TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

For my final undergraduate business paper, I wrote an analysis of Apple as it transforms into a mobile company. I am posting it here in its entirety (except for financial exhibits) below.

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Especially since they released the iPhone in 2007, Apple has been spectacularly successful. In 2009, sales totaled more than $36 billion, compared to just $5.3 billion in 2001, and their market capitalization is nearing Microsoft’s. This growth is driven by incredible iPhone and iPod touch sales and Windows users switching to Macs. In second quarter 2010, for example, Mac sales increased by thirty-three percent.

Mac sales, though, offer little future opportunity. The PC is a mature market with little growth and innovation potential. Therefore, Apple should be looking toward other markets to offer their next growth opportunity. Apple started down this road with the iPhone in 2007 and it has proved to be the next growth market. In 2010, just three years after its release, iPhone sales now account for a greater percentage of Apple’s net sales than Macintosh sales. As such, since the PC is mature and mobile devices are the future, Apple should shift to a mobile focus. Their goal should be to define what these mobile devices are and take a controlling share of the market.

This paper will consider Apple’s purpose, briefly look at what Apple has done recently, what corporate strategy they need to achieve success in the mobile market, and finally what their mobile business strategy should be.

Changing Things

In Apple’s 1997 “Think Different” ad campaign, the narrator declared, “And while some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.” The ad was referring to a number of the twentieth century’s great minds, but it aptly captures Apple’s purpose: to change the world for the better. Bill Gates spoke of a computer on every desk, while Steve Jobs spoke of computers as “bicycles for the mind”. For Apple, creating computer devices is not their ultimate purpose. Rather, they are a means for changing things.

With each major new product, Apple has either created a new product type or completely changed an existing one. The Macintosh was the first personal computer as we know it; the iPod defined the MP3 player; iTunes changed the music business; and the iPhone has done it for mobile devices.

Apple’s purpose also informs their overall strategy. In Leading with Purpose, Richard Ellsworth writes,

Purpose brings meaning to the eternal environment. It provides individuals with the assumptions and beliefs that form the lenses through which they view external circumstances (94).

Because they are seeking to make a significant impact, Apple should choose markets or product types that are ready for radical change. In Management, Peter Drucker argues there are two ways to do this. First, companies can look for “discontinuities” in society that can be exploited, and two they can impose a vision of the future on the status quo that will shape what is to come (113-114). Apple tends to be somewhere between these two; for example, the smartphone certainly existed before the iPhone, but its full potential was not realized until Apple released the iPhone. Apple imposed its vision of what smartphones should be on the industry. This also means that Apple’s overall strategy is differentiation—their products are substantially better than and different from competing products, and as a result, they should seek higher profit margins.

Recent History

While announcing the iPad in January 2010, Steve Jobs declared Apple the world’s biggest mobile devices company in the world by revenue. This claim was a bit of a stretch, as it includes revenue from Mac notebooks, but it indicates how Apple conceptualizes their company.

The iPad, a tablet device based on the iPhone OS, was released on April 3. The release was very successful; in a month, they sold more than a million units. This is especially impressive because the iPad is a completely new type of device—unlike the iPod and iPhone, Apple is creating this device type.1 Apple has, for the first time since the Macintosh, created a successful new device type.

It has defined what a tablet is. It is a device designed specifically for touch input, for media consumption (text, video, music, web browsing) and for alternative creative work (“painting,” for example).

Mobile is the Future

Apple is becoming a mobile computing company. There is good reason for this. The personal computer, Apple’s main business until this year, is a mature market. U.S. sales of PCs, for example, only grew by 5.3 percent in 2007. This means growth for Macintosh sales must result primarily from converting Windows users rather than organic growth. Just as important, the PC has matured as a device, which leaves little room for Apple to do what it does best—innovate. Apple’s desktop and notebook lines have not changed substantially in their design since 2003. Apple has introduced innovations in recent years, such as multi-touch trackpads and substantially better batteries than their competitors, but these are not the huge leap forwards Apple prefers to introduce. They are improvements to a relatively static set of devices.

The mobile market, though, is wide open. Gartner expects worldwide smartphone sales to grow to 525 million units in 2012 from 179 million units in 2009, and this is just smartphones, a single kind of mobile device. This is an incredible growth market for the future. This is confirmed by the iPhone’s success. In the second quarter of 2010, iPhone sales overtook Mac sales.

? More important for A?pple, though, there is incredible opportunity for significant innovation. Apple redefined what a smartphone is with the iPhone, and since these devices are so new, has the opportunity to continually do so for these devices.

How should they do this, though? To answer that, we will first consider their corporate strategy.

Corporate Strategy

In Corporate Strategy, Collis and Montgomery explain there are two kinds of diversification—linked and constrained. Companies using linked diversification enter new businesses when it relates in some way to another business they are already in (it is linked to it), but does not necessarily have any connection to their other businesses. If they are using constrained diversification, however, they only enter a new business if it is based on their core resources or competencies. Companies based on linked diversification have little coherence to their overall corporate strategy, while companies using constrained diversification tend to be more focused. Constrained diversification allows companies to maximize the effect of their resources because they are shared (100).

