discussion

Week 5

For this assignment, make sure you post your initial response to the Discussion Area by the due date assigned.

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Respond to the following questions using the lessons and vocabulary found in the readings.

In the Supplemental Material below, read the case study “Apple Computer, Inc.: Maintaining the Music Business While Introducing iPhone and Apple TV.” 

Based on the information, evaluate the three basic approaches used by Apple to produce innovation. Be sure to support your views with research, rationale, and appropriate examples.

Your posting should be the equivalent of 1 to 2 single-spaced pages (500–1000 words) in length.

Start reviewing and responding to the postings of your classmates as early in the week as possible. Respond to at least two of your classmates. Participate in the discussion by asking a question, providing a statement of clarification, providing a point of view with a rationale, challenging an aspect of the discussion, or indicating a relationship between two or more lines of reasoning in the discussion. Complete your participation for this assignment by the end of the week.

on time clear

188

Robin Chapman, Robert E. Hoskisso

n

Arizona State University

“This will go down in history as a turning point
for the music industry,” said Apple Computer CEO
Steve Jobs. “This is landmark stuff. I can’t overesti-
mate it!”1 Jobs was referring to the April 2003 debut
of Apple’s iTunes Online Music Store, the first legal
online music service to have agreements with all five
major record labels. Although initially available only
for Macintosh users, iTunes sold more than 1 mil-
lion songs by the end of its first week in operation.
Not only did iTunes change the nature of the music
industry, it also added greatly to Apple’s revenues by
way of promoting the purchase of the iPod—a por-
table digital music device that can store downloaded
iTunes songs. In 2007, Apple controlled more than
70 percent of the digital music market,2 and its net
income was $3.5 billion (see Exhibits 1 and 2). Jobs
hopes further that the success of iTunes will flour-
ish with the launch of Apple TV and iPhone in 2007.
In May 2007, Apple was named by BusinessWeek as
the most innovative company for the third year in a
row. Apple’s focus on innovation has helped it main-
tain a competitive advantage and marketing prowess
over other industry players that have historically been
much stronger than Apple.3 However, Apple must
beat the competition on a number of levels. iTunes
faces stiff competition from new and existing online
music and video download services both legal and
illegal. The iPod, Apple TV, and iPhone all face the
threat of lower-priced rivals and possible substitutes.
Apple’s innovative ability and the quality of its mar-
keting strategy will likely determine the outcome of
the company’s foray into the music, mobile phone,
and video-on-demand businesses.

Early Company History
On April 1, 1976, Steve Jobs and Stephen Wozniak
began the partnership that would eventually become
Apple Computer. Both electronics gurus, Jobs and
Wozniak had known each other since high school and
had worked together previously on other projects.4 In
early 1976, Wozniak had been working on combining
video monitors with computers. His idea was to invent
a user-friendly computer that ordinary consumers could
buy. Wozniak, who worked for Hewlett-Packard (HP) at
the time, decided to approach his employer with his idea.
HP, however, did not see a future for personal comput-
ers (PCs) and soundly rebuffed him. At that point, Steve
Jobs told his friend Wozniak that they should go into
business together and sell computers themselves.5

Their first computer, the Apple I, was built in the
garage of Jobs’s parents (see Exhibit 3). Known as a “kit
computer,” the original Apple consisted merely of a cir-
cuit board and did not even have an exterior casing. It
was intended to be sold to hobbyists only. Jobs called the
computer an “Apple” in honor of his days working at an
orchard while seeking enlightenment—and because nei-
ther he nor Wozniak could come up with a better name.6
The Apple I received mixed responses from hobbyists,
and the duo decided it was time to expand the market
for personal computers by building a more attractive
and useful machine, the Apple II.7

Growth
After taking on new partners to fund expansion plans, the
company officially became Apple Computer, Inc., in early

C A S E 1 4
Apple Computer, Inc.:
Maintaining the Music Business
While Introducing iPhone and
Apple TV*

* This case is intended to be used as the basis for class discussion rather than to illustrate effective or ineffective handling of an administrative or strategic situ-
ation. We appreciate the previous input on an earlier case focused only on the music industry by Jeff Berrong, Marilyn Klopp, Max Mