1

Apple in 2008
Introduction
In 1997, Apple Computer was in deep trouble. The company that had pioneered the personal computer (PC mar!et with its easy-to-use Apple II in 197" and introduced the #irst $raphical user inter#ace (%&I with the 'acintosh in 19"( was bleedin$ red in!. Apple)s worldwide mar!et share, which had been #luctuatin$ between 7* and 9* since 19"(, had sun! to (*. +ales were declinin$. Apple was on trac! to lose ,-7" million on re.enues o# ,7 billion, on top o# a ,7(/ million loss in 1990. In 1uly 1997, the co#ounder o# the company, +te.e 1obs, who had been #ired #rom Apple in 19"2, returned as C34. At an in.estor con#erence, 'ichael 5ell, C34 o# 5ell Computer, was as!ed what 1obs should do as head o# Apple. 5ell 6uipped 7I)d shut it down and $i.e the money bac! to shareholders.81 9y ://", the situation loo!ed .ery di##erent. Apple was on trac! to boo! record sales o# more than ,-: billion and net pro#its o# close to ,(.7 billion. The stoc! price, which had traded as low as ,0 a share in ://- was about ,17/, with the mar!et capitali;ation at ,1(/ billion, which #ar surpassed that o# 5ell Computer which was about ,(1 billion. 5ri.in$ the trans#ormation were stron$ sales o# Apple)s iPod music player, music downloads #rom the iTunes store, and Apple)s iPhone. In addition, stron$ sales o# Apple)s i'ac laptop and des!top computers had li#ted Apple)s mar!et share in the &nited +tates PC busi- ness to ".2*, up #rom a low o# under -* in ://(.: Apple now ran!ed third in the &nited +tates PC mar!et behind 5ell with -:* and <P :2*. 'oreo.er, analysts were predictin$ that the halo e##ect o# the iPod and iPhone, to$ether with Apple)s adoption o# Intel)s microprocessor architecture, would dri.e stron$ sales $oin$ #orward. To emphasi;e the broadenin$ product port#olio o# the company, Apple had dropped 7computer8 #rom its name. =or the #irst time in :/ years, it loo!ed as i# Apple, the perennial also-ran, mi$ht be sei;in$ the initiati.e. 9ut 6uestions remained. Could the company continue to build on its momentum> Could the company brea! out o# its niche and become a mainstream player in the computer industry> <ow sustainable was the iPod dri.en sales boom> ?ould the iPhone continue to $ain mar!et traction> And with new competitors comin$ alon$, could Apple hold onto its mar!et leadin$ position in the mar!et #or di$ital music players>

Apple 1997

1976

The Early Years

Apple)s $enesis is the stu## o# computer industry led$ed.- 4n April =ools 5ay 1970, two youn$ electronics enthusiasts, +te.e 1obs and +te.e ?o;nia!, started a company to sell a primiti.e personal computer that ?o;nia!)s had desi$ned. +te.e 1obs was @ust :/ years oldA ?o;nia!, or ?o; as he was commonly called, was #i.e years older. They had !nown each other #or se.eral years, ha.in$ been introduced by a mutual #riend who reali;ed that they shared an interest in consumer electronics. ?o; had desi$ned the computer @ust #or the #un o# it. That is what people did in 1970. The idea that somebody would actually want to purchase his machine had not occurred

This case was prepared by Charles ?. B. <ill, the &ni.ersity o# ?ashin$ton. Copyri$ht Charles ?. B. <ill C ://". Deprinted by permission.

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Case 1 Apple in ://"

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to ?o;, but it did to 1obs. 1obs persuaded a reluctant ?o; to #orm a company and sell the machine. The location o# the company was +te.e 1obs) $ara$e. 1obs su$$ested they call the company Apple and their #irst machine, Apple I. They sold about :// computers at ,000 each. The price point was pic!ed as somethin$ o# a pran!. The Apple I had se.eral limitationsE no case, !eyboard, or power supply bein$ ob.ious ones. It also re6uired se.eral hours o# laborious assembly by hand. 9y late 1970, ?o; was wor!in$ on a replacement to the Apple I, the Apple II.( In 4ctober 1970, with the Apple II under de.elopment, 1obs and ?o; were introduced to 'i!e 'ar!!ula. 4nly -(, 'ar!!ula was already a retired millionaire, ha.in$ made a small #ortune at =airchild and Intel. 'ar!!ula had no plans to $et bac! into business anytime soon, but a .isit to 1obs) $ara$e chan$ed all that. <e committed to in.estin$ ,9:,/// #or one-third o# the company and promised that his ultimate in.estment would be ,:2/,///. +tunned, 1obs and ?o; a$reed to let him @oin as a partner. It was a #ate#ul decision. The combination o# ?o;)s technical s!ills, 1obs) entrepreneurial ;eal and .ision, and 'ar!!ula)s business sa..y and connections, was a power#ul one. 'ar!!ula told 1obs and ?o; that neither o# them had the eFperience to run a company and persuaded them to hire a President, 'ichael +cott, who had wor!ed #or 'ar!!ula at =airchild. The Apple II was introduced in 1977 at a price o# ,1,://. The #irst .ersion was an inte$rated computer with a 'otorola microprocessor and included a !eyboard, a power supply, a monitor, and the 9A+IC pro$rammin$ so#tware. It was +te.e 1obs who pushed ?o; to desi$n an inte$rated machineE he wanted somethin$ that was easy to use, not @ust a toy #or $ee!s. 1obs also insisted that the Apple II loo!ed $ood. It had an attracti.e case and no .isible screws or bolts. This di##erentiated it #rom most personal computers at the time that loo!ed as i# they had been assembled by hobbyists at home (as many had . In 197", Apple started to sell a .ersion o# the Apple II that incorporated somethin$ newE a dis! dri.e. The dis! dri.e turned out to be a critical inno.ation, #or it enabled third-party de.elopers to write so#tware pro$rams #or the Apple II that could be loaded .ia #loppy dis!s. +oon pro$rams started to appear, amon$ them 3asy?riter, a basic wordprocessin$ pro$ram, and GisiCalc, a spreadsheet

pro$ram. GisiCalc was an instant hit, and pulled in a new customer set, business types who could use GisiCalc #or #inancial plannin$ and accountin$. 9ecause GisiCalc was only a.ailable #or the Apple II, it helped to dri.e demand #or the machine. 9y the end o# 19"/, Apple had sold more than 1//,/// Apple IIs, ma!in$ the company the leader in the embryonic personal computer industry. The company had success#ully eFecuted an IP4, was $eneratin$ o.er ,:// million in annual sales, and was pro#itable. ?ith the Apple II series sellin$ well, particularly in the education mar!et, Apple introduced its neFt product, the Apple III, in the #all o# 19"/. It was a #ailure. The computer was #illed with bu$s and crashed constantly. The Apple III had been rushed to mar!et too 6uic!ly. Apple reintroduced a reen$ineered Apple III in 19"1, but it continued to be outsold by Apple II. Indeed, successi.e .ersions o# the Apple II #amily, each an impro.ement on the proceedin$ .ersion, continued to be produced by the company until 199-. In total, more than two million Apple II computers were sold. The series became a standard in American classrooms, where it was .alued #or its intuiti.e ease o# use. 'oreo.er, the Apple II was the mainstay o# the company until the late 19"/s, when an impro.ed .ersion o# the 'acintosh started to $arner si$ni#icant sales.

