Intel

Introduction

Within the context of this given case, we aim to examine the background of the Intel infringement case reference Comp/c-3/37990 Intel of 13 May 2009, Intel are held responsible for infringing Article 83 of the EC Treaty where it has been found guilty of abusing it’s dominant market position on the x86 central processing unit (CPU) market by awarding rebates. We shall consider the basis on which the Decision Commission has made this decision to fine Intel and what evidence contributes towards this investigation. In addition to this, we will also be examining whether the decision taken was justified and if it had any kind of positive outcome on the consumers. If we consider the guidanc on the Commission enforcement priorities in implementing Article 82 on the EC Treaty to abusive exlusionary conduct by dominant undertaking.

According to the Article 82 of Treaty that clearly outlines the EC Article 82 forbids any kind of abuse of a dominant position in the market. This goes hand in hand with the case-law where it is considered illegal for an undertaking to be in a dominant position and that such a dominant position is entitled to compete purely on basis of their hard work and merits. However, it should be noted that the undertaking concerned as a special responsibility forbidding it’s behaviour to diminish authentic deformed competition on the common market. It should be noted that Article 82 is considered as the legal fundamental for a critical element of competition policy and it’s effective enforcement that helps market operate more efficiently and effectively for the advantage of businesses and its consumers.

It (Article 82) outlines the enforcement priorities that will guide the Commission’s action in implementing Article 82 to exclusionary conduct by dominant undertakings. In addition to that, it attempts to offer a greater deal of accuracy and speculation in relation to the general framework of evaluation that the Commission recruits in determining whether it should pursue cases that relate to the various kinds of exclusionary conduct and to help undertakings better assess whether specific behaviour is likely to result in intervention by the Commission under Article 82.

According to the application of Article 82 to exclusionary conduct by dominant undertakings, the Commission will emphasise on the kinds of behaviour that are most hazardous to consumers. It can be noted that even though it is the customer who is most likely to take advantage from the stiff competition, as it results in lower prices, good quality and a diverse choice of new enhanced services and goods.

It is the duty of the Commission to instruct the enforcement to make sure the market operates in the precise manner, also making sure consumers take advantage from the efficiency and productivity that results from effective competition between under-takings. If consumers are excessively charged a high price or influencing their behaviour that under-estimates the efforts to accomplish a combined internal market that is considered to be liable of infringing Article 82. In regards to implementing the general enforcement fundamentals and rules set out in the Commission, it will take into account the specific facts and circumstances for every individual case. [Ref 1]

Let us consider the background of the Intel case, Intel has a reputation for specialising in manufacturing microprocessors (CPUs) and chipsets for user personal computers. This is registered proprietor of well known brand names, such as: Pentium and Celeron. The Intel case is a perfect example of how cruelly and sensibly a corporation can take an advantage of it’s leading dominant position in the market.

This case clearly outlines the inherent differences between the monopoly compared by intellectual property rights and the Treaty competition rules that forbids any form of abuse of dominant position. Intel has cleverly registered numerous thousands patents to safeguard its creative inventions and it is impossible in a pragmatic sense for it’s rivals to know in advance whether or not their products may read on Intel’s patents. Interestingly, Intel was found guilty of infringing it’s dominant position in relation to VIA, which is considered as one of Intel’s direct rivals in both the chipsets and CPU markets. As VIA was in need of the various components due to the interoperability, also due to the critical requirement for compatibility with Microsoft operations software.

In order to make this operate, VIA required a licence from Intel that would allow them to use it’s patents in the design and manufacture of it’s chipsets which would let them communicate with Intel’s microprocessors. In addition to this, VIA also was in need of a licence in relation to it’s supply of CPU’s so that they are completely Windows compaitable. It should be noted from the year 1998 to the year 2000, both the parties had a reciprocal chipset licencing agreement. By December 2000, Intel launched it’s latest Pentium 4 processor in the market, simultaneously that VIA would require a licence.

A new licence was therefore by Intel on non-reciprocal conditions. Furthermore, such a proposed agreement envisaged an ‘asymmetrical’ licenced that would entitle Intel to unlimited use of all the VIA patents and technology but VIA would only be able to acquire a licence to use Intel’s technology to manufacture and sell only specific chipsets. In addition to this, it even proposed a ‘market division’ which would limit the VIA licence to the manufacture of chipsets for use with Pentium 4 processors, however it could not be used in conjunction with any enhanced versions of that same processor.

According to VIA, Intel was infringin (September 2001) Article 82 of the EC Treaty and Chapter II of the Competition Act 1998 and it is not entitled to relief in circumstances where this would compel VIA to enter into a licence agreement consisting of illegal terms and conditions.

In regards to the CPU Action, VIA outlined the two key competition law defences, these consist of Intel’s refusal to licence it’s Pentium 4 technology which is considered as a violation and abuse of it’s dominant position in the CPU market. Secondly, Intel’s refusal to licence it’s prospective rights was abusive primarily because these rights related to technology that was the industry standard and which was significant in order for it’s rivals to have access to the CPU market. The refusal would eliminate competition from VIA and protect VIA from marketing valuable new products ( the essential facilities defence).

It cannot be denied that the case is indeed very complex in it’s structure and nature , it consisted of a thorough and comprehensive investigation that was taken by the Commission. Whether Intel was accountable for abusing it’s dominance in the market by imposing a licencing policy for exploiting and enforcing it’s large portfolio of patent rights is evident from the various names that were included in this long list of names who complained of Intel’s abuse of power.

It can be observed that within the Intel case, there are obvious signs of conditional rebates where they were bestowed to consumers, rewarding them for a specific kind of purchasing behaviour. Furthermore, such rebates within a dominant undertaking can have an actual or prospective pledge effects that are similar to exclusive purchasing contract.

Intel was adamant to refuse granting of a licence on any kind of reasonable conditions, this clearly demonstrates its abuse of it’s dominantnposition in the CPU and chipset markets. Due to the patents being the industry standard it was impossible for chipset manufacturers to enter the market unless they were able to make use of Intel’s gateway technology. Interestingly when multi-product rebates take place, it is purely considered as anti-competitive, this is what exactly Intel did, it tried to do so on a tying market if it is a huge market that equally efficiently provides some of the key components however they cannot compete against the discounted bundle.

Why is the CPU so much of an importance in the Intel caseThis is primarly because the CPU is considered as an essential component of a computer, in regards to the actual performance and cost of the system. Furthermore, the manufacturing process of the CPU requires high technology and expensive facilities. The CPU is segmented into two sub-categories: CPUs of the x86 architecture and CPUs of a non-x86 architecture. The x86 architecture is a standard designed by Intel for it’s CPU. It can operate on both operating systems (Windows and Linux).

According to the Commission’s comprehensive investigation in the x86 CPUs, the relevant product market was not under the market of x86 CPUs. It can be noted that the 10 year period that has been considered and included by the Decision Commission (1997-2007), Intel was seen to be continuously in a leading position, in terms of it’s market shares which were excessive by 70%.

