What are key forces in the general and industry environments that affect Apples choice of strategy?

In April 2019, Apple CEO Tim Cook held the second quar- of over $45 to a high of $230 in August 2018 , and when the ter earnings presentation at the Apple Park corporate cam- company reached a market capitalization of over $1 trillion pus in the 1,000-seat auditorium named the Steve Jobs in 2018, that made it the most valuable company in the Theater. Part of a 175-acre campus developed in 2017, the world. In addition, Cook had instituted Apple's first ring-shaped 2.8-million-square-foot facility with walls of dividend since 1995 in 2012, and bought back more than curved glass surrounding an inner greenspace courtyard \$200 billion of shares, producing strong free cash flows and was possibly the last evidence of the direct vision and inno- an "impressive" balance sheet." This had made investors vation of Apple co-founder Steve Jobs. Originally envi- happy. sioned by Jobs in 2011 as a center for creativity and Cook had done what CEOs of public companies are supcollaboration, the building honored his legacy, memory, posed to do-drive up value. But revenue from the flagship and enduring influence. Jobs, who died in 2011, would have products-iMac, iPad and iPhone-was falling or stagnant, turned 64 in February 2019. As Apple's current CEO Tim and only the services and other products sectors were seeCook said, "Steve's vision for Apple stretched far beyond ing growth. In addition, operating margins were declining his time with us. He intended Apple Park to be the home of in products, indicating that high iPhone prices may have innovationforgenerationstocome."YetthepaceofinnovationatApplehadslowedconsid.30percent.IfiPhonesaleswereinereasinglychallengedbybeentheonlythingkeepingmarginsstableataround erably. Since Steve Jobs's death, the only new physical prod- 30 percent. If iPhone sales were increasingly challenged by uct launched had been the Apple Watch in 2014. The iconic. Huawei, something would have to change. Was Apple's iPhone, in FY2018 representing 63 percent of total reve. recent shift into services and other products going to be the nues, was over 10 years old, and even though upgrades kept answer? (See Exhibits 1 to 3.) "Other products" included customers coming back, competition had eroded Apple's wearables such as the iWatch and the AirPod wireless earsmartphone market share such that second quarter 2019 phones, and home products such as the HomePod voiceiPhone revenues had declined by over 17 percent year over controlled smart speaker system. These were new, but year. Mac computer and iPad sales had declined as well. perhaps not as innovative as Apple's other products. Were Although Apple's FY2018 revenues were up by about expectations of major breakthroughs unrealistic? As one 16 percent overall, the bulk of that inerease came from ser- analyst said, it is hard to find "ways to make the world's vices and other products such as the Apple Watch. In this most valuable company even more valuable when it's ar environment, there was some concern that although re- ready so big that conventional growth strategies-extending search and development spending was up in FY2018, re- product lines, moving into new territories-would barely breakthroughs. This posed yet again the unavoidable ques- Apple, Fortune Magazine's "world's most admired comtion that still seemed to haunt the 42-year-old Apple: What pany" since 2008 , 6 had distinguished itself by excelling over happens to a modern company whose innovations and in- the years not only in product innovation but also in revenue spirations are so closely tied to the vision of one leader and margins (since 2006 Apple had consistently reported when that leader's influence is no longer present?2 gross margins of over 30 percent). By 2019, Apple Inc. was Tim Cook was considered a highly effective leader, yet known for having top-selling products not only in desktop ing perhaps too cautious about entering new product cate- also in online music and "app" services (Thunes and App gories, pursuing acquisitions, or driving employees to Store), mobile communication devices (iPhone), digital achieve almost impossible stretch goals. 3 On the other consumer entertainment (Apple TV), tablet computers hand, investors had been mostly very pleased with the stock (iPad), operating systems (macOS and iOS), software (Saperformance under Cook. Since he was named CEO in fari web browser) and online services (iCloud), as well as August 2011, Apple share price had risen from an average wearable technology (Apple Watch, AirPods) and home accessories (HomePod, Beats products), mobile payment sys* This case was prepared by Professar Alan B. Eiqner of Pace Untwersity and tems (Apple Pay), and a subscription-based music Professor Pauline Assenza, Western Conneetieut State University. This case is streaming scrvice (Apple Music). Additional services rollbased solely on library research and was developed for elass discussion rather ing out in 2019 included Apple TV+ original content, subsinuation. Cepyright \& 2019 Alan B. Eisner. EXHIBIT 3 Apole Products and Sanviepe Powonua and Rrineo Mmanden [eodoen. thindearty accescrib net sales also include imsortization of the beferred vilue of Mapa, Siri. and free iCloud services, which are bundlod in the sules price of ecrtala peodacts. Sourte: Quarterly Report Farn 104. Apple, March 3a, 2019, operationaldetails.GivenApplesglobelgrowthinmultiplewasthetechnicalgenius,andA.C."Mike"MarkkulaJr.,productcategories,andtheassociatedcomplexityinstrategicexecution,CEOTimCookwouldbechallengedtosustainthelevelofinnovationforwhichthecompanywasknown.CompanyBackgroundFounderSteveJobsAppleComputerwasfoundedinMountainView,essentiallycreatingthepersonalcomputerindustry.ByCalifornia,onApril1,1976,bySteveJobsandSteveWozniak.Jobswasthevisionaryandmarketer,Wozniakwhohadjoinedtheteamseveralmonthsearlier,wasthebusinessman.Jobssetthemissionofempoweringindividu-ats,oneperson-onecomputer,anddoingsowitheleganeeofdesignandfierceattentiontodetail.In1977,thefirstversionoftheAppleIIbecamethefirstcomputerordinarypeoplecoulduserightoutofthebox,anditsinstantsuc-1980,ApplewastheindustryleaderandwentpublicinDecemberofthatyear. EXHIBIT 4 Apple Innovation Time Line EXHIBIT 1 Apple Sales. 