Mp3 player market share 2011

Read the case, bring 3 questions you have. Then under each question, brief explain why the questions are important to ask. (The reason you ask the questions). Each explanation only needs 4-5 sentences, no more than 5 sentences.

Below is the case:

Apple Inc. in 2012

On October 5, 2011, Steve Jobs tragically died of cancer. The recently retired CEO of Apple Inc. was a legend: he had changed Apple from a company on the verge of bankruptcy to one of the largest and most profitable companies in the world. Moreover, he had revolutionized several industries in the process. Few companies’ successes were so closely identified with its CEO. Jobs’s passing promised to usher in a new era at Apple. The new CEO, Tim Cook, had an extraordinary challenge: how to sustain Apple’s current successes in computers, MP3 players, phones, and tablets, while taking Apple to the next level.

The company began as “Apple Computer,” best known for its Macintosh personal computers (PCs) in the 1980s and 1990s. Despite a strong brand, rapid growth, and high profits in the late 1980s, Apple almost went bankrupt in 1996. Then Jobs went to work, transforming Apple Computer into “Apple Inc.” with innovative non-PC products, starting in the early 2000s. In fact, Apple viewed itself as a “mobile device company.”1 By 2011, Macintosh revenues were less than 20% of Apple’s $108 billion in sales2 (see Exhibits 1a through 1c for financial information and net and unit sales). Meanwhile, Apple’s stock was making history of its own. Apple became the most valuable company in the world in 2012 (see Exhibit 2 for Apple’s share price over time).

By almost any measure, Apple’s accomplishments in the prior decade had been spectacular. Yet Cook knew that no company in the technology industry could relax. Challenges abounded. iPod sales, for example, had been falling for four straight years by 2012. At the same time, Microsoft was set to introduce Windows 8, which the company promised would challenge Apple’s vaunted leadership in user interface. Even though Macintosh sales had grown faster than the industry in recent years, Apple’s share of the worldwide PC market had remained below 5% since 1997 (see Exhibit 3a for Apple’s PC market share, worldwide). Many also wondered if the company could thrive without Jobs. Cook, Jobs’s former chief operating officer, had built Apple’s formidable global supply chain, but he came to the CEO job with a very different skill set. Finally, would the iPhone continue its march to dominate smartphones in the face of growing competition from companies such as Google and Samsung? And would Apple’s newest creation, the iPad, continue to dominate the tablet market, or would new competitors, ranging from Amazon to Samsung, steal share and drive down profits?

Apple’s History

Steve Jobs and Steve Wozniak, a pair of 20-something college dropouts, founded Apple Computer on April Fool’s Day, 1976.3 Working out of the Jobs family garage in Los Altos, California, they built a computer circuit board that they named the Apple I. Within several months, they had made 200 units and had taken on a new partner—A.C. “Mike” Markkula Jr., who was instrumental in attracting venture capital as the experienced businessman on the team. Jobs’s mission was to bring an easy-to- use computer to market, which led to the release of the Apple II in April 1978. It sparked a computing revolution that drove the PC industry to $1 billion in annual sales in less than three years.4 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, was a relatively “open” system that other producers could clone. Apple, on the other hand, practiced horizontal and vertical integration. It relied on its own proprietary designs and refused to license its hardware to third parties.

IBM PCs not only gained more market share, but also emerged as the new standard for the industry. Apple responded by introducing the Macintosh in 1984. The Mac marked a breakthrough in ease of use, industrial design, and technical elegance. However, the Mac’s slow processor speed and lack of compatible software limited sales. Apple’s net income fell 62% between 1981 and 1984, sending the company into a crisis. Jobs, who was often referred to as the “soul” of the company, was forced out in 1985.5 The boardroom coup left John Sculley, the executive whom Jobs had actively recruited from Pepsi-Cola for his marketing skills, alone at the helm.

The Sculley Years, 1985–1993

Sculley pushed the Mac into new markets, most notably in desktop publishing and education. Apple’s desktop market was driven by its superior software, such as Aldus (later Adobe) PageMaker, and peripherals, such as laser printers. In education, Apple grabbed more than half the market. Apple’s worldwide market share recovered and stabilized at around 8% (see Exhibit 3a). By 1990, Apple had $1 billion in cash and was the most profitable PC company in the world.