The IBM PC and Its Aftermath

Apple)s success $al.ani;ed the world)s lar$est computer company, I9', to speed up de.elopment o# its entry into the personal computer mar!et. I9' had a hu$e and .ery pro#itable main#rame computer business, but it had so #ar #ailed to de.elop a personal computer, despite two attempts. To $et to mar!et 6uic!ly with this, its third PC pro@ect, I9' bro!e with its established practice o# usin$ its own proprietary technolo$y to build the PC. Instead, I9' adopted 7open architecture,8 purchasin$ the components re6uired to ma!e the I9' PC #rom other manu#acturers. These components included a 10-bit microprocessor #rom Intel and an operatin$ system, '+-54+, which was licensed #rom a small ?ashin$ton state company, 'icroso#t. 'icroso#t had been in the industry #rom its inception, writin$ a .ersion o# the 9A+IC so#tware pro$rammin$ lan$ua$e #or the 'IT+ Atari in 1977, the #irst PC e.er produced. I9')s desire to license 9A+IC brou$ht them to Dedmond to tal! with the

company)s C34, 9ill %ates. %ates, still in his early :/s, persuaded I9' to adopt a 10-bit processor (ori$inally I9' had been considerin$ a less-power#ul "-bit processor . <e was also instrumental in pushin$ I9' to adopt an open architecture, ar$uin$ that I9' would bene#it #rom the so#tware and peripherals that other companies could then ma!e. Initially I9' was intent on licensin$ the CPH' operatin$ system, produced by 5i$ital Desearch, #or the I9' PC. <owe.er, the current .ersion o# CPH' was desi$ned to wor! on an "-bit processor, and %ates had persuaded I9' that it needed a 10-bit processor. In a series o# 6uic! mo.es, %ates purchased a 10-bit operatin$ system #rom a local company, +eattle Computer, #or ,2/,///. %ates then hired the desi$ner o# the operatin$ system, Tim Paterson, renamed the system '+-54+ and o##ered to license it to I9'. In what turned out to be a masterstro!e, %ates persuaded I9' to accept a non-eFclusi.e license #or '+-54+ (which I9' called PC-54+ . To sto!e sales, I9' o##ered a number o# applications #or the I9' PC that were sold separately, includin$ a .ersion o# GisiCalc, a word processor called 3asy?riter, and well-!nown series o# business pro$rams #rom Peachtree +o#tware. Introduced in 19"1, the I9' PC was an instant success. 4.er the neFt two years, I9' would sell more than 2//,/// PCs, sei;in$ mar!et leadership #rom Apple. I9' had what Apple lac!ed, an ability to sell into corporate America. As sales o# the I9' PC mounted, two thin$s happened. =irst, independent so#tware de.elopers started to write pro$rams to run on the I9' PC. These included two applications that dro.e adoptions o# the I9' PCA wordprocessin$ pro$rams (?ord Per#ect and spreadsheet pro$rams (Botus 1-:-- . +econd, the success o# I9' $a.e birth to clone manu#acturers who made 7I9'-compatible8 PCs that also utili;ed an Intel microprocessor and 'icroso#t)s '+-54+ operatin$ system. The #irst and most success#ul o# the clone ma!ers was Compa6, which in 19"- introduced its #irst personal computer, a :"-pound 7portable8 PC. In its #irst year, Compa6 boo!ed ,111 million in sales, which at the time was a record #or #irst year sales o# a company. 9e#ore lon$, a pro#usion o# I9' clone ma!ers entered the mar!et, includin$ Tandy, Ienith, Beadin$ 3d$e, and 5ell. The last was established in 19"( by 'ichael 5ell, then a student at the &ni.ersity o# TeFas, who initially ran the company out o# his dorm room.

The Birth of the Macintosh

9y 19"/, two other important pro@ects were underway at AppleA Bisa and the 'acintosh. Bisa was ori$inally concei.ed as a hi$h-end business machine and the 'acintosh as a low-end portable machine. The de.elopment o# both the Bisa, and ultimately the 'acintosh, were in#luenced by two .isits +te.e 1obs paid to JeroF)s #abled Palo Alto Desearch Center (PADC in Ko.ember and 5ecember 1979. =unded out o# JeroF)s success#ul copier business, PADC had been set up to do ad.anced research on o##ice technolo$y. 3n$ineers at PADC had de.eloped a number o# technolo$ies that were later to become central to personal computers, includin$ a %&I, so#tware pro$rams that were made tan$ible throu$h on screen icons, a computer mouse that let a user clic! on and dra$ on screen ob@ects, and a laser printer. 1obs was astounded by what he saw at PADC and decided on the spot that these inno.ations had to be incorporated into Apple)s machines. 1obs initially pushed the Bisa team to implement PADC)s inno.ations, but he was reportedly dri.in$ people on the pro@ect nuts with his demands, so President 'i!e +cott pulled him o# the pro@ect. 1obs reacted by essentially hi@ac!in$ the 'acintosh pro@ect, and trans#ormin$ it into a s!un! wor!s that would put his .ision into e##ect. 9y one accountE <e hounded the people on the 'acintosh pro@ect to do their best wor!. <e san$ their praises, bullied them unmerci#ully, and told them they weren)t ma!in$ a computer, they were ma!in$ history. <e promoted the 'ac passionately, ma!in$ people belie.e that he was tal!in$ about much more than a piece o# o##ice e6uipment.2 It was durin$ this period that 9ud Tribble, a so#tware en$ineer on the 'ac pro@ect, 6uipped that +te.e 1obs could create a 7reality distortion #ield.8 1obs insisted that the 'ac would ship by early 19":. Tribble !new that the schedule was unattainable, and when as!ed why he did not point this out to 1obs, he repliedE 7+te.e insists that we)re shippin$ in early 19":, and won)t accept answers to the contrary. The best way to describe the situation is a term #rom +tar Tre!. +te.e has a reality distortion #ield. . . . In his presence, reality is malleable. <e can con.ince anyone o# practically anythin$. It wears o## when he)s not around, but it ma!es it hard to ha.e realistic schedules.80

Andy <ert;#eld, another en$ineer on the 'acintosh pro@ect, thou$ht Tribble was eFa$$eratin$, 7until I obser.ed +te.e in action o.er the neFt #ew wee!s. The reality distortion #ield was a con#oundin$ mLlan$e o# a charismatic rhetorical style, an indomitable will, and an ea$erness to bend any #act to #it the purpose at hand. I# one line o# ar$ument #ailed to persuade, he would de#tly switch to another. +ometimes, he would throw you o## balance by suddenly adoptin$ your position as his own, without ac!nowled$in$ that he e.er thou$ht di##erently.7 9ac! at Apple, thin$s were chan$in$ too. 'i!e +cott had le#t the company a#ter clashes with other eFecuti.es, includin$ 'ar!!ula, who had become chairman. +te.e 1obs persuaded 1ohn +culley to @oin Apple as C34. +culley was the #ormer .ice president o# mar!etin$ at Pepsi, where he had become #amous #or launchin$ the Pepsi Challen$e. 1obs had reportedly as!ed +culley, 75o you want to sell su$ar water #or the rest o# your li#e, or do you want to chan$e the world>8 +culley opted #or chan$in$ the world. A ?harton '9A, +culley had been hired #or his mar!etin$ sa..y, not his technical s!ills. ?hile the Bisa pro@ect su##ered se.eral delays, 1obs pushed the 'acintosh team to #inish the pro@ect and beat the Bisa team to mar!et with a better product. Introduced in 19"(, the 'acintosh certainly captured attention #or its stylish desi$n and utili;ation o# a $raphical user inter#ace, icons, and a mouse, all o# which made the machine easy to use and were not #ound on any other personal computer at the time. 1obs, e.er the per#ectionist, a$ain insisted that not a sin$le screw should be .isible on the case. <e reportedly #ired a desi$ner who presented a moc!up with a screw that could be seen by li#tin$ a handle. 3arly sales were stron$A then they #altered. =or all o# its appeal, the 'acintosh lac!ed some important #eaturesE it had no hard dis! dri.e, only one #loppy dri.e, and insu##icient computer memory. 'oreo.er, there were #ew applications a.ailable to run on the machine, and the 'ac pro.ed to be a more di##icult machine to de.elop applications #or than the I9' PC and its clones. 1obs, howe.er, seemed obli.ious to the problems, and continued to tal! about outsi;ed sales pro@ections, e.en when it was ob.ious to all around him that they were unattainable. In early 19"2, Apple posted its #irst loss. Aware that drastic action was necessary, but could not be ta!en while 1obs was runnin$ the 'acintosh di.ision,

+culley $ot bac!in$ #rom the board o# directors to strip 1obs o# his mana$ement role and o.ersi$ht o# the 'acintosh di.ision. In late 19"2, an embittered 1obs resi$ned #rom Apple, sold all o# his stoc!, and le#t to start another computer company, aptly named KeJT.

