Iphones the Revolutionary Device - Case Study Example

iPhones – the revolutionary device Table of Contents Contents 0 Introduction 1 Company background 1.2 Revolution in the mobile phone industry 2 1.2.1 Features of iPhone 2 1.2.2 Pre-digital stage 3 1.2.3 Ongoing Innovation 5 1.3 Government Regulations 6 2.0 Market Structure 7 2.1 Market Structure and its evolution 7 2.2 Current Situation 8 2.3 Competition in the sector 9 3.0 Demand for iPhones 10 3.1 Demographics 10 3.2 Consumer Characteristics 11 3.3 Substitutes 12 4.0 Pricing 12 4.1 Skimming 12 4.2 Versioning or Pricing Discrimination 12 4.3 Bundling Pricing Strategy 13 5.0 Analysis 13 1.0 Introduction 1.1 Company background Apple Inc. manufactures, designs and markets mobile communication and media devices, a variety of products such as personal computers, portable digital music system. These are bundled and sold with related software, services, peripherals, networking solutions, third party digital content and applications (The New York Times 2014). Their range of products and services include Mac, iPod, iPhones, iPad, Apple TV, several professional and software applications, the iOS and OS X operating systems and iCloud, in addition to accessories and support offerings. Because of its culture of innovation and technology, Apple keeps delving into something exciting every now and then. Thus, in 2013, the company acquired a Silicon Valley startup WiFiSlam, which makes mapping applications for smart phones. Apple Inc. was established in 1976 by Steve jobs and Steve Wojnaik and they initially focused on computer hardware and software. They entered the market with personal computers but suffered a blow during the 1990s when several manufacturers stepped in and competition intensified. When they introduced Mac Computers in 1984, IBM was their only competitor and held 16% market share. However, Microsoft entered the market in the 1990s Apple lost its market position and competitive edge (Firmin, Firmin, Wood and Wood 2010). To reposition itself and to remain competitive, Apple then launched its new operating system OS X. It was at this juncture that they introduced iPod Nano, ROKR iPod phone and iTunes. Apple met with several failures and after Steve Jobs took over the reins in 1997, things took a turn for the better. The launch of its first iPhone in 2007 changed the course of the company altogether. The company is one of the largest corporations in the United States today and consistently introduces new products with new technology. With the introduction of iPod and iPhones the company now focuses more on consumer electronics. 1.2 Revolution in the mobile phone industry 1.2.1 Features of iPhone The iPhone is considered a revolutionary product as it combines a revolutionary mobile phone, a widescreen iPod with touch controls and a breakthrough internet communications device which allows desktop-class email, web browsing, searching and maps through this small and lightweight handheld device (Apple Press Info, 2007). This was the first of its kind in the global smart phone market. This was the first touch screen interface and the new user interface is based on a large multi-touch display where the users control the iPhone with just their fingers. All the functioanlities on the iPhone can be accessed through its 3.5 inch touch-screen display and one “home” button (Sliwinska, Ranasinghe and Kardava 2008). Iphone has been referred to as a “revolutionary leap-frog product” “light years ahead of anything else” (Kim 2011). Even if such statements may seem exaggerated, the fact remains that iPhone has divided the history of the smart phone into two phases – a pre-iPhone phase and a post-iPhone phase. The pre-iPhone smart phone was more of a personal digital assistant (PDA) with features such as phone, messaging, calculator etc. The introduction of iPhones transformed the entire experience of using phones. The story of smart phones took a radical turn beginning with iPhones as this seemingly tiny device led to a dramatic transformation of the whole ecosystem of the wireless industry. The iPhone is a computer platform people can build on by developing and installing software for it. The software power has redefined what users can do on their mobile phones. Iphone allows users to make phone calls by simply pointing to the number or name. Additionally, it syncs contacts from the user’s PC, Mac or Internet Service so that the list is always up to date (Apple Press Info, 2007). Favourites list can be created and calls can be merged to create conference calls. The SMS application is supported by a full QWERTY soft and elegant keyboard that suggests and checks spellings. Equipped with a 2 megapixel camera and a photo management application, iPhone is a GSM with Wi-Fi wireless technologies for data networking; it is a Bluetooth enabled device. The iPhone has three built-in sensors – an accelerometer, a proximity sensor and an ambient light sensor. Contents of the device change automatically when the device is rotated. The proximity sensor detects when the phone has been lifted to the ear and turns of display to save power. The ambient light sensor adjusts the display’s brightness to enhance user experience. The first model had a storage capacity of 8GB but on February 2008, Apple launched the next model with 16GB capacity (Ritchie, 2013). Customer satisfaction was higher than for any other Apple product. People could enjoy music, photos and videos on this most revolutionary mobile phone and best Wi-Fi mobile device in the world. 