Apple offered its customers a complete desktop solution, including hardware, software, and peripherals that allowed them to simply “plug and play.” Apple also stood out for typically designing its products from scratch, using unique chips, disk drives, and monitors. IBM-compatibles narrowed the gap in ease of use in 1990 when Microsoft released Windows 3.0. Still, as one analyst noted, “the majority of IBM and compatible users ‘put up’ with their machines, but Apple’s customers ‘love’ their Macs.”6

Macintosh’s loyal customers allowed Apple to sell its products at a premium price. Top-of-the-line Macs went for as much as $10,000, and gross profit hovered around an enviable 50%. However, as IBM-compatible prices dropped, Macs appeared overpriced by comparison. As the volume leader, IBM compatibles were also attracting the vast majority of new applications. 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. After taking on the chief technology officer title in 1990, Sculley tried to move Apple into the mainstream by becoming a low- cost producer of computers with mass-market appeal. For instance, the Mac Classic, a $999 computer, was designed to compete head-to-head with low-priced IBM clones.

Sculley also chose to forge an alliance with Apple’s foremost rival, IBM. They worked on two joint ventures; one to create a new PC OS and one aimed at multimedia applications. Apple undertook another cooperative project involving Novell and Intel to rework the Mac OS to run on Intel chips that boasted faster processing speed. These projects, coupled with an ambition to bring out new “hit” products every 6 to 12 months, led to a full-scale assault on the PC industry. Yet Apple’s gross margin dropped to 34%, 14 points below the company’s 10-year average. In June 1993, Sculley was replaced by Michael Spindler, the company’s president.

The Spindler and Amelio Years, 1993–1997

Spindler killed the plan to put the Mac OS on Intel chips and announced that Apple would license a handful of companies to make Mac clones. He tried to slash costs, which included cutting 16% of Apple’s workforce, and pushed for international growth. In 1992, 45% of Apple’s sales came from outside the United States. Yet despite these efforts, Apple lost momentum: a 1995 Computerworld survey 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 PC7 (see Exhibit 4 for shipments and installed base of PC microprocessors). Spindler, like his predecessor, had high hopes for a revolutionary OS that would turn around the company’s fate. But at the end of 1995, Apple and IBM parted ways on their joint ventures. After spending more than $500 million, neither side wanted to switch to a new technology.8 Following a $69 million loss in Apple’s first fiscal quarter of 1996, the company appointed another new CEO, Gilbert Amelio, an Apple board member.9

Amelio proclaimed that Apple would return to its premium-price differentiation strategy. Yet Macintosh sales fell amid Apple’s failure to produce a new OS that would keep it ahead of Microsoft’s Windows 95. In December 1996, Amelio announced the acquisition of NeXT Software (founded by Jobs after he left Apple) and plans to develop a new OS based on NeXT. Jobs also returned to Apple as a part-time adviser. Despite more job cuts and restructuring efforts, Apple lost $1.6 billion under Amelio and its worldwide market share tumbled to around 3% (see Exhibit 3a). At one point, insiders believed that Apple was within 90 days of bankruptcy. To save the company, Jobs became the company’s interim CEO in September 1997.

Steve Jobs and the Apple Turnaround

Jobs moved quickly to reshape Apple. In August 1997, Apple announced that Microsoft would invest $150 million in Apple and make a five-year commitment to develop core products, such as Microsoft Office, for the Mac. Jobs abruptly halted the Macintosh licensing program. Almost 99% of customers who had bought clones were existing Mac users, cannibalizing Apple’s profits.10 Jobs also refused to license the latest Mac OS. Apple’s 15 product lines were slashed to just four categories— desktop and portable Macintoshes, for consumers and professionals. Other restructuring efforts involved hiring Taiwanese contract assemblers to manufacture Mac products and revamping Apple’s distribution system from smaller outlets to national chains. Tim Cook, hired by Jobs in 1998 after a career in operations at Compaq, IBM, and Intelligent Electronics, was credited with closing Apple’s factories and streamlining the supply chain. In addition, Apple launched a website to set up direct sales for the first time. Internally, Jobs focused on reinvigorating innovation. Apple pared down its inventory significantly and increased its spending on R&D (see Exhibit 5 for PC manufacturers’ key operating measures).

Jobs sought to bring a new culture to Apple. While previous CEOs sought to broaden Apple’s products, Jobs believed deeply in focus. Apple had one of the narrowest product lines of any company of comparable size. Jobs also believed in extreme practices of secrecy, including a “closed door policy” in which key cards accessed only certain areas and dummy positions for new hires until they could be trusted. Everyone knew that violation of Apple’s culture of confidentiality was immediate grounds for termination.11 Employees reported that working with Jobs was rewarding, but often difficult. Jobs noted that “I don’t think I run roughshod over people, but if something sucks, I tell people to their face.”12 “My passion,” noted Jobs, “has been to build an enduring company where people were motivated to make great products. Everything else was secondary.”13 Jobs was especially fanatic about industrial design, simplicity, and product elegance.