The Golden Years

?ith 1obs $one, +culley shut down the Bisa line, which had done poorly in the mar!et due to a .ery hi$h price point o# ,1/,///. <e pushed de.elopers to #iF the problems with the 'acintosh. In 1anuary 19"0, a new .ersion o# the 'acintosh, the 'ac Plus, was introduced. This machine #iFed the shortcomin$s o# the ori$inal 'ac, and sales started to $row a$ain. ?hat also dro.e sales hi$her was Apple)s domination o# the des!top publishin$ mar!et. +e.eral e.ents came to$ether to ma!e this happen. Desearchers #rom JeroF PADC #ormed a company, Adobe, to de.elop and commerciali;e the Post+cript pa$e description lan$ua$e. Post+cript enabled the .isual display and printin$ o# hi$h 6uality pa$e layouts loaded with $raphics (e.$., colored charts, line drawin$s, and photos . Apple licensed Post+cript and used it as the output #or its Apple Baser?riter, which was introduced in 19"2. +hortly a#terward, a +eattle company, Aldus, introduced a pro$ram called Pa$e'a!er #or the 'ac. Pa$e'a!er used Adobe)s Post+cript pa$e description lan$ua$e #or output. Althou$h Aldus introduced a .ersion o# Pa$e'a!er #or '+-54+ in 19"0, Apple already had a lead, and with the 'ac)s %&I inter#ace appealin$ to $raphic artists, Apple)s ti$htened its hold on the des!top publishin$ se$ment. Apple)s position in des!top publishin$ was #urther stren$thened by the release o# Adobe Illustrator in 19"7 (a #reehand drawin$ pro$ram and Adobe Photoshop in 199/. The period between 19"0 and 1991 were in many ways the $olden years #or Apple. 9ecause it made both hardware and so#tware, Apple was able to control all aspects o# its computers, o##erin$ a complete des!top solution that allowed customers to 7plu$ and play.8 ?ith the Apple II series still sellin$ well in the education mar!et, and the 'ac dominatin$ des!top publishin$, Apple was able to char$e a premium price #or its products. %ross mar$ins on the 'ac line $ot as hi$h as 22*. In 199/, Apple sales reached ,2.0 billionA its $lobal mar!et share, which had #allen rapidly as the I9'-compatible PC

mar!et had $rown, stabili;ed at "*. The company had a stron$ balance sheet and was the most pro#itable personal computer manu#acturer in the world. 5urin$ this period eFecuti.es at Apple acti.ely debated the merits o# licensin$ the 'ac operatin$ system to other computer manu#acturers, allowin$ them to ma!e 'ac clones. +culley was in #a.or o# this mo.e. +o was 'icroso#t)s 9ill %ates, who wrote two memos to +culley layin$ out an ar$ument #or licensin$ the 'ac 4+. %ates ar$ued that the closed architecture o# the 'acintosh pre.ented independent in.estment in the standard by third parties, and put Apple at a disad.anta$e a$ainst the I9' PC standard. <owe.er, some senior eFecuti.es at Apple were a$ainst the licensin$ strate$y, ar$uin$ that once Apple licensed its intellectual property, it would be di##icult to protect it. In one .ersion o# e.ents, senior eFecuti.es debated the decision at a meetin$, and too! a .ote on whether to license. %i.en the contro.ersial nature o# the decision, it was decided that the .ote in #a.or had to be unanimous. It was notE a sin$le eFecuti.e .oted a$ainst the licensin$ decision, and it was ne.er pursued." In another .ersion o# e.ents, 1ean-Bouis %assee, head o# DM5 at Apple, .i$orously opposed +culley)s plans to clone, and +culley bac!ed down.9 %assee was deeply distrust#ul o# 'icroso#t and 9ill %ates and belie.ed that %ates) probably had an ulterior moti.e, $i.en how the company bene#ited #rom the I9' standard. Ironically, in 19"2 Apple had licensed its 7.isual displays8 to 'icroso#t. Deportedly %ates had stron$armed +culley, threatenin$ that 'icroso#t would stop de.elopin$ crucial applications #or the 'ac unless Apple $ranted 'icroso#t the license. At the time, 'icroso#t had launched de.elopment o# its own %&I. Called ?indows, it mimic!ed the loo! and #eel o# the 'ac operatin$ system, and 'icroso#t did not want to be stopped by a lawsuit #rom Apple. +e.eral years later, when Apple #iled a lawsuit a$ainst 'icroso#t, ar$uin$ that ?indows -.1 imitated the 7loo! and #eel8 o# the 'ac, 'icroso#t was able to point to the 19"2 license a$reement to de#end its ri$ht to de.elop ?indowsE a position that the @ud$e in the case a$reed with.

1990 199!
9y the early 199/s, the prices o# I9'-compatible PCs were declinin$ rapidly. As lon$ as Apple was the only company to sell machines that utili;ed

%&Is, its di##erential appeal $a.e it an ad.anta$e o.er '+-54+-based PCs with their clun!y teFtbased inter#aces, and the premium price could be @usti#ied. <owe.er, in 199/, 'icroso#t introduced ?indows -.1, its own %&I that sat on top o# '+54+, and Apple)s di##erential appeal be$an to erode. 'oreo.er, the dramatic $rowth o# the PC mar!et had turned Apple into a niche player. =aced with the choice o# writin$ so#tware to wor! with '+-54+H ?indows operatin$ systems and Intel microprocessors (now the dominant standard #ound on 9/* o# all personal computers , or the 'ac 4+ and 'otorola processors, de.elopers lo$ically opted #or the dominant standard (des!top publishin$ remained an eFception to this rule . De#lectin$ on this lo$ic, 5an 3ilers, then .ice president o# strate$ic plannin$ at Apple, reportedly stated that 7The company was on a $lide path to history.81/ +culley too, thou$ht that the company was in trouble. Apple seemed boFed into its niche. Apple had a hi$h cost structure. It spent si$ni#icantly more on DM5 as a percenta$e o# sales than its ri.als. (In 199/, Apple spent "* o# sales on DM5, Compa6 about (*. Its microprocessor supplier, 'otorola, lac!ed the scale o# Intel, which translated into hi$her costs #or Apple. 'oreo.er, Apple)s small mar!et share made it di##icult to recoup the spiralin$ cost o# de.elopin$ a new operatin$ system, which by 199/ amounted to at least ,2// million. +culley)s $ame plan to deal with these problems in.ol.ed a number o# steps.11 =irst, he appointed himsel# chie# technolo$y o##icer in addition to C34Na mo.e that raised some eyebrows $i.en +culley)s mar!etin$ bac!$round. +econd, he committed the company to brin$ out a low-cost .ersion o# the 'acintosh to compete with I9' clones. The result was the 'ac Classic, introduced in 4ctober 199/ and priced at ,999. <e also cut prices #or the 'acs and Apple IIs by -/*. The reward was a 0/* increase in sales .olume, but lower $ross mar$ins. +o, third, he cut costs. The wor!#orce at Apple was reduced by 1/*, the salaries o# top mana$ers (includin$ +culley)s were cut by as much as 12*, and Apple shi#ted much o# its manu#acturin$ to subcontractors (#or eFample, the Power9oo! was built in 1apanNa #irst #or Apple . =ourth, he called #or the company to maintain its technolo$ical lead by brin$in$ out hit products e.ery 0 to 1: months. The results include the #irst Apple

