission to bring an easy -to-use computer to market. In April 1978, the
company launched the Apple II, a relatively simple machine that people could use straight out of the
box. The Apple II sparked a computing revolution that drove the PC industry to $1 billion in annual
sales in less than three years.
3
Apple quickly became the industry leader, selling more than 100,000
Apple IIs by the end of 1980. In December 1980, Apple launched a successful IPO.
Apple’s competitive position changed fundamentally in 1981, when IBM entered the PC market.
The IBM PC, which used Microsoft’s DOS operating system (OS) and a microprocessor (also called a
CPU) from Intel, seemed bland and gray alongside the graphics- and sound-enhanced Apple II. But
the IBM PC was a relatively “open” system that other producers could clone. By contrast, Apple
relied on proprietary designs that only Apple could produce. As IBM-compatibles proliferated,
Apple’s revenue continued to grow, but its market share dropped sharply, falling to 6.2% in 1982.
4

In 1984, Apple introduced the Macintosh, marking a breakthrough in ease of use, industrial
design, and technical elegance. Yet the Mac’s slow processor speed and a lack of compatible software
limited its sales. Between 1983 and 1984, Apple’s net income fell 17%, leaving the company in crisis.
In April 1985, Apple’s board removed Jobs from an operational role. Several months later, Jobs left
Apple to found a new company named NeXT. Those moves left John Sculley, the CEO whom Apple
had recruited from Pepsi-Cola in 1983, alone at th e helm. Sculley had led Pepsi’s successful charge
against Coca-Cola. Now he hoped to help Apple compete against dominant players in its industry.
The Sculley Years, 1985–1993
Sculley sought to make Apple a leader in desktop publishing as well as education. He also moved
aggressively to bring Apple into the corporate worl d. Apple’s combination of superior software, such
as Aldus (later Adobe) PageMaker, and peripheral s, such as laser printers, gave the Macintosh
unmatched capabilities in desktop publishing. Sales exploded, turning Apple into a global brand. By
1990, Apple’s worldwide market share stabilized at about 8%. In the education market, which
contributed roughly half of Apple’s U.S. sales, the company held a share of more than 50%. Apple
had $1 billion in cash and was the most profitable PC company in the world.
Apple controlled the only significant alternative, both in hardware and in software, to the then-prevailing IBM-compatible standard. The company practiced horizontal

and vertical integration to a
greater extent than any other PC company, with the exception of IBM. Apple typically designed its
products from scratch, using unique chips, disk drives, and monitors, as well as unusual shapes for
its computers’ chassis. The company also developed its own proprietary OS, which it bundled with
the Mac; its own application software; and many peripherals, including printers.
Analysts generally considered Apple’s products to be more versatile than comparable IBM-compatible machines. IBM-compatibles narrowed the gap in ease of use in 1990,

when Microsoft
released Windows 3.0. But in many core software technologies, such as multimedia, Apple retained a
big lead. In addition, since Apple controlled all as pects of its computer, it could offer customers a
complete desktop solution, including hardware, software, and peripherals that allowed customers to
“plug and play.” By contrast, users often struggled to add hardware or software to IBM-compatible
PCs. As a result, one analyst noted, “The majority of IBM and compatible users ‘put up’ with their
machines, but Apple’s customers ‘love’ their Macs.”
5

around an enviable 50%. However,
senior executives at Apple realized that trouble was brewing. As IBM-compatible prices dropped,
Macs appeared overpriced by comparison. As Sculley explained, “We were increasingly viewed as
the ‘BMW’ of the computer industry. Our portfolio of Macintoshes were almost exclusively high-end,
premium-priced computers. . . . Without lower prices, we would be stuck selling to our installed
base.” Moreover, Apple’s cost structure was high: Apple devoted 9% of sales to research and
development (R&D), compared with 5% at Compaq, and only 1% at many other IBM-clone
manufacturers. These concerns led Dan Eilers, then vice president of strategic planning at Apple, to
conclude: “The company was on a glide path to history.”
6

Sculley was a marketer by training. Nonetheless, in March 1990, he took on the post of chief
technology officer (CTO). As CEO and CTO, Sculley strove to move Apple into the mainstream by
offering “products and prices designed to regain market share.”
7
That meant becoming a low-cost
producer of computers with mass-market appeal. He also sought to maintain Apple’s technological
lead by bringing out “hit products” every 6 to 12 months. In October 1990, Apple shipped the Mac
Classic, a $999 computer that was designed to compete head-to-head with low-priced IBM clones.
One year later, the company launched the PowerBook laptop to rave reviews. And in 1993, Apple
introduced the Newton, a high-profile “personal di gital assistant” (PDA). Despite Sculley’s high
hopes for the Newton, it ultimately failed.
In 1991, meanwhile, Sculley made a bold move to forge an alliance with Apple’s foremost rival,
IBM. Apple and IBM formed a joint venture, named Taligent, with the goal of creating a
revolutionary new OS. At the time, it cost around $500 million to develop a next-generation OS;
subsequent marginal costs were close to zero. The two companies also formed a joint venture, named
Kaleida, to create multimedia applications. Apple committed to switching from the Motorola
microprocessor line to IBM’s new PowerPC chip, while IBM agreed to license its technology to
Motorola in order to guarantee Apple a second source. Sculley believed that the PowerPC could help
Apple to leapfrog the Intel-based platform. Meanwhile, Apple undertook another cooperative project,
this one involving Novell and Intel. Codenamed Star Trek, it was a highly secretive effort to rework
the Mac OS to run on Intel chips. A working prototype was ready in November 1992.
Under Sculley, Apple worked to drive down costs—by shifting much of its manufacturing to
subcontractors, for example. But these efforts were not enough to sustain Apple’s profitability. Its
gross margin dropped to 34%—14 points below the company’s 10-year average. In June 1993, the
Apple board “promoted” Sculley to chairman and appointed Michael Spindler, the company
president, as the new CEO. Five months later, Sculley left Apple for good.
The Spindler and Amelio Years, 1993–1997
As head of Apple, Spindler tried to reinvigorate its core markets: education (K-12) and desktop
publishing, in which the company held 60% and 80% shares, respectively.
8
Meanwhile, Spindler
killed the plan to put the Mac OS on Intel chips and announced instead that Apple would license a
handful of companies to make Mac clones. Those companies would pay roughly $50 per copy for a
Mac OS license. International growth became a key objective for Apple during the Spindler years. (In
1992, 45% of its sales came from outside the United St ates.) Spindler also moved to slash costs, cutting
16% of Apple’s workforce and reducing R&D spending. Yet despite Spindler’s efforts, Apple lost
momentum: A 1995 Computerworld survey of 140 corporate buyers found that none of the Windows
users would consider buying a Mac, while more than half the Apple users expected to buy an Intel-based PC.
9
(See Exhibit 4—Shipments and Installed Base of PC Microprocessors.) Like Sculley,
moreover, Spindler had hoped that a revolutionary new OS would turn the company around, but
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708-480 Apple Inc., 2008
4
prospects for a breakthrough faded. At the end of 1995, Apple and IBM parted ways on Taligent and
Kaleida. After spending more than $500 million, neither side wanted to switch to a new technology.
10

Then, in its first fiscal quarter of 1996, Apple reported a $69 million loss and announced further
layoffs.
11
Two weeks later, Gilbert Amelio, an Apple director, replaced Spindler as CEO.
Amelio sought to push Apple into high-margin segm ents such as servers, Internet access devices,
and PDAs. Soon after he arrived, he proclaimed that Apple would return to its premium-price
differentiation strategy. In addition, while Amelio saw the pressing need for a new OS, he canceled
development of the much-delayed next-generation Mac OS. In December 1996, Amelio announced
that Apple would acquire NeXT Software and develop a new OS based on work done by NeXT. He
also announced that the founder of NeXT, Steve Jobs , would return to Apple as a part-time adviser.
Meanwhile, Amelio led the company through three reorganizations and several deep payroll cuts.
12