This approach led to Jobs’s first real coup—the iMac—introduced in August 1998. The $1,299 all- in-one computer featured colorful translucent cases with a distinctive eggshell design. The iMac also supported “plug-and-play” peripherals, such as printers, that were designed for Windows-based machines for the first time. Thanks to the iMac, Apple’s sales outpaced the industry’s average for the first time in years. Following Jobs’s return, Apple posted a $309 million profit in its 1998 fiscal year, reversing the previous year’s $1 billion loss.

Another priority for Jobs was to break away from Apple’s tired, tarnished image. Jobs wanted Apple to be a cultural force. Not coincidentally, perhaps, Jobs retained his position as CEO of Pixar, an animation studio that he had bought in 1986. (Jobs later sold Pixar to Walt Disney for $7.4 billion in 2006.) Through multimillion-dollar marketing campaigns such as the successful “Think Different” ads and catchy slogans (“The ultimate all-in-one design,” “It just works”), Apple promoted itself as a hip alternative to other computer brands. Apple ads were placed in popular and fashion magazines as well, venturing out from general computer publications. Later on, Apple highlighted its computers as the world’s “greenest lineup of notebooks” that were energy efficient and used recyclable materials.14 The goal was to differentiate the Macintosh amid intense competition in the PC industry.

The Personal Computer Industry

While Apple pioneered the first usable “personal” computing devices, it was IBM that brought PCs into the mainstream in the 1980s. But by the early 1990s, a new standard known as “Wintel” (the Windows OS combined with an Intel processor) dominated the industry. Thousands of manufacturers—ranging from Dell Computer to no-name clone makers—built PCs around standard building blocks from Microsoft and Intel. Growth was driven by lower prices and expanding capabilities. The overall industry continued to boom through the early 2000s, propelled by Internet demand and emerging markets such as China. Although volume growth slowed over the next decade, analysts predicted that more than 2 billion PCs would be used worldwide by 2015.15

Slowing revenue growth followed the slowdown in volume. Despite PCs that were faster, with more memory and storage, average selling prices (ASPs) declined by a compound annual rate of 8%– 10% per year from the early 1990s through 2005.16 The rate of decline in ASP lessened between 2006 and 2011 to a compound annual rate of 2%.17 By 2011, the average PC manufacturers’ net profit margin, excluding Apple, was 5%.18 The standardization of components led PC makers to cut spending on R&D to between 1% and 3% of revenue19 (see Exhibit 5). As contract manufacturing in Taiwan and China became popular, Asian firms took over responsibility for more innovations, such as industrial designs. New PC products emerged as well. Laptop computers started to gain traction in the late 1980s. Three decades later, portable PCs represented about 60% of worldwide PC shipments.20 The growth in demand for laptops was linked to lower prices: the ASP for a portable PC was $746 in 2011,21 down 25% in only three years.22

A new subproduct category of netbooks took off during the global economic downturn in 2009. These lightweight mini notebooks had limited storage and were optimized for the Web. Price- sensitive consumers loved the roughly $400 average price.23 Initial interest in the category was huge: more than 40 million netbooks sold in 2009. But the emergence of the iPad in 2010 led to a rapid decline. Yet another category of laptops called Ultrabooks came to the market in 2011. These ultra- thin, lightweight, Windows-based notebooks were high-performance PCs, which manufacturers hoped would ignite new demand and accelerate replacement cycles as prices came down.24

Buyers and Distribution

PC buyers fell into five categories: home, small and medium-sized business (SMB), corporate, education, and government. Home consumers represented the biggest segment, accounting for nearly half of worldwide PC shipments.25 While all buyers cared deeply about price, home consumers also valued design, mobility, and wireless connectivity, business consumers balanced price with service and support, and education buyers depended on software availability.