In addition to this, there were important obstacles to entry and development present in the x86 CPU market. Intel is a powerful and reputable brand, it saw a rise in it’s brand reputation due to product differentiation that contributed as an obstacle or hindrence to entry. The recognised high level of obstacles to entry and development are constant with the observed market structure, where all the leading rivals to Intel, apart from AMD left the market or they lacked some kind of importance.

Furthermore, it can be observed that from October 2002 to December 2007, according to the Decision, Intel’s market shares and obstacles to entry and development, Intel held a dominant position in the market. In terms of the condition rebates offered by Intel, it awarded major OEM’s rebates that were conditioned on these OEM purchasing all or most of their supply requirements; this entails numerous brand who were offered these rebates. Dell was offered rebates for three years December 2002- December 2005) that conditioned Dell’s purchasing exclusively Intel CPUs.

With regards to the payments and rebates Intel offerd a major OEM’s and MSH which are seen with context of the growing fierce compeition threat that AMD portrayed. With this regard, the Decisions demonstrated that OEM’s, IT managers and Intel considered that AMD products had numerous positive innovative factors and they were considered a viable option to those of Intel.

In essence, it can be agreed that the conditions of the case-law for detecting prospective abuse were evidently found, the Decision also conducted an economic analysis of the capability of the rebates to foreclose a rival that would be efficient as Intel, albeit not dominant. According to the found evidece collated by the Commission, it led to the conclusion that Intel’s conditional rebates and payment induced sincerity of key OEMs and of a major retailer, the effects of which were complementary in that they most importantly diminished rivals ability to compete on the merits of their x86 CPUs. Furthermore it can be added that Intel’s anti-competition conduct thereby resulted in a decrease of consumer choice and in lower incentives to innovate.

Intel believed it did not wrong, it clearly defended the rebates and it stated in the two different kinds of arguments, that it wanted to introduce a rebate that would allow them to respond to price competition from it’s rivals and therefore it met stiff competition. Secondly, by using the rebate, it adopted a vis-a-vis every individual OEM was considered as significant, in order to accomplish significant efficiencies that were pertinent to the CPU industry. Intel carried on debating there were four different kinds of efficiencies that were accomplished by any exclusivity requirements of it’s rebates and production efficiencies and risk sharing and marketing efficiencies.

According to the findings by the Commission, Intel’s debates relating to goal justification are flawed as they relate more generally to behaviour to which the Commission did not report (i.e.discounting of rebates) and not to conduct to which the Commission did object ( conditions relationg to rebates) and non of the efficiency defences offered an appropriate justification/ valid explanation for the behaviour questioned.

It can be concluded that as a whole that the conditional rebats granted by Intel to Dell, HP, MSH and NEC collectively point at the abuse of a dominant position under Article 82 of the Treaty and Article 54 of the agreement. In addition to this, the individual abuses are also considered as part of a single strategy focused at foreclosing AMD. Therefore the individual abuses form a part of a single infringement of Article 82 of the EC Treaty.

In addition the Decision states that Intel practices were implemented collectively at two tiers of the distribution chain or cycle that can be viewed in the context of the rapidly growing competitive threat that are portrayed by AMD. Intel wanted to destroy the ability of AMD to compete at the same scale which would then result in making AMD weaker and be unable to match the same merits and standards as that of Intel, therefore, deliberately preventing them from selecting non-Intel based compueters on the merits. (i.e. quality and price of CPUs).

The Decision determines that Intel has certainly infringed Article 82 of the Treaty and Article 54 of the EEA Agreement by getting involved in a single and consistent infringement of Article 82 of the Treaty and Article 54 of the EEA Agreement from October 2002- December 2002 by imposing a strategy targeted at foreclosing its rivals from the x86 CPU market. Intel was issued with a legal notice refraining it from any act or engaging in any activity that has the same or similar effect of this kind. It can be concluded that the decision taken by the Decision Commission is certainly justified and even though consumers may have benefited from the decision, it was much more important for Intel to realise it’s mistake in abusing it’s dominant position in the market.

References

Communication from the Commission — Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (Text with EEA relevance. Retrieved 8th April, 2011. From:

Howard, A (2003). Intel v VIA. Retrieved 9th April, 2011. From:

Summary of Commission Decision of 13 May 2009 relating to a proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement

(Case COMP/C-3/37990 – Intel). Retrieved 9th April, 2011. From:

This paper seeks to find ways where to get the $675 million for Intel. I will also discuss the specific amount to be raised from each source and I will attempt give a justification for both my naming of source of financing and the amount I intend to raise from each source, if such be the case. The discussions and analyses should be geared in having a proper balancing of debt to equity. 2. Analysis and Discussion The case facts Intel Corporation, known as the computer chip is facing a problem of having to finance cost of shipped products which are found defective.

In its shipments of product starting last November, the company had shipped nearly a million defective motherboards for personal computers. For need of recall, it expected that it will cost it will cost the company hundreds of millions of dollars. Intel company’s current financial statements of Iintel Co. in the 1999 Annual Report to Shareholders, showed total assets of US$ 43,849. 00 million, total liabilities of US $ 11,314. 00 million USD , and a total stockholders’ equity of US $32,535. 00 . ( See Appendix A).

The case instructs us to assume the following: Recall of the products will involve costs of for notification of purchasers, remanufacture of the motherboards, shipping of replacement inventory, labor for parts replacement, `goodwill` payments to purchasers, and regulatory reporting on the recall. Although Intel appears to downplay the total cost, the best internal estimate is that this error will cost Intel approximately $725 million. The case instructs that this cost will be incurred in the second quarter of 2000. Another given assumption is that Intel will need to raise $675 million in additional cash to service this recall.

Further it is an assumed that the current cash, accounts receivables, and current investments (current assets as per Balance Sheet) are committed to either current operations or other mandatory projects. 2. 2 Analysis and Discussion of Issue 2. 2. 1 What should Intel do to raise the $ 675 million additional cash while still attaining a balanced debt to equity ratio? To balance debt to equity is must be presumed to be beneficial to the company. The questions are how to balance debt to equity? Debt to equity at a certain level, it could either be advantageous or disadvantageous to the company.

A highly leveraged firm is possible if Debt to equity level is outside industry benchmark. It means then that investing with the company is risky. On the other had it to good but very far from average debt to equity, the company might not operating under maximum stock price assumption. There is therefore a trade-off return and risk that will determine whether a company is highly leveraged or not. It is therefore not proper to just borrow then finance the need because the relation of risk and return trade off the company could not just borrow and borrow to finance its needs of 675 million arising warranty liabilities for defective shipments.

It could therefore imply that if the source of financing is purely from creditors the debt to equity ratio will get higher leveraged until it becomes too dangerous or not encouraging for the company. At the other side of the coin, financing the source could come purely from additional stocks to be issued with the same the debt to equity ratio. To illustrate, let us first determine the ideal debt to equity ratio of Intel by getting industry average. The industry average would mean that such debt to equity is the one that characterized the industry under the normal course of event.