Despite these austerity moves, Apple lost $1.6 billion on his watch, and its worldwide market share
dropped from 6% to 3%.
13
The Apple board forced Amelio out, and in September 1997 Steve Jobs
became the company’s interim CEO.
Steve Jobs and the Apple Turnaround
Steve Jobs moved quickly to shake things up. In August 1997, he announced that Microsoft had
agreed to invest $150 million in Apple and had also reaffirmed its commitment to develop core
products, such as Microsoft Office, for the Mac thro ugh August 2002. Jobs also brought the Macintosh
licensing program to an abrupt end. Since the announcement of the first licensing agreement, clones
had reached 20% of Macintosh unit sales, while the value of the Mac market had fallen 11%.
14

Convinced that clones were cannibalizing Apple’s sales, Jobs refused to license the latest Mac OS. In
addition, Jobs consolidated Apple’s product range, reducing the number of its lines from 15 to 3.
Jobs’s first real coup was the launch of the iMac , in August 1998. The iMac lacked a floppy-disk
drive but incorporated a low-end CPU, a CD-ROM drive, and a modem, all housed in a distinctive
translucent case that came in multiple colors. It also supported “plug-and-play” peripherals, such as
printers, that were designed for Windows-based machines. (Previous Macs had required peripherals
that were built for the Apple platform.) Roughly three years after its launch, the iMac had sold about
6 million units, compared with sales of 300 million PCs during the same time frame.
Under Jobs, Apple continued its restructuring efforts. It outsou rced the manufacturing of Mac
products to Taiwanese contract assemblers and revamped its distribution system, eliminating
relationships with thousands of smaller outlets and expanding its presence in national chains. In
November 1997, Apple launched a website to sell its products directly to consumers for the first time.
Internally, Jobs worked to streamline operations and to reinvigorate innovation. Under his watch,
Apple pared down its inventory significantly and increased its spending on R&D. (See Exhibit 5—PC
Manufacturers: Key Operating Measures.)
Another priority for Jobs was to reenergize Apple’s image. The company began promoting itself
as a hip alternative to other computer brands. For Jobs, Apple was not just a technology company; it
was a cultural force. Not coincidentally, perhaps, Jobs retained his position as CEO of Pixar, an
animation studio that he had cofounded in 1986. In collaboration with Disn ey, Pixar produced such
major films as Toy Story and Monsters, Inc.
15
(In 2006, Disney bought Pixar. Jobs, who had become
Disney’s largest shareholder, assumed a seat on the Disney board.
16
)
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Apple Inc., 2008 708-480
5
The Macintosh Business in the 21st Century
In 2008, the sale of Macintosh computers remain ed a pivotal business for Apple, notwithstanding
the company’s name change. “We think PCs are more important than they were five years ago,” Jobs
said in 2007.
17
That year, Mac sales accounted for 43% of Apple’s total revenue.
18

Apple put a high premium on creating machines that offered a cutting-edge, tightly integrated
user experience. Apple charged premium prices as well. Its top-of-the-line model, the Mac Pro, cost
$2,799. While it had a sleek metal case and featured high-end graphics capability, it did not come
with a monitor. For $599 to $1,799, users could buy an Apple Cinema Display to accompany the Mac
Pro. At the low end of its product line, Apple offered the Mac mini; ranging in price from $599 to
$799, the mini required users to purchase a keyb oard, a mouse, and a monitor separately. Notebook
models accounted for the lion’s share of Mac sales. They included the MacBook ($1,099 to $1,499), the
MacBook Pro ($1,999 to $2,799), and ultra-thin MacBook Air ($1,799 to $2,598).
19

In marketing its Mac products, Apple highlighted features that differentiated them from other
PCs while also emphasizing their interoperability with other machines. Attractive Apple design
factors (“Design that turns heads”), ease of use (“It just works”), security (“ 114,000 Viruses? Not on a
Mac”), and high-quality bundled software (“Awesome out of the box”) were among the qualities that
distinguished the Macintosh line. At the same time, Apple trumpeted the Mac as an “Everything-ready” device that worked well with other devices.
20
Over time, the Mac had become a less closed
system, incorporating standard interfaces such as the USB port. Owners of a Mac mini could use a
non-Mac keyboard, for example, and users of a non-Mac PC could attach it to an Apple display.
21

Technology and Innovation
Under Jobs, the seeds of earlier efforts to engineer Macintosh products for the Intel platform at last
came to fruition. In June 2005, Apple announced that it would abandon its longstanding use of
PowerPC chips in favor of Intel microprocessors.
22
Apple began shipping two products built with
Intel Core Duo chips in January 2006, and the entire Macintosh line ran on Intel chips by early 2007.
23

Driving the leap to Intel was Jobs’s frustration with the PowerPC chip line. The makers of that
line, IBM and Freescale Semiconductor (a spin-off from Motorola), had failed to match Intel’s
performance, especially in low-power applications. High energy use drained batteries, created excess
heat, and blocked advances in laptop performance. The latter point was crucial. Portable machines
made up an increasingly large share of Apple’s PC revenue—61% in 2007, up from 45% just two
years earlier.
24
Intel’s dual-core technology, which in effect allowed two chips to occupy one piece of
silicon, enabled Apple to build laptops that were both faster and less power-hungry.
25
With “Intel
inside,” the Mac also became a machine that could easily run Windows and other third-party
operating systems: By loading a software package such as VMware Fusion or Parallels Desktop,
Macintosh users could operate both Windows- and Mac-based applications.
26
That capability offset a
longstanding disadvantage to choosing a Mac—the relative lack of Macintosh software.
On the operating system front, Apple introduced a fully overhauled OS in 2001. Called Mac OS X
and based on UNIX, the new operating system offere d a more stable environment than previous Mac
platforms.
27
Apple issued upgrades of OS X every 12 to 18 months, with the aim of generating not
only extra revenue, but also new interest in the Ma c and greater loyalty among existing Mac users. In
October 2007, it launched its sixth major OS X release, called Leopard. Just two months later, Jobs
called Leopard the “most successful” OS X release ever: With sales totaling 4 million copies, it had
already reached 20% of the Macintosh installed base.
28

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708-480 Apple Inc., 2008
6
Proprietary, Apple-developed applications made up a growing segment of the company’s efforts
to support the Macintosh line. Instead of relyin g on independent software vendors (ISVs), Apple
built programs such as those in the iLife suite (iPhoto, iTunes, iWeb) on its own. In 1998, when Adobe
Systems rejected Jobs’s request to create a vide o-editing program for the Mac, Apple launched an
internal project to create Final Cut Pro.
29
Such moves required Apple to assume significant
development costs.
30
Meanwhile, the company continued to depend on the cooperation of key ISVs—
especially Microsoft. In 2003, after Apple developed the Web browser Safari, Microsoft announced
that it would no longer develop Internet Explorer for the Mac. Apple did receive assurances in 2005
that Microsoft would develop its Office suite for Macintosh for at least another five years.
31
Full
interoperability with Office products was critical to Apple’s market viability. Microsoft benefited
from this arrangement as well. By one estimate, it raised up to $1 billion by selling Office to Mac
users. (In January 2008, Microsoft released Office:Mac 2008.) All the same, Jobs hedged his bets by
developing iWork productivity applications, including Pages, Keynote, and Numbers.
32

Distribution and Sales
Apple opened its first retail store in McLean, Virginia, in May 2001.
33
As of June 2008, it operated
215 stores, and its retail division accounted for 19% of total revenues. Although most of the stores
were in the United States, the chain also included outlets in Australia, Canada, China, Italy, Japan,
and the United Kingdom.
34
Observers viewed Apple’s retail st rategy as a huge success: One analyst
said that the company had become “the Nordstrom of technology.”
35
By mid-2008, its stores had
logged more than 350 million visits; during a single quarter in 2007, they drew 31 million visitors.
36

