Apple Analysis

Over the past four years (1999 to 2002), Apple's share of the global PC market has shrunk from 9.4% to 2.6%. In the past six years, against a backdrop of unparalleled profitability in information technology, Apple was profitable in only three of those six years, despite a slew of provocative product introductions. It may be that the business model at Apple is somewhat flawed. Apple's Steve Jobs, who returned to the company in 1996, did some brutal housekeeping. Job's predecessor, Gil Amelio, had already done most of the dirty work. But Jobs made some harsh decisions too, rescinding the licenses of competitors who have been cloning Apple's Macintosh computers. Apple has been suffering losses on price because machines based on Microsoft's Windows are much cheaper. Apple also is a big loser compared with Windows based on the availability and breadth of applications.

During this period, Apple's competitors in the PC industry IBM, Hewlett-Packard (HP) and Compaq are all experiencing significantly slow sales growth, mainly due to lagging economic conditions. The only company that appeared to do showing increases in sales was Dell Computers. Industry analysts were predicting significant declines in sales growth for the next year as the PC market matured. Apple remains profitable because of the sheer size of the computer industry that has grown up around them. Since business is primarily about relationships, and Apple has chosen to value the relationship with the end-user higher than their relationship with the distribution channel, this approach puts Apple at a competitive disadvantage. Apple has two problems. Not only is its sales and marketing structure less effective than it could be, but as it increases its success, it increases the burden on the support infrastructure that Apple provides for its users. At a time when even governments are outsourcing, Apple is providing ever more services directly to end-users.

The innovations of Apple's software engineering attracts a loyal following that allows them to be profitable, but it fails to attract the diversity of buyers necessary to achieve the necessary growth for financial success in the future. The Apple business model, so far, has excluded the very same people the Apple innovative genius was aimed at: the average user, the small business, and the middle-class.

To survive, Apple has been trying to convince Windows users to migrate to the Mac platform. But since Apple is not competitive on either price or applications, there is no compelling reason for users to switch. Apple has decided to go into the retail store business to ensure that its products receive enough attention. This move may prove to be problematic, because the reason that Apple products are not getting the retailers' attention is because they are not selling well and the move into retail takes Apple into an area where it has demonstrated no competence. Steve Job's focus on selling Macs to consumers has helped boost profits, but it appears to be keeping Apple from exploring potential new markets. In addition, Mac-only chains such as The Computer Store and Computer Ware have closed down some stores, citing weak margins. Now, faced with competition from Apple stores, others may cut back. This strategy may backfire on Apple since they are creating an uncomfortable situation for their retailers by competing directly with them. Apple would probably be better served by working with their partners to improve the existing sales channels. Apple's strategy for the major markets and for increasing their market share targets governments and businesses, not solely in the United States, but globally. The current Apple business model follows three broad industry categories: Software Engineering, Hardware Manufacturing, and Retail.

Software Manufacturing, the core of the Apple genius, drives the Hardware and Retail categories. To understand how this business model limits Apple's market share, we will briefly outline each leg of the business model individually.

Software Engineering: Apple is the world leader both in quality and functionality. Software is extremely profitable too, as Microsoft, Intuit, Oracle, Adobe and many other companies demonstrate. Apple has set the technological pace for functionality and the end-user experience. With OS X, Apple will be developing faster and better software for all of its general and niche markets: Education, Entertainment, Enterprise, Consumer. Apple is not always first to a market with an application, but when it focuses its developmental skills on a target, the final product is usually very impressive. Its best strength however is in the Operating System software, not the application products. The Mac OS is very impressive when compared to other existing systems; in fact some industry experts think that they are far superior to the others.

Hardware Manufacturing: Apple's designs and creativity attracts and inspires copycats because of its technological prowess and innovative design. Cost of ownership is lower, built-in functionality is greater, and interoperability with the OS is tighter and easier. The hardware sales base has now extended into servers and mp3 players.

Retail: Despite superior product offerings, Apple has failed to capture a large market share, but not for lack of effort. Clone licensing failed to generate greater sales. In general, the large retailers' sales people knew PC's and wanted to sell PC's. Apple has two problems. Not only is its sales and marketing structure less effective than it could be, it increases the burden on the support infrastructure that Apple provides for its users. At a time when even governments are outsourcing, Apple is providing ever more services directly to end-users.

Businesses operating at the cutting edge expect direct manufacturer support, but they don't necessarily want or need sales exclusivity. The original store-within-a-store approach at Comp USA didn't work, and now a direct Apple employee staffs each site to ensure that the technology is introduced properly. With this string of setbacks in mind, Apple has turned to the Apple Store in high traffic upscale malls to bring the product direct to the users.

Given Apple's assets of Software Engineering and Hardware Manufacturing, a dedicated customer base, and a development standard that the industry copies, Apple should focus on running their OS as an upgrade to many of the established PC installations. This approach could potentially generate a huge worldwide market share overnight. Instead of trying to get users to switch when buying new equipment, users could instead choose Apple's OS, and use the equipment they already own. An approach like this would put Apple market share and profits through the roof. The success of the Windows iPod clearly shows the