Industry average then indicates that such is the presently approved by the most of the creditors. Higher than the average ratio, creditors would be more reluctant to finance the company’s need for funds. By logical analysis, Intel could go bankrupt if it could not borrow in case of emergency. If such is the case, the presumption is that in case of emergency needs of the company, Intel could not run to banks to barrow because of high debt to equity. The consequence of its failure to have the funds as when required is a problem of working capital.

Bankruptcy could ensue if the company cannot meet its current liabilities. Bankruptcy in turn could result to stopping business operation. Computing the industry average Yahoo Finance yields debt to equity of 0. 11. Given this figure, the company should know that resorting further or borrowing could endanger the company in a more risky and greater the risks may drive investors away from the company. As computed debt to equity ratio declined from 0. 35 to 0. 38. (See computation, Appendix A).

Resorting to pure investment from stockholders, the company expects its stockholders to make additional investment, which may be also very remote on the premise that the stockholders are unready to invest or to reinvest their earnings. If reinvestment is pursued or resorted by stockholders in the form of stock dividend, debt to equity will remain at 1999 debt to equity level of 0. 35. (See Appendix A) Reduced in simple terms, resorting to borrowing is not be applicable to the company because the debt to equity would deteriorate by getting a bigger gap from the industry average, remaining at 0.11

Conclusion:

Our observation confirms that balancing debt to equity is paramount both long term and short tem health of the Intel. We also learned that there is a limit to one company’s borrowing since creditors could just say “no” if there is a point where it is already critical to the company especially if it cannot compel its owners or stockholders to invest without delay. It must balance its act buy looking at industry average. By looking at industry average, it will have a guide that will set the proper amount to be borrowed.

3. 2 Recommendation: Since Intel is just too liquid to have the 675 million USD via reinvestment in the form of stock dividend. By so doing debt to equity ratio at year end would still be balance. There is a net advantage of resorting to stock dividend by 0. 03 differences in debt to equity ratio. (See Appendix A)

References: 1. Yahoo Finance, Industry browser, 2006, {www document} URL http://biz. yahoo. com/p/830conameu. html, accessed August 4, 2006 2. Intel, Dividend Summary, 2006{www document} URL

We are responsible for what we are, and whatever we wish ourselves to be, we have the power to make ourselves.

If what we are now has been the result of our own past actions, it certainly follows that whatever we wish to be in future can be produced by our present actions; SO WE HAVE TO KNOW HOW TO ACT. Man is man, so long as he is struggling to rise above nature, and this nature is both internal and external…And if we read the history of nations between the lines, we shall always find that the rise of a nation comes with an increase in the number of such men, and the fall begins when this pursuit after the Infinite, however vain the utilitarian may call it, has ceased. That is to say, the mainspring of the strength of every race lies in its SPIRITUALITY and the death of that race begins the day that spirituality wanes and materialism gains ground. You have to GROW inside out.

None can teach you, none can make you spiritual. There is no other teacher but YOUR OWN SELF. MAKE YOUR OWN FUTURE. Let the dead past bury its dead”. The infinite future is before you, and you must always remember that each WORD, THOUGHT and DEED lays up a store for you, and that as the bad thoughts and bad works are ready to spring upon you like tigers, so also there is the inspiring hope that the good thoughts and good deeds are ready with the power of a hundred thousand angels to defend you always and forever. I am sure NATURE will pardon a man who will use his reason and cannot believe, rather than a man who believes blindly instead of using the faculties He has given him..

.WE MUST REASON; and when reason proves to us the truth of these prophets and great man about whom the ancient books speak in every country, we shall believe in them. We shall believe in them when we see such prophets among ourselves. We shall then find that they were not peculiar men, but only illustrations of certain principles. Go on doing good, thinking good thoughts continuously, that is the only way to suppress base impressions. Never say any man is hopeless, because he only represents a character, a bundle of habits, which can be checked by new and better ones.Character is repeated habits; and repeated habits alone can reform character.

.. The chaste brain has TREMENDOUS energy and GIGANTIC will power. We can overcome the difficulty by CONSTANT PRACTICE. We must learn that nothing can happen to us, unless we make ourselves susceptible to it. `It is the coward and the fool who says, “THIS IS FATE”- so says the Sanskrit proverb. But it is the strong man who stands up and says, “I WILL MAKE MY FATE “.

It is the people who are getting old who talk of fate. Young men generally do not come to astrology.

• Core Competency (CI#1) : Apple design, develop and market numerous product and service lines. They sell their products to education, consumer creative professional, business and government customers. While apple seems to display numerous products and conduct business on different segments, it is legitimate to wonder what the company is really good at? Too much diversity is exactly what crushed Apple during the John Scully days.
• Cannibalization (CI#2): Through January 2005, Apple has opened 102 retail stores. Although these launches are potentially beneficial, Apple stores are hurting the resellers’ business and not all of them will survive. Considering that the company’s resellers still account for more than 50% of its domestic sales, the company is facing the risk of cannibalization and might deeply suffer.
• High Cash (CI#3): Why is Apple holding so much cash? Having too much cash in reserve might either mean that the company does not know yet how to allocate it or that they may have some risk concerns about future potential investment.
• Succession (CI#4): Apple is clearly one of the handful of companies where the fortunes are seen to be intricately tied to the person in charge. The star quality and the visionary talents associated with Steve Jobs are certainly contributed to the success of the company. So the news of Jobs’ cancer surgery might lead to a succession problem and compromise the company’s future.

Current situation

Current performance

Apple achieved a solid performance for the first quarter of 2005 compared to the same quarter 2004 with strong net sales in the Americas segment (+77%) in Europe (+63%) and in Japan (+18%).

The Americas segment represents approximately 47% of the company’s total net sales. The increase in net sales in the Americas, Europe and Japan was primarily driven by increased demand of the iPod and the consumer-oriented iMAC. Demand for the iBook products were especially high for the Americas, while peripherals and other hardware were more popular in Europe. The retail segment’s net sales grew to $561 million as compared to $273 million in the same period in 2004, this represents a remarkable 105% increase.

Strategic posture

Mission

Apple strives for continuous improvement in our environmental, health and safety management systems and in the environmental quality of our products, processes and services.

Apple’s Guiding Principles:

• Meet or exceed all applicable environmental, health and safety requirements.
• Where laws and regulations do not provide adequate controls, Apple will adopt their own standards to protect human health and the environment.
• Support and promote sound scientific principles and fiscally responsible public policy that enhance environmental quality, health and safety.
• Advocate the adoption of prudent environmental, health and safety principles and practices by their contractors, vendors and suppliers.
• Communicate environmental, health and safety policies and programs to Apple employees and stakeholders.
• Design, manage and operate our facilities to maximize safety, promote energy efficiency and protect the environment.
• Strive to create products that are safe in their intended use, conserve energy and materials and prevent pollution throughout the product life cycle including design, manufacture, use and end-of-life management.
• Ensure that all employees are aware of their role and responsibility to fulfill and sustain Apple’s environmental, health and safety management systems and policy.