The Apple retail experience gave many of those visitors their first exposure to the Macintosh product
line, and the company estimated that “new to Mac” consumers bought half of the 1.4 million Macs
sold in Apple stores during the 2007 fiscal year.
37
(Apple boosted its presence in other retail venues as
well. In late 2006, for example, it entered a pa rtnership with Best Buy, and by the end of 2007
customers could shop for Mac products in 270 Best Buy outlets.
38
) A key factor in bringing people
into the stores, most analysts believed, was the po pularity of the iPod. More generally, observers
speculated that an iPod “halo effect” had benefited Apple’s Mac business.
39

Macintosh sales were indeed robust. In the fiscal year 2007, Mac revenues came to $10.3 billion, for
a year-over-year increase of 40%. Unit sales exceed ed 7 million, up from 5.3 million in the previous
year.
40
(See Exhibit 6—Apple Inc.: Unit Sales by Product Category.) Mac sales thus grew three times
as fast as the overall PC market, which increased by about 14% in 2007.
41
By mid-2008, Apple had
become the third-largest PC maker within the U.S. market, with a market share of 8.5%.
42
Yet Apple’s
share of the worldwide PC market had edged up only slightly in recent years; it remained in the 2%
to 3% range, where it had languished for nearly a decade.
43

The Evolving Personal Computer Industry
From its earliest days in the mid-1970s, the industry had experienced explosive growth. Although
Apple pioneered the first usable “personal” computing devices, IBM was the company that brought
PCs into the mainstream. IBM’s brand name and product quality helped it to capture the lion’s share
of the market in the early 1980s, when its customers included almost 70% of the Fortune 1000. IBM’s
dominance of the PC industry started to erode in the late 1980s, as buyers increasingly viewed PCs as
commodities. IBM tried to boost its margins by building a more proprietary PC, but instead it lost
more than half of its market share. By the early 1990s, “Wintel” (the Windows OS combined with an
Intel processor) had replaced “I BM-compatible” as the industry standard. Throughout the 1990s,
thousands of manufactur ers—ranging from Compaq and Dell to no-name clone makers—built PCs
around building blocks from Microsoft and Intel.
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Apple Inc., 2008 708-480
7
In 2008, by one estimate, the number of PCs in use around the world would top 1 billion.
44
In
2007, worldwide PC shipments totaled 269 million units.
45
The U.S. market and the Asia/Pacific
market (which excluded Japan) each accounted for about 26% of total shipments, Latin America for
9%, and Japan 5%. The largest regional market, EMEA (Europe, Middle East, and Africa), absorbed
34% of worldwide PC shipments.
46
Annual PC unit growth had averaged roughly 15% from the mid-1980s through 2000. After leveling off sharply earl y in the following decade, growth resumed at a
10% to 15% rate annual over the next several years. A rising share of that growth occurred in Asia
and in other emerging markets. In the United States, where an estimated 60% of households already
owned a PC, the PC market grew by only about 3% per year.
47

Revenue growth, meanwhile, did not keep pace with volume growth—largely because of strong
downward pricing pressure. By one estimate, the average selling price (ASP) for a PC declined from
$1,699 in 1999 to $1,034 in 2005, or by a compound annual rate of 8% per year.
48
During that period,
prices for key components (CPUs, memory, and hard disk drives) dropped even faster, by an average
annual rate of 30%.
49
PC pricing then leveled off somewhat, partly because consumer demand shifted
toward powerful machines that could run media and gaming applications, and partly because
demand shifted from desktop units to more-exp ensive notebook models. In 2007, the ASP for
notebook PCs was about $1,000, while the desktop ASP ran at roughly $700.
50
For PC vendors, the
upshot of these pricing trends was persistently low profitability: The average profit margin on a PC
in 2007 was less than 5%.
51

PC Manufacturing
The PC was a relatively simple device. Using a screwdriver, a person with relatively little
technological sophistication could assemble a PC from four widely available types of components: a
microprocessor (the brains of the PC), a motherboard (the main circuit board), memory storage, and
peripherals (the monitor, keyboard, mouse, and so on). Most manufacturers also bundled their PCs
with an operating system. While the first PC was a desktop machine, by 2008 there was a wide range
of forms, including laptops, notebooks, sub-notebooks, workstations (more powerful desktops), and
servers (computers that acted as the backbone for PC networks).
In 2008, using off-the-shelf components, it cost roughly $400 to produce a mass-market desktop
computer that would retail for $500. The largest cost element was the microprocessor, which ranged
in price from $50 to more than $500 for the late st CPU. The other main components of a basic
machine—motherboard, hard drive, memory, chassis, power, and packaging—together cost between
$120 and $250. A keyboard, mouse, modem, CD-ROM and floppy drives, and speakers totaled $50 to
$140; a basic monitor cost about $75; and Windows Vista and labor added about $70 and $30,
respectively, to the final cost. A PC maker could pu sh its retail price down to $300 by using a less
powerful CPU, cutting back on hard drive capacity and memory, and offering lower-quality
peripherals. Alternatively, by tailoring a machine for computer gaming enthusiasts, a manufacturer
could build a PC whose sale price topped $3,000.
52

As components became increasi ngly standardized, PC makers cut spending on research and
development. In the early 1980s, the leading PC co mpanies spent an average of 5% of sales on R&D.
By the early 2000s, Dell Computer—then the industry leader—devoted less than 1% of its revenue to
that purpose. Rather than invest heavily in R&D, companies such as Dell looked to innovations in
manufacturing, distribution, and marketing to give them a competitive edge. Many firms, for
example, turned to contract manu facturers to produce both components and entire PCs. At first,
these contractors focused on handlin g simple manufacturing tasks at flexible, high-volume plants in
low-cost locations. Over time, they moved into mo re complex areas, such as design and testing.
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708-480 Apple Inc., 2008
8
Buyers and Distribution
PC buyers fell into five categories: home, small- and medium-sized business (SMB), corporate,
education, and government. In 2007, home buyers purchased about 42% of the world’s computers,
while SMB customers accounted for roughly 32% of the PC market, large corporations for 12%,
education for 8%, and government for 6%.
53
(In recent years, the home share of the market had risen
by a few percentage points; the business share ha d gone down slightly, partly because of slowing
corporate PC upgrade cycles.
54
) The criteria that guided PC purchases varied by market segment.
Business customers made decisions according to a combination of service and price. Education
buyers focused on a combination of price and software availability. The consumers who made up the
home market, traditionally very sensitive to cost, had begun in recent years to value stylish product
design, as well as mobility and wireless networking capability.
In the 1980s, most PC buyers were business managers with relative ly little technological
sophistication. In general, they bought no more than a few PCs at a time, placed great emphasis on
receiving service and support, and preferred to buy established brands throug h full-service dealers.
In the early 1990s, however, as customers became more knowledgeable about PCs, alternative
channels emerged. Corporate information technolo gy managers and purchasing departments, often
operating under tight budgets, began to buy large numbers of PCs directly from vendors or their
distributors. Superstores (Wal-Mart, Costco) and elec tronics retailers (Best Bu y, Circuit City) catered
to the consumer and SMB markets. Web-based re tailers, which sold PC merchandise at steep
discounts, also saw a sharp increase in demand. By the early 2000s, the so-called “white box”
channel—which featured generic machines assembled by local entrepreneurs—had become the
largest channel for PC sales. Although branded PC makers had recaptured a portion of overall
market share in recent years, white-box PCs still made up 37% of worldwide shipments as of 2006,
and their share of key emerging markets remained particularly large.
55