1.2.2 Pre-digital stage Before the introduction of the iPhones, handsets were viewed as cheap, disposable devices, subsidized to attract subscribers and lock them into using the carriers’ proprietary services. With the launch of iPhones these balances of power was disturbed, as carriers realized that even costly phones could win customers and bring in revenues (Vogelstein, 2008). In fact, iPhone changed the way carriers and manufacturers behaved. Shortly after the introduction of the first iPod in 2002, Steve Jobs had started thinking of this new phone that would revolutionize the sector. Jobs had seen Americans carry separate devices such as Blackberry’s and mp3 players and they would naturally prefer all features bundled into one. Obstacles such as sluggish data networks implied that servers were not ready for full blown handheld internet device. It also required the creation of a new and sophisticated operating system to manage complicated networking or graphics. Competition too, was expected as Palm Treo 600 had merged phone, PDA and Blackberry into one single device. However, this stepped up the challenge for Apple’s engineers. Apple had started working on its iPhone in 2005 and was ready with a prototype by mid-2006 (Goggin 2009). Before this, Apple had already created a mobile phone aimed at holding on to its digital music market. This was the release of ROKR in September 2005, a joint venture between Motorola and Apple. Apple focused on the music software while Motorola was responsible for the phone along with the mobile carrier Cingular. ROKR was not very well accepted by the market as it carried only 100 songs and did not permit music to be directly downloaded. Nevertheless this was the first mobile phone to feature Apple iTunes applications. As ROKR went to the market, Apple was already working on its iPhones where Apple had tighter control over music and other content. Over the years, Apple associated with different technology companies such as Motorola and carriers such as AT&T in developing, researching and trying prototypes. Apple’s hardware engineers had been working on a tablet PC for a year and they sounded convincing that they could use the same interface for the phone. ARM11 chip released during that period made the cell phone processors fast and efficient which enabled combining the functionality of a phone, a computer and an iPod (Vogelstein, 2008). By this time wireless minutes had become cheap and Apple could resell them to customers. Carriers were keen for association because voice charges had slashed and iPhone could lead to an increase in the number of data customers. Apple did not want to use Linux as the OS because it was someone else’s creation and this led to the development of its own operating system for iPhones. They also ensured that iPhones did not generate too much radiation and hence they built models of human heads and tested the effects. The touch screen was improvised upon – from hard plastic to glass, which helped minimize scratching. 1.2.3 Ongoing Innovation Apple kept up pace with consumer demand and brought in new versions in quick succession. Just one year after launching the first iPhone, Apple launched iPhone 3G which was twice as fast at half the price. iPhone 3G supported Microsoft Exchange ActiveSync and was available in more than 70 countries (Ritchie, 2013a). In this model the radio was significantly updated and aGPS (assisted global positioning system) chip was added for more precise location services. The biggest change was in the design as the original aluminium casing was replaced by new polycarbonate ones with metal buttons. The biggest change in the launch of 3G was the drop in price to attract more consumers. iPhone 4 was the biggest leap as it allowed Face Time video calling which set new standard for mobile communication (Ritchie, 2013b). Further development was made with each new model launched and the changes and launches have been tabulated below. Table 1 Models and Features of IPhones Model Number Code Name Features Storage Launch Price Year of Launch iPhone1 (1.1) M68 Mobile phone, iPod with touch controls and Internet device 4GB/8GB $499/$599 January 9, 2007 iPhone 2G 16GB Half the price of iPhone 1.1 February 5, 2008 iPhone 3G (iPhone 1.2) N82 Enhanced speed, aGPS, updated radio and audio, change in design 8GB/16GB $199/$299 on contract July 11, 2008 iPhone 3GS (iPhone 2.1) N88 Oleophobic coating on the screen, new processor and iOS 3.0 enhanced speed 8GB/16GB $199/$299 on contract June 19, 2009 iPhone 4 (iPhone 3.1) N90/N92 Optical lamination, LED backlighting, 24% thinner than the earlier version, stainless steel band around the iPhone, 5 megapixel camera 16GB/32GB $199/$299 on contract April 28, 2011 iPhone 4S (iPhone 4.1) N94 Addition of infrared sensor to enable speak feature, 8 megapixels for the rear-facing mirror 16Gb/32GB/64GB $199/$299/$399 on contract October 14, 2011 iPhone 5 (iPhone 5.1) N41/N42 Back to the original of Aluminium phone, increased speed, 25% thinner body, nanoSIM, 16Gb/32GB/64GB $199/$299/$399 on contract September 21, 2013 Source: Own Table based on data from Ritchie (2013) 1.3 Government Regulations Apple sources its labour and machinery from different companies across the nations. As such it is bound by government regulations such as