Goals

•  Innovation above everything else.
• Increase sales in the education segment.
• Produce user friendly, good appearance products to get customers “think Different” and “think Digital”.
• Developing new digital lifestyle consumer, and professional software application
• Investing in new products area such as rack-mount servers, RAID storage system and wireless technologies.
• Provide a high quality sales and after sales support experience.

Strategy

Trough the design and the development of its own operating system, hardware and many software application and technologies, Apple strives to bring to its customers compelling new products and solution with superior ease-of-use, seamless integration and innovative industrial design.

Apple currently focus on:

• Increasing marketing and advertising investment in order to improve product and brand awareness.
• Vertical growth strategy: expand the retail segment by opening more retail stores. (CI#2)
• Market opportunities related to digital music distribution and consumer electronic devices, including iPod.
• Implement a cost leadership strategy to keep up with the competition and be more affordable for the educational segment.
• Continue to be the leader in innovation for new technology by implementing a product differentiation strategy. Policies “Employee diversity “: This policy is a key component and contribute to the success of the company. “We respect these differences and threat them as an additional value that we incorporate in the way we treat other and approach our customers. ” Therefore, Apple apply that each employee is fully responsible for understanding and following this policy. Substance policy”
• Apple comply with applicable substance legislation worldwide.
• monitor and assess new scientific findings on the environmental impact of substances used in Apple products.
• educate our supply chain partners and drive innovations within our supply chain to find alternative materials that improve environmental performance. “Product Take-Back and Recycling Policy”
• Producers should provide a means to facilitate environmentally friendly recycling of their products at the end of electronic products’ useful life.
• Consumers should select a disposal method for end-of-life electronics products that does not adversely impact the environment.
• Governments should develop a legal framework and public policies to promote appropriate end-of-life management, including environmentally friendly disposal and recycling.
• Materials generated from the recycling of our products should be used as feedstock for new products whenever possible.

Corporate governance

Board of directors

The Board consists of 6 members, of which 5 are external directors: Board Member-Occupation Audit and Finance committee Nominating Committee

Audit and committees members are used to ensure feedback and monitor implementation and compliance. Steve Jobs Co-founder of Apple in 1976, he has played an important role in the development of the personal computer.

He also co-founded NeXT Software, inc. and served as CEO until 1997 when NeXT was acquired by Apple. Director since 1997 and currently CEO of Apple and Pixar Animation Studios, Jobs is viewed as a key character for the company. However his strong voice and personality within the company could give him the power to sway the board.

• William V. Campbell Director of Apple since 1997, he was also the former CEO and president of Intuit, Inc. Mr. Campbell also serves on the board of directors of Opsware, Inc. His experience and knowledge in business, finance and technology might be valuable for the company, however, he is in direct competition with Apple in the sale of software such as Quickbook.
• Millard S. Dexler Director of Apple since 1999, he has been Chairman and Chief Executive Officer of J. Crew Group, Inc. since March 2003. Previously, Mr. Drexler was Chief Executive Officer of Gap Inc. from 1995 and President from 1987 until September 2002. Albert Gore, Jr Director since 2003, he was a former Vice President of the United States of America.
• He has remained an active leader in technology, launching a public/private effort to wire every classroom and library in America to the Internet. Therefore, Gore plays a key role in the implementation of Apple’s products in the educational segment.
• Arthur D. Levinson Director since 2000, he has been President, Chief Executive Officer and a director of Genentech Inc. since July 1995. Mr. Levinson’s experience could benefit apple but his interest may be somewhere else.
• Jerome B. York Director since 1997, he is also a director of Tyco International Ltd. nd Metro-Goldwyn-Mayer, Inc. Previously, Mr. York was Chairman and Chief Executive Officer of MicroWarehouse, Inc., a reseller of computer hardware, software and peripheral products and he also served as a Senior Vice President and Chief Financial Officer of IBM Corporation. Mr. York’s experience in the computer industry might be a big pro for the company.
• The Board of Apple is composed of a very diverse group of professionals who bring valuable expertise in the areas of technology, biotechnology, finance, turnaround strategies, retail business management, etc.

The backgrounds and current “independent” positions of these members provide a wealth of knowledge and a variety of business perspectives for Apple. However the external activities of some of the members of the board might also be a source of conflict for the company.

Top management & management style

1. Fred D. Anderson-Executive Vice President and CFO
2. Timothy D. Cook-Executive Vice President, Worldwide Sales and Operations
3. Nancy R. Heinen-Senior Vice President, General Counsel and Secretary
4. Ronald B. Johnson, Senior Vice President, Retail
5. Peter Oppenheimer, Senior Vice President of Finance and Corporate Controller
6. Jonathan Rubinstein, Senior Vice President, Hardware Engineering
7. Philip W. Schiller, Senior Vice President , Worldwide Product Marketing
8. Vertrand Serlet, Ph. D. -Senior Vice President, Software Engineering
9. Sina Tamaddon, Senior Vice President, Applications
10. Avadis Tevanian, Jr., Ph. D. -Senior Vice President, Chief Sofware Technology Officer C. Management Style Despite the fact that the company claims to have a partnership management style, I personally believe that Steve Jobs is leading an entrepreneurial style and highly influence the company.

External environment scan

Societal environment

Political-legal forces

• Different countries have different legislations and these in some ways restrict the companies or give opportunities to the company.
• NAFTA, European Union and other regional trade open doors to market in Europe, Asia, Latin America that offer enormous potential.
• Political uncertainties caused by terrorism activities are directly impacting the overall business of the company.
• The company relies on access to patent and intellectual property obtained from third parties. The company might unknowingly encounter infringe issues with existing patents of others.
• Beatles lawsuit against the company may negatively affect the company’s reputation. The company has to comply with the environment regulations such as environment safe disposal or recycling.

Socio-cultural forces

• The computer and internet usage is growing worldwide and is a good source of opportunities for the computer industry.
• Customers had become more experienced and computer literate.
• Education has become a primordial issue for the new generation, which is a key factor for the company’s business.

Economic

• In the past year, the industry has been affected by the slow economic and that resulted in low consumer spending. However the current economy shows some sign of improvement, consumer spending and investment might increase as well.
• Due to weak economic conditions, the U. S. educational is encountering large budget deficits in many states. This factor has a negative impact over Apple’s sales in the educational segment.
• Sales of products that include components obtained from foreign suppliers can be adversely affected by currency exchange rate fluctuations and by international trade regulations (tariffs and antidumping penalties).

Technology

Technology is evolving at a rapid pace today ,and people appreciate more & more advances in their systems and are switching over to new information appliances.