PC Manufacturers
In 2007, the four top PC vendors—Hewlett-Packard, Dell, Acer, and Lenovo—accounted for more
than 50% of worldwide PC shipments. Below this top tier were various PC brands, but none of them
could claim more than a 5% share.
56
(See Exhibit 7—PC Manufacturers: Worldwide Market Shares.)
Even as these companies continued to consolidate the PC market, their fortunes were very much in
flux. (See Exhibit 8—Apple Competitors: Selected Financial Information.)
Hewlett-Packard (HP), following a rough period in the wake of its acquisition of Compaq
Computer in 2002, had staged an impressive comeback. In 2006, HP overtook IBM to become the
world’s largest technology company (with sprawling operations in imaging and printing, software
and services, and data storage); it also surpassed Dell as the world’s leading PC maker. Under CEO
Mark Hurd, HP rebuilt its PC business around the company’s strong presence in retail channels
(where sales via 110,000 outlets worldwide made up 40% to 45% of its PC revenue) and around a
“decommoditization” strategy. That strategy (exemplified by the slogan “The Computer Is Personal
Again”) emphasized product design, stepped-up R&D spending, and aggressive consumer
marketing.
57
Dell, meanwhile, had stumbled. In the early 2000s, it had been the leading PC vendor, in
terms of both market share and profitability. Its di stinctive business model, which combined direct
sales and build-to-order manufacturing, made for significant cost savings and enabled its products to
become the favorite of corporate IT managers. In 2007, more than 80% of its revenues came from the
corporate market. Yet Dell did not adapt quickly to the changing needs of the PC marketplace. In
January 2007, three years after handing control of the company to a successor, founder Michael Dell
returned as CEO and initiated a far-reaching tr ansformation plan. Under his new strategy, the
company doubled its investment in design an d began releasing consumer-friendly products,
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Apple Inc., 2008 708-480
9
including a notebook PC that came in eight colors. More important, it moved into retail distribution
for the first time since 1994. By January 2008, De ll had made deals to sell its PCs through Wal-Mart,
Best Buy, and Staples, as well as through major chains in Europe, China, and Japan. Boosting
international sales was another high priority for Dell, which had long focused on the U.S. market.
58

Two Asian companies, Acer and Lenovo, focused much of their activity on emerging markets. But
they also benefited from acquisitions of high-profile U.S. PC brands. With its purchase in August
2007 of Gateway, the number-three U.S. PC brand, Taiwan-based Acer became the third-largest PC
vendor in the world. As part of that deal, Acer al so acquired Packard-Bell, a PC maker with a strong
presence in Europe (where Acer also was a leading brand). Given the strength of all three brands in
retail channels, Acer was poised to target the gr owing consumer market. Similarly, its emphasis on
producing notebook PCs (worldwide, it sold almost as many notebooks as Dell) aligned the company
with current trends.
59
China-based Lenovo vaulted into the front ranks of PC vendors in 2005, when
it acquired IBM’s PC business for $1.75 billion. Although Lenovo would retain the right to use the
IBM logo on ThinkPad notebooks and ThinkCentre desktop PCs until 2010, it was phasing out its
reliance on the IBM brand, whose reach did not extend far beyond the slow-growing corporate
market. Lenovo’s greatest asset was its position in China, where it commanded a 35% market share.
Under its CEO (a former Dell executive named William Amelio), Lenovo pursued a broad global
strategy, operating headquarte rs both in Beijing and in Raleigh, North Carolina.
60

Suppliers, Complements, and Substitutes
Suppliers to the PC industry fell into two catego ries: those that made products (such as memory
chips, disk drives, and keyboards) with many sources; and those that made products—notably
microprocessors and operating systems—that had just a few sources. Products in the first category
were widely available at highly competitive prices . Products in the second category were supplied
chiefly by two firms: Intel and Microsoft.
Microprocessors Microprocessors, or CPUs, were the hardware “brains” of a PC. In 2006,
microprocessor sales totaled $33.2 billion.
61
For many years, Intel was the dominant producer of PC-compatible CPUs. But that market became more co mpetitive in the 1990s, when companies like AMD
(Advanced Micro Devices) and Transmeta challenged Intel with directly competitive products. Still,
Intel remained the market leader by virtue of its powerful brand and its large manufacturing scale. In
2007, despite inroads by AMD into Intel’s share of the microprocessor market, Intel continued to
supply more than 80% of all PC CPUs.
62
Since 1970, CPU prices (adjusted for changes in computing
power) had dropped by an average of 30% per year.
63

Operating systems An OS was a large piece of software that managed a PC’s resources and
supported its applications. After the launch of th e IBM PC, Microsoft dominated the PC OS market,
in part because it offered an open standard that multiple PC makers could incorporate into their
products. During the 1980s, Microsoft sold a relati vely crude OS called MS-DOS. In 1990, Microsoft
started to challenge Apple’s technical supremacy by introducing Windows 3.0, an OS that featured a
Macintosh-like graphical interface. Although Windows was generally inferior to the Mac OS, users—
and corporate IT managers, in particular—eagerly adopted it. During the 1990s, Microsoft issued a
new, highly profitable release of Windows every few years. Windows XP, released in October 2001,
sold 17 million copies in its first eight weeks on the market. Developed at a cost of $1 billion, XP
initially garnered Microsoft between $45 and $60 in revenue per copy, according to analysts’
estimates.
64
The latest edition of Windows, Vista, fared less well in its early going. Released in
January 2007 after numerous delays, Vista received low marks for its sluggish performance, and
users were reluctant to upgrade to it from XP. In response to user complaints, Dell even revised its
Vista-only offer on new PCs and began of fering PCs with XP preloaded on them.
65
Meanwhile,
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708-480 Apple Inc., 2008
10
Microsoft reportedly aimed to issue its next upgrade, Windows 7, in 2010.
66
In 2007, 85% to 90% of all
PCs in the world ran on some version of Windows.
67

Application software The value of an OS corresponded directly to the quantity and quality of
application software that was available on that platform. The Apple II, for example, was a hit among
business users because it supported VisiCalc, the first electronic spreadsheet. Other important
application segments included word processing, pr esentation graphics, desktop publishing, database
management, personal finance, and Internet browsing. Throughout the 1990s and into the next
decade, the number of applications available on PCs exploded, while average selling prices (ASPs)
for PC software collapsed. Microsoft was the larges t vendor of software for Wintel PCs and, aside
from Apple itself, for Macs as well.
68
However, ISVs wrote the majority of PC applications.
Alternative technologies By 2008, PCs were far easier to use than they had been two decades
earlier. They had also begun to enter the price range of consumer electronics (CE) products. As a
result, the “digital convergence” of PC and CE products had become a significant factor in the PC
marketplace. Various alternative devices—ranging from handheld PDAs to smartphones, from TV
set-top boxes to game consoles—had begun to supp lement or even to replace PCs. Advanced game
devices like Sony PlayStation3, for example, allowed consumers to not only run traditional video
games, but also to play DVDs and CDs, surf the Web, and play games directly online.
Beyond Macintosh
A fast-increasing portion of Apple’s core operations involved non-Macintos h business areas that
were less than a decade old (iPod, iTunes) or, indeed, less than a year old (Apple TV, iPhone). These
product lines set Apple on a path toward becoming a full-fledged digital convergence company.
The iPod Phenomenon
Apple launched the iPod, a portable digital music player based on the MP3 compression standard,
in November 2001.
69
Thanks to its sleek design, it soon became “an icon of the Digital Age,” in the
words of one writer.
70
In 2008, Apple offered a full line of iPod devices, ranging in price from $49 to
$499. At the low end was the 1GB iPod shuffle, whic h randomly played up to 240 songs. Apple also
offered the iPod nano, which stored up to 2,000 songs or up to 8 hours of video content; the iPod
classic, whose 160GB version could hold 40,000 songs or 200 hours of video; and the iPod touch,
which stored up to 7,000 songs and offered many new features, including WiFi connectivity.
71
ASPs
for products in the iPod line ran $50 to $100 higher than that of other MP3 players.
72

