The iPad Threat to PCs By Arik Hesseldahl Apple's new computer could erode sales of netbooks and tablet deViceS 501d by PC makers, analysts say Apple's new iPad, a lightweight device that browses the Web and delivers media, may serve as an alternative to netbooks and pose a threat to PC makers. While the iPad is not a fullfledged PC, it's capable of handling many of the tasks consumers deem important in netbooks, stripped-down notebooks that have surged in popularity in recent years. In a lightweight package, the iPad provides access to e-mail, the Internet, and digital media such as electronic books. The cheapest version of the iPad will sell for $499, compared with about $400 or less for many kinds of netbooks. "People who are looking at netbooks wi says Charles Smulders of market research rm Gartner. That could spell trouble for computer makers such as Hewlett-Packard, Acer, and Dell, which relied on delayed purchases of more expensive netbooks for growth in recent quarters as consumers and companies _ machines. The number of PCs shipped rose 15.2% in the fourth quarter, compared with a decline of 0.4% a year earlier, according to research firm IDC. "A substantial portion" of that growth came from the sales of netbooks, says IDC analyst David Daoud. Silver Lining: Margin Squeeze May End If there's a silver lining in the iPad's introduction, it's that PC makers may need to boost their reliance on higherpriced devices, analysts say. Sales of netbooks can put pressure on average selling prices that if unchecked can lead to narrower margins. "The netbook market has created a race to zero margins ,\" Forrester analyst James McQuivey says. "It has created a market where higherpriced, highermargin notebooks have a harder time selling because consumers think they can get essentially the same experience in a netbook with a lower price ." So if netbook growth slows, PC vendors may need to refocus their efforts on selling hi ghermargin traditional notebooks, says Daoud of IDC. \" It will bring some needed sanity and new alternatives for the PC industry," Daoud says. \"For so long, all they could do was drive down prices. Now they can think outside the box and bring out devices that will compete with Apple at prices they can live with.\" Sumit Agnihotry, a vicepresident at PC maker Acer, which sells several netbooks, says the smaller computers will probably keep their place in the PC industry. "The industry has proven that the netbook is says. "We think they're here to stay." Still he says Acer is working on a tablet an important category ," he product that will compete headto-head with Apple's iPad. It's due to be announced in the second half of 2010. iPad Will Tempt PC Tablet Users Apple's iPad may also make a dent in sales of existing tabletstyle computers, a category that has been available for the better part of a decade but failed to catch on with consumers. Only about 1.03 million tablets were sold in 2009, down from 1.3 million in 2008 , according to Gartner. Tablets are generally aimed at businesses that have a specic need for a PC that accepts input from a penshaped stylus. Though the iPad doesn't use a stylus, there's a good chance that its thin, lightweight body could lure some business users away from their tablets. Harry Labana is chief technology officer of Citrix Systems, which makes software that gives mobile devices, including Apple's iPhone, the ability to access software and files on other computers remotely. He sees opportunity for sales of the iPad in areas such as medicine. For example, doctors who want to View patient records or X-ray images can do so from a device like the iPad that connects remotely to another computer where patient files are stored. "Not everyone who spends their work day walking around needs a full-power laptop or a PC to read certain data or to send mail ," he says. Hewlett-Packard introduced a tablet it calls the Slate at the Consumer Electronics Show in Las Vegas in early January. "The slate category is exciting and will be the focus of multiple efforts on several platforms in the industry ," says HP spokeswoman Marlene Somsak. \"We'll have a number of products in this space this year and beyond." She declined t comment specifically on the iPad. A spokeswoman for Dell declined to comment. Apple Computer was founded in 1976 by Steve Wozniak (24 years old) and Steve Jobs (20) in the garage of the latter's parents.l Their first product, the Apple I, was a personal computer kit, engineered and hand-built by Steve Wozniak. In 19'?9, Apple Computer introduced its second product, the Apple II. Equipped with colour graphics and open architecture, the Apple II was aimed at enlarging the customer base beyond 'hobbyists' 98% of whom were males aged between 25 and 45 with the knowledge to program their own routines.2 Apple wanted to erase the perception of a computer as something scientic and complex, and make it easy to use for ordinary people. Whereas the PCs in the market were kits for hobbyists to assemble with no monitor, no keyboard and no software, the Apple II was designed to be of practical use for the consumer. With an all-in-one design in a plastic casing, including the keyboard, power supply, and graphics, it came with software for home and office use such as the Apple Writer word processor and the VisiCalc spreadsheet. The Apple II was a considerable success and helped the company stand out among other garage start-ups in the newly formed US$3 billion industry.3 In December 1980, Apple Computer went public, resulting in an overall market value of more than USS] billion. Over the next four years, Apple Computer developed several PC models the Apple III, Apple IIe, Lisa, Apple He, and so on. During this time, John Sculley, president of PepsiCo, was hired as CEO. Apple Computer aimed to make an \"every person's computer\" that was easy to use in the same way that people drive a car without having to