2015-2018 fdallars in millinne and unite in thmueandes (1) lrieluzes deferrals and aittex liation of ralabed softwate upgrade rights and non-seftware services. 3640 milion due to a change in estimate based an the arailability of aldilienal supparting infurmation. (3) Includes sales of AirPods, Apple TV, Apple Watch, Heals products. HomelPod, iPod touch and oller Appiehranded std thind-party asoessories Soroces Annual Repart. Apple Ind. 2017.; Anmual Report. Apple lne, 20IS. EXHIBIT 2 Apple Product Performance-Percentage of Total Sales Source: Annual Regort Apple lnc. 20t8. Apple Areade for games, and Apple Card, a credit card to leverage "its uaique ability to design and develop its own stored in Apple Wallet. (see Exhibit 4). operations systems, hardware, application software and scrAs the time line shows, most of the product innovations vices to provide its customers products and solutions with incocarred after 1998, when Apple was undor Steve Jobs's lead- novative design, superior ease-of-use and seamless ership. However, there was also a 12 year period in which Jobs integration." This strategy required not only product design Was not in charge. The company's ongoing stated strategy was and marketing expertisc but also scrupulous attention to Sources: Tineline of Applo Int. producs. Wikipedins nuthor estimales. decision to stop work on a brand-new operating system and market cap cxceeded Microsoft's, making it the biggest tech jump-start development by using NeXTStep brought Steve company in the world. "In 2011, Steve Jobs made his last Jobs back to Apple in 1997 . product launch appearance to introduce iCloud, an online these stores worldwide were considered architectural guarded secret and fiercely protected its innowative patents. wonders, including the iconic Fifth Avenue glass cube in For cxamplc, a well-publicized series of lawsuits in 2012 New York City. Apple had even received trademark protec- highlighted rifts between Apple and Samsung. who was tion for its retail stores' "distinctive design and layout."17 both a rival and sapplicr. Samsung smartphones had capPartly due to the appealing design of both the shopping ex - tured more market share than Apple's iPhones in the beginperience and the products being sold within, Apple retail ning of 2012, and Apple argued that Samsung had stores had traditionally generated more sales per square succeeded with both its phones and tablets only by copying foot than any other U.S. retailer, including its closest luxury Apple's designs. Samsung replied by claiming that Apple TivalTiftany&Co.18Tosolidifyitssupplychain,Applehadenteredintomul-hadinfringedonSamsungspatents.22U.S.intellectualpropertycourtsfoundinfavorofApple,butJapanese tiyear agreements with suppliers of key components. Apple courts found in favor of Samsung. The threat of ongoing had had historically excellent margins, partly because of its battle meant Apple needed to look for other suppliers of Applc had outsoureed almost all manufacturing and final Apple still had a major challenge finding reliable suppliers assembly to its Asian partners, paying close attention to for increasingly scaroe components, and that the continued scheduling and quality issues. Outsourcing to Asian manu- reliance on Foxconn as the sole manufacturer of the iPhone facturers was not without its problens, howcver. In 2012, meant that any disruption there could have major conseheadlines worldwide exposed China's Foxconin manulactur- Apple, as well as most other technology companies, used Foxconn facilities to assemble procuucts, including the iPad Status of Apple's Business UnIts In 2019 and iPhone. After the story broke, Apple CEO Tim Cook The Apple Computer Business visited the Foxconn plant and reviewed an audit of working In the computer market, Apple had always refused to comconditions that found violations in wages, overtime, and pete on price, relying instead on its reliability, design elecnvironmental standards. Apple stated that it remained gance, ease of use, and integrated features to win customers. across our worldwide supply chain, "30 and Cook announced when Apple began asing Intel processors in the iMac deskthat Apple would be bringing some of the production of top and the MacBook portables, which allowed them to run Mac computers back to the United States, starting in 2013 . Microsoft Office and other business software. They could do this without affecting the company's profit. Hewever, in FY2018 Apple's worldwide Mnc computer ability, beceuse of automation cost savings. 21 ability,beeduseofautomationcostsavings.21ApplehadalsohistoricallypaidattentiontoresearchtosignalthedeclineofthiscategorysincetheintroductionsalesdeereasedSpercentoverthepreviousyear,continuing and development, increasing its R&D itrvestment year after of the iPad in 2010. Overall it appeared that sales of deskyear. In the second quarter of 2019, Apple spent $3.9 billion top computers, especially, were slowing worldwide as the on R\&D, an increase of 1 percent from the previous year. tablet and smartphone markets grew, and this was evident AsoneofSteveJobsslcgacies,ApplehadtraditionallykeptthespecificsofitsresearchanddevelopmentacloselyintheworldwidePCmarketsharedatafrom2018,whereonlyDellsawanysignificantgrowth(seeExhibit5).Apple EXHIBIT 5 Worldwide PC Market Share, Calendar Year 2018 (units in thousands) Sourve: Inventory and Procesonr Sagply 1ssues hieh Agsinst Holiday PC Stripctents, According to DC, IDC, Jamusy 10,2019. saw the greatest decline amongst its rivals, a deeline also digital camera or camcorder appear obsolete. By the fourth evident in its own revenue profile, which had seen the quarter of 2015 Apple had achieved almost 19 percent market Mav's share of Apple overall revenue drop from more than share, in a close tie with Samsung, and by July 2016 it had 40 percent in 2007 to ubout 11 percent in 2016, and slip. sold wer 1 billion units, becoming "one of the most imporping