The economics of the iPod were stellar by CE industry standards, with gross margins that ranged
from 30% to 35%.
73
In 2007, analysts estimated that Apple paid a bill of materials (BOM) of $127 for
an 80GB iPod classic, which retailed for $249. The largest expense in the BOM was for the hard drive,
which cost $78.
74
In the case of the iPod nano, which used flash memory instead of a hard drive,
margins were higher: An 8GB nano (which retailed for $199) had a BOM of $83, with flash
components accounting for $48 of that sum. As the cost of flash memory dropped, Apple built an
increasing share of its iPod line around flash drives.
75
Maintaining relationships with key suppliers—
ranging from Samsung, which manufactured the iPod’s video-audio chip, to Toshiba, which made
many of its hard disk drives—was crucial to Apple’s strategy for the device. Forging deals with flash
manufacturers was especially important. In November 2005, the company agreed to pay $500 million
up-front to Intel and Micron to secure “a substant ial portion” of the output from a new flash-memory
joint venture. It made similar deals with Hynix, Samsung, and Toshiba.
76
In mid-2007, Apple was on
track to command roughly 25% of all flash production for use either in iPod products or in the
iPhone, which also relied on flash memory.
77

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Apple Inc., 2008 708-480
11
As of mid-2008, Apple had sold more than 150 million iPods. According to most estimates, the
device commanded 70% or more of the U.S. market for portable music players.
78
Rivals in the MP3
player market included Creative, Samsung, and Sony. The most prominent challenge to the iPod
came from Microsoft, which introduced its Zune line of music players in late 2006. At the hardware
level, Zune players roughly matched comparable iPod models and included features—wireless
music-sharing capability, an FM tuner—that the iPod lacked. According to some reviewers, though,
Zune software and the Zune Marketplace conten t store were inferior to iTunes offerings.
79
Most iPod
competitors had converged on the use of Microsoft’s WMA standard.
80
(See Exhibit 9—iPod
Competitors: Comparison of Models and Prices for MP3 Players.)
Initially, the iPod could sync only with Macs. But in August 2002 Apple introduced an iPod for
Windows.
81
In other ways, too, the company’s approach to developing and marketing the iPod was
less closed than its longtime approach to deploying the Macintosh. In this regard, the iPod accessory
market was particularly important. By 2007, that market—consisting of 1,000-plus advertised items—
generated more than $1 billion in sales. For ever y $3 dollars spent on an iPod, according to one
analyst, consumers spent another $1 on iPod add- on products. And Apple, through a program that
licensed its “Made for iPod” logo, earned an esti mated 5% of the retail price of such items.
82

The iTunes System
One key element of the iPod system was the iTunes Music Store, an online service that Apple
launched in April 2003. For 99 cents per song, visito rs could download music offered by all five major
record labels and by thousands of independent music labels. Users could play a downloaded song on
their computer, burn it onto their own CD, or transfer it to an iPod. Initially available only to Mac
users, the iTunes store became Windows-compatible in October 2003. Within three days of the launch
of that service, PC owners had downloaded 1 million copies of free iTunes software and had paid for
1 million songs.
83
By mid-2007, users had downloaded more than 500 million copies of the Windows
version of iTunes.
84
The first legal site that allowed music downloads on a pay-per-song basis, iTunes
became the dominant online store of its kind. By June 2008, it had sold more than 5 billion songs, and
it claimed a 70% share of the worldwide digital music market. It was also the largest U.S. music
retailer of any kind, having surpassed Wal-Mart and Best Buy in music sales earlier that year.
85

The introduction of iTunes had a galvanic impact on iPod sales. Before the advent of iTunes,
Apple sold an average of 113,000 iPods per quarter; by the quarter that ended December 2003, iPod
sales had shot up to 733,000 units—and then continued to rise.
86
(See Exhibit 10 —iPod and iTunes:
Quarterly Unit Sales.) In 2007, combined iPod and iTunes sales accounted for 45% of total revenue at
Apple.
87
The direct impact of iTunes on Apple’s prof itability was far less impressive. Of the 99 cents
that Apple collected per song, as much as 70 cents went to the music label that owned it, and about 20
cents went toward the cost of credit card processing. That left Apple with only about a dime of
revenue per track, from which Apple had to pay for its website, along with other direct and indirect
costs.
88
In essence, Jobs had created a razor-and-blade business, only in reverse: Here, the variable
element served as a loss leader for a profit-driving durable good.
89

Central to the iTunes model was a set of standards that guarded both the music labels’ intellectual
property and the proprietary technology inside the iPod. An Apple-exclusive “digital rights
management” (DRM) system called FairPlay protected iTunes songs against piracy by limiting to five
the number of computers that could play a downlo aded song. FairPlay enabled Jobs to coax music
executives into supporting the initial iTunes ventur e. It also helped fuel iPod sales, since no
competing MP3 player could play FairPlay-protected songs.
90
Observers called iTunes a “Trojan
horse” that allowed iPod-specific standards to invade users’ music libraries and, in effect, to lock out
other music players.
91
The iPod, meanwhile, could play content recorded in most standard formats.
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708-480 Apple Inc., 2008
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Despite the success of iTunes, Apple had a tens e relationship with music companies, which
balked at its dominance of the digital music market and objected in particular to its fixed pricing
structure. In July 2007, after Appl e refused to renegotiate its flat 99-cent-per-song price, Universal
Music Group declined to renew its annual contract with iTunes and instead opted to license content
to Apple on an at-will basis. Other big labels, yi elding to the power of the iTunes market share,
renewed their iTunes contracts largely on Apple’s terms.
92
At the same time, they pursued other
outlets for selling digital music. Napster, Rhapsody, Wal-Mart.com, and Zune Marketplace, among
other online music stores, each had distribution deals with all four remaining major labels (EMI, Sony
BMG, Universal, and Warner Brothers). These stores sold individual song downloads at 99 cents or
less per track, and a few of them also offered subscription plans that allowed unlimited listening for
$5.99 to $14.99 per month. Most of these services used Microsoft’s WMA format. Meanwhile, mobile
telephony companies such as AT&T and Verizon also sold digital music, mainly through subscription
services.
93
In April 2008, the social network site MySpace announced plans to open an online music
store in partnership with major music labels.
94

A new competitive threat to iTunes emerged in September 2007, when Amazon.com began
distributing DRM-free copies of music from the fo ur big labels. To secure rights to that music,
Amazon agreed to use variable pricing, with song prices ranging from 89 cents to more than $1
apiece.
95
By mid-2008, most major online music retailers—including Napster, Rhapsody, and Wal-Mart—offered DRM-free songs, variable pricing, or both. Apple, for its part, had

signed a deal with
EMI in May 2007 that allowed it to sell DRM-free songs under its new “iTunes Plus” offering. Other
labels, however, had so far refused to license their content to Apple for DRM-free distribution.
96

The Apple TV “Hobby”
Starting in 2005, Apple moved to adapt its digita l music model to digital video. That year, it
created a video iPod device that could play movies, TV shows, and music videos.
97
By 2008, all iPods
other than the shuffle model could play video files, and users could download TV shows (for $1.99 or
more per episode) and movies (for $9.99 or more apiece) from iTunes.
98
In addition, Apple launched
a video rental offering in early 2008. Fees ($2.99 to $3.99 for a 24-hour rental) were comparable to
those of other rental services, and the movie selection included titles from all six major film studios.
99

By mid-2008, iTunes users were buying or renting more than 50,000 movies per day, and iTunes had
become “the world’s most popular online movie store.”
100
Nonetheless, as Jobs conceded, Apple’s
digitial video business fell short of the standard set by its music offerings.
101
Lack of cooperation from
content providers was largely to blame: In August 2007, for example, NBC Universal announced that
it would stop licensing its TV shows for sale on iTunes.
102