• Internet availability and usage is growing and leads to good opportunities for the industry.
• The traditional desktop might become outdated by the entrance of new revolutionary products.
• Increasing demand for new technology in schools and professionals.

Task environment

Threat of New Entrants:

• Medium to High – In the PC market any firm that discovers a new technology that is efficient in terms of price & performance is an immediate threat to the industry. However, Established standards, start-up costs and established brands names (Intel, Windows) are difficult to overcome for a new entrant. Threat of substitute products:
• High – The new forms of Information appliance like Digital TV / HDTV Digital set- top box & Internet screen phones are gaining increasing popularity this might hamper the growth of the PC industry as a whole.

Bargaining power of suppliers:

• High – Since the industry is highly dependent on component suppliers, a powerful supplier could exert pressure on the market, by supplying components at a higher price to increase his profits. Since Apple is working only with few selected suppliers, the company is running at a higher risk than the average.

Bargaining power of buyers:

• Low – Due to high number of other suppliers in the industry the customer has the options to take the cheapest and the best.

Rivalry among competition:

• High – Competition among the giants is fierce, everyone aiming for a larger market share ,intensive price cuts & changes.

Internal environment scan

Corporate structure

Apple is organized along functional lines. Apple is structured primarily on a geographic basis.

The company’s reporting operating segment are comprised of:

1. The Americas
2. Europe, Middle East and Africa
3. Japan
4. Other: Asia-Pacific (Australia, Asia, and the subsidiary FileMaker, Inc. )

Corporate culture

• Commitment to innovation and product quality
• Dedication to hard work and education
• Commitment to diversity and to empowering employees
• Commitment to safety and conservation of the environment/energy Steve Jobs has a huge impact in the company’s culture. Since Job’s return in 1997, the company has reinvented itself with an array of different colors and styles of computers.

The introduction of the Ipod and Itunes largely position the company as an innovative leader.

Corporate resources

Marketing mix

Product Apple is committed to sell original, good looking products that have an easy-to-use interface. The company offers a range of personal computing products, related devices and peripherals, and various third party hardware-products. In addition, the company offers software products (Mac OS X), server software and related solution; professional application software; and consumer, education and business oriented application software.

Apple has been very innovative by finding new usages for its Macintosh computer, such as desktop publishing and strong graphics/animation capabilities. The Macintosh’s functionality for managing multimedia files from cameras, DV recorder and MP3 devices has been very popular and successful. The new introduction of Apple’s iPod and the iTune has revolutionize the digital music industry.

Place Apple’s operating segment are comprised of:

• U. S.
• South America
• Europe
• Japan
• Australia.

Recently Apple chose to implement a vertical growth strategy and began xpanding their own retail stores. The company also sells its product via third-parties dealers, or via internet through their own website or through the iTune online music stores.

Promotion In 2003, Apple formed a strategic alliance with PepsiCo. The Pepsi iTune Music promotion calls for people to use the winning code found under the Pepsi’s bottle caps products to redeem songs from Apple’s iTunes Music Store. This promotion has already been successful for both companies and increased the awareness of the iTune presence in the market.

In 2003, Apple also announced a marketing partnerships With America Online that are aimed at driving iTunes use deeply into the mainstream. Apple and America Online have agreed to put iTunes “buy this song” buttons next to every song that’s listed in AOL’s music service, which its 25 million subscribers can access. Clicking the button will automatically launch the iTunes music jukebox and begin downloading the song; billing will be handled through the customer’s existing arrangement with AOL. Apple has a joint venture with Hewlett Packard.

Apple has produced an iPod for PC users and the success of this product was a good way for the company to capture non-MAC users. The company’ also drew on endorsements from music stars. U2 singer Bono, rap artist Dr. Dre and Rolling Stones singer Mick Jagger each gave a live endorsement of the iChat videoconferencing software. Singer Sarah McLachlan also appeared live to sing several songs and to talk about how she used the iPod. In 2005, Apple Computer has initiated a partnership with Wal-Mart that will soon see the iPod shuffle featured at Wal-Mart discount locations around the country.

Apple price is know to be above average in the industry. The company is using a differentiation strategy and focus more on innovation, and quality. This strategy is justifying their premium prices. Lately, however, their new technology and their high cash flow allowed them to lower their price and to offer more discount to certain markets such as the education market.This new pricing strategy may help Apple to better compete with the non-Mac user market but might cause some issue with the brand image/recognition.

Finance

The financial results for the fiscal 2004 fourth quarter ended September 25, 2004.

For the year 2004, the Company reported net income of $276 million on revenue of $8. 28 billion compared to net income of $69 million on revenue of $6. 21 billion in 2003. Their net income has increased 400%! Sales to the education market grew 11 percent, bringing its highest quarterly total for that market in seven years. Apple has a strong balance sheet with a lot of cash, their inventories have almost double compared to the year 2003. Apple short-term debt and long-term debt have been completely paid, which is a very good advantage for the company.

Research and development

Apple consider that R&D are critical for the activity of the company. therefore, they are willing to increase investment in R&D to keep a sustainable competitive advantage in the industry. According to the company’s Annual Report in 2004: “In order to remain competitive, the Company believes that increased investment in research and development (R&D) is necessary in order to maintain and extend its position in the markets where it competes.

The Company’s R&D spending is focused on delivering timely updates and enhancements to its existing line of personal computers, displays, operating systems, software applications and portable music players; developing new digital lifestyle consumer and professional software applications; and investing in new product areas such as rack-mount servers, RAID storage systems, and wireless technologies. ” New products are a necessity in this industry and seems to be a priority for Apple. New products are not always a success, though.

This might explain why Apple seems to be so hesitant in investing its high cash flow into new projects, the company might be afraid by the potential failure of the outcome.

Operation and logistics

Apple heavily rely on third-parties in the manufacturing and logistics sector. Therefore, the company’s overall performance is greatly dependent on the performance of its distributors. In order to have more control over the quality of the buying experience, Apple has done continual effort to become vertically integrated during these two passed years.

Apple work only with suppliers that meet the criteria from their policy (involve commitment to environment, safety and diversity. ) At each period the company performs a detailed review on demand forecasts, inventory, product lifecycle status.

Human Resources Management (HRM)

Apple has over 13,000 employees world wide. Apple believe that employee’s diversity is a key component for the company success. The company expects that all employee will respect the background or cultural differences of their peers.

Apple offer great benefits to its employee such has competitive pay, and compensation, insurance coverage, bonuses, substantial product discount, stock purchase and saving/investment plan. The company offers all-level of position such as internship, part-time and entry-level for college student.

Information systems

Apple has encountered a substantial success by introducing a new digital music device called iPod that can store 1,000 songs and copy a CD in 10 seconds. The continual heavy investment in R&D allowed the company to be on the edge of new technology.

Online store distribution channel has been very powerful for the company.