further to 9.5 percent in the first quarter of 2019.24 There had been rumors Apple was planning to refresh the iMac, and completely revamp the Mae Pro. Targeting phone market share had dropped by over 23 percent. The professional users, and very expensive at around $3,000, main challenge was coming from Huawel (soe Exhibil 6). the Mac Pro product had never had a large market In addition, the smurtphone market was increasingly share, but the creative professionals-the videographers, turning into a batle between mobile operating systems. Approduct were still waiting for a delnyed redesign,23 The from Samsung's line of smartphones. This was partly due to iMac did soe new processors and gruphies in 2019, but the Samsung's use of Google's Android operating system. By basic design remained the same. 2018, the operating system map had Android devices captur Personal Digital Entertainment Devices: IPod ing the majority of market share (see Exhibit 7)21 Over the yeurs, in Asian markets especially, Applo's shares Although many unalysts at the time felt the MP3 player mar. of mobile devices had lost considerable ground to Samsung. ket was oversaturated, Apple had introduced the iPod Touch Huawel, and other smartphones produced by Asian in 2007, intending it to be an iPhone without the phone, a manufacturers. Younger Asian users, the 20-something college AT \&T phone bill. The iPod Touch borrowed most of its fon- thing, and that was incrensingly un Android-driven device, ?o tures from the iPhonc, including the finger-touch interface, In 2019, overall iPhone socond quarter sales were down but it remained mainly an iPod, with a larger viewing area 17 percent from the previous year. The overall smartphone for videos. Apple released the fifthgeneration iPod Touch in market was slowing down as mature markets were increns- September 2012, and the sixth-generation version debuted in ingly dependent on replacement purchases, and emerging 2015. A seventh-eneration was relcased in May, 2019.2x The markets appeared more interested in low-cost devices. iPod Touch had sold well over 100 million units since its Other than the removal of the headphone port, Apple had debut in 2007, and although it was no longer promoted on not made any significant technological changes to the the Apple website, it was still for snle. The device was still a iPhone lineup, so if Apple wanted to address its declining cheap way to get entertainment, and used for portuble gam- market share, it might have to lower prices, which, given the ing,thisdeviceaugmentedwithacheapphoneforcallingandtextingwasstilllessexpensivethsnaniPhone.iPhonesmajorcontributiontoApplesbottomline($167Bofpercentoftotalsalesin2018),wouldmakeitdifficult for the company to maintain its profit margins or grow net phone and viden iPod. The iPhone allowed users to access all iPod content and play music and video content purchased Tablet Computer: iPad from iTunes. Subsequent smartphone models increased the In April 2010, Apple released the iPad, a tablet computer, as a quality of the photo and video components to make even the platform for andio-visual media, including books, periodicals, EXHIBIT 7 \$martphone Operating System Market Share, Fourth Ouarter 2018 movies, music, games, and web content. More than 300,000 also appeared, including Google's Chromebook, Amazon's iPads were purchased by eager tech consumers during the de- Kindle Fire, and Microsoft Windows' Surface tablet. 33 vice's iirst day on store shelves. Weighing only 1.5 pounds, Going into 2019 there were signs that the iPad models' this lightweight, portable, and touch-screen device was seen as sales-as well as the entire tablet industry-were in decline, a gigantic iPod Touch.3. Features like the sleek design, touch perhaps due to the "jumbo" phones coming from the likes made the ipad apps, and list and easy-to-navigate software of Samsung (and Apple), and low-cost Google-based tainment industry. The iPad was selected by Time anagazine as Apple finally redesigned the iPad lineup in 2019 , providone of the 50 Best Irventions of the Year 2010.31 ing a major upgrade in power with Apple's new A 12 Bionic Up until September 2010, Apple iPads had accounted chip, and introducing a new iPad Mini and iPad Air, both for 95 percent of tablet computer sales, 32 but by the end of ultra-portable with Apple Pencil support. The iPad Pro, 2012 , that figure had fallen to 78.9 percent; and by the end although expensive, was redesigned to incorporate a full- of 2018 Apple held only about 26 percent of the market. screen Liquid Retina display. Face ID, as well as the The loss of share was partly due to tablet devices. such as powerful A12X Bionic chip with Nearal Engine und supSamsung's Galaxy, that were based on Google's open- port for the new Apple Pencil and Smart Keyboard. Even souree Android system. Other platiorms and devives had though the category had scen reduced activity as a whole, EXHIBIT \& Worldwide Quarterly Tablet Market Share. Third Quarter 2018 the iPad continued to perform for Apple, with 2018 seeing iPods and connected with the iTunes Music Store for purthe strongest growth in years. Part of this growth was due to chasing digital music and movie files that could be customer response to the iPad Pro and the adoption of the downloaded and played by iPods, iPads, and the iPhone, iPad in operational scenarios such as in airline pilots' flight and by iTunes on PCs. bags and maintenance ground crews' service bays as an Although the volume was there, iTunes had not neces. direction. One commentator called Chrome "a wake-up call for the Safari UI guys.") Browser market share data in 2019 The App Store - Apple Arcade, Apple News+ showed Chrome in the top spot, with its various versions grabbing over 65 percent of global market share. Rccent In March 2008, Apple announced that it was relcasing the versions of Mierosolt Internet Explorer and Edge held second iPhone software development kit (SDK), allowing develop3.7 percent share. 