environmental policies by international and local authorities. Companies are bound by regulations to provide a safer working condition by minimizing environmental impacts of their business operations (Yahoo Contributor Network 2007). The international and local governments are implementing stricter policy which can have a huge affect on supply. For instance, a Greenpeace report alleged that Apple’s iPhone contains toxic chemicals and consumer watchdog is considering a lawsuit against Apple. Thus, even European authorities can intervene which can limit the amount of products in circulation. Apple’s latest software iOS 7 enables users’ movements to be tracked inside malls, museums and stadiums (Pressman 2014). This has opened a huge new opportunity for marketers to track users’ location but the sensitivity of information has sparked controversies. Privacy advocates believe that the government should step in and regulate the collection and uses of location tracking data while others believe that industry should self0-regulat on this issue. Some tracking analytics forms have agreed to observe a code of conduct on consumer privacy. However, the user is under constant threat because they are not aware where the data is flowing and what is going to happen. Apps usually seek permission to access location but few users read the fine print on privacy policies. 2.0 Market Structure 2.1 Market Structure and its evolution The mobile phone market was sophisticated and mature before iPhone came into the market. Five manufacturers including Nokia, Motorola, Samsung, Siemens and Sony Ericsson dominated 75 percent of the world mobile phone market (Bergvall-Kåreborn and Howcroft 2013). The entire mobile market landscape changed significantly when Apple launched its iPhone with internet access in 2007. Apple always maintains secrecy in all its product launches and this enhances anticipation. Apparently, iPhone was marketed with staged launches and film extras were paid to queue up outside retail stores aimed at generating interest among passers-by. The market structure of Apple’s iPhone is oligopoly. Oligopoly market structure is said to occur when the market is dominated by a few number of sellers and each is aware of the product differentiation of others. If firms in an oligopoly market collude, they reduce output and drive up prices and increase costs. Oligopoly forms often end up competing against each other. Iphone has several competitors from different software platforms such as Android and Blackberry’s. Besides, Apple is able to maintain its pricing structure which is also a characteristic of oligopoly market structure. In oligopolistic market structures the regulator, through licensing, determines the small number of rims that would be allowed to operate (Pereira and Rodrigues 2010). 2.2 Current Situation Apple has total control over its supply chain as it uses multiple sourcing and works closely even with suppliers’ suppliers. Soon after the launch of the first generation iPhone in 2007, Apple released the iPhone Software Development Kit (SDK) in March 2008 which enabled third party developers to create applications for the iPhone, iPod touch, and iPad (Bergvall-Kåreborn & Howcroft, 2013). As with all other products, Apple kept the apps too under centralized control. All the apps developed for the iPhone could be distributed and sold only through the Apps Store controlled by Apple. Developers set their price for the application and Apple generates its own revenues any such new development. Apple has the discretion to halt the launch of any application if it deems it inappropriate or unsuitable. Apple controls the quality and content of the applications through 113 guidelines outlining acceptance criteria. When iPhone was first launched it was a ‘closed’ device for several reasons – it was locked to one network provider, its applications could be downloaded only from Apple’s App Store, and it was not open to the wider development community (Goggin 2009). In addition, its contents were safeguarded by the digital rights management regime well established through iTunes. Despite such precautions and ‘closed’ attitude, iPhone was hacked and modifications and instructions were freely available on blogs and websites. Even in countries where Apple had not launched product users were able to buy it and connect it with a service provider of their choice. After its initial experience, Apple in 2009 is a more open platform, where it maintains its controls but the developers have better access (Goggin 2009). A thriving user culture has also provided the users with the opportunity to modify its hardware and software. However, Apple continues to be a ‘closed’ platform and does not invite innovation as it comes pre-programmed. Over time, the iPhones’ menus evolved and each individual can customize and configure it to suit each one’s needs – each iPhone screen can look quite different. The technology that is used in IPhones has been borrowed from the distinctive Apple ‘i’ technologies which includes the hardware of the iPod and the software, intellectual property and digital rights management regime of the iTunes applications. iPhones now offer new affordances and design in addition to a larger screen for everyday invention and consumption. Because of these factors iPhone has set in a new logic of adaption that Apple cannot license. Apple has tried to give new powers of adaptation in the user’s hands but it has not been able to control unauthorized modifications of the iPhone. 