understand the mechanics. On 22 January 1984, Apple Computer launched the Macintosh (Mac), offering an unprecedented graphic user interface and allowing users to operate the computer by clicking the mouse. At that time, users of IBM compatibles had to memorize the DOS commands and enter them using a keyboard in order to operate the computer. The graphic operating environment of Microsoft's Windows 1.0 was not released until November 1985. The easy and intuitive computer experience that Mac offered was warmly received by the market. Four months after its launch, Apple Computer reported that 70,000 Macintosh computers had been shipped and 180,000 more units would be expected by the end of 1984. In the following year, after a power struggle between Steve Jobs and John Sculley, Jobs abruptly left the company he had founded. During Sculley's tenure, Apple Computer developed new computer product lines such as the Centris, Quadra and Performa, in addition to various models in the Macintosh line. Furthermore, Apple Computer expanded its business to computer peripherals such as laser printers, and pioneered the new personal digital assistant (PDA) device market by introducing Newton in 1987. Meanwhile, Microsoft's Windows PC was gainng market share under the slogan \"Windows everywhere". Windows PC contrasted with Apple Computer, which focused on the existing market of sophisticated and creativity-inclined users to sell elegant, high-margin computers.4 As Windows attracted average PC users with a strong integration with complementary software applications such as Microsoft's Ofce suite and Exchange server, Apple Computer seemed to be losing the battle. In 1992, it eamed over US$500 million, but sales dropped sharply to US$90 million the following year. In 1993, Sculley was replaced by Michael Spindler, the president of Apple Europe. The new CEO made efforts to turn the company around by pushing Macintosh lines and making thousands of lay-offs, but the company saw its market share fall 9% to 14%, and it had made a US$68 million loss by the end of 1995. In 1996, Apple Computer replaced Spindler, appointing Gilbert Amelio, a veteran IT expert, as CEO. He instigated many changes, which included massive lay-offs and bringing Jobs back to the company as an advisor. However, the financial situation got worse the company lost US$2 billion in two years and its market share plummeted from 7.4% in 1995 to 3% in 1997, as did the stock price. In 199?, when Amelio resigned, Apple was again under the leadership of Steve Jobs as interim CEO. 011 15 August 1998, Apple introduced the iMac, an all-in-one desktop computer in a translucent, candy-coloured plastic casing. The computer was designed to be optimal for accessing the internet. Whereas PCs with a Windows system had a complicated wizard for internet connection, iNIac aimed to simplify users' internet connection experience. Apple said 'i' stood for 'internet' it took only two steps to set up and connect to the internet. In its rst ve months, 800,000 iMacs were sold. On 23 October 2001, Apple introduced its first digital music player, the iPod. The first generation of the iPod Classic was sold in two models the 5GB for US$399 and the 10GB for US$499. Less than six months later, Apple launched a new service, the iTunes music store, which offered a wide selection of copyrighted quality digital music for 99 cents per song. As the iPod was a huge success, Apple started to milk it by spinning off various product lines and lowering the price. In three years it introduced four generations of the iPod Classic and launched a new iPod Mini. The device became smaller, with long-lasting batteries, different colours, and the price dropped even further. People could buy the iPod Classic Photo 40GB for the price of the iPod Classic rst-generation 10GB model (US$499). Five years from the rst iPod launch, the product line had evolved into the fth generation of the iPod Classic (starting at US$249), two Mini series, one Shufe, and one Nano model. Meantime, the iTunes music store evolved to offer not only music but also TV shows and movies. Using the iTunes software, iPod users simply purchased, downloaded the music, video, and podcast and synchronised them with their devices. On 9 January 200?, Apple dropped \"Computers" from its name, marking its expansion into the consumer electronics market in addition to its focus on personal computers. On the same day, Apple introduced the iPhone to the world. The iPhone had minimal user interface hardware, featuring only four buttons. It had a full multi-touchscreen user interface that maximized the user's ability to browse the internet, view multimedia and play games. The iPhone was offered in two models the 4GB for US$499 and the 8GB for US$599. Less than three months after its release, Apple dropped the price of the iPhone 8GB to US$399 and discontinued the 4GB model. The most distinctive feature of the iPhone was to enable users to customize their phones to their own needs and interests (business, games, sports, social networking) by hosting a marketplace called the App Store. The iTunes App Store was launched on 10 July 2008 and allowed iPhone users to browse and download applications (or \"apps\") developed by Apple and third-party programmers. Apps could be also used for the iPod Touch, launched on 5 September 2007, which added the iPhone's Wi-Fi connectivity and multi-touch graphical user interface to the iPod. On 3 April 2010, Apple launched a 9.? inch (diagonal) tablet PC, the iPad. Using a multi- touchscreen, users could listen to music, watch videos, browse the internet, play games, read e-books, and so on. The built-in battery lasted for 10 hours of video and 140 hours of audio playback. Its weight and size fell between smartphones and laptops. Like the iPhone, users could purchase apps available in the iTunes App Store and customize their own iPad. The rst generation of iPad