SWOT/TOWS analysis

SWOT analysis

Strengths Weaknesses

1. Ease of use
2. Established in the personal computer market
3. High Corporate reputation
4. Control over the product (manufacture both the computers themselves and also the operating systems which they run)
5. Leader in innovation and product differentiation
6. Employee diversity
7. Strategic Alliance (HP)
8. Joint venture with Pepsi
9. Strong Top management
10. Loyal customer base
11. Creative style
12. The ease of use has led to some image issues, with some business people regarding the Macintosh as a toy.
13. High inventory
14. Distribution problems high prices
15. Not IBM compatible, though great strides have been made in connectivity the Macintosh is not transparently compatible.
16. Declining share in educational market
17. Too many product lines

Opportunities Threats

1. Internet
2. Growing industry
3. Creating new software markets and selling the hardware into these markets.
4. Demand for innovation
5. Employee benefit programs
6. Growing educational market (In both higher education and schooling, the Macintosh ease of use and low maintenance costs are attractive. )
7. Music downloads from Itune
8. Very intense competition among the industry
9. Price competition
10. loss of market share
11. Potential litigations
12. Budget deficits in education
13. Technological and prices discontinuity
14. Potential increase in supply’s costs

TOWS analysis SO1

• Focusing on innovation and product differentiation will contribute to the customers satisfaction
• The diversity of the employees and the employee benefit programs contribute to the high corporate reputation
• Joint venture with Pepsi and strategic alliance with HP respond to the demand for music download.
• The growing educational market should increase Apple’s market share in this segment
• The growing industry should allow the company to decrease prices
• The high corporate reputation might suffer from the potential litigations.
• Strong management might overcome the potential litigations.
• Focus on innovation and product creative style might offset the low prices of competitors.
• Innovation will depend on the technological -prices conditions and changes.
• The image issues concerning the ease of use of the machine might contribute to the loss of share.
• The discontinuity in technology and prices might create some forecasting problems, which could result in excess or shortage of inventory.
• Competition might take advantage of Apple’s high price.
• Apple’s high price might lower the amount of educational contracts
• Not being IBM compatible might lead to loss in market share
• The broad product line might be endangered by the technology and prices discontinuity.

Strategic alternatives and recommended strategy

Strategic alternatives

Turnaround

The company could stop the expansion of their own retail segment in order to maintain a healthy relationship with its third-party distributor and avoid lawsuit. This strategy would also reduce the risks and costs tied to the stores investment. Apple could use its high cash to implement a product development strategy within the market segment they are currently serving. The company could also keep selling its products at a premium price in order to maintain the company’s reputation as an upscale and innovative brand.

Pros

• Improve relationship with resellers.
• Reduce risks
• The allocation of the high cash into a product development strategy might ultimately increase the revenue of the company
• The premium price might be profitable and the upscale image brand of the company is respected.

Cons

• No control over the quality of the buying experience procured by the third-party distribution
• Potential loss of market share because of the premium selling price
• Broad product lines might lead to confusion and extra overhead costs.

Pause and proceed with caution

In the Annual Report for 2004, the company saw an increase in revenue and profitability. The introduction of iPod or Itune items have largely contributed to the company’s successful year. The retail segment growth has increased the brand awareness of the company but has led to some conflicts with the resellers. This strategy has to be taken with caution because Their lower price strategy is allowing the company to attract some non-Mac users. During the mid of this year (2005), the company could consider to primarily focus on: the music segment market and the education segment.

Apple could also implement a succession plan for the eventual departure of Steve Jobs. The company’s growth strategy has to be taken with caution and compromises with resellers have to be done.

Pros

• Good financial results
• More control over the quality of the buying experience
• Better brand awareness
• Less confusion among core competency.
• Sufficient cash flow to support the discounted prices.
• Cannibalization risk is still present
• The low prices might discredit Apple’s upscale brand image.

Vertical growth

The company could decide to do a forward integration, by expanding its own retail store. Apple could use its high cash to finance this investment. The stores are a critical way to leverage Apple’s brand and showcase newfangled digital wares to affluent consumers.

Pros

• Total control over the quality of the buying experience
• High cash can support the investment for the retail segment
• Better brand awareness

Cons

• Dissatisfaction of the resellers
• Potential loss of revenue due to cannibalization
• The high cash investment is risky, and might have been allocated in a more safety way.

Recommended strategy

Pause and Proceed

The last fiscal year has seen improvement for Apple. Profits have increased and the focus has been on innovation, especially in the music segment market. Using the high cash to implement a price strategy appears to be a good idea to compete with the non-Mac users. The brand image might slightly suffer from this strategy, therefore marketing incentive should be increased in order to sustain Apple’s reputation for high quality and innovative products. The retail segment growth should be implemented with a lot of caution.

Apple needs to ease the pain of the resellers by coming up with programs to encourage these longtime partners to help it accomplish goals it can’t achieve on its own.Apple should also primarily focus on the music segment market and the educational segment market in which they have good opportunities. This focus would allow Apple to be more competitive and profitable.  Least but not Last, the company should prepare a succession plan in response to the eventual departure of Steve Jobs.

Implementation

• Who?

The top management should narrow their focus to two market segment.

• What?

Apple’s core competency should focus on the music segment market and the educational segment market in which they have good opportunities. (CI#1)

• How?

The company has to invest more into these 2 segments and cut some product lines that are not very profitable to the company.

• Who?

As Steve Jobs initiated, the company should keep focusing on a price strategy

• What?

By lowering the prices, the company will be able to be more competitive and increase market share.

• How?

The company can use its high cash to support discounted prices.

• Who?

The top management should decide to expand the retail store.

• What?

Improve the quality of the buying experience by having control over the salesperson and collaborate with the resellers. (CI#2)

• How?

The company can use its high cash to invest in the retail store expansion. The company should also tightly work with the resellers by supporting them through programs and bonuses.

• When?

During mid-2005.

• How much?

The Company’s current strong financial condition and low debt-to-equity ratio will provide the means to accomplish these implementation initiatives in the short-term. In the long-term these measures will be well worth the cost in increased revenue and market share.

• Who?

The board of directors and the top management should prepare a succession plan.

• What?

The company has to deal with Steve Jobs eventual departure.

• How?

Steve Jobs has to delegate some of his power to the top management and he should also implement some training programs. Tim Cook might be a good potential successor.

• When?

Right now.

Mainteince and control

The company’s strong financial position should allow the implementation of the strategies stated above. However the investment related to the retail segment growth is very costly and might be risky.

Therefore, the company should:

• Increase gradually the opening of retail stores.
• Assess performance by having Finance and Marketing reviewing “the numbers “monthly”.
• Spot and immediately address any negative trends The top management should periodically visit stores and gather feedback from line employees. They should also gather feedback from resellers to address expansion issue.

The company’s focus on the music segment market and the education segment market has to be tightly monitored.

• Top management should evaluate on a weekly basis overall performance. Revenue, Profit, ROI)
• Feedback forms should also be given to customers to maintain good relations and to spot market trends early.