2.3 Competition in the sector However, Apple faces competition from Android phones which had a market share of 33 percent and 28.9 percent of Blackberry’s while Apple’s share of the market was 25 percent between November 2010 and February 2011 (Yang 2011). The rest of the market was shared by Windows and other systems. However, consumers have several options and the market was dominated by five big platform providers – Nokia appears to dominate the market with its Symbian OS and has 52.4 percent market share in 2008. RIM with its Blackberry’s had 16.6%, Microsoft with its Windows OS was at 11.8%, LIMO Foundation with Linux mobile OS at 8.1% and Apple with iOS had 8.2% of the market (Holzer and Ondrus 2008). In 2008 Google had just launched its Android OS and was expected to capture the market soon. In the third quarter of 2009, Android’s market share stood at 3.5 percent. The current situation shows a dramatic shift towards the Android platform and stands at 81.9 percent with Apple’s iOS at 12.1% while Microsoft, RIM and Symbian share between them the rest 6 percent of the market (Statista 2013). 3.0 Demand for iPhones 3.1 Demographics When iPhones were initially launched 50% of the users were 30 years or younger. The users described themselves as technologically sophisticated. They were early adopters of technology and included professional and scientific users, arts and entertainment and from the information industry. Almost 75% of these early adopters were Apple customers. However this segment alone could not provide sustained growth and Apple faced the challenge of going beyond the youth technophiles to the mainstream users. The primary target segment for iphones is the middle-upper income professional as it is a device that can help them coordinate their busy schedule and communicate effectively with their colleagues, friends and family (Yang 2011). The secondary target segment comprises of high school, college and graduate students as it serves the function of a music device, a phone and an instrument for games. It is thus promoted as a single, portable multifunction device. The demographic for iPhones is debatable. The youngsters do not want to use an iphone because if their parents use it, it is meant for old people – this makes it less cool (Holland, 2011). Youngsters at college are seen around with smart phones other than iPhones. However, it is a costly phone and hence only a more affluent client base could be seen using it. At the same time, there are arguments that youngsters need an iPod for music and games also a smart phone. So it is cheaper to buy an iPhone instead of an iPod and a smart phone. 3.2 Consumer Characteristics Consumers are become sophisticated and look for mobile phones that fulfill their needs. Not only in developed countries, even consumers in developing countries demand phones with advanced models incorporating cameras, GPOS navigation, Internet browsing etc (Husso 2011). Most consumers appreciate value-added features and also seek post-purchase services provided by the manufacturer. Thus, they base their purchase decision on the combination of the phone and the availability of these services. Apple has consistently been offering differentiated products in terms of design, operating system overall quality and capabilities. Product differentiation, branding and pricing strategies have been responsible for the position that Apple has achieved. Being a software-driven company, Apple’s launch of iPhone caught the traditional phone manufacturers off guard iPhone’s marketing strategy involves brand awareness, ease of use, compatibility with iTunes and any other Mac or Apple products. Apple maintains secrecy prior to any new product launch. Because of their strategy to maintain secrecy, innovation, branding and product to product connectivity as well as compatibility, iPhone is the most sought after phone in the smart phone market (Yang 2011). 3.3 Substitutes iPhone faces severe competition as the Android platform appears to have become popular with the younger generation. The market share of Android has gone up from a mere 3.5% in 2009 to 81.9% by the end of 2013 (Statista 2013). All smart phones offer similar features now and iPhone’s uniqueness had diminished. 4.0 Pricing When the iPhones were launched in 2007, the prices for 4GB and 8GB versions were $499 and $599 respectively. The price did not deter the early adopters but just two months later Apple discontinued the $499 version and reduced the price of the premium version from $599 to $399 (Sliwinska, Ranasinghe and Kardava 2008). 