Apple Business Model Case Study

Apple Business Model

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Abstract
Apple Incorperation is one of the most sought-after computer campany

Introduction

The world wide web is very strong and has changed the word in many ways.
As a fan of Apple Macintosh,I am personally impressed with many of its innovations.It strikes me whether or not the company has really become monopoly.
This paper will explore its business model and its so called
I will closely examine Apple in different areas
-PC market
-software
-portable player
-music
Then the second part deals with the judging of its monopoly position based on the microeconomic aspects.

Apple Inc.
Apple is truly a unique entity, both in what it accomplishes and in how it is organized.During the course of the Macintosh Revolution, Steve Jobs was forced out of Apple. It is no surprise that the Macintosh revolution started to fail rapidly with his departure, despite some attempts during his absence to alter the business model. With Steve Jobs back in the campany, and Mac OS X released, Apple's future is very bright.

Firstly, in order to be able to judge if it Apple is a monopoly or not, we need to know what does monopoly actually means

The definition of Monopoly
Monopoly is “A situation in which a single company owns all or nearly all of the market for a given type of product or service. This would happen in the case that there is a barrier to entry into the industry that allows the single company to operate without competition (for example, vast economies of scale, barriers to entry, or governmental regulation). In such an industry structure, the producer will often produce a volume that is less than the amount which would maximize social welfare”.
So according to the definition above, we will see if Apple is a monopoly or not.

Apple operating system
We all know that in order to use Apple’s operating system or Mac OS, one needs to own a Mac,the only place that this particular system can be run on. The "monopoly" is the fact that you can not buy Mac OS and install it on a computer from another vendor - so you are stuck with overpriced item from a single vendor. Also,
Apple has always provided a complete computing experience. From the very beginning Apple sold the hardware, operating system and the basic applications one would need.
However, most people think that monopoly is measured in terms of market share. This is also misunderstood. People would say that a company with 5% market share for personal computers cannot be a monopoly.

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But in this case, Apple has 100% market share of the its own platform. When one walks into a store, they know that they are going to buy a PC or that they are going to buy a Macintosh. There’s really no trading off features each time, as there is between different PC’s. You are buying the OS. You don’t want to learn a new one. You don’t even want things that are different.
We can say that Apple is using their dominance over their own platform to dominate the OS software

Digital music
In the area of digital music players and digital content delivery
, in a way, Apple has no monopoly position that denies competitors from offering similar products. The iPod is sold on retail shelves next to competing players. Apple sells the iPod but it also sells audio and video content via its music store. The iPod had become popular before the iTunes Store had really gotten off the ground. But since Apple only allowed the iPod to use the DRM ( Digital Rights Management) for it's music store, iPod users had no choice in terms of where to buy their music online.Furthermore, Digital music is a mass market. Apple doesn't make the only digital music player available in the market. However, They may have the best, but as long as there are competitors in the market, there is no monopoly. You can import songs into your iPod with programs other than iTunes, that is what Anapod and iPod Explorer are for. As such, ITunes is defenitely not the only Online Music provider. Users are choosing to use this service, and choosing to buy iPods.

As the definition previously stated, what can be catagorized as monopoly are
-having berriers to entry
-practicing price discrimination
-does not maximize social wellfare

Berriers to entry
Having berriers to entry in this sense rather due to an inability for others to enter the Mac operating system or digital music market due to the fact that they cannot compete against Mac.
In fact, it is a bussiness model, in which the monopoly has the ability to prevent other players in, either by keeping price significantly low or making patent barriers, which ends up with only one option for the user. That's not the case for ipod/ITMS, you can buy any other mp3 devices, you can buy music from anywhere you would like, although itunes would be the best choice, but it does not prevent you from trying others. All business is about relationships. Apple, wants to keep a close relationship with its customers. Undoubtedly, these close relationships help it to understand the needs and wants of users.
In short, Apple uses its operating system monopoly power and application program dominance to try to eliminate competition, acquire control of new markets, and block innovation that could challenge its position.