In a related effort, Apple took steps to bring digi tal video content directly into consumers’ living
rooms. In March 2007, the company released the Apple TV, a device that enabled users to stream
movies and TV shows to a television set—after downloading that content from iTunes via PC. High
pricing and limited functionality kept early sales of the device low. In July 2007, Jobs referred to the
Apple TV as “a hobby,” suggesting that it was of lower priority than Apple’s three main businesses
(Macintosh, iPod-iTunes, iPhone).
103
But in January 2008 he released “Apple TV, take two,” which
featured increased memory, lower pricing, and improved functionality. Apple TV users could now
acquire content for their TV directly from iTunes, while bypassing their PC entirely.
104

The iPhone Gamble—Version 1.0
Apple and its distribution partner, the mobile op erator AT&T Mobility (formerly called Cingular
Wireless), began selling the iPhone in late June 2007. The iPhone was Apple’s bid to unite the iPod
with a mobile phone service. But the company’s real goal for the product, Jobs said, was to “reinvent
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Apple Inc., 2008 708-480
13
the phone.”
105
The iPhone was a multifunction communication device—“the Internet in your pocket,”
in Jobs’s words—that shared ma ny qualities with smartphones.
106
It featured e-mail capability, Web
access, and text messaging; a calendar, an address book, and other PDA functions; and a 2-megapixel
camera.
107
The entire system ran on a specially ad apted version of Apple’s OS X platform.
108

Buyers of the iPhone, during its first year of availability, paid $399 for an 8-GB model and $499 for
a 16-GB model. In a departure from standard industry practice, AT&T did not cushion those prices
with a subsidy.
109
The iPhone therefore stood out in a worl dwide market where handsets that cost
$300 or more accounted for only 5% of total sales.
110
(In the U.S. market, where operator subsidies
were particularly generous, an estimated 80% of handset transactions were for less than $100
apiece.
111
) Service plans for the iPhone, available ex clusively from AT&T, required a two-year
contract and started at $59.99 per month. While that fee was $20 per month more than AT&T’s
standard wireless package, it covered both voice and data service.
112

AT&T, the largest U.S. mobile operator, made concessions to Apple that no handset maker had
previously received in a carrier distribution agreement.
113
(Verizon Wireless, the second-largest
operator, reportedly turned do wn a similar deal with Apple.
114
) In exchange for a five-year
exclusivity period in the U.S. market, AT&T gave Apple near-complete control over the development,
and branding of the iPhone.
115
Apple also barred AT&T from distributing the iPhone through third
parties, such as Best Buy and Radio Shack. Most important, instead of subsiding iPhone sales, AT&T
agreed to share service revenue with Apple. According to reports, Apple received 10% of all
subscription fees paid by iPhone users, or an average of about $10 per month per subscriber.
116

Before July 2008, data service for the iPhone re lied on AT&T’s relatively slow Edge network (also
known as a 2G or 2.5G service). A 3G (third-generation) network was the fastest available wireless
solution; Jobs initially opted against equipping the iPhone for such a network because 3G usage
severely taxed the device’s battery charge.
117
Meanwhile, iPhone users could also tap into WiFi hot-spots, which generally offered much faster service than the Edge network.
118

When Jobs first announced the iPhone, in January 2007, he said that Apple aimed to sell 10 million
units of the device by the end of 2008.
119
By June 2008, consumers had bought about 6 million
iPhones. As impressive as that figure was, it left Apple with a likely share of the worldwide mobile
handset market of less than 1%. (Consumers in 2007 bought an estimated 1.1 billion handsets.
120
) The
iPhone’s position within the smartphone market wa s somewhat better. Jobs, for example, cited data
showing that the iPhone gained a 19.5% share of th e U.S. smartphone market during its first quarter
of availability.
121
(Worldwide, users bought about 120 million smartphones in 2007.
122
)
Unit sales told only part of the iPhone story, however. As many as 1 million of the 3.7 million
iPhones sold by the end of 2007 fell into the wo rldwide “gray market,” in which consumers bought
unlocked iPhones from unauthorized resellers and used them on unsanctioned mobile networks.
Most of those units ended up in China, Russia, and other markets with no le gal iPhone distribution.
(As of June 2008, Apple had signed agreements to distribute the iPhone only in the United States and
in five European countries. Deals were slow in coming, partly because Apple demanded a share of
service revenue that ran as high as 40%.) Even so, by an estimate made in early 2008, the resulting
loss of service-share revenue was on track to co st Apple $1 billion over a three-year period.
123

The iPhone Gamble—Version 2.0
In July 2008, just a year after launching the iPhone, Apple reinvented it.
124
The new offering, called
the iPhone 3G, came not only with faster network service, but also with an entirely new pricing
model and with a new platform for adding third-party applications to the device.
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As the product name implied, a key difference between the iPhone 3G and its predecessor was
that it supported 3G network coverage. The device’s battery life had improved enough to allay Jobs’s
concerns. In tests, the 3G service enabled downloading of data that was two or three times as fast as
the Edge service. All the same, users complained ab out the limitations of AT&T’s 3G coverage area.
125

In August 2008, users also began reporting frequent connection failures while using the 3G network;
one report suggested that the iPhone’s 3G chip set, rather than AT&T service, was to blame.
126

The iPhone 3G was also cheaper than the first iPho ne—at least with respect to the initial purchase
price for the device. U.S. consumers could buy an 8-GB iPhone 3G for $199 or a 16-GB model for $299.
Those prices reflected a subsidy from AT&T. To take advantage of it, users had to join one of AT&T’s
service plans, which now started at $69.99 per mont h ($10 higher than before). AT&T still required
users to enter a two-year contract.
127
Meanwhile, the carrier also signal ed that at some point it would
offer an unsubsidized iPhone for $599 (8-GB) to $699 (16-GB).
128

A restructured agreement between Apple and AT&T—one that was closer to the U.S. mobile
industry norm for such deals—underlay the reduction in consumer pricing for the iPhone. Apple
gave up its claim to a share of iPhone subscription revenue, and in exchange it received from AT&T a
fixed premium for each iPhone sold.
129
According to one report, AT&T paid Apple an average of $466
for every iPhone bought by a consumer (an average that covered sales of both 8-GB model and 16-GB
models). That figure, the same report suggested, included a $100 bounty that AT&T paid to Apple
each time an iPhone buyer signed up for AT&T service through an Apple retail outlet.
130
AT&T, as
part of its revised agreement with Apple, was also able to extend its period of exclusivity for selling
the iPhone by one year.
131
In another notable step away from the initial iPhone deal, Apple opened
up a new retail channel for the device: Best Buy an nounced in August 2008 that Apple had agreed to
let it begin selling iPhones in its nearly 1,000 stores.
132

The chief benefits of the iPhone 3G essentially ma tched those of the first iPhone, and they reflected
Apple’s prowess in designing user interface (UI) technology. Unlike most mobile phones, the iPhone
had no embedded keyboard. Instead, it featured a 3.5-inch “multi-touch” widescreen display that
took up most of its surface area. Critics raved about this UI, which allowed users to manipulate
content on the screen by tapping, pinching, and draggi ng their finger on it. The device also featured
“accelerometer” technology, which enabled it to sense when users were moving and to adjust its
screen orientation accordingly. It s screen quality, meanwhile, mark ed a big step forward for iPod
video functionality.
133
Partnerships with Google and YouTub e allowed Apple to provide customized
search, mapping, and video features. In addition, users could buy music for the iPhone directly from
the device, via the iTunes Wi-Fi Music Store.
134