33 and Firefox had 9.6 percent. Safari bad ers to create applications for the iPhone and iPod Touch 3.7 percent share.3s iCloud was introduced in 2011 during one of Steve Store. The App Store was made available on iTunes, and it Jobs's last public appearances. The web-based storage ser- was directly available from the iPhone, iPad, and iPod vice initially struggled to get traction, but in 2014 was Touch products. This opened the window for another group upgraded to iCloud Drive, allowing users to interoperate of Apple customers, the application developers, to collabowithWindowsandconnectalliOSdevices.Asanalterna-ratewithApple.DeveloperscouldpurchasetheiPhonetivetoGoogleDriveandDropbeloperProgramfromApplefor$99,createeitherfree tive to Google Drive and Dropbox, this gave Apple an intro Dcveloper Program from Apple lor $99, create either free into the enterprise/corporate user space, a market C.O or commercial applications for the iPhone and iPod Touch, Tim Cook bad begun to successfally target." 19 and then submit these applications to be sold in the App In other software development areas, Apple had not been Store. Developers would be paid 70 percent of the downthat successfil. In 2012, Apple stumbled hadly with its Maps load fee customers paid to the App Store, and Apple would software. Relessed in iOS6, Apple Maps was meant to replace 30 pervert of the revenue. Software. Released in iOS6, Apple Maps was meant to replace Google Maps on the iPhone, but instead produoed distorted By 2019, over 180 billion apps had been downloaded images and gave really bad directions. CEO Tim Cook had to from Apple's App Store, 45 but Google Play, the app store apologize that Apple bad fallen short of its commitment to for Android users, had grabbed more of the download buck to using its competitor's mapping software, 4 maks go 7.6 billion downloads, while Google Play had 19.5 billion. The most popular App Store downloads were games, 45 It iTunes/AppleMusicArguahly,Applesmostinnovativesoftwareproductwasand1.35billiontabletusersworidwide,andthisnumberwasworthnotingthatthemobileappindustrywaslarge-in2019therewereanestimated2.7billionsmartphoneusers Arguably, Apple's most innovative software product was and 1.35 billion tablet users woridwide, and this number iTunes, a free downloadable software program for con- was expected to continue to grow. Data showed that 90 persumers running on either Mac or Windows operating cent of mobile time was spent on apps, and this was a posystems. It came bundled with all Mac computers and tentially lucrative business for both the app developer und the platform host. Apple was intending to capitalize on this HealthKit and ResearchKit had helped wearers monitor by offering its new Apple Arcade, an ad-free subscription and improve their health and fitners, showing that this service, providing access to over 100 exclusive or new device was more than just an iPhone extension on the wrist. games. Apple was attracting game developers who appreci- Apple's AirPods, first released in 2016, were Apple's ated the superior iPhone animation technology and, unlike most popalar accessory product, with over 35 million units on the Google Play platform, Apple had the ability to pro- sold in 2018. These wireless Bluetooth earphones not only vicie security and protection against malware, counterfeit played audio but could handle phone calls and reccive ing, and piracy. This meant high quality games would be assistance from Siri, Apple's digital assistant. AirPoxis had available for Apple products exclusively. 4 full functionality with all Apple products, including Apple Also available in 2019 in the App Store was Apple Watch and Apple TV. With the existing hardware products all appearing to stagnate, analysts were looking to Apple's services and "other products" for growth opportunitics. While the "other" products such as Apple Watch, Apple TV, AirPods, and HomePod grew 35 percent in FY2018, the services category-which included Apple Pay, Apple Music, iCloud, iTunes, and the App Store-grew 24 percent to a record $37.2 billion and sccounted for 14 percent of all resenues, beating every category except the iPhone. In addition, making this sector more attractive, profit margin estimates averaged almost 64 percent. In particular, the App Store, having tripled revenue between 2013 and 2016, was projected to produce about two-thirds of Apple's growth target for 2020..55 In 2019, Apple reported over 390 million prid subscriptions across its services portfolio, an increase of 120 million since the previous year. Many analysts were wondering whether Apple could create "the world"s greatcst subseription model, where users can opt to have the latest iPhone and many services for a fixed fee. This would lock many into its ecosystem and create a constant stream of recurring revenues, "56 Others cautioned that Apple's strength is "using the services division to boost the sales of the iPhone and keep people locked into an ever.growing cycle of updated hardware."9y This may be Apple's exact intention. The Future of Apple Under Cook, Apple had transitioned itself "from being a hypergfowth company to being a premium, branded consumer company, 45t Apple was a truly vertically integrated designer and marketer of products and services, If long-time Apple fans were not satisfied with the state of Apple's innovation today, they might have to realize, as former Apple marketing guru Guy Kawasaki did, that [It is] difficult kor Apple to top itself. ... It would be foollsal to bet against Apple based on my experience.... If nothing else, Apple will once again force everyone to improve their game., As CEO Tim Cook said during the second quarter earnings call of 2019: One of Apple's great strengths is our culture of flexibility, adnptraility, and creativity. This quarter testured some important annoeneements that speak to the power of our commitment to innoration and longe term thinking... we proviewod a gamechanging array of new services, each of them rooted in principles that are fundamentally Apple... These features aren't just nice to have. They actually help to eilminate the boundary between hardware, softwarc, and service, crenting a singalarly evceptional experience for our users. to It