Price Discrimination
Before judging if Apple practices price discrimination or not, we ought to define this term first. The practice of price discrimination means that a company charge different price for a particular product in the hope of reducing competition.


From this chart we can see that the sale of the songs perchased through itunes has sky rocketed as a result of the price that is cheaper compared to other providers of digital music download.

Tracks: iTunes = $0.99 each; Retail = not offered.
Albums: iTunes = $9.99; Retail = $12.99 - $16.99.
TV Shows: iTunes = $2.99; Retail = >$30 DVD season packs.
Movies: iTunes = $9.99; Retail = >$15.99.
Games: iTunes = $4.99; Retail = >$15 (Palm/WinMobile)
Tracks: iTunes = $0.99 each; Retail = not offered.
Albums: iTunes = $9.99; Retail = $12.99 - $16.99.
TV Shows: iTunes = $2.99; Retail = >$30 DVD season packs.
Movies: iTunes = $9.99; Retail = >$15.99.
Games: iTunes = $4.99; Retail = >$15 (Palm/WinMobile)

At the same time, as Apple has large market capacity→ content price lower → unit sell more →market capacity becomes larger = one of berrier


This graph also help illustrate the point that as the price of songs from itunes is cheaper than its competitor, the quantity purchased through the Itunes store is increasing

Markets exist to set fair prices. If prices get set too high, buyers tend to hold onto their money, and competitors emerge to offer either better or cheaper products. If prices fall too low, sellers either withdraw from the market or introduce better products designed to entice consumers to pay a premium.
Obviously, iTunes clearly is giving the consumer a better choice and a better price. iTunes does not lock you into its ecosystem. That is all up to you. You definitely can still go retail to get music without the DRM and Apple will not keep you from doing that.
In addition , Apple argued that the logic behind this low price is to reduce piracy,the sale of the ipod is just a by-product.
Although some record labels want to charge more but since Apple’s Itunes accounts for more than 80% of online digital song download, they have no bargaining power.Thus, prevent them from raising the price.

Actually Apple has already been taken to court on whether they were a monopoly, in Europe, by France. Apple won. The courts ruled that their were plenty of alternatives in the market and as such Apple was not doing anything wrong. Yes they have tied their iTunes music store offerings to the iPod via Fairplay. Not entirely because they are evil, but they negotiated with the content providers who required some form of DRM. Fairplay apparantly satisfied the content providers requirements.

As is mentioned in many articles, Apple isn't trying to make money off of the music. They're just trying to break even with the songs. Instead, they want to sell iPods. They make it easy and cheap to buy the songs but how are people gonna play the songs on-the-go? With an iPod of course.

Now come to the last point,
Does it maximize social welfare?
In terms of the issue that whether or not Apple has maximized social welfare through its dominance in this market or not? This point is very crucial in the way that Apple has gone beyond the expectations of the market and has continuously improved their producs along with lowered the price. In other word, they dominate symply because they produce the highest quality product at the lowest price possible. However, this can hold true only in the short run, once Apple acquires enough recognition in this market, there will be less innovations produced and the price will rise. As such, the only way that we can ensure that the latter situation would not happen is through competitions in the market.

Conclusion

History has proven that monopolies consistently do two things: They always stifle innovation and (with the possible exception of heavily regulated monopolies) they always produce an inferior product compared to what a “normal” market would produce.
Int his case,The legendary Apple is not a monopoly it just has gained market dominance through public choice.
As Apple created and made a new working system and changed the world. Before Apple there was no legitimate market at all for online music, at least not one done in a way that we users would want. Apple hit on the formula of making the music player a satellite to your computer. They did it first and deserve to keep doing it. Still Apple needs true competitor so that they can still produce tThis situation could change for the worse, however, if Apple continues to dominate this market. It is very hard to drive for perfection when there isn’t a strong competitor in the market to motivate you.