portable, the Power9oo! noteboo!, which was shipped in late 1991 and $arnered .ery #a.orable re.iews, and the Apple Kewton handheld computer, which bombed. =i#th, Apple entered into an alliance with I9', whose mana$ers reali;ed that it had lost its hold on the PC mar!et to companies such as Intel, 'icroso#t, and Compa6. The I9' alliance had se.eral elements. 4ne was the decision to adopt I9')s Power PC microprocessor architecture, which I9' would also use in its own o##erin$s. A second was the establishment o# two @oint .enturesE Tali$ent to create a new operatin$ system, and Oaleida to de.elop multimedia applications. A third was a pro@ect to help I9' and Apple machines wor! better to$ether. Althou$h +culley)s $ame plan helped to boost the top line, the bottom line shrun! in 199- due to a combination o# low $ross mar$ins and continuin$ hi$h costs. In 199(, +culley le#t Apple. <e was replaced by 'ichael +pindler, a %erman en$ineer who had $ained prominence as head o# Apple 3urope. In 199(, +pindler #inally too! the step that had been lon$ debated in the companyE he decided to license the 'ac-4+ to a hand#ul o# companies, allowin$ them to ma!e 'ac clones. The 'ac-4+ would be licensed #or ,(/ a copy. It was too little too lateNthe industry was already waitin$ #or the introduction o# 'icroso#t)s ?indows 92. ?hen it came, it became clear that Apple was in serious trouble. ?indows 92 was a bi$ impro.ement o.er ?indows -.1, and it closed the $ap between ?indows and the 'ac. ?hile many commentators critici;ed Apple #or not licensin$ the 'ac-4+ in the 19"/s, when it still had a bi$ lead o.er 'icroso#t, ironically 9ill %ates disa$reed. In a 1990 inter.iew with Fortune, %ates notedE As Apple has declined, the basic criticism seems to be that Apple)s strate$y o# doin$ a uni6ue hardwareHso#tware combination was doomed to #ail. I disa$ree. Bi!e all strate$ies, this one #ails i# you eFecute poorly. 9ut the strate$y can wor!, i# Apple pic!s its mar!ets and renews the inno.ation in the 'acintosh. 1: +pindler responded to ?indows 92 by committin$ Apple to de.elop a neFt-$eneration operatin$ system #or the 'acintoshNsomethin$ that raised 6uestions about the Tali$ent alliance with I9'. At

the end o# 1992, I9' and Apple parted ways, endin$ Tali$ent, which a#ter ,2// million in in.estments, had produced little. 9y then, +pindler had other issues on his mind. The latter hal# o# 1992 pro.ed to be a disaster #or Apple. The company seemed unable to predict demand #or its products. It o.erestimated demand #or its low-end 'acintosh Per#orma computers and was le#t with eFcess in.entory, while underestimatin$ demand #or its hi$h end machines. To compound matters, its new Power9oo!s had to be recalled a#ter batteries started to catch #ire, and a price war in 1apan cut mar$ins in one o# its best mar!ets. As a conse6uence, in the last 6uarter o# 1992, $ross mar$ins slumped to 12*, down #rom :9* in 199(, and Apple lost ,0" million. +pindler responded in 1anuary 1990 by announcin$ 1,-// layo##s. <e su$$ested that up to (,/// mi$ht ultimately $oNsome :-* o# the wor!#orce.1- That was his last si$ni#icant act. <e was replaced in =ebruary by %ilbert Amelio. Amelio, who @oined Apple #rom Kational +emiconductor where he had $ained a reputation #or his turnaround s!ills, lasted @ust 17 months. <e #ollowed throu$h on +pindler)s plans to cut personnel and stated that Apple would return to its di##erentiation strate$y. <is hope was that the new 'ac operatin$ system would help, but wor! on that was in total disarray. <e too! the decision to scrap the pro@ect a#ter an in.estment o# more than ,2// million. Instead, Apple purchased KeJT, the computer company #ounded by none other than +te.e 1obs, #or ,(:2 million. The KeJT machines had recei.ed stron$ re.iews but had $ained no mar!et traction due to a lac! o# supportin$ applications. Amelio #elt that the KeJT 4+ could be adapted to run on the 'ac. <e also hired +te.e 1obs as a consultant, but 1obs was rarely seen at AppleA he was too busy runnin$ PiFar, his computer animation com- pany that was ridin$ a wa.e o# success a#ter a hu$e hit with the animated mo.ie, Toy Story.1( Amelio)s mo.es did nothin$ to stop the slide in Apple)s #ortunes. 9y mid-1997, mar!et share had slumped to -*, #rom 9* when Amelio too! the helm. The company boo!ed a loss o# ,7(: million in 1990 and was on trac! to lose another ,(// million in 1997. It was too much #or the board. In 1uly 1997, Amelio was #ired. ?ith mar!et share #allin$, third- party de.elopers and distributors were rethin!in$ their commitments to Apple. ?ithout them, the company would be dead.

The Return of Steve Jobs

=ollowin$ Amelio)s departure, +te.e 1obs was appointed interim C34. In April 199", he too! the position on a permanent basis, while stayin$ on at PiFar as C34. 1obs mo.ed 6uic!ly to #iF the bleedin$. <is #irst act was to .isit 9ill %ates and stri!e a deal with 'icroso#t. 'icroso#t a$reed to in.est ,12/ million in Apple and to continue producin$ 4##ice #or the 'ac throu$h until at least ://:. Then he ended the licensin$ deals with the clone ma!ers, spendin$ more than ,1// million to ac6uire the assets o# the lead- in$ 'ac clone ma!er, Power Computin$, includin$ its license. 1obs !illed slowsellin$ products, most notably the Apple Kewton handheld computer, and reduced the number o# product lines #rom 0/ to @ust #our. <e also pushed the company into online dis- tribution, imitatin$ 5ell Computer)s direct-sellin$ model. ?hile these #iFes brou$ht the company time and a #a.orable reaction #rom the stoc! mar!et, they were not a recipe #or $rowth.