was offered in two versions one with Wi-Fi and the other with both Wi- Fi and 3G within which three models existed: 16GB, 32GB and 64GB. The powerful comeback of Apple was accompanied by its expansion into the retail business. One of Job's priorities after returning to Apple was ending almost every big box retailer's ties to Apple, as those computer and electronics stores that Apple had relied heavily on often had poorly trained and ill-maintained Mac sections that fell short of providing customers with a unique and pleasant purchase experience.5 Apple decided to open its own retail stores to service its customers and sell Mac computers, software, iPods, iPhones, iPads, third-party accessories and other consumer electronics such as Apple TV. A typical Apple store has a sleek layout and design with surgical grade stainless steel walls, backlit signage, wood tables and stone ooring. Many Apple Stores feature a theatre for presentations and workshops and a studio for training with Apple products. And in every store there is a Genius Bar for technical support and repairs, as well as free workshops available to the public. Staff members in the Apple Store are normally well-trained young workers who are passionate about Apple products and who take pride in helping their customers. About 30,000 of the 43,000 of Apple employees in the US work in Apple Stores. With Apple Stores, Apple was able to \"turn the boring computer sales oors into a sleek playroom filled with gadgets." Apple opened its first retail stores in the US in 2001 and rolled out more stores in the US and around the world in the years that followed. Within ten years, Apple has risen to be ranked among the top retailers in the world; the number of Apple Stores worldwide has grown to 363 as of June 2012, with global sales of US$16 billion in merchandise in 2011. The Apple Store chain ranks first among US retailers in terms of sales per unit area in 2011, with sales of US$3,085 per square foot, almost doubling Tiffany & Co, the second retailer on the list.7 On 24 August 2011, Steve Jobs resigned as CEO and was replaced by Tim Cook, the C00. As shown in Exhibit A, over the previous ten years under Steve Jobs' leadership, Apple's value had escalated exponentially. The company's stock was up 3,000% since the launch of the iPod, 125% since the launch of the iPhone, and 20% since the launch of the iPad.E'l Apple had inuenced the digital lifestyles of people through its iPod, iPhone and iPad, and during that time the company's value hit a record high of US$340 billion, making it the second most valuable company in America. Managing the Business Portfolio at the Corporate Level Other giants in consumer electronics and computer industries had the opportunities to create new market space as Apple did, but they simply missed them. Sony Corporation, founded in 1946 in Japan, has been a leading manufacturer of electronic products, including the Sony Walkman and PlayStation. Since the 1980s, when it revolutionized the audio-cassette with the Walkman, Sony had grown into a global conglomerate. As of April 2011, the Sony Group was engaged in (l) the consumer and professional electronics market, (2) the music industry, (3) the motion picture industry, (4) manufacturing of mobiles, and (5) nancial services. Despite its cutting-edge technology based on vast R&D and a globally renowned brand reputation, Sony turned in a lacklustre performance. Net income dropped from US$15 billion in 1999 to US$851 million in 2004, and then to (US$26 billion) in 2011. The share price hit a 24-year low in November 2011. CEO Howard Stringer recalled Sony's missed opportunities to create compelling products like Apple's iPod and iTunes music store, in an interview with Businessweek: \"Steve Jobs figured it out. We figured it out, we didn't execute. The music guys didn't want to see the CD go away.\"9 The same logic drove the misstep at Microsoft when it killed its Courier tablet project. At the time when Apple was developing the iPad, Microsoft was also pursuing its own tablet (the Courier) but there were conicting visions for its development within the corporation. One group, led by J. Allard in the Xbox division, favoured a sleek, two-screen tablet, responsive to a ngertip or pen. It was designed to run a modied version of Windows and did not need Ofce applications such as Microsoft Word and Exchange. The other group, led by Steven Sinofsky in the Windows division, wanted to keep Courier on its Windows platform, but the development of a tablet-friendly Windows was two years away. The Microsoft leadership decided to cancel the Courier (envisioned by Allard) for the sake of protecting their old products, as they were concerned that it would not clearly align with the Windows and Ofce 'anchises, according to some sourcesm As a result, Microsoft lost the momentum to enter the rapidly growing tablet market that Apple's iPad created. Questions for Interactive Class Discussion Please prepare your answers to the following questions for the class discussion as you read this case and accompanying press articles. With the iPad, in which industry did Apple create a blue ocean? Be specic about which industry (e. g, do not state consumer electronics). Was that industry attractive prior to Apple's new iPad? Was Apple a new entrant or an incumbent in the iPad industry? Where did the crucial innovation for the iPad come from? Was it an innovation in technology, an innovation in the market, or an innovation in the value created? While there may be more than one type of innovation, which was the most crucial and why? With the iPad, did Apple focus on the existing core customers of that industry? Did Apple pursue either differentiation or low cost or both in the iPad industry? Please remember that low cost is NOT the same thing as low price. With the iPad what did it eliminate, reduce, create, and/or raise as compared to industry standards