In distribution, a significant shift occurred in the early 1990s when more knowledgeable PC customers moved away from full-service dealers that primarily sold established brands to business managers. Instead, larger enterprises bought directly from the manufacturer, while home and SMB customers started to buy PCs through superstores (Walmart, Costco), electronics retailers (Best Buy), and Web-based retailers. At the same time, the so-called “white box” channel—which featured generic machines assembled by local entrepreneurs—represented a large channel for PC sales, especially in emerging markets. White-box PCs reportedly represented about 30% of the overall market in 2011, and were most frequently sold to small offices and home offices.26

PC Manufacturers

The four top PC vendors—Hewlett-Packard, Dell, Lenovo, and Acer—accounted for 53.6% of worldwide shipments in 2011 (see Exhibit 3b for PC manufacturers’ market shares). Industry leadership had shifted numerous times in the prior three decades, with Hewlett-Packard (HP) emerging as the most recent leader. Following a rough period after the acquisition of Compaq Computer in 2002, HP outsourced most of its production to Asia and dramatically lowered its costs. But HP’s PC leadership came with a high price: since 2005, HP market share eroded, margins declined, and the board fired three CEOs.27 HP proposed selling or spinning off PCs in 2011, then recanted. Nonetheless, HP held on to the number-one position in worldwide shipment market share at 17.7%.28

Dell held the second-largest market share with 12.6% of worldwide PC shipments for 2011.29 Its distinct combination of direct sales and build-to-order manufacturing was popular in the corporate market for a decade. Yet when a boom in retail consumer PCs outpaced corporate sales, Dell was late to catch on. Founder Michael Dell returned as CEO in January 2007 and emphasized consumer- friendly products, reentered retail distribution, and pushed for international expansion. Still, Dell struggled with cost controls and poor margins. China-based Lenovo vaulted into the front ranks of PC vendors in 2005 when it acquired IBM’s money-losing PC business for $1.75 billion. The upward trend continued through 2011 when Lenovo’s worldwide share grew to 12.5%.30 Lenovo’s greatest strength was its dominant position in China, the fastest-growing PC market in the world, where it commanded 35% share.31 In 2007, Taiwan-based Acer bought Gateway, a leading U.S. PC brand, and became the third-largest PC vendor in the world. Acer also acquired Packard-Bell, a PC maker with a strong presence in Europe (where Acer also was a leading brand). Acer’s success was partly a function of its leadership in netbooks,32 but the company lost its third-place ranking largely due to declining netbook sales. Suppliers, Complements, and Substitutes

Suppliers to the PC industry fell into two categories: 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. Intel commanded roughly 80% of the PC CPU market. Competition emerged in the 1990s from companies like Advanced Micro Devices (19.6% in the fourth quarter of 2011) and VIA Technologies (0.1% in the fourth quarter of 2011).33 Still, Intel remained the market leader with leading-edge technology, manufacturing scale, and a powerful brand. Since 1970, CPU prices (adjusted for changes in computing power) had dropped by an average of 30% per year.34 Performance of CPUs continued to double roughly every 18 to 24 months, but prices for microprocessors had stabilized in recent years. However, ARM, a low-power, lower-performance, and lower-priced CPU that was used in smartphones, was expected to enter the PC market in 2012.

Operating system An OS was the software that managed a PC’s resources and supported its applications. Microsoft had dominated this market since the IBM PC in the 1980s. More than 90% of all PCs in the world ran on some version of Windows. Microsoft’s big hit in the new millennium was Windows XP. Introduced in October 2001, 17 million copies of XP were sold in its first eight weeks of sales. Developed at a cost of $1 billion, XP initially garnered for Microsoft between $45 and $60 in revenue per copy.35 Vista, the next version introduced in 2007, did not fare as well. Consumers complained about its sluggish performance and were reluctant to upgrade to Vista. Two years later, Windows 7 was released to strong reviews. Analysts estimated that Microsoft spent $1.5 billion to develop Windows 7 and another $1 billion in marketing. Microsoft shipped over 100 million units of the new OS in the first six months, making it the fastest-selling OS in history.36 In 2012, Microsoft was betting heavily on its next-generation product, Windows 8. Expected in fall 2012, the OS included a new user interface that would incorporate touch and would be available for PCs as well as tablets. Microsoft was also making Windows 8 available on an Intel and a non-Intel (ARM) CPU for the first time. Windows 8 on ARM would not be compatible with most existing Windows software.

Application software, content, and complementary products The value of a computer corresponded directly to the complementary software, content, and hardware that were available on that platform. Key application software included word processing, presentation graphics, desktop publishing, and Internet browsing. Since the early 1990s, the number of applications available on PCs exploded, while ASPs for PC software collapsed. Microsoft was the largest vendor of software for Wintel PCs and, aside from Apple itself, for Macs as well.37 Firms such as Google even offered productivity software (Google Apps) for free. PCs also benefited from a wide selection of content, and a vast array of complementary hardware, ranging from printers to multimedia devices. The number of new, exciting PC applications had slowed considerably in recent years, as software developers increasingly focused on new devices, such as phones and tablets.