is entirely possible Apple is not done innowating. In April 2019, Apple CEO Tim Cook held the second quar- of over $45 to a high of $230 in August 2018 , and when the ter earnings presentation at the Apple Park corporate cam- company reached a market capitalization of over $1 trillion pus in the 1,000-seat auditorium named the Steve Jobs in 2018, that made it the most valuable company in the Theater. Part of a 175-acre campus developed in 2017, the world. In addition, Cook had instituted Apple's first ring-shaped 2.8-million-square-foot facility with walls of dividend since 1995 in 2012, and bought back more than curved glass surrounding an inner greenspace courtyard \$200 billion of shares, producing strong free cash flows and was possibly the last evidence of the direct vision and inno- an "impressive" balance sheet." This had made investors vation of Apple co-founder Steve Jobs. Originally envi- happy. sioned by Jobs in 2011 as a center for creativity and Cook had done what CEOs of public companies are supcollaboration, the building honored his legacy, memory, posed to do-drive up value. But revenue from the flagship and enduring influence. Jobs, who died in 2011, would have products-iMac, iPad and iPhone-was falling or stagnant, turned 64 in February 2019. As Apple's current CEO Tim and only the services and other products sectors were seeCook said, "Steve's vision for Apple stretched far beyond ing growth. In addition, operating margins were declining his time with us. He intended Apple Park to be the home of in products, indicating that high iPhone prices may have innovationforgenerationstocome."YetthepaceofinnovationatApplehadslowedconsid.30percent.IfiPhonesaleswereinereasinglychallengedbybeentheonlythingkeepingmarginsstableataround erably. Since Steve Jobs's death, the only new physical prod- 30 percent. If iPhone sales were increasingly challenged by uct launched had been the Apple Watch in 2014. The iconic. Huawei, something would have to change. Was Apple's iPhone, in FY2018 representing 63 percent of total reve. recent shift into services and other products going to be the nues, was over 10 years old, and even though upgrades kept answer? (See Exhibits 1 to 3.) "Other products" included customers coming back, competition had eroded Apple's wearables such as the iWatch and the AirPod wireless earsmartphone market share such that second quarter 2019 phones, and home products such as the HomePod voiceiPhone revenues had declined by over 17 percent year over controlled smart speaker system. These were new, but year. Mac computer and iPad sales had declined as well. perhaps not as innovative as Apple's other products. Were Although Apple's FY2018 revenues were up by about expectations of major breakthroughs unrealistic? As one 16 percent overall, the bulk of that inerease came from ser- analyst said, it is hard to find "ways to make the world's vices and other products such as the Apple Watch. In this most valuable company even more valuable when it's ar environment, there was some concern that although re- ready so big that conventional growth strategies-extending search and development spending was up in FY2018, re- product lines, moving into new territories-would barely breakthroughs. This posed yet again the unavoidable ques- Apple, Fortune Magazine's "world's most admired comtion that still seemed to haunt the 42-year-old Apple: What pany" since 2008 , 6 had distinguished itself by excelling over happens to a modern company whose innovations and in- the years not only in product innovation but also in revenue spirations are so closely tied to the vision of one leader and margins (since 2006 Apple had consistently reported when that leader's influence is no longer present?2 gross margins of over 30 percent). By 2019, Apple Inc. was Tim Cook was considered a highly effective leader, yet known for having top-selling products not only in desktop ing perhaps too cautious about entering new product cate- also in online music and "app" services (Thunes and App gories, pursuing acquisitions, or driving employees to Store), mobile communication devices (iPhone), digital achieve almost impossible stretch goals. 3 On the other consumer entertainment (Apple TV), tablet computers hand, investors had been mostly very pleased with the stock (iPad), operating systems (macOS and iOS), software (Saperformance under Cook. Since he was named CEO in fari web browser) and online services (iCloud), as well as August 2011, Apple share price had risen from an average wearable technology (Apple Watch, AirPods) and home accessories (HomePod, Beats products), mobile payment sys* This case was prepared by Professar Alan B. Eiqner of Pace Untwersity and tems (Apple Pay), and a subscription-based music Professor Pauline Assenza, Western Conneetieut State University. This case is streaming scrvice (Apple Music). Additional services rollbased solely on library research and was developed for elass discussion rather ing out in 2019 included Apple TV+ original content, subsinuation. Cepyright \& 2019 Alan B. Eisner. EXHIBIT 3 Apole Products and Sanviepe Powonua and Rrineo Mmanden [eodoen. thindearty accescrib net sales also include imsortization of the beferred vilue of Mapa, Siri. and free iCloud services, which are bundlod in the sules price of ecrtala peodacts. Sourte: Quarterly Report Farn 104. Apple, March 3a, 2019, operationaldetails.GivenApplesglobelgrowthinmultiplewasthetechnicalgenius,andA.C."Mike"MarkkulaJr.,productcategories,andtheassociatedcomplexityinstrategicexecution,CEOTimCookwouldbechallengedtosustainthelevelofinnovationforwhichthecompanywasknown.CompanyBackgroundFounderSteveJobsAppleComputerwasfoundedinMountainView,essentiallycreatingthepersonalcomputerindustry.ByCalifornia,onApril1,1976,bySteveJobsandSteveWozniak.Jobswasthevisionaryandmarketer,Wozniakwhohadjoinedtheteamseveralmonthsearlier,wasthebusinessman.Jobssetthemissionofempoweringindividu-ats,oneperson-onecomputer,anddoingsowitheleganeeofdesignandfierceattentiontodetail.In1977,thefirstversionoftheAppleIIbecamethefirstcomputerordinarypeoplecoulduserightoutofthebox,anditsinstantsuc-1980,ApplewastheindustryleaderandwentpublicinDecemberofthatyear. EXHIBIT 4 Apple Innovation Time Line EXHIBIT 1 Apple Sales. 