"e# Com$%ter &fferin's

Almost immediately, 1obs started to thin! about a new product that would embody the spirit o# Apple. ?hat emer$ed in 'ay 199" was the i'ac. The di##erentiator #or the i'ac was not its so#tware, its power, or its monitorE it was the desi$n o# the machine itsel#. A sel#-contained unit that combined the monitor and central processin$ unit in translucent teal and with cur.ed lines, the i'ac was a bold departure in a world dominated by putty-colored PC boFes. To de.elop the i'ac, 1obs ele.ated a team o# desi$ners headed by 1onathan I.e, $i.in$ them an unprecedented say in the de.elopment pro@ect. I.e)s team wor!ed closely with en$ineers, manu#acturers, mar!eters and 1obs himsel#. To understand how to ma!e a plastic shell loo! eFcitin$ rather than cheap, the desi$ners .isited a candy #actory to study the #iner points o# ma!in$ @elly beans. They spent months wor!in$ with Asian partners desi$nin$ a sophisticated process capable o# producin$ millions o# i'acs a year. The desi$ners also pushed #or the internal electronics to be redesi$ned, to ma!e sure that they loo!ed $ood throu$h the thic! shell. Apple may ha.e spent as much as ,02 a machine on the casin$, compared with perhaps ,:/ #or the a.era$e PC.12

Priced at ,1,:99, i'ac sales were stron$, with orders placed #or 1//,/// units e.en be#ore the machine was a.ailable. 'oreo.er, accordin$ to Apple)s research, one-third o# i'ac purchases were by #irst-time buyers accordin$ to Apple)s research.10 The i'ac line was continually updated, with #aster processors, more memory, and bi$$er hard dri.es bein$ added. The product was also soon a.ailable in many di##erent colors. In 1999, Apple #ollowed up the i'ac with introduction o# the i9oo! portable. Aimed at consumers and students, the i9oo! had the same desi$n theme as the i'ac and was priced a$$ressi.ely at ,1,299. +ales o# the i'ac and i9oo! helped push Apple bac! into pro#itability. In 1999, the company earned ,(:/ million on sales o# ,0.1 billion. In :///, it made ,011 million on sales o# almost ," billion. To !eep sales $rowin$, Apple continued to in.est in the de.elopment o# a new operatin$ system, based on the technolo$y ac6uired #rom KeJT. A#ter three years wor! by nearly 1,/// so#tware en$ineers and a cost o# approFimately ,1 billion, the #irst .ersion o# Apple)s new operatin$ systems was introduced in ://1. Onown as 4+ J, it $arnered ra.e re.iews #rom analysts who saw the &KIJ-based pro$ram as o##erin$ superior sta- bility and #aster speed than the old 'ac 4+. 4+ J also had an enhanced ability to run multiple pro$rams at once, to support multiple users, connected easily to other de.ices such as di$ital camcorders, and was easier #or de.elopers to write applications #or. In typi- cal Apple #ashion, 4+ J also sported a well-desi$ned and intuiti.ely appealin$ inter#ace. +ince ://1, new .ersions o# 4+ J ha.e been introduced almost once a year. The most recent .ersion, 4+ J Beopard, was introduced in ://" and retailed #or ,1:9. To $et the installed base o# 'ac users to up$rade to 4+ J, who at the time numbered :2 million, Apple had to o##er applications. The deal with 'icroso#t ensured that its popular 4##ice pro$ram would be a.ailable #or the 4+ J. +te.e 1obs had assumed that the .ote o# con#idence by 'icroso#t would encoura$e other third-party de.elopers to write pro$rams #or 4+ J, but it did not always happen. 'ost si$ni#icantly, in 199", Adobe +ystems re#used to de.elop a 'ac .ersion o# their consumer .ideo-editin$ pro$ram, which was already a.ailable #or ?indows PCs. +hoc!ed, 1obs directed Apple to start wor!in$ on its own applications. The #irst #ruits o# this e##ort were two .ideo-editin$ pro$ramsE =inal Cut Pro #or

pro#essionals and i'o.ie #or consumers. KeFt was iBi#e, a bundle o# multimedia pro$rams preinstalled on e.ery 'ac, which included i'o.ie, i5G5, iPhoto, %ar$a$e 9and, and the iTunes di$ital @u!eboF. Apple also de.eloped its own ?eb browser, +a#ari. 'eanwhile, Apple continued to update its computer lines with eye-catchin$ o##erin$s. In ://1, Apple introduced its Titanium Power9oo! %( noteboo!s. Cased in Titanium, these ultrali$ht and #ast noteboo!s #eatured a clean post-industrial loo! that mar!ed a distinct shi#t #rom the whimsical loo! o# the i'ac and i9oo!. As with the i'ac, 1onathan I.e)s desi$n team played a central part in the products de.elopment. A core team o# desi$ners set up a desi$n studio in a +an =rancisco warehouse, #ar away #rom Apple)s main campus. They wor!ed #or siF wee!s on the basic desi$n, and then headed to Asia to ne$otiate #or widescreen #lat panel displays and to wor! with tool ma!ers.17 The Titanium noteboo!s were #ollowed by a redesi$ned des!top line that appealed to the company)s $raphic desi$n customers, includin$ the o##erin$ o# ele$antly desi$ned .ery wide screen cinema displays. In ://(, I.e)s desi$n team came out with yet another ele$ant o##erin$, the i'ac %2 computer, which PC Magazine described as a 7simple stunnin$ all in one desi$n.81" This was #ollowed in ://" with the release o# yet another stron$ desi$n, the ultra-thin 'ac9oo! Air that wei$hed @ust - pounds and was only /.70 o# an inch thic! at its widest point. =or all o# Apple)s undisputed desi$n eFcellence and the loyalty o# its core user base, $raphic artists and students, durin$ the early :///s Apple)s $lobal mar!et share remained anemic, trailin$ #ar behind industry leaders 5ell, <P, and I9'HBeno.o. ?ea! demand, combined with its low mar!et share, translated into another loss #or Apple in ://1, leadin$ some to 6uestion the permanence o# +te.e 1ob)s turnaround. <owe.er, while Apple)s share in its core &.+. mar!et #ell to less than -* in ://(, it started to pic! up a$ain in ://2, and the company made stron$ share $ains in ://0P://" (see 3Fhibit 1 . 'omentum was particularly stron$ in the &nited +tates, where Apple shipments sur$ed. 5urin$ the second 6uarter o# ://", #or eFample, Apple)s shipments were up o.er (/* compared to the prior year, and its $rowth rate was three times that o# the industry. 5ri.in$ $rowth durin$ the ://2P://" period, accordin$ to many analysts, was the sur$in$ popularity o# Apple)s iPod music

3Fhibit 1 ?orldwide 'ar!et +hare and &nited +tates 'ar!et +hare, +econd Quarter ://"
Com$any <P 5ell Acer Beno.a Toshiba Apple 4ther Total Glo(al Mar)et ,hare -./ 1".1* 12.0* 9.(* 7."* (.(* 1.9* (:.9* 1//* *+,+ Mar)et ,hare -./ :2.-* -1.9* ".1* (./* 2.2* ".2* 10."* 1//*

,o%rce0 %artner Press releaseE 7?orldwide PC 'ar!et %rew 10* in +econd Quarter o# ://",8 1uly 10, ://".

player and, in ://7, the iPhone. These two products had raised Apple)s pro#ile amon$ youn$er consumers and was ha.in$ a spill-o.er e##ect on 'ac sales.19

Intel Inside1 2indo#s on the 3es)to$

+ince the company)s inception, Apple had not used Intel microprocessors, which had become the industry standard #or microprocessors since the introduction o# the I9' PC in 19"1. In 1une ://2, Apple announced that it would start to do so. 5ri.in$ the transition was $rowin$ #rustration with the per#ormance o# the PowerPC chip line made by I9' that Apple had been usin$ #or o.er a decade. The PowerPC had #ailed to !eep up with the Intel chips, which were both #aster and had lower power consumptionNsomethin$ that was .ery important in the portable computer mar!et, in which Apple had a respectable mar!et share. The transition created si$ni#icant ris!s #or Apple. 4ld applications and 4+ J had to be rewritten to run on Intel processors. 9y the sprin$ o# ://0, Apple had produced Intel compatible .ersions o# 4+ J and its own applications, but many other applications had not been rewritten #or Intel chips. To ma!e the transition easier, Apple pro.ided a #ree so#tware pro$ram, !nown as Dosetta, which enabled users to run