Apple uses constrained diversification. Apple is, inherently, a personal computer company (hardware and software), and their businesses utilize their competencies in developing hardware and software. The Macintosh, iPad, iPhone, iPod and AppleTV are all computers, which allows Apple to share resources between businesses. For example, the Macintosh, iPad, iPhone and AppleTV all run OS X, Apple’s operating system. This creates economies of scope, which, Collis and Montgomery point out, create cost savings for the company because their resources are shared across multiple businesses (72).

Rather than just have related businesses, though, each business is a focused platform with no extraneous products or product types. The Macintosh, for example, consists of two kinds—desktop and notebook. These separate product lines each share resources and complement each other. The iMac and MacBook Pro are both primarily constructed from aluminum and glass, so not only do they share the same materials (which reduces costs), but they resemble each other, creating unity between product lines.

Each platform, too, complements the other. Apple’s Macintosh computers sync their media and personal data (calendar, contacts, email) seamlessly with the other platforms. Because they work so well together, owning products from each platform benefits users by creating an experience where their devices “just work.”

The platform advantage does not apply just to Apple’s devices. Through iTunes, users can purchase music, movies and television shows that syncs across all of their devices, or even do so from their iPhone or iPad. The App Store allows users to download applications for their iPhones and iPads wherever they are, and now the iBook Store, released in April, will allow them to do the same with books.

Because Apple has chosen what businesses to enter carefully, these platforms reinforce the others and make them more powerful. The sum is greater than the parts. This creates a complete package for consumers to choose, and it is difficult for competitors to match. Their platform strategy makes each individual business more valuable than it would be as a separate entity.

Their strategy can be improved, however. Currently, MobileMe—a service Apple offers that keeps contacts, calendar, and email in sync across multiple devices over the air—is a premium service that costs $99 per year. This is the wrong approach. Rather than a premium service, MobileMe should be free and integrated into Apple’s platforms. MobileMe should act like the “glue” that integrates the platforms and as a draw for users. Apple’s goal should be to get as many MobileMe users as possible. Once someone is happily using MobileMe across their various devices, they are less likely to switch to a competitor’s product.

The iBook Store, too, can be much more. At the moment, it is just that—a book store. Instead, it should become a print media platform for books, text books, newspapers and magazines. The print industry is at a juncture in its history, where it is switching from print to digital. The digital print industry is in its infancy, but is vital for the future. This provides Apple a significant opportunity to establish its platform as the preeminent one.

This fits Apple’s platform strategy well. With iTunes, Apple’s intent is to make the major forms of media used on their devices immediately and easily available, and the iPad is positioned as a reading device and is perfect for it. Establishing the best print media platform would strengthen their media offering and make the iPad much more convincing as a device.

Mobile Business Strategy

Apple’s goal for their mobile business should not be to take a Microsoft-like monopoly of the industry, but rather to take a sizable portion—twenty-five to thirty percent or so. Since Apple is fundamentally about innovation, differentiation, they can seek high profit margins, and thus do not need overwhelming market share. Strong profit margins allow them to have a high percentage of the industry’s profit share without a corresponding market share.

It should be asked, then, why they should seek a market share as high as twenty-five to thirty percent if they are targeting higher profit rather than market share. The reason is that some level of market share is necessary to attract developers, both in quantity and quality, to develop for the platform. Just like for the PC, a solid group of third-party developers is necessary for a mobile platform’s success.2

Gaining market share, however, should not be Apple’s primary goal—it is just a means. Market share today does not guarantee market share tomorrow. Rather, Apple’s goal should be to define what these devices are, again and again, so the competition responds to Apple. Peter Drucker wrote that “What makes the future happen is always a business’s embodiment of an idea of a different economy, a different technology, a different society. It need not be a big idea; but it must be one that differs from the norm of today” (117). This means defining what the devices are (e.g., a pocket-sized device, or a tablet-sized device), and what they do. Apple must do this through constant innovation.

By constantly defining what these devices are and what they do, Apple can secure for itself the role of industry innovator, and thus a position of strength. If they are constantly redefining the industry, they do not need overwhelming market share.

The iPhone’s release in 2007 is a perfect example. Before the iPhone, no smartphones used touch as a primary means of input. After its release, however, most smartphones use large touch screens and even resemble the iPhone.

? The similarities extend to the software, too. They try to match the iPhone’s features—specifically, its excellent web browser and the App Store. The iPhone defined what smartphone devices are (all screen, touch input) and what they do (browse the web, run user-downloadable applications). Competitors have tried to make incremental improvements, such as a higher-resolution screen or a physical keyboard, but none have made serious changes to the basic definition laid out by Apple in 2007.