References

-An industry approach to cases in strategic management,second edition;john a.pearce richard b robinson
-Strategic management and business policy,Thomas l.wheelen J.david hunger
-National bestseller apple, Jim Carlton
-Forbes greatest technology stories,jeffrey young
-Icon,steve jobs
-http://www.theappleloop.com/Home/monograph.html
-http://www.computer.org/portal/site
-http://cruel.org/econthought/texts/misc/arrow_on_ms.html
-http://www.applematters.com/index.php
-http://answers.google.com/answers/threadview?id=503560(Pricing Setting by Fraud)
-http://www.bloggingstocks.com
-http://www.onelittlecog.com/2007/03/21/apple-the-monopoly-that-few-notice/
-http://kalsey.com/2002/05/apples_anticompetetive_practices/
-http://www.expatica.com/actual/article.asp?subchannel_id
-http://www.macworld.co.uk/mac/news/index.cfm?newsid=15002
-http://www.osnews.com/story.php/14763/Apple-and-Dell-Business-Models/
-http://www.digg.com/apple/iPod_iTunes_=_Monopoly_Suit



Apple has achieved success as one of the most valuable companies in the world. This Five Forces analysis gives insights about the external factors influencing the firm. Apple’s Five Forces analysis also sheds light on what the company does to ensure leadership despite the negative effects of external factors in the competitive landscape. Established in 1976, Apple has been through low times. However, under the leadership of Steve Jobs, the company has succeeded to become an industry leader. Based on this Five Forces analysis, Apple continues to address competition and the bargaining power of buyers, which are among the most significant external factors impacting the firm. Also, this Five Forces analysis indicates that Apple must focus its efforts on these two external factors to keep its leadership in the industry.

Apple’s Five Forces analysis (Porter’s model) of external factors in the firm’s industry environment points to competitive rivalry or intensity of competition, and the bargaining power of buyers or customers as the most significant factors that should be included in strategic formulation to ensure the continued success of Apple products.

Overview: Apple Inc.’s Five Forces Analysis

Apple’s strategies are partly based on the need to address forces in the external business environment. These forces can limit or reduce the firm’s market share and revenues. Apple’s Five Forces analysis, based on Porter’s model, shows the following strengths or intensities of external factors in the industry environment:

  1. Competitive rivalry or competition (strong force)
  2. Bargaining power of buyers or customers (strong force)
  3. Bargaining power of suppliers (weak force)
  4. Threat of substitutes or substitution (weak force)
  5. Threat of new entrants or new entry (moderate force)

Considering these five forces, Apple must focus its attention on competitive rivalry and the bargaining power of buyers. The analysis supports Apple’s current position of continuous innovation. The firm effectively addresses the five forces in its external environment, although much of its effort is to strengthen its position against competitors and to keep attracting customers to Apple products.

Competitive Rivalry or Competition with Apple (Strong Force)

Apple faces the strong force of competitive rivalry or competition. This component of Porter’s Five Forces analysis model determines the intensity of influence competitors have on each other. In Apple’s case, this influence is based on the following external factors:

  1. High aggressiveness of firms (strong force)
  2. Low switching cost (strong force)

Companies like BlackBerry, Samsung, LG, and others aggressively compete with Apple. Such aggressiveness is observable in rapid innovation, aggressive advertising, and imitation. On the other hand, switching cost is low, which means that it is easy for customers to switch from Apple to other brands, thereby making competition even tougher. Thus, this part of the Five Forces analysis shows that competitive rivalry is among the most significant considerations in Apple’s strategic formulation.

Bargaining Power of Apple’s Customers/Buyers (Strong Force)

The bargaining power of buyers is strong in affecting Apple’s business. This component of Porter’s Five Forces analysis model determines how buyers impact businesses. In Apple’s case, buyers’ strong power is based on the following external factors:

  1. Low switching cost (strong force)
  2. Small size of individual buyers (weak force)

It is easy for customers to change brands, thereby making them powerful in compelling companies like Apple to ensure customer satisfaction. On the other hand, each buyer’s purchase is small compared to Apple’s total revenues. This condition makes customers weak at the individual level. However, because it is easy to shift from Apple to other brands, buyers still exert a strong force. Thus, this part of the Five Forces analysis shows that Apple must include the bargaining power of buyers or customers as one of the most significant variables in developing strategies.