C41

,ection A0 9usiness Be.el CasesE 5omestic and %lobal

older applications on Intel-based 'acs. 'oreo.er, Apple went a step #arther by issuin$ a utility pro$ram, !nown as 9oot Camp, which enabled 'ac owners to run ?indows JP on their machines. 9oot Camp was included was part o# 4+ J Beopard, and allows 'ac owners to run ?indows JP or Gista i# they should so chose. De.iews o# Apple)s Intel-based machines were $enerally #a.orable, with many re.iewers notin$ the speed impro.ement o.er the older PowerPC 'acs.:/ In the #all o# ://0, Apple reported that its transition to an Intel-based architecture was complete, some siF months ahead o# schedule. The mo.e to Intel architecture may ha.e helped Apple to close the price di##erential that had lon$ eFisted between ?indowsbased PCs and Apple)s o##erin$s. Accordin$ to one analysis, by +eptember ://0, Apple)s products were sellin$ at a discount to comparable product o##erin$s #rom 5ell and <P.:1

Mo5in' into 6etail

In ://1, Apple made another important strate$ic shi#tE the company opened its #irst retail store. In an industry that had lon$ relied on third-party retailers or direct sales, as in the case o# 5ell, this shi#t seemed ris!y. 4ne concern was that Apple mi$ht encounter a bac!lash #rom Apple)s lon$-standin$ retail partners. Another was that Apple would ne.er be able to $enerate the sales .olume re6uired to @usti#y eFpensi.e retail spaceA the product line seemed too thin. <owe.er, Apple clearly #elt that it was hurt by a lac! o# retail presence. 'any computer retailers did not carry Apple machines, and some o# those that did o#ten buried 'ac displays deep in the store.

=rom the start, Apple)s stores eFhibited the same stylish desi$n that characteri;ed its productsE clean lines, attracti.e displays, and postindustrial #eel (see 3Fhibit : . +te.e 1obs himsel# was intimately in.ol.ed in the desi$n process. Indeed, he is one o# the named in.entors on a patent Apple secured #or the desi$n o# the si$nature $lass staircase #ound in many stores, and he was apparently personally in.ol.ed in the desi$n o# a $lass cube atop a store on Kew Ror!)s =i#th A.enue that opened in ://0. In an inter.iew, 1obs noted that 7?e spent a loto# time desi$nin$ the store, and it deser.es to be built per#ectly.8:: Customers and analysts were immediately impressed by the product #luency that employees in Apple stores eFhibited. Indeed, one hallmar! o# Apple stores seems to be the personal attention paid to customers by smilin$ sales sta##, an approach that is remonstrant o# upscale retailers li!e Kordstrom. They also li!ed the hi$hli$ht o# many stores, a 7$enius bar8 where technical eFperts helped customers #iF problems with their Apple products. The wide-open interior space, howe.er, did nothin$ to allay the #ears o# critics that Apple)s product port#olio was @ust too narrow to $enerate the tra##ic re6uired to support premium space. The critics could not ha.e been more wron$. +purred on by boomin$ sales o# the iPod, Apple)s stores did eFceptionally well. 9y early ://", Apple had some :// stores in upscale locations that $enerated some :/* o# the company)s total re.enues, and the company was plannin$ to open another (/ stores. +ales per s6uare #oot are apparently now si$ni#icantly in eFcess o# ,(,///, ma!in$ Apple the en.y o# other retailers.:-

3Fhibit :

+ales o# Apple)s 'ain Product Bines ://-P://7 (millions

4003 4004 ,(,9:,1,-/0 , :7" , ":1 , 921 4007 ,0,:72 ,(,2(/ , "99 ,1,/91 ,1,1:0 4008 , 7,-72 , 7,070 , 1,""2 , 1,:79 , 1,1// 400! ,1/,-1( , ",-/2 , :,(90 , 1,2/" , 1,:0/ , 1:-

Computers iPod iTunes +o#tware Peripherals iPhone

,(,(91 , -(2 , -0

, 0(( , 091

The iPod 6e5ol%tion

In the late 199/s and early :///s, the music industry was $rapplin$ with the implications o# two new technolo$ies. The #irst was the de.elopment o# ineFpensi.e portable 'P- players that could store and play di$ital music #iles, such as 5iamond 'edia)s Dio, which was introduced in 1997 and could hold two hours o# music. The second was the rise o# peerto-peer computer networ!s, such as Kapster, Oa;aa, %ro!ster, and 'orpheus, that enabled indi.iduals to e##iciently swap di$ital #iles o.er the Internet. 9y the early :///s, millions o# indi.iduals were downloadin$ music #iles o.er the Internet without the permission o# the copyri$ht holders, the music publishin$ companies. =or the music industry, this de.elopment had been de.astatin$. A#ter years o# steady $rowth, $lobal sales o# music pea!ed in 1999 at ,-".2 billion, #allin$ to ,-: billion in ://-. 5espite the #all in sales, the International =ederation o# the Phono$raphic Industry (I=PI claimed that the demand #or music was hi$her than e.er, but the decline in sales re#lected the #act that 7the commercial .alue o# music is bein$ widely de.alued by mass copyin$ and piracy.8:( The music industry had tried to counter piracy o.er the Internet by ta!in$ le$al action to shut down the peer-to-peer networ!s, such as Kapster, and #ilin$ lawsuits a$ainst indi.iduals who made lar$e num- bers o# music #iles a.ailable o.er the Internet. Its suc- cess had been limited, in part because peerto-peer networ!s o##ered tremendous utility to consumers. They were #ast, immediate, and enabled consumers to unbundled albums, downloadin$ @ust the trac!s they wanted while i$norin$ @un! #iller trac!s. And, o# course, they were #ree. The music industry was desperate #or a le$al alternati.e to ille$al downloadin$. Its own initiati.es, introduced in ://:, had $ained little traction. 'usicKet, which o##ered son$s #rom ?arner 'usic, 9'%, and 3'I, had a sin$le subscription planE ,9."2 a month #or 1// streams and 1// downloads. A#ter -/ days downloads eFpired and could not be played. Pressplay, which o##ered music #rom +ony, &ni.ersal, and 3'I, had #our subscription plans, #rom ,9.92 to ,:(.92 a month, #or up to 1,/// streams and 1// downloads. The hi$her subscription #ee ser.ice #rom Pressplay allowed users to burn up to :/ son$s a month onto C5s that would not eFpire, but no more than two son$s could be burned #rom any one artist.:2