There is an interesting parallel between the nascent mobile market and the personal computer market of the mid-1980s. Apple dominated the early personal computer market with integrated hardware and software (only Macintosh ran Mac OS, so consumers could only use the Mac OS by purchasing a Macintosh), but Microsoft licensed its operating system to any computer manufacture who wanted it. Microsoft ended up dominating the market.

In the mobile market, Apple is following a similar path as it did with the Mac: hardware and software are integrated. With Android OS, however, Google is using Microsoft’s strategy (with a few differences). In an attempt to grab market share, Google allows any device manufactures to use Android on their smartphones. By giving away the operating system and taking a majority of the market, Google can ensure a place for the company in the mobile market, entice developers to their platform and commoditize their competitor’s main advantage—the operating system.

They are grabbing significant market share in the smartphone market. In first quarter 2010, Android’s market share grew to twenty-eight percent, up from twenty percent in fourth quarter 2009. Apple’s market share in the same period stood at twenty-one percent.3 Going forward, Android’s success may come at the expense of Apple’s own market share, and thus could marginalize the platform. The question, then, is whether Apple should follow Google’s strategy and license the iPhone OS to other companies in an attempt to negate Android’s advantage.

This is not the proper strategy. Apple’s basic business model is to sell hardware. Everything else—the operating system, iTunes, the App Store—are used to make their products more valuable and thus to increase hardware sales. Apple enjoys high profit margins on their products not because the hardware is better than what others offer (although that is a part of it), but primarily because their software is better. At the 2007 All Things Digital conference, Steve Jobs said,

If you look at what a Mac is, it’s OS X, right? It’s in a beautiful box, but it’s OS X. And if you look at what an iPhone will hopefully be, it’s software.

If Apple were to license the iPhone OS to other manufactures, this would give away their hardware’s main advantage and thus significantly cut into their sales. Apple would have to find a different business model.

In Leading the Revolution, though, Gary Hamel provides an even more compelling answer. Hamel wrote,

What is not different is not strategic. To the extent that strategy is the quest for above-average profits, it is entirely about variety—not just in one or two areas, but in all components of the business model (72).

If Apple merely follows Google’s strategy, but plans just to do it better, they are playing on Google’s terms, and that is a difficult game to win.

Instead, Apple should differentiate the platform. Because the Android platform is spread over a large number of devices and manufactures, it is necessarily fragmented. Some devices have 3.5 inch screens while others are 4.3 inches; some have track balls; some have hardware keyboards while others do not. Worse, because Android devices are manufactured by different companies with unique versions of the operating system, and are dependent on them for software upgrades, some Android phones are stuck on older versions of the operating system that cannot take advantage of new features or applications. This is confusing for users and makes it difficult for developers to build applications that can run on the entire platform. Android may have twenty-eight percent of the market in the last quarter, but developers can only build applications for a portion of those devices. This is terrible for users and developers.

Apple’s hardware-software integration strategy eliminates this problem. Because Apple controls the iPhone’s hardware and software, they can guarantee that users can access operating system updates immediately and that the hardware characteristics are uniform across the entire platform. For developers, this means if their application is on the App Store, every iPhone user can use their application, and for users, this means if an application is available on the store, they can use it.4 They do not have to worry whether their iPhone is stuck with an outdated version of the operating system, or whether their hardware is incompatible with the application. They just use it.

Their integration strategy provides other advantages as well. By controlling the hardware and software, Apple can guarantee a level of quality their competitors cannot. Moreover, they can build hardware and software features their competitors cannot access, and thus make their products more valuable. For example, the iPad’s battery lasts for ten hours of use. For its weight, thickness and price, this is an incredible advantage over competing devices, and it is due to Apple’s own battery and processor technology. Apple is doing this in software, too, with iPhone OS 4 (announced in April), and recent acquisitions like Siri, a natural speech recognition company.

Controlling the hardware and software together is the best way for Apple to differentiate their products, because they can guarantee the quality of their devices and create innovations and features exclusive to the platform. This not only is Apple’s best strategy for succeeding in the mobile market, but it serves their goal of constantly re-defining it. Controlling the hardware and software allows them to make substantial changes quickly—there are no other manufactures to deal with.

1. “Tablet computers” released in 2003 were not tablets in the current sense of the term, but rather notebook computers with touch screens. They are very different devices and should be understood as such. [↩]
2. It should be noted that while market share is important for this (developers do not want to build applications for insignificant platforms), excellent developer tools and environment is even more important. That is outside the scope of this paper, however. [↩]
3. This is somewhat misleading, though, because it excludes iPod touch devices, and they are estimates. The trend it indicates is what matters, and other estimates—such as Gartner’s—agree. Android is gaining significant market share. [↩]
4. This is somewhat overstated. The iPhone platform has some fragmentation as well, due to improved processing speeds in newer iPhones and new hardware capabilities, but this fragmentation is immaterial compared to Android’s. [↩]