2015-2018 fdallars in millinne and unite in thmueandes (1) lrieluzes deferrals and aittex liation of ralabed softwate upgrade rights and non-seftware services. 3640 milion due to a change in estimate based an the arailability of aldilienal supparting infurmation. (3) Includes sales of AirPods, Apple TV, Apple Watch, Heals products. HomelPod, iPod touch and oller Appiehranded std thind-party asoessories Soroces Annual Repart. Apple Ind. 2017.; Anmual Report. Apple lne, 20IS. EXHIBIT 2 Apple Product Performance-Percentage of Total Sales Source: Annual Regort Apple lnc. 20t8. Apple Areade for games, and Apple Card, a credit card to leverage "its uaique ability to design and develop its own stored in Apple Wallet. (see Exhibit 4). operations systems, hardware, application software and scrAs the time line shows, most of the product innovations vices to provide its customers products and solutions with incocarred after 1998, when Apple was undor Steve Jobs's lead- novative design, superior ease-of-use and seamless ership. However, there was also a 12 year period in which Jobs integration." This strategy required not only product design Was not in charge. The company's ongoing stated strategy was and marketing expertisc but also scrupulous attention to Sources: Tineline of Applo Int. producs. Wikipedins nuthor estimales. decision to stop work on a brand-new operating system and market cap cxceeded Microsoft's, making it the biggest tech jump-start development by using NeXTStep brought Steve company in the world. "In 2011, Steve Jobs made his last Jobs back to Apple in 1997 . product launch appearance to introduce iCloud, an online these stores worldwide were considered architectural guarded secret and fiercely protected its innowative patents. wonders, including the iconic Fifth Avenue glass cube in For cxamplc, a well-publicized series of lawsuits in 2012 New York City. Apple had even received trademark protec- highlighted rifts between Apple and Samsung. who was tion for its retail stores' "distinctive design and layout."17 both a rival and sapplicr. Samsung smartphones had capPartly due to the appealing design of both the shopping ex - tured more market share than Apple's iPhones in the beginperience and the products being sold within, Apple retail ning of 2012, and Apple argued that Samsung had stores had traditionally generated more sales per square succeeded with both its phones and tablets only by copying foot than any other U.S. retailer, including its closest luxury Apple's designs. Samsung replied by claiming that Apple TivalTiftany&Co.18Tosolidifyitssupplychain,Applehadenteredintomul-hadinfringedonSamsungspatents.22U.S.intellectualpropertycourtsfoundinfavorofApple,butJapanese tiyear agreements with suppliers of key components. Apple courts found in favor of Samsung. The threat of ongoing had had historically excellent margins, partly because of its battle meant Apple needed to look for other suppliers of Applc had outsoureed almost all manufacturing and final Apple still had a major challenge finding reliable suppliers assembly to its Asian partners, paying close attention to for increasingly scaroe components, and that the continued scheduling and quality issues. Outsourcing to Asian manu- reliance on Foxconn as the sole manufacturer of the iPhone facturers was not without its problens, howcver. In 2012, meant that any disruption there could have major conseheadlines worldwide exposed China's Foxconin manulactur- Apple, as well as most other technology companies, used Foxconn facilities to assemble procuucts, including the iPad Status of Apple's Business UnIts In 2019 and iPhone. After the story broke, Apple CEO Tim Cook The Apple Computer Business visited the Foxconn plant and reviewed an audit of working In the computer market, Apple had always refused to comconditions that found violations in wages, overtime, and pete on price, relying instead on its reliability, design elecnvironmental standards. Apple stated that it remained gance, ease of use, and integrated features to win customers. across our worldwide supply chain, "30 and Cook announced when Apple began asing Intel processors in the iMac deskthat Apple would be bringing some of the production of top and the MacBook portables, which allowed them to run Mac computers back to the United States, starting in 2013 . Microsoft Office and other business software. They could do this without affecting the company's profit. Hewever, in FY2018 Apple's worldwide Mnc computer ability, beceuse of automation cost savings. 21 ability,beeduseofautomationcostsavings.21ApplehadalsohistoricallypaidattentiontoresearchtosignalthedeclineofthiscategorysincetheintroductionsalesdeereasedSpercentoverthepreviousyear,continuing and development, increasing its R&D itrvestment year after of the iPad in 2010. Overall it appeared that sales of deskyear. In the second quarter of 2019, Apple spent $3.9 billion top computers, especially, were slowing worldwide as the on R\&D, an increase of 1 percent from the previous year. tablet and smartphone markets grew, and this was evident AsoneofSteveJobsslcgacies,ApplehadtraditionallykeptthespecificsofitsresearchanddevelopmentacloselyintheworldwidePCmarketsharedatafrom2018,whereonlyDellsawanysignificantgrowth(seeExhibit5).Apple EXHIBIT 5 Worldwide PC Market Share, Calendar Year 2018 (units in thousands) Sourve: Inventory and Procesonr Sagply 1ssues hieh Agsinst Holiday PC Stripctents, According to DC, IDC, Jamusy 10,2019. saw the greatest decline amongst its rivals, a deeline also digital camera or camcorder appear obsolete. By the fourth evident in its own revenue profile, which had seen the quarter of 2015 Apple had achieved almost 19 percent market Mav's share of Apple overall revenue drop from more than share, in a close tie with Samsung, and by July 2016 it had 40 percent in 2007 to ubout 11 percent in 2016, and slip. sold wer 1 billion units, becoming "one of the most imporping further to 9.5 percent in the first quarter of 2019.24 