Alternative technologies Since the early 2000s, consumer electronics (CE) products, ranging from cellphones to TV set-top boxes to game consoles, started to encroach on functionality that was once the sole purview of the PC. For example, advanced game devices like Sony PlayStation 3 allowed consumers to watch DVDs, surf the Web, and play games directly online in addition to playing traditional video games. At the same time, smartphones increasingly functioned as handheld computers, allowing users to do e-mail, visit websites, and manage their online lives. Despite being in the market since the 1980s, tablet computers failed to gain significant ground until the introduction of the iPad in 2010.38 Sales of tablets exploded to more than 60 million units in 2011. While several industry insiders worried about the impact of digital devices on the PC industry, Jobs viewed all of these devices as part of an integrated strategy to deliver breakthrough user experiences.

The Macintosh and Apple’s “Digital Hub” Strategy

In 2001, marking Apple’s 25th anniversary, Jobs presented his vision for the Macintosh in what he called the “digital hub.” He believed that the Macintosh had a real advantage for consumers who were becoming entrenched in a digital lifestyle, using digital cameras, portable music players, and digital camcorders, not to mention mobile phones. The Mac could be the preferred “hub” to control, integrate, and add value to these devices. Jobs viewed Apple’s control of both hardware and software, one of the few remaining in the PC industry, as a unique strength.

Apple subsequently revamped its product line to offer machines that could deliver a cutting-edge, tightly integrated user experience. Although the company remained committed to the education market, new PC products focused on home consumers’ lifestyles. Apple’s computer sales were growing faster than the industry. Thanks to creative marketing and several innovative computer products, such as the ultra-thin Mac Air, Apple became the third-largest PC vendor in the U.S. with an 11.0% unit share in Q4 2011.39 The company’s greatest strength lay in the premium-priced PC category; 91% of PCs priced above $1,000 in the U.S. market were sold by Apple.40 Globally, Apple’s market share had risen steadily since 2004, but remained below 5% at the end of 2011.41

Changing the Macintosh To accomplish his vision, Jobs made four important changes in the Macintosh: he delivered a new OS; he switched to a new chip architecture; he invested in a new suite of proprietary applications; and he bet on the Apple Store. First, and perhaps most important, Apple introduced a new OS in 2001, the first fully overhauled platform released since 1984. The Mac OS X was based on UNIX, a more stable, industrial-strength OS favored by computer professionals. Analysts estimated that OS X cost Apple roughly $1 billion to develop. Apple issued upgrades every 12 to 18 months, in greater frequency than Microsoft. Over time, Apple was slowly converging its computer OS with the OS on its iPhone and other digital devices.

Second, since the early 1990s, Apple had built Macs with an IBM CPU, called PowerPC. In 2006, Jobs made a large investment to shift Apple to Intel chips. By the next year, the entire Macintosh line ran on Intel.42 Critical to the Mac’s resurgence, Intel’s chips enabled Apple to build laptops that were both faster and less power-hungry.43 By 2011, notebooks accounted for 72%44 of all Macintosh sales compared to 38% nine years earlier. With “Intel Inside,” the Mac could also natively run Microsoft Windows along with Windows applications. This capability potentially offset a long-standing disadvantage to choosing a Mac—the relative lack of Macintosh software.

The third element of the new Mac strategy was developing a proprietary set of applications. Building programs such as the iLife suite (iPhoto, iTunes, iWeb) required Apple to assume significant development costs.45 At the same time, the company continued to depend on the cooperation of key independent software vendors—especially Microsoft. In 2003, after Apple developed its Web browser Safari, Microsoft said it would no longer develop Internet Explorer for the Mac. However, Microsoft did continue to develop its Office suite for Macintosh. Full interoperability with Office products was critical to Macintosh’s viability. Jobs still hedged his bets by developing iWork productivity applications, including Pages, Keynote, and Numbers.46

The final piece of Jobs’s puzzle was a new distribution strategy. The first Apple retail store opened in McLean, Virginia, in 2001. Apple not only wanted consumers to look at the eye-catching Macintosh designs, but also wanted people to directly use and experience Apple’s software. The Apple retail experience gave many consumers their first exposure to the Macintosh product line. By 2011, the company estimated that more than half of all retail Mac sales were to new Mac customers.47 The retail division—with more than 300 stores in 13 countries—accounted for 13% of Apple’s total revenue.48 Observers viewed Apple’s retail strategy as a huge success: one analyst said that the company had become “the Nordstrom of technology.”49 Most analysts believed that the popularity of media products, such as the iPod, iPhone, and iPad, were critical to bringing consumers into the stores and exposing them to the Mac.