Vision statement

“Man is the creator of change in this world. As such he should be above systems and structures, and not subordinate to them. “

Explanation of vision

Apple lives this vision through the technologies it develops for consumers and corporations. It strives to make its customers masters of the products they have bought. Apple doesn’t simply make a statement. It lives it by ensuring that its employees understand the vision and strive to reach it. It has put systems in place to enable smooth customer interaction. It has put objectives in place to continuously move forward; implemented strategies to fulfil these objectives; and ensured that the right marketing, financial and operational structures are in place to apply the strategies.

Mission statement

Apple is committed to bringing the best personal computing experience to students, educators, creative professionals and consumers around the world through its innovative hardware, software and internet offerings. ” The PC Industry We can glean Insight into the history and composition of the PC Industry from its eponymous title. In the late 1970s, as Wozniak and Jobs were starting Apple computer, personal computers were an emerging product. The following chart (Reimer) gives an overall view of the major market players since the mid-1970s. Market share of Macintosh peaked at slightly more than 10% in the early 1990s and has since tapered to between 2-3%. The IBM PC and its clones became the standard due to the success of the open nature of the PC. This allows product developers to offer vastly more products for the platform. Some argue that not licensing the Mac OS was a mistake.

Bill Gates and Microsoft were encouraging Apple to license their OS in the early 1980s, because they were developing software for Apple and had much riding on the success of the company. When Apple did not license, Microsoft began developing their operating system, Windows. (Linzmayer, 169-75, 245-9) While Apple clearly dominates the online music industry, the battle for domination is not over. Although digital music sales are growing rapidly, the Recording Industry Association of America (RIAA) states that digital sales account for only 4% of all music sales. Analysts at Forrester (Bartiromo) and Gartner (Bruno) validate this. Apple’s sales are between 66% and 75% of downloads and 80% of music players. (Bruno) Apple is part to a suit alleging monopolistic practices concerning their market share dominance of players and downloads. (Grundner) The other players in the download market are (the revised) Napster, Yahoo Music, Rhapsody, and illegitimate file-sharing services. Portable music players competing with the iPod include those made by Creative, Samsung, iRiver, and Sony.

A major point of contention between these services and player manufacturers is the control of a variety of incompatible Digital Rights Management (DRM) schemes. The Future of Apple Personal Computers – A Shift in Strategy Apple has historically taken a far different path than the traditional Windows and Intel combination. Microsoft provides the Windows operating system to separate downstream hardware producers such as Dell. Apple vertically integrated both the operating system software and hardware completely under Apple.

A consumer running Microsoft Windows can choose from a myriad of systems based on the Intel processor, while a consumer running Apple’s OS X must purchase Apple hardware. Apple is adjusting this strategy by migrating their microprocessors from IBM and Motorola PowerPC to Intel. Analysts believe that the Intel-based Macintosh may be able to run Microsoft Windows applications by the end of 2006. In addition to switching processors, Apple positioned their computers as an immediate option for the traditional Microsoft Windows user. With Apple Boot Camp, users may now use Mac OS X or Windows on an Apple computer.

Past attempts at licensing Apple technology (to IBM, Gateway, and others) failed on accord of Apple’s rigid demands. Many technology leaders (such as a 1985 letter by Bill Gates to Apple CEO John Sculley) criticized Apple for keeping a closed architecture. Apple cofounder Steve Wozniak criticizes this strategy, “We had the most beautiful operating system, but to get it you had to buy our hardware at twice the price. That was a mistake”. Whether Apple would be willing to pursue this reversal of vertical integration is unclear.

Although such a move would cannibalize a portion of Apple’s own hardware sales, it would also provide royalty-based revenue that could approach $1 billion annually. Jobs traditionally sided against licensing Apple technology. He referred to Mac clone producers as “leeches” and he personally killed Power Computing (a Mac clone producer) by terminating their license in 1997. (Linzmayer, 255) Apple in the Living Room Apple’s iPod and iTunes are a powerful combination that fosters a network style of increasing returns. (Barney, 124) By selling iPods, Apple increases the consumer demand for music from iTunes.

By placing more musical choices on iTunes (including less popular songs that appeal to niche audiences), there is more demand for iPods. Apple had 70% of the legal music download market in early 2005. (Yoffie) Apple is shooting for the digital living room of the future. For example, Apple just released a “boom box” portable version of the iPod. This iPod (the iPod Hi-Fi) comes with a remote control. Instead of forming a strategic alliance, Apple engineered the iPod Hi-Fi and designed it with high-fidelity features. (Burrows) Apple is clearly trying to develop a stronger core competency in the entertainment area.

The Apple Hi-Fi Apple may also release an Apple-branded cell phone and iPod combination device by the end of 2006. (Burrows) This product would again position Apple as a “second mover” responding to Palm’s Treo and Verizon’s VCAST technology. Strategic Alliances and Entertainment Jobs had the early strategic vision to complement computing with movie entertainment. After founding NeXT, he personally acquired a majority interest in the young movie company Pixar in February 1986. (Linzmayer, 219) Jobs went on to invest of his personal wealth into Pixar.

In 1995, Pixar solidified its position within animated movies with the debut of Toy Story. Grossing $358 million worldwide, it became the 3rd-largest grossing animated movie in history. After this success, Jobs took Pixar public and negotiated far better terms with Disney. Later successes included Toy Story 2, Monsters Inc. , and Finding Nemo. Ironically, Jobs stated in the November 23, 1998Business Week, “I Think Pixar has the opportunity to be the next Disney – not replace Disney – but be the next Disney.”. The alliance between Pixar and Disney has remendous potential for economies of scope. As CEO of Apple and Disney’s largest shareholder, Jobs is the strategic link between Disney. Opportunities include combining the animated movie expertise of Disney and Pixar, as well as sharing the content of Disney’s ABC or ESPN networks over Apple’s digital offerings. (Burrows, Grover, and Green) A current example of the fusion between Disney, Jobs, Apple, and technology is video on the iPod. Disney’s Desperate Housewives was one of the first television programs available for purchase and download to the newer video-enabled iPod.

There are concerns about whether these synergies will come to fruition. There are fears that the personality and style of Jobs may conflict with Disney, and that Disney CEO Iger could be “Amelioed” – driven out of office by Jobs in a manner similar to how Jobs drove Amelio out of the CEO post at Apple. (Burrows, Grover, and Green)

External analysis

Technological Environment Brand Awareness

Style at a Premium Apple’s products are trendy and stylish. After Jobs returned in 1997, Apple retained designer Jonathan Ive to differentiate their computers from the typical beige box.