There had been rumors Apple was planning to refresh the iMac, and completely revamp the Mae Pro. Targeting phone market share had dropped by over 23 percent. The professional users, and very expensive at around $3,000, main challenge was coming from Huawel (soe Exhibil 6). the Mac Pro product had never had a large market In addition, the smurtphone market was increasingly share, but the creative professionals-the videographers, turning into a batle between mobile operating systems. Approduct were still waiting for a delnyed redesign,23 The from Samsung's line of smartphones. This was partly due to iMac did soe new processors and gruphies in 2019, but the Samsung's use of Google's Android operating system. By basic design remained the same. 2018, the operating system map had Android devices captur Personal Digital Entertainment Devices: IPod ing the majority of market share (see Exhibit 7)21 Over the yeurs, in Asian markets especially, Applo's shares Although many unalysts at the time felt the MP3 player mar. of mobile devices had lost considerable ground to Samsung. ket was oversaturated, Apple had introduced the iPod Touch Huawel, and other smartphones produced by Asian in 2007, intending it to be an iPhone without the phone, a manufacturers. Younger Asian users, the 20-something college AT \&T phone bill. The iPod Touch borrowed most of its fon- thing, and that was incrensingly un Android-driven device, ?o tures from the iPhonc, including the finger-touch interface, In 2019, overall iPhone socond quarter sales were down but it remained mainly an iPod, with a larger viewing area 17 percent from the previous year. The overall smartphone for videos. Apple released the fifthgeneration iPod Touch in market was slowing down as mature markets were increns- September 2012, and the sixth-generation version debuted in ingly dependent on replacement purchases, and emerging 2015. A seventh-eneration was relcased in May, 2019.2x The markets appeared more interested in low-cost devices. iPod Touch had sold well over 100 million units since its Other than the removal of the headphone port, Apple had debut in 2007, and although it was no longer promoted on not made any significant technological changes to the the Apple website, it was still for snle. The device was still a iPhone lineup, so if Apple wanted to address its declining cheap way to get entertainment, and used for portuble gam- market share, it might have to lower prices, which, given the ing,thisdeviceaugmentedwithacheapphoneforcallingandtextingwasstilllessexpensivethsnaniPhone.iPhonesmajorcontributiontoApplesbottomline($167Bofpercentoftotalsalesin2018),wouldmakeitdifficult for the company to maintain its profit margins or grow net phone and viden iPod. The iPhone allowed users to access all iPod content and play music and video content purchased Tablet Computer: iPad from iTunes. Subsequent smartphone models increased the In April 2010, Apple released the iPad, a tablet computer, as a quality of the photo and video components to make even the platform for andio-visual media, including books, periodicals, EXHIBIT 7 \$martphone Operating System Market Share, Fourth Ouarter 2018 movies, music, games, and web content. More than 300,000 also appeared, including Google's Chromebook, Amazon's iPads were purchased by eager tech consumers during the de- Kindle Fire, and Microsoft Windows' Surface tablet. 33 vice's iirst day on store shelves. Weighing only 1.5 pounds, Going into 2019 there were signs that the iPad models' this lightweight, portable, and touch-screen device was seen as sales-as well as the entire tablet industry-were in decline, a gigantic iPod Touch.3. Features like the sleek design, touch perhaps due to the "jumbo" phones coming from the likes made the ipad apps, and list and easy-to-navigate software of Samsung (and Apple), and low-cost Google-based tainment industry. The iPad was selected by Time anagazine as Apple finally redesigned the iPad lineup in 2019 , providone of the 50 Best Irventions of the Year 2010.31 ing a major upgrade in power with Apple's new A 12 Bionic Up until September 2010, Apple iPads had accounted chip, and introducing a new iPad Mini and iPad Air, both for 95 percent of tablet computer sales, 32 but by the end of ultra-portable with Apple Pencil support. The iPad Pro, 2012 , that figure had fallen to 78.9 percent; and by the end although expensive, was redesigned to incorporate a full- of 2018 Apple held only about 26 percent of the market. screen Liquid Retina display. Face ID, as well as the The loss of share was partly due to tablet devices. such as powerful A12X Bionic chip with Nearal Engine und supSamsung's Galaxy, that were based on Google's open- port for the new Apple Pencil and Smart Keyboard. Even souree Android system. Other platiorms and devives had though the category had scen reduced activity as a whole, EXHIBIT \& Worldwide Quarterly Tablet Market Share. Third Quarter 2018 the iPad continued to perform for Apple, with 2018 seeing iPods and connected with the iTunes Music Store for purthe strongest growth in years. Part of this growth was due to chasing digital music and movie files that could be customer response to the iPad Pro and the adoption of the downloaded and played by iPods, iPads, and the iPhone, iPad in operational scenarios such as in airline pilots' flight and by iTunes on PCs. bags and maintenance ground crews' service bays as an Although the volume was there, iTunes had not neces. direction. One commentator called Chrome "a wake-up call for the Safari UI guys.") Browser market share data in 2019 The App Store - Apple Arcade, Apple News+ showed Chrome in the top spot, with its various versions grabbing over 65 percent of global market share. Rccent In March 2008, Apple announced that it was relcasing the versions of Mierosolt Internet Explorer and Edge held second iPhone software development kit (SDK), allowing develop3.7 percent share. 