Then alon$ came the iPod and iTunes. These products were born out o# an o.ersi$htE in the late 199/s, when consumers were startin$ to burn their #a.orite C5s, 'acs did not ha.e C5 burners, or so#tware to mana$e their di$ital music collections. Deali;in$ the mista!e, C34 +te.e 1obs ordered Apple)s so#tware de.elopers to create the iTunes pro$ram to help 'ac users mana$e their $rowin$ di$ital music collections. The #irst iTunes pro$ram led to the concept o# the iPod. I# people were $oin$ to maintain the bul! o# their music collection on a computer, they needed portable 'P- players to ta!e music with themNa +ony ?al!man #or the di$ital a$e. ?hile there were such de.ices on the mar!et already, they could only hold a #ew do;en son$s each. To run the iPod, Apple licensed so#tware #rom PortalPlayer. Apple also learned that Toshiba was buildin$ a tiny 1."-inch hard dri.e that could hold more than 1,/// son$s. Apple 6uic!ly cut a deal with Toshiba, $i.in$ it eFclusi.e ri$hts to the dri.e #or 1" months. 'eanwhile, Apple #ocused on desi$nin$ the user inter#ace, the eFterior stylin$, and the synchroni;ation so#tware to ma!e it wor! with the 'ac. As with so many product o##erin$s un.eiled since 1obs had returned to the helm, the desi$n team led by 1onathan I.e played a pi.otal role in $i.in$ birth to the iPod. I.e)s team wor!ed in secrecy in +an =rancisco. The members, all paid eFtremely well by industry standards, wor!ed to$ether in a lar$e open studio with little personal space. The team was able to #i$ure out how to put a layer o# clear plastic o.er the white and blac! core o# an iPod, $i.in$ it tremendous depth o# teFture. The #inish was superior to other 'P- players, with no .isible screws or ob.ious @oins between parts. The serial number o# the iPod was not on a stic!er, as with most products, it was ele$antly etched onto the bac! o# the de.ice. This attention to detail and desi$n ele$ance, althou$h not with cost implications, was to turn the iPod into a #ashion accessory.:0 The iPod was un.eiled in 4ctober ://1 to miFed re.iews. The price o# ,-99 was si$ni#icantly abo.e that o# competin$ de.ices, and because the iPod only wor!ed with Apple computers, it seemed destined to be a niche product. <owe.er, initial sales were stron$. It turned out that consumers were willin$ to pay a premium price #or the iPod)s hu$e stora$e capacity. 'oreo.er, 1obs made the call to de.elop a .ersion o# the iPod that would be compatible with

?indows. A#ter it was introduced in mid-://:, sales too! o##. 9y this time, 1obs was dealin$ with a bi$$er strate$ic issueNhow to persuade the music companies to ma!e their music a.ailable #or le$al downloads. 1obs met with eFecuti.es #rom the ma@or labels. <e persuaded them that it was in their best interest to support a le$al music download business as an alternati.e to widespread ille$al downloadin$ o# music o.er peer-to-peer networ!s that the music industry had not been able to shut down. People would pay to download music o.er the Internet, he ar$ued. Althou$h all o# the labels were settin$ up their own online businesses, 1obs #elt that because they were limited to sellin$ music owned by the parent companies, demand would also be limited. ?hat was needed was a reputable independent online music retailer, and Apple #it the bill. I# it was $oin$ to wor!, howe.er, all o# the labels needed to $et on board. &nder 1obs) scheme, iTunes #iles would be downloaded #or ,/.99 each. The only portable di$ital player that the #iles could be stored and played on was an iPod. 1ob)s ar$ument was that this closed world made it easier to protect copyri$hted material #rom unauthori;ed distribution. 1obs also meet with :/ o# the world)s top recordin$ artists, includin$ &:)s 9ono, +heryl Crow, and 'ic! 1a$$er. <is pitch to them was that di$ital distribution is $oin$ to happen, and the best way to protect your interests is to support a le$al online music distribution business. ?ooed by 1obs, these power#ul sta!eholders encoura$ed the music recordin$ companies to ta!e Apple)s proposal seriously.:7 9y early ://-, 1obs had all o# the ma@or labels onboard. Baunched in April ://-, within days it was clear that Apple had a ma@or hit on its hands. A million son$s were sold in the #irst wee!. In mid://(, iTunes passed the 1// million-download mar!, and sales !ept acceleratin$, hittin$ the 12/ milliondownload mar! in 4ctober ://(. At that point, customers were downloadin$ more than ( million son$s per wee!, which represented a run rate o# more than :// million a year. ?hile +te.e 1obs admitted that Apple did not ma!e much money #rom iTunes downloads, probably only ,/.1/ a son$, it did ma!e $ood mar$ins on sales o# the iPodNand sales o# the iPod ballooned (see 3Fhibit : . As the installed base o# iPods eFpanded, an ecosystem o# companies sellin$ iPod accessories emer$ed. The accessories include spea!ers, headphones, and

add-on peripherals that allowed iPods to record .oice, char$e on the $o, play tunes o.er the radio, or use the iPod wirelessly with a remote. There are also cases, nec! straps, belt clips, and so on. 9y ://0, it was estimated that there were more than 1// companies in this system. Apple collects an unspeci#ied royalty #rom companies whose products access the iPod)s ports and bene#its indirectly #rom the pre#erence o# buyers #or the iPod o.er competin$ products that lac! the same accessories.:" +uccess such as this attracts competitors. DealKetwor!s, ?almart, RahooS, Kapster, and Ama;on all set up le$al downloadin$ ser.ices to compete with iTunes. <owe.er, iTunes continued to outsell its ri.als by a wide mar$in. In mid-://", iTunes was accountin$ #or about 9/* o# all le$al music downloads.:9 iTunes was also the lar$est music retailer in the &nited +tatesNthe other three all had physical stores. The iPod also had plenty o# competition includin$ o##erin$s #rom +an5is! and 'icroso#t (Iune . 'any o# these were priced a$$ressi.ely, well desi$ned, and had as much stora$e capacity as the iPod. =ew, howe.er, mana$e to $ain share a$ainst the iPod, which accounted #or 7-.2* o# all unit sales in the &nited +tates in 1uly ://" and ""* o# total dollar sales. +an5is! was second with an "* share o# unit sales, and 'icroso#t was third with a :.0* share o# unit sales. 'oreo.er, Apple)s seems to ha.e yet a$ain stolen a march on its competitors in late ://7 when it introduced the iPod touch, which had ?eb-browsin$ capability and 6uic!ly $enerated stron$ sales .olume. <owe.er, the o.erall mar!et #or di$ital music players was maturin$ by ://7, with $rowth rates droppin$ into the low sin$le di$its. Apple needed another new product dri.er to !eep sales eFpandin$.

The iPhone
In 1une ://7, Apple introduced the iPhone. =irst announced in 1anuary ://7, the iPhone was essentially a smartphone that was also able to browse the ?eb, ta!e pictures, and #unction as a di$ital music player. The iPhone was di##erentiated #rom established smartphone o##erin$s by re.olutionary touch screen desi$n that replaced the traditional mechanical !eypad and allowed users to 6uic!ly and easily switch between #unctions. The phone used a .ersion o# Apple)s

4+ J operatin$ system and the company)s +a#ari ?eb browser. Apple struc! a deal with ATMT, under which it was to be the eFclusi.e pro.ider o# wireless ser.ice #or the iPhone. &nder the deal, ATMT would share a percenta$e o# its ser.ice #ees #rom iPhone users with Apple (the percenta$e was rumored to be -/*, but neither company would con#irm this . Priced between ,(99 and ,299 dependin$ on the model, the iPhone was positioned at the hi$h end o# the smartphone mar!et. +ome were s!eptical that the de.ice would be able to $ain share #rom established smartphones such as Desearch in 'otion with its 9lac!berry and o##erin$s #rom Palm, 'otorola, and Ko!ia, all o# which had $ained a #ollowin$ amon$ business users. +te.e 1obs announced that the $oal was to try and $rab 1* o# the total $lobal mar!et #or cell phones in the #irst #ull year that the iPhone was on the mar!et. ?ith a total mar!et in eFcess o# 1 billion units, most o# which were not smartphones, this su$$ested a $oal o# sellin$ 1/ million iPhones in #iscal ://" (which ended +eptember ://" . There was some disappointment that the iPhone would use ATMT)s slower data networ!, rather than the #aster -% networ! that was more suited to ?eb browsin$. There was also disappointment that the iPhone did not contain a %P+ location-#indin$ #unction. 5espite the hi$h price and percei.ed limitations, early demand #or the iPhone was stron$, with lon$ lines #ormin$ outside Apple stores on the day the de.ice was released. Althou$h some consumers eFperienced acti.ation problems, most were happy with their purchase. The de.ice $ot ra.e re.iews #or its desi$n ele$ance, ease o# use, and compellin$ touch screen inter#ace. Apple sold more than :2/,/// iPhones in the #irst two days the de.ice was on the mar!etA it soon became clear that the company had another hit on its hands. In 1une ://", Apple introduced a second .ersion o# its iPhone, the iPhone -%. 5esi$ned to run on a #aster -% networ!s, the new phone also incorporated %P+ #unctionality. ATMT was a$ain pic!ed as the eFclusi.e ser.ice pro.ider in the &nited +tates. <owe.er, Apple shi#ted the business model. Instead o# $i.in$ a share o# ser.ice #ees to Apple, ATMT a$reed to pay a subsidy to Apple #or each iPhone sold. The subsidy allowed Apple to drop the price #or the iPhone to as low as ,199 #or an entryle.el model. Ret a$ain, lon$ lines #ormed outside