Ive’s design of the iMac included clear colorful cases that distinguished Apple computers. (Linzmayer, 295-6) Apple’s iPod (with the trademark white ear buds and simple track wheel) commands a 15%-20% premium over other MP3 players. Apple and Pixar limit the number of computer products and movies that they sell. Product differentiation with focused quality and style also extend to the Jobs Pixar – “Pixar’s executives focus on making sure there are no ‘B teams,’ that every movie gets the best efforts of Pixar’s brainy staff of animators, storytellers, and technologists”. The Stylish Design of the iMac and Mac Mini Apple positions its Macintosh computers as higher quality and higher price. HP, Dell, and other PC manufacturers are pricing many systems under the $1,000 threshold. “Apple is struggling to meet demand for its new MacBook Pro laptop despite a $1,900 price tag that is nearly twice that of garden-variety rivals”. Apple has only recently entered the low-end (below $500) consumer market with the Mac Mini. Although the Mac Mini is a base model with few features, it comes encased in a very small and distinctive package.

Apple portrays this computer as “Small is Beautiful”. (Apple) Likewise, the iPod Shuffle was Apple’s first entry into the lower-end ($100 range) of flash- memory-based portable music players. Interoperability Although Apple competes directly with Microsoft for operating systems, the release of iTunes for Windows in 2002 was a key strategic move. This decision expanded the potential customer base to nearly all personal computer owners, even though Apple only has 2%-3% of all personal computer sales. (Yoffie) Conversely, Apple depends on Microsoft for a version of Microsoft Office.

As the most widely used office suite of applications, Macintosh users rely on Office to correspond with companies that standardized on Windows. This is from a strategic alliance between Apple and Microsoft after Jobs returned in 1997. Apple’s iTunes service has a technological hook (asset specificity) to Apple’s iPod. Although versions of iTunes exist for both Apple and Microsoft operating systems, the iTune’s AAC file format prevents other portable music players (such as iRiver or Samsung) from playing purchased songs.

Technology and the digital lifestyle

Apple not only dominates the music player market, its iLife suite provides consumers with easy-to-use software for music and video composition. With “podcast” a household word, Apple’s Garage Band application makes the recording of podcasts and music very easy.

Regulatory Environment

While introducing new technologies, there is a persistent threat of legal action by competitors. For example, Apple sued Microsoft in 1988 (settled in 1997 for an undisclosed amount) for perceived similarities between Microsoft Windows and Macintosh audiovisual works. Microsoft has generally been the focus for government antitrust charges (such as U. S. v. Microsoft). Both federal and state governments assert that Microsoft’s dominance blocked fair competition within the software industry. This is an advantage for Apple, because its operating systems are a viable substitute for Windows. Furthermore, Microsoft’s continued support for Office for Macintosh reduces the perceived level of market monopoly and abuse.  Manufacturers will continue to trespass on Apple’s intellectual property.

For example, the company tex9 released an open source music program called xtunes that was very similar to iTunes. In 2002, Apple took legal action against tex9, who then altered the program and renamed it sumi (pronounced, “sue me”). Legal threats can surface from somewhat unusual sources. Apple Corps Ltd. is the London-based company that owns the rights to the music of the Beatles. Paul McCartney and Ringo Starr recently sued Apple over the use of the Apple logo in iTunes, claiming that it violated Apple’s agreement not to produce music under an apple-based logo. Associated Press) Research and development is a key component to Apple’s sustained competitive advantage. Apple is currently taking legal action against several popular technical web sites for releasing proprietary product research. Sites such as appleinsider. com have allegedly posted verbatim content from documents protected by employee non-disclosure agreements. Release of critical insider information could give Apple’s competitors a jump in producing rival products. Industry Analysis Using Porter’s Five Forces Model

Apple operates in two primary industries:

• Computing – Hardware and Software
• Delivery of Entertainment and Media

Apple has always been under intense competition within the computer, software, and entertainment industries. “Looking to 2005… Every time that Apple had jumped into the lead in a product category during the past two decades, it had had difficulty in sustaining its leadership position. ” (Yoffie) We use Porter’s Five Forces Model to understand why Apple’s industries are so competitive.

Cast

Amazon On-demand online services to purchase music (similar to iTunes). Google They make everything. The “Next Google” New entrants with disruptive technology. Rivalry – High Threat Microsoft Windows Operating System, Windows Media Player for playing music and video.

• Linux Competition to Mac OS X Operating System. Napster, Rhapsody Online music sources – alternatives to iTunes Music Store. Dell, HP, Lenovo Alternate sources for computer hardware. iRiver, Samsung, Creative Small, stylish MP3 Players. DreamWorks Animated movies. YouTube. com Online video. Substitutes – Moderate Threat XM, Sirius Satellite Radio for music. XBox, PS2 Entertainment Media, Media and Music. Various Internet Streaming Radio and Podcasts. Music CDs, DVD- Audio and SuperAudio CD Alternative means to acquire music. Broadcast, Cable, Satellite, NetFlix, TiVo, Theatres
• Suppliers of Television and Movies. Will they sign exclusive contracts with other online services? Note that this threat is reduced for Disney / Pixar. Buyers – Moderate Threat Consumers and Illegal peer-to-peer file sharing Consumers share music using peer-to-peer networks without paying for music. Distributors Apple retailers may pressure for lower prices or better terms. For example, the release of the Apple Store in 2001 “infuriated longtime independent Apple retailers that didn’t appreciate Cupertino cannibalizing their sales. ” (Linzmayer, 300) Consumer Attitudes and Behaviors

Consumers or businesses may reduce spending on personal computers or non-essential (potentially high elasticity of demand) music players if they fear economic downturns. Consumer Refresh Consumers and businesses may continue to use previous-model iPods and Cycles Macs rather than upgrade to current iPods, iMacs, or OS. The total industry threat for the industry space that Apple occupies (computer equipment and distribution of entertainment) is a high threat industry. Apple must continue to pursue product differentiation (i. e. he style and ease-of-use of an iPod) and economies of scope (i. e. offering ABC television shows on iTunes) to maintain their sustained competitive advantage in this industry. Which External Threats are Most Significant

• Computer Hardware and Software: Open Source software such as the Linux Operating System and Open Office applications threaten both Apple and Microsoft. The low (often, free) cost of the software may allow it to overtake Apple and Microsoft, especially in developing markets such as China.
• Music Products: Major online retailers such as Amazon are considering entry into the online music market.

With a wide internet presence and a household name, Amazon could present a formidable challenge to Apple. If the major record labels (Universal, Sony BMG, EMI, and Warner) negotiate better terms with new competitors to iTunes, Apple may be unable to provide some of the music content that they currently offer. The major music labels dislike Apple’s dollar per song pricing. They would prefer to earn higher profits with “variable pricing”. (Wingfield) With variable pricing, the most popular songs would be greater than $1, and less popular songs would be less than $1.

Although the labels recently renewed their contracts with Apple, there may be provisions that allow future changes in the pricing model. (Wingfield and Smith)

Suppliers

The recent shift to Intel processors could present a significant threat to Apple. With only two companies (Intel and AMD) producing Intel-compatible processors, there is a strong potential for tacit collusion and oligopoly power between these suppliers. Apple purchasing must now directly compete with HP, Lenovo, and Dell.