In conjunction with launching the iPhone 3G, Appl e introduced a new benefit for iPhone users: a
platform for third-party applications. An updated software package, called iPhone 2.0, enabled users
to install programs distributed through Apple’s ne w online App Store. Users could visit the store and
download applications directly from their iPhone. Offerings ranged from popular games (Scrabble,
Sodoku) to business programs developed by Oracle and salesforce.com. The first iPhone did not
support such applications. But now even users of the older model, as well as iPod touch owners,
could download iPhone 2.0 software (for a $10 fee) and equip their device for the new platform. As of
July 2008, the App Store distributed more than 800 different programs—90% of them priced at less
than $10.
135
By mid-August 2008, customers had downloaded more than 60 million applications, and
sales came to an average of $1 million per day. Jobs speculated that the App Store might become “a
$1 billion marketplace at some point in time.” Apple, which had to approve each application before it
went on sale, kept 30% of the retail price for every product and let developers keep the rest.
136

Drawbacks to the iPhone included its low storage capacity, in comparison with other music
players, and its lack of memory expandability; its relatively low-resolution camera, which lacked
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Apple Inc., 2008 708-480
15
video capability; and a level of GPS functionality (introduced in the iPhone 3G) that fell short of what
other smartphones offered. Its battery lasted as little as five hours during routine 3G use (or ten hours
during 2G use); more important, the battery was non-replaceable and had a predicted life of roughly
one year. To attract enterprise customers, the second iteration of the iPhone added features that the
first iPhone lacked, such as advanced email security and support for the Microsoft Exchange email
platform. Yet the iPhone 3G, while it could display Microsoft Office documents, lacked the ability to
run or synchronize with them. For high-volume email users, its lack of a physical QWERTY keyboard
and its failure to provide a cut-and-past e tool were also serious limitations.
137

Apple launched the iPhone 3G simultaneously in 22 markets (including Australia, Japan, Mexico,
and many European countries), and the device would be available in roughly 70 markets worldwide
(including India, as well as numerous Latin American countries) by the end of 2008.
138
On the whole,
pricing structures and distribution agreements in those markets matched those in the U.S. market,
with carriers subsidizing iPhone sales. By moving away from the revenue-sharing model, Apple was
able to sign deals with carriers rapidly. The company also moved away from offering iPhone
exclusivity to carriers. As yet, Apple had no deal to sell the device in China, the world’s largest
mobile phone market. Negotiations with China Mobile, that country’s dominant carrier, broke down
in early 2008 over Apple’s demand for a share of service revenue, but they resumed later that year.
139

The economics of the iPhone 3G tilted strongly in Apple’s favor. Falling component costs and
design improvements, for example, reduced the iPhone’s cost structure. According to one analysis,
the cost of materials for an 8-GB model was about $174, while materials for the first iteration of that
model had cost $227.
140
Meanwhile, lower consumer pricing and wider international distribution
helped fuel promising early sales for the iPhone 3G. Over the first weekend of its availability,
worldwide shipments of the device totaled 1 million units. At that pace, Apple was on track to exceed
its initial goal of selling 10 million units before 2009.
141

In 2008, would-be “iPhone killer” products were rapidly appearing on the market. Mobile
operators, in collaboration with handset makers, rushed to offer to uchscreen devices: Sprint-Nextel
distributed the Samsung Instinct, for example, wh ile Verizon Wireless sold the LG Dare; both
products hit the U.S. market in July 2008.
142
Blackberry (which had a market-leading 45% share of the
U.S. smartphone market) released a 3G device called the Bold in May and would release an advanced
touchscreen phone called the Thunder by the end of the year.
143
Other iPhone competitors included
the Palm Centro; the Nokia N95; and the Diamond Touch, a 3G touchscreen handset that HTC Corp.
introduced in May 2008.
144
Most of these devices ran on closed platforms such as Windows Mobile
OS or Nokia’s Symbian OS. Meanwhile, Google had created an open mobile OS called Android;
mobile operators and handset makers could use it at no cost and without restriction.
145
In August
2008, T-Mobile announced that it would distribute an HTC-made Android phone in the U.S. market
sometime before the end of the year. Called “the Dr eam,” that device would feature a touchscreen UI,
would support 3G service, and would retail for $150 (with a two-year contract).
146

“New Rules”?
Apple underwent profound changes during the first decade of the 21st century—from its
migration to a new microchip architecture to its expansion into whole new business lines. Steve Jobs,
noted one analyst at mid-decade, “has created a fusion of fashion, brand, industrial design and
computing. . . . [I]f he is to successfully revamp Appl e, [Jobs] will ultimately win not by taking on PC
rivals directly, but by chan ging the rules of the game.”
147
Could Apple truly “change the rules” of the
game in computing and in next-generation devices? And could it retain its innovative edge even after
Jobs—the man who had “changed the rules” for the company, again and again—was no longer at its
helm? Those questions animated discussion of Apple Inc. and its future.
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708-480 -16-

Exhibit 1a Apple Inc.: Selected Financial Information, 1981–2008 (in millions of dollars, except for number of employee and stock-related data)

1981 1986 1991 1996 1998 2000 2002

2004 2005 2006 2007
1Q08–
3Q08

Net sales 334 1,902 6,309 9,833 5,941 7,983 5,742 8,279 13,931 19,315 24,006 24,584
Cost of sales 170 891 3,314 8,865 4,462 5,733 4,021 5,871 9,738 13,525 15,568 15,859
Research and development 21 128 583 604 310 380 447 489 534 712 782 811
Selling, general, and
administrative 77 610 1,740 1,568 908 1,546 1,557 1,910 2,393 3,145 3,745

3,573
Operating income (loss) 66 274 447 (1,383) 261 620 46 349 1,650 2,453 4,409 4,833
Net income (loss) 39 154 310 (816) 309 786 65 276 1,335 1,989 3,498 3,698
Cash, cash equivalents, and
short-term investments 73 576 893 1,745 2,300 4,027 4,337 5,464 8,261 10,110 15,386

20,774
Accounts receivable, net 42 263 907 1,496 1,035 955 707 1,050 1,312 2,845 4,029 3,245
Inventories 104 109 672 662 78 33 45 101 165 270 346 545
Net property, plant,
and equipment 31 222 448 598 348 313 621 707 817 1,281 1,832

2,177
Total assets 255 1,160 3,494 5,364 4,289 6,803 6,298 8,050 11,551 17,205 25,347 31,709
Total current liabilities 70 138 1,217 2,003 1,520 1,933 1,658 2,680 3,484 6,443 9,299 9,218
Total shareholders’ equity 177 694 1,767 2,058 1,642 4,107 4,095 5,076 7,466 9,984 14,532 19,622
Cash dividends paid    57 14
Employees 2,456 5,600 14,432 13,398 9,663 11,728 12,241 13, 426 16,820 20,186 23,700 NA
International sales/sales   27% 26% 45% 52% 45% 46% 43% 41% 41% 41% 41% NA
Gross margin   49% 53% 47% 10% 25% 28% 30% 29% 30% 35% 35% 35%
R&D/sales   6% 7% 9% 6% 5% 5% 8% 6% 4% 4% 3% 3%
SG&A/sales 23% 32% 28% 16% 15% 19% 27% 23% 17% 16% 16% 15%
Return on sales   12% 8% 5% NA 5% 10% 1% 3% 10% 10% 15% 15%
Return on assets   24% 15% 10% NA 7% 12% 1% 3% 12% 14% 14% 12%
Return on equity   38% 25% 19% NA 22% 19% 2% 5% 18% 24% 24% 19%
Stock price low $1.78 $2.75 $10.28 $4.22 $3.28 $7.00 $6.80 $10. 64 $31.65 $50.57 $83.27 110.15
Stock price high $4.31 $5.47 $18.19 $8.75 $10.75 $36.05 $13.06 $34.22 $74.98 $91.81 $199.83 198.08
P/E ratio at year-end 27.7 16.8 21.9 NA 17.5 6.1 79.6 90.7 46.1 37.4 50.4 31.5
Market value at year-end 1,223.7 2,578.3 6,649.9 2, 598.5 5,539.7 4,996.2 5, 146.4 25,892.5 60,586.6 72,900.8 173,426.9 147,618.9
Sources: Standard & Poor’s Compustat® data; Datastream.
Notes: Apple’s fiscal year ends in September. All data here reflect fiscal-year results, except for share price data, which ref lect calendar-year results. All data

for the 1Q08–3Q08 period pertain to the
nine months ending June 30, 2008.
NA = Not Available or Not Applicable.
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Apple Inc., 2008 708-480
17
Exhibit 1b Apple Inc.: Net Sales Data by Product Cate gory, 2002–2008 (in millions of dollars)
2002 2003 2004
2005