4.1 Skimming Such high end products have to be initially targeted at the early adopters without which the early success will not be lasting. This tempted Apple to use different pricing strategies such as skimming and versioning. Skimming is the process of selling a product a high price at the cost of high volume of sales. This strategy helps companies recover the investments incurred in the original research but this strategy is implemented only for a limited period of time. The early adopters are less price-sensitive and hence companies target this segment. Early users understand the value of such products and their need for such products is more than others. This strategy provides a high profit margin but the risk of depressed sales is high. 4.2 Versioning or Pricing Discrimination Over time, Apple had to shift from the skimming strategy to other pricing strategies to gain market share. By this time, competitors such as Samsung and HTC had entered the market for smart phones. Apple thus employed versioning or pricing discrimination where different customers were charged different prices for the same product. Customers have the choice to select the product based on the functions, features and storage capacity desired. This strategy could be applied because Apple could segment customers based on shared attributes. Thus, price discrimination could be implemented by offering different versions of the same product. However, the form of price discrimination depends upon then nature of the market power. Apple used temporal price discrimination where it charged different customers based in their desire or ability to pay. This helped them build a wide customer base and at the same time wide profit margins from those willing to pay a premium price. Based on this strategy, Apple had reduced its price of the premium version from $599 to $399. 4.3 Bundling Pricing Strategy Apple also adopted bundling pricing strategy but with a difference. Apple knows that consumers would spend on downstream purchases such as song purchases and video rentals and on Apps. Besides the handsets had buried costs in terms of monthly fees over a two-year contract. Through this “bundling” strategy the consumer ultimately pays much more than he would have thought at the time of purchase. Apple even bundles the iPhone with a mobile contract commitment of two years. Thus, there is marginal hardware difference in iPhone 5, 4S and 4 and iPhone 5 and 4S are identical in software but the prices of these three variant differ drastically (Steinway 2012). From the bundled perspective, iPhone 4S is particularly appealing. 5.0 Analysis Apple undoubtedly introduced a revolutionary product with features and functions unique for a mobile phone. However, their strategy has always been to create fervor around their product. They do not reveal any details of new product launch until they are ready. Apple sells several versions of iPhones at different prices for different features and functions to suit individual requirements but basically aimed at different segments. Consumers shift their purchasing decisions as Apple changes its price schedule. The early adopters may feel a sense of pride in purchasing it on day one but there are others that wait for the prices to fall in due course. The market structure in the smart phone sector continues to oligopolistic with two major players dominating the market. Apple’s market share had started dwindling after Android picked up the market by 2010. By October 2012, Apple again grew its market share while Samsung also enhanced its market share. However, Apple could narrow the gap between Samsung and Apple because iPhone 5 was launched during that period. Apple owes its current position to iPhone 5 which propelled it back to the top of US smart phone charts Currently the number of players currently in the global smart phone market are limited to two major players – Samsung at 30.6% followed by Apple at 24.1 percent. The chart below demonstrates the market share of smart phone manufacturers. This is based on data gathered from Reuters (2013). Source: Own Chart As far as the OS is concerned, Android shows a rise from 3.5% in 2009 to 81.9% by the end of 2013. Apple’s OS has a mere 12.1% thereby demonstrating the decline in its popularity. All others such as Symbian, Microsoft and RIM have negligible market share. Source: Own Chart This suggests that Apple needs to change its marketing strategy including its pricing decisions and its strategy to bundle up with network carriers. Apple is known for its hi-tech inventions and innovations but competitors such as Nokia, HTC and Samsung smart phones are equally packed with features and functions. Besides, there appears to be no regulations to protect consumer privacy. iPhones can track the movements of the user which encroaches on his right to privacy. There is no information whether all smart phones can track user movements. Despite the drawbacks, Apple has changed the way people communicate and work. They introduced a product with value-added services and made life easier for the users. Smart phones are able to offer data services which has added to the elements that add value to the product. These elements include real time news on any issue across the world. Numerous applications have added functionality to the device and the iPhones have made progressive innovation. Apple has been able to sustain the value of iPhones but it has not been able to capture a wider segment. While earlier it was considered to be a smart phone for the technophiles it is now considered to be a device for the elderly. This suggests that it has not kept pace with changes and advancement in technology as the younger generation prefers the Android platform. Sales at Apple have been declining which confirms the increase in the market share of Android phones. Apple creates fervor for its product by keeping the launch a secret till the last moment. Initial sales after a new launch are high but after the early adopters have purchased iPhone, they reach a plateau in sales and this is when they introduce some new pricing strategy. 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