33 and Firefox had 9.6 percent. Safari bad ers to create applications for the iPhone and iPod Touch 3.7 percent share.3s iCloud was introduced in 2011 during one of Steve Store. The App Store was made available on iTunes, and it Jobs's last public appearances. The web-based storage ser- was directly available from the iPhone, iPad, and iPod vice initially struggled to get traction, but in 2014 was Touch products. This opened the window for another group upgraded to iCloud Drive, allowing users to interoperate of Apple customers, the application developers, to collabowithWindowsandconnectalliOSdevices.Asanalterna-ratewithApple.DeveloperscouldpurchasetheiPhonetivetoGoogleDriveandDropbeloperProgramfromApplefor$99,createeitherfree tive to Google Drive and Dropbox, this gave Apple an intro Dcveloper Program from Apple lor $99, create either free into the enterprise/corporate user space, a market C.O or commercial applications for the iPhone and iPod Touch, Tim Cook bad begun to successfally target." 19 and then submit these applications to be sold in the App In other software development areas, Apple had not been Store. Developers would be paid 70 percent of the downthat successfil. In 2012, Apple stumbled hadly with its Maps load fee customers paid to the App Store, and Apple would software. Relessed in iOS6, Apple Maps was meant to replace 30 pervert of the revenue. Software. Released in iOS6, Apple Maps was meant to replace Google Maps on the iPhone, but instead produoed distorted By 2019, over 180 billion apps had been downloaded images and gave really bad directions. CEO Tim Cook had to from Apple's App Store, 45 but Google Play, the app store apologize that Apple bad fallen short of its commitment to for Android users, had grabbed more of the download buck to using its competitor's mapping software, 4 maks go 7.6 billion downloads, while Google Play had 19.5 billion. The most popular App Store downloads were games, 45 It iTunes/AppleMusicArguahly,Applesmostinnovativesoftwareproductwasand1.35billiontabletusersworidwide,andthisnumberwasworthnotingthatthemobileappindustrywaslarge-in2019therewereanestimated2.7billionsmartphoneusers Arguably, Apple's most innovative software product was and 1.35 billion tablet users woridwide, and this number iTunes, a free downloadable software program for con- was expected to continue to grow. Data showed that 90 persumers running on either Mac or Windows operating cent of mobile time was spent on apps, and this was a posystems. It came bundled with all Mac computers and tentially lucrative business for both the app developer und the platform host. Apple was intending to capitalize on this HealthKit and ResearchKit had helped wearers monitor by offering its new Apple Arcade, an ad-free subscription and improve their health and fitners, showing that this service, providing access to over 100 exclusive or new device was more than just an iPhone extension on the wrist. games. Apple was attracting game developers who appreci- Apple's AirPods, first released in 2016, were Apple's ated the superior iPhone animation technology and, unlike most popalar accessory product, with over 35 million units on the Google Play platform, Apple had the ability to pro- sold in 2018. These wireless Bluetooth earphones not only vicie security and protection against malware, counterfeit played audio but could handle phone calls and reccive ing, and piracy. This meant high quality games would be assistance from Siri, Apple's digital assistant. AirPoxis had available for Apple products exclusively. 4 full functionality with all Apple products, including Apple Also available in 2019 in the App Store was Apple Watch and Apple TV. With the existing hardware products all appearing to stagnate, analysts were looking to Apple's services and "other products" for growth opportunitics. While the "other" products such as Apple Watch, Apple TV, AirPods, and HomePod grew 35 percent in FY2018, the services category-which included Apple Pay, Apple Music, iCloud, iTunes, and the App Store-grew 24 percent to a record $37.2 billion and sccounted for 14 percent of all resenues, beating every category except the iPhone. In addition, making this sector more attractive, profit margin estimates averaged almost 64 percent. In particular, the App Store, having tripled revenue between 2013 and 2016, was projected to produce about two-thirds of Apple's growth target for 2020..55 In 2019, Apple reported over 390 million prid subscriptions across its services portfolio, an increase of 120 million since the previous year. Many analysts were wondering whether Apple could create "the world"s greatcst subseription model, where users can opt to have the latest iPhone and many services for a fixed fee. This would lock many into its ecosystem and create a constant stream of recurring revenues, "56 Others cautioned that Apple's strength is "using the services division to boost the sales of the iPhone and keep people locked into an ever.growing cycle of updated hardware."9y This may be Apple's exact intention. The Future of Apple Under Cook, Apple had transitioned itself "from being a hypergfowth company to being a premium, branded consumer company, 45t Apple was a truly vertically integrated designer and marketer of products and services, If long-time Apple fans were not satisfied with the state of Apple's innovation today, they might have to realize, as former Apple marketing guru Guy Kawasaki did, that [It is] difficult kor Apple to top itself. ... It would be foollsal to bet against Apple based on my experience.... If nothing else, Apple will once again force everyone to improve their game., As CEO Tim Cook said during the second quarter earnings call of 2019: One of Apple's great strengths is our culture of flexibility, adnptraility, and creativity. This quarter testured some important annoeneements that speak to the power of our commitment to innoration and longe term thinking... we proviewod a gamechanging array of new services, each of them rooted in principles that are fundamentally Apple... These features aren't just nice to have. They actually help to eilminate the boundary between hardware, softwarc, and service, crenting a singalarly evceptional experience for our users. to It is entirely possible Apple is not done innowating