Apple stores, and in the #irst three days, the iPhone -% was on the mar!et, more than 1 million units were sold. 9y Au$ust, analysts were issuin$ #orecasts callin$ #or Apple to sell 11 million iPhones in #iscal ://", and :2 million in ://9, with much o# the $rowth comin$ #rom rapidly eFpandin$ sales in (/ other countries. ?hile the :2 million still only represented only a small slice o# the 1.: billion wireless handsets #orecast to be sold $lobally in ://9, it would ma!e Apple one o# the top-three ma!ers o# smartphones in the world and the only one with a stron$ position amon$ consumers as opposed to business users. -/ 4ne #eature o# the iPhone -% that started to $arner a lot o# attention was the rapid $rowth in third-party applications #or the phone. In 1uly ://", Apple opened an online store #or applications that were written to run on the iPhone. In the #irst month, the phone was on the mar!et, more than 0/ million pro$rams were downloaded. ?hile many applications were #ree, Apple was sellin$ ,1 million worth o# applications a day and su$$ested that sales could reach a ,2// million annual run rate #airly 6uic!ly. Apple !ept -/* o# the proceeds #rom application sales, @ust about enou$h to co.er the costs o# the store, lettin$ pro$ram creators !eep the other 7/*. Amon$ the bi$ sellers were some $ames applications, such as +uper 'on!eyball #rom +e$a, which sold -//,/// copies in :/ days at ,9.99 a copy.-1

The erson!l "o#puter Industr$ in the 2000s

=or all o# its product success, Apple remained a niche player in the computer industry, albeit one that was $ainin$ share amon$ consumers. A#ter years o# $rowth, sales o# PCs had #allen #or the #irst time e.er in ://1, but the $rowth path had soon resumed. In ://(, 179 million PCs were sold worldwide, and by ://" this #i$ure had increased to :9million.-: +ales to consumers accounted #or about 1H- o# this #i$ure, and some 0/* o# the year on year $rowth in PC sales was now comin$ #rom emer$in$ mar!ets. The industry is characteri;ed by a hand#ul o# players who collecti.ely account #or about hal# the

mar!et, and a lon$ tail o# small enterprises that produce unbranded or locally branded 7white boF8 computers, o#ten sellin$ their machines at a si$ni#icant discount to $lobally branded products. Amon$ the lar$er players, consolidation has been a theme #or se.eral years. In ://:, <P ac6uired Compa6, %ateway and e'achines mer$ed in ://(, and the Chinese #irm Beno.o ac6uired the personal computer business o# I9' in ://2. The lar$e PC #irms compete a$$ressi.ely by o##erin$ e.er-more power#ul machines, producin$ them as e##iciently as possible and lowerin$ prices to sell more .olume. The a.era$e sellin$ price o# a PC has #allen #rom approFimately ,1,7// in 1999 to less than ,1,/// in ://0, and pro@ections are that it may continued to #all, #ueled in part by a$$ressi.e competition between 5ell Computer and <P.-All o# these players #ocus on the desi$n, assembly, and sales o# personal computers, while purchasin$ the .ast ma@ority o# component parts #rom independent companies. In recent years, the top personal computer companies ha.e reduced their DM5 spendin$ as a percenta$e o# sales, as the industry has transitioned toward a commodity business. The eFistence o# the lon$ tail o# white boF ma!ers is made possible by the open architecture o# the dominant PC standard based on Intel-compatible microprocessors, and a 'icroso#t operatin$ system, and the low-tech nature o# the assembly process. The components #or these boFes, which are themsel.es commodities, can be purchased cheaply o## the shel#. ?hite boF ma!ers ha.e a stron$ position in many de.elopin$ nations. In 'eFico, #or eFample, domestic brands accounted #or 0/* o# all sales in ://2, up #rom ((* in :///. In Batin America as a whole, 7/* o# personal computers are produced locally. ?hite boF ma!ers ha.e a much wea!er position in the &nited +tates, ?estern 3urope, and 1apan, where consumers display a stron$er pre#erence #or branded 3ndnotes
1. Quoted in Pete 9urrows, 7+te.e 1obs8 'a$ic Oin$dom, BusinessWeek, =ebruary 0, ://0, 0:P0". :. K. ?in$#ield, 7Apple &n.eils Kew Computers,8 Wall Street Journal, Au$ust ", ://0, 9-. 7Apple Increases PC 'ar!et +hare, Dan!s Third 9ehind 5ell and <P,8 Chattah9oF.com. -. 'uch o# this section is drawn #rom P. =reiber$er and '. +waine, Fire in the Valley (Kew Ror!E 'c%raw-<ill, :/// .

products that incorporate leadin$-ed$e technolo$y. In contrast, in the de.elopin$ world, consumers are willin$ to accept older components i# it sa.es a #ew hundred dollars.-( 5urin$ the 199/s and early :///s, 5ell $rew rapidly to capture the mar!et lead. 5ell)s success was based on the in.entory mana$ement e##iciencies associated with its direct sellin$ model (5ell could build machines to order, which reduced its need to hold in.entory . 5ell was also helped by the problems <P #aced when it mer$ed with Compa6. 9y ://2, howe.er, a resur$ent <P had lowered its costs, could price more a$$ressi.ely, and was startin$ to $ain $round a$ainst 5ell. Apple continued to be the odd man out in this industry, and was the only ma@or manu#acturer that did not adhere to the ?indows architecture.

Str !te%ic Issues

As ://" drew to a close, Apple was in an en.iable position. De.enue and pro#its $rowth was stron$, dri.en by new product introductions, such as the iPhone, and stron$ sales o# Apple)s line o# personal computers. ?hile the iPod boom was startin$ to run its course as the mar!et reached saturation, the company mi$ht ha.e #ound a new $rowth dri.er in its iPhone business. In the PC mar!et, Apple was still a niche player, albeit one with renewed $rowth prospects and an increasin$ly stron$ brand amon$ consumers. In the business mar!et, by contrast, Apple had .ery limited presence. %oin$ #orward, obser.ers wondered whether Apple could continue to maintain its $rowth rate, particularly $i.en concerns that C34 +te.e 1obs, considered the architect o# Apple)s re.i.al, was ill and mi$ht not be at the helm #or much lon$er.

(. =or a detailed history o# the de.elopment o# the Apple II, see +te.e ?eyhrich, A le !! "istory, httpEHHapple:history .or$HhistoryHah/1.html. 2. P. =reiber$er and '. +waine, Fire in the Valley, -27. 0. Andy <ert;#eld, 7Deality 5istortion =ield,8 httpEHHwww .#ol!lore.or$HPro@ectGiew.py>pro@ect 'acintosh. 7. Ibid. ". This .ersion o# e.ents was told to the author by a senior eFecuti.e who was present in the room at the time.