Bargaining Power of Apple’s Suppliers (Weak Force)

Apple experiences the weak force of the bargaining power of suppliers. This component of Porter’s Five Forces analysis model indicates the influence of suppliers in imposing their demands. In Apple’s case, suppliers have a weak bargaining power based on the following external factors:

  1. High number of suppliers (weak force)
  2. High overall supply (weak force)

Even though Apple has less than 200 suppliers of components for its products, the company has more options because there are many suppliers around the world. This condition makes individual suppliers weak in imposing their demands on firms like Apple. In relation, there is a high level of supply for most components of Apple products. Thus, this part of the Five Forces analysis shows that Apple does not need to prioritize the bargaining power of suppliers in developing strategies for innovation and industry leadership.

Threat of Substitutes or Substitution (Weak Force)

The threat of substitution is weak in affecting Apple’s business. This component of Porter’s Five Forces analysis model determines the strength of substitute products in attracting customers. In Apple’s case, substitutes exert a weak force based on the following external factors:

  1. High availability of substitutes (moderate force)
  2. Low performance of substitutes (weak force)

Substitutes to Apple products are readily available in the market. For example, people can easily use digital cameras instead of the iPhone to take pictures. They can also use landline telephones to make calls. However, these substitutes have low performance because they have limited features. Many customers would rather use Apple products because of their advanced features. Thus, substitution has a weak force in impacting Apple’s business. This part of the Five Forces analysis shows that Apple does not need to prioritize the threat of substitution in business processes like marketing and product design and development.

Threat of New Entrants or New Entry (Moderate Force)

Apple experiences the moderate force of the threat of new entrants. This component of Porter’s Five Forces analysis model indicates the effect and possibility of new competitors entering the market. In Apple’s case, new entrants exert a moderate force based on the following external factors:

  1. High capital requirements (weak force)
  2. High cost of brand development (weak force)
  3. Capacity of potential new entrants (strong force)

Establishing a business to compete against firms like Apple requires high capitalization. Also, it is considerable costly to develop a strong brand to compete against large firms like Apple. These factors make new entrants weak. However, there are large firms with the financial capacity to enter the market and impact Apple. Google has already done so through products like Nexus smartphones. Samsung also used to be a new entrant. These examples show that there are large companies that have potential to directly compete against Apple. Thus, the threat of new entry is moderate. This part of the Five Forces analysis shows that Apple must maintain its competitive advantage through innovation and marketing to remain strong against new entrants.

References
  • Apple Inc. Form 10-K, 2014.
  • Apple Info.
  • Burke, A., van Stel, A., & Thurik, R. (2010). Blue ocean vs. five forces. Harvard Business Review88(5), 28-29.
  • Dobbs, M. (2014). Guidelines for applying Porter’s five forces framework: a set of industry analysis templates. Competitiveness Review24(1), 32-45.
  • Flores, M., Musgrove, K., Renner, S., Hinton, V., Strozier, S., Franklin, S., & Hil, D. (2012). A comparison of communication using the Apple iPad and a picture-based system. Augmentative and Alternative Communication28(2), 74-84.
  • Gershon, R. A. (2013). Digital media innovation and the Apple iPad: Three perspectives on the future of computer tablets and news delivery. Journal of Media Business Studies10(1), 41-61.
  • Grundy, T. (2006). Rethinking and reinventing Michael Porter’s five forces model. Strategic Change15(5), 213-229.
  • Karagiannopoulos, G. D., Georgopoulos, N., & Nikolopoulos, K. (2005). Fathoming Porter’s five forces model in the internet era. Info7(6), 66-76.
  • Low, D. K., & Pittaway, A. P. (2008). The ‘iPhone’ induction–a novel use for the Apple iPhone. Pediatric Anesthesia18(6), 573-574.
  • Mozur, P. (2013, April 24). Apple Faces Dilemma Over Strategy in China. The Wall Street Journal.
  • Sherr, I. (2013, September 21). iPhone Sales Test Apple Strategy. The Wall Street Journal.

Apple Inc., Case Study & Case Analysis, Porter's Five Forces Analysis, Strategy

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