2006 2007
1Q08–
3Q08

Power Macintosh
a
1,380 1,237 1,419 NA NA NA NA
iMac
b
1,448 1,238 954 NA NA NA NA Desktops
c
NA NA NA 3,436 3,319 4,020 4,240
PowerBook 831 1,299 1,589 NA NA NA NA
iBook 875 717 961 NA NA NA NA
Portables
d
NA NA NA 2,839 4,056 6,294 6,416
Total Macintosh Net Sales 4,534 4,491 4,923 6,275 7,375 10,314 10,656

iPod 143 345 1,306 4,540 7,676 8,305 7,493
Other music products
e
4 36 278 899 1,885 2,496 2,508
iPhone and related products NA NA NA NA NA 123 1,038
Peripherals and other hardware
f
527 691 951 1,126 1,100 1,260 1,231
Software
g
307 362 502 NA NA NA NA
Service and other net sales 227 282 319 NA NA NA NA
Software, service, and other sales
h
NA NA NA 1,091 1,279 1,508 1,658
Total Net Sales 5,742 6,207 8,279 13,931 19,315 24,006 24,584

Source: Apple financial statements; casewriter calculations.
Note: Apple’s fiscal year ends in September. All data here reflect fiscal-year results.
NA = Not Available or Not Applicable.
a
Includes Xserve product line.
b
Includes eMac product line.
c
Includes iMac, eMac, Mac Mini, Mac Pro, Power Mac, and Xserve product lines.
d
Includes MacBook, iBook, MacBook Pro, and PowerBook product lines.
e
Includes sales from iTunes Music Store, iPod -related services, and iPod-related accessories.
f
Includes sales of Apple-branded and third-party displa ys, wireless connectivity and networking solutions,
and other hardware accessories.
g
Includes sales of Apple-branded operating system, application software, and third-party software.
h
Includes sales of Apple-branded operating system, applic ation software, third-party software, AppleCare Services,
and Internet services.

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708-480 Apple Inc., 2008
18
Exhibit 1c Apple Inc.: Operational Data by Segment, 2002–2008 (in millions of dollars)

2002 2003 2004

2005

2006

2007
1Q08–
3Q08

Americas

Net sales 3,131 3,181 4,019 6,658 9,415 11,596 11,001
Operating income 278 323 465 970 1,899 2,949 NA
Depreciation, amortization, and accretion 4 5 6 6 6 9 NA
Segment assets 395 494 563 705 896 1497 NA

Europe

Net sales 1,251 1,309 1,799 3,073 4,096 5,460 5,899
Operating income 122 130 280 465 627 1,348 NA
Depreciation, amortization, and accretion 4 4 4 4 4 6 NA
Segment assets 165 252 259 289 471 595 NA

Japan

Net sales 710 698 677 924 1,211 1,082 1,189
Operating income 140 121 115 147 208 232 NA
Depreciation, amortization, and accretion 2 3 2 3 3 3 NA
Segment assets 50 130 114 165 181 159 NA

Retail

Net sales 283 621 1,185 2,278 3,246 4,115 4,597
Operating income (loss) (22) (5) 39 396 600 875 NA
Depreciation, amortization, and accretion 16 25 35 43 59 88 NA
Segment assets 141 243 351 589 651 1,085 NA

Other
a

Net sales 367 398 599 998 1,347 1,753 1,898
Operating income 44 51 90 118 235 388 NA
Depreciation, amortization, and accretion 2 2 2 2 3 3 NA
Segment assets 67 78 124 133 180 252 NA

Source: Apple financial statements; casewriter calculations.
Note: Apple’s fiscal year ends in September. All data here reflect fiscal-year results.
NA = Not Available or Not Applicable.
a
“ Other” segments include the Asia-Pacific region and Apple’s FileMaker business.
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Apple Inc., 2008 708-480
19
Exhibit 2 Apple Inc.: Daily Closing Share Price, December 1980–August 2008

Source: Thomson Datastream, accessed January 2008; OneSource Global Business Browser, accessed August 2008.

Exhibit 3 Apple Inc.: Worldwide PC Share, 1980–2007

Source: Adapted from Info Corp., International Data Corp., Gartner Dataquest, and Merrill Lynch data.
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708-480 Apple Inc., 2008
20
Exhibit 4 Shipments and Installed Base of PC Microprocessors, 1992–2007 (in millions of units)
Total Ship ments 1992 1994 1996 1998 2000 2002 2003 2004 2005 2006 2007
Intel Technologies
PC units shipped 30.6 47.8 76.0 105.0 156 126 152 170 200 230 261
PC installed base 122.2 211.4 347.5 542.5 839 1,111 1,263 1,433 1,633 1,863 2,124
Mac units shipped NA NA NA NA NA NA NA NA NA 5.7 7.6

Motorola (680X0)
Units shipped 3.9 3.9 0.8 0.2 NA NA NA NA NA NA NA
Installed base 16.5 24.9 26.8 27.5 NA NA NA NA NA NA NA

PowerPC
Units shipped 0 0.8 4.0 3.5 4.7 3.1 3.3 3.5 4.7 NA NA
Installed base 0 0.8 7.8 14.1 22.2 29.4 32.9 36.2 40.9 NA NA
Source: Adapted from Gartner Dataquest, InfoCorp., International Data Corp., Merrill Lynch, and Credit Suisse data.
Notes: Between 5% and 10% of total microprocessor shipments go into non-PC end products. In any given year, roughly
30% to 45% of microprocessors in the total installed base in volve older technologies that are probably no longer in
use. The figures for PowerPC shipments exclude microprocessors destined for Sony PlayStation and Xbox 360
machines. Figures for “Mac units shipped” cover Macintosh calendar year sales.
NA = Not Available or Not Applicable.

Exhibit 5 PC Manufacturers: Key Op erating Measures, 1997–2007
1997 2000 2003 2004 2005 2006 2007 Gross Margin (%) Apple 21% 28% 29% 29% 30% 30% 35%
Dell 23% 21% 19% 19% 18% 17% 19%
a

Hewlett-Packard 38% 31% 29% 27% 25% 26% 24%
R&D/Sales
Apple 12.1% 4.8% 7.6% 5.9% 3.8% 3.7% 3.3%
Dell 1.2% 1.5% 0.8% 0.9% 0.8% 0.9% 1.0%
a

Hewlett-Packard 7.2% 5.4% 5.0% 4.4% 4.0% 3.9% 3.5%

Source: Compiled from company financial re ports; Hoover’s, Inc., www.hoovers.com.
Note: All information is on a fiscal-year basis. The fiscal year ends in September for Apple, in January for Dell,
and in October for Hewlett-Packard.
a
For Dell, 2007 figures cover the three quarters ending November 2, 2007.
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Apple Inc., 2008 708-480
21
Exhibit 6 Apple Inc.: Unit Sales by Product Cate gory, 2004–2008 (in thousands of units)
2004 Y/Y
Change

2005
Y/Y
Change

2006
Y/Y

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