Competition In The Mp3 Player Industry

Competition in the MP3 Player Industry

How will Apple fare after its fantastic success with the iPod?

Case Analysts

Robert Carter

Mike D'Attoma

Introduction

The Apple iPod has changed the face of the portable music player industry over the last few years. It has been so successful that it is thought to be as influential as the Sony Walkman was in the 1980's.1 In fact, over one-hundred ten million iPods (110,000,000) have been sold over the last six years.2 The highly popular digital music store and library, iTunes, also plays a big role in iPod's success by making digital music cheap and easy-to-access. The big question is: How will Apple continue to be an industry leader in the increasingly competitive MP3 player market? In this paper we will analyze Apple's financial position, current strategies, strengths, weaknesses, and competition in the MP3 player industry. We will then use this analysis to recommend a strategic plan for Apple to follow for the next five to ten years.

Financial Analysis

We will be looking at financial ratios for Apple as a company to rate their overall financial health. First, however, let's look at how much iPod sales accounted for total sales at Apple. In 2005, the iPod accounted for 32.3% ($4.5 billion) of Apple's total sales.3 On October 22, 2007, Apple reported quarterly earnings of $6.22 billion, of which 26% ($1.61 billion) came from iPod sales. In comparison, big-name competitors Dell and Sony only receive around 5-8% of their total sales from MP3 players. This has a lot to do with Apple's market share in the MP3 industry as well. iPod accounts for a whopping 70% market share in the MP3 player industry, while its closest competitor, Microsoft's Zune, hovers around 8-10%.4 iPod has held this commanding market share lead for almost 5 years now. Figure 1 below shows iPod sales per fiscal quarter for the last 5 years.

Figure 1

iPod Sales per Fiscal Quarter

You can see a very steady upward trend in the amount of iPods sold, with 2 quarters standing out, taking place in the holiday seasons of 2006 and 2007.

In Figure 2 below we compare some of the key financial ratios of Apple with those of their top competitors in the MP3 player industry. Though all 4 of these companies create MP3 players, we must keep in mind that the majority of each company's sales come from other products, such as computers and comsumer electronics.

The overall financial health of a company is a strong indicator of how they may fare in the MP3 player market, however.

Figure 2

Key Financial Ratios (June 07' end of quarter)5

Apple Microsoft Sandisk Sony

Gross Profit Margin 38.1% 81.9% 41.9% 37.1%

Current Ratio 2.7 1.7 6.4 1.3

Quick Ratio 2.2 1.5 5.1 0.6

Inventory Turnover 64.1 7.1 4.5 5.1

Debt-to-Equity Ratio 0.00 0.00 0.25 0.60

Price/Earnings Ratio 47.3 21.2 147.3 35.5

EBIT Margin 18.7% 39.3% 7.3% 4.6%

Return on Equity 26.1% 45.2% 1.6% 4.7%

Return on Assets 16.2% 22.3% 1.1% 1.4%

Net Profit Margin (5-yr avg) 10% 28% 11.8% 1.6%

Current Stock Price (10/27/07) $184.70 $35.03 $41.02 $49.22

(Industry Best in Bold)

In comparison to Sony, Microsoft and Sandisk, Apple seems to be in the upper-tier of the industry as far as overall financial health goes. They have no debt, which is always great for a business, and their stock price is leaps and bounds higher than those of their competitors. Apple is also dominating the competition in inventory turnover, selling their whole inventory 64 times a fiscal year, whereas their competitors only manage to sell their inventories 4-7 times a year! The iPod's domination of the MP3 market is a big reason for this large inventory turnover ratio. Also they have healthy quick and current ratios, meaning they have plenty of assets to cover their liabilities. The return on equity and return on assets percentages are also healthy in comparison to other companies in the industry, particularly Sandisk and Sony. Apple is getting a much greater return on each dollar invested in assets and equity.

Overall, Apple's 2007 year revenue increased to $24.01 billion with $3.5 billion in profits. Apple ended the fiscal year 2007 with $15.4 billion in cash and no debt.6 Also, on October 22, 2007 it was announced that Apple's earnings per share had reached $1.01, and their cash on hand was $7.1 billion.7 Apple is experiencing the best financial health it's had in a long time, and it can attribute much of that success to the overwhelming popularity of the iPod.

Current Strategic Plan

Apple currently employs a broad-differentiation, vertically integrated, first-mover strategy. Apple has always been known for doing things their "own way," creating unique products from top-to-bottom for a very loyal customer base. Apple is also known for being among the first to enter a market with a new product as well. They did this 24 years ago by introducing the first computer with a graphical user interface and mouse (Lisa), then again in 1998 with the unique iMac. (No floppy disc drive?? Unthinkable!) They were not technically the first-mover with the iPod, the "MPMan" by SaeHan Information Systems of South Korea beat them to the punch there,8 but Apple's MP3 player wasn't far behind, and it fared much better, beginning a digital music revolution.

Apple's newest product, the iPhone, certainly isn't a first-mover in the industry, Blackberry has them beat there. Apple's strategy revolves around their user-friendly interface and unique design, however, and once again Apple has come through. 1.39 million iPhones have already been sold since it's initial release on June 29, 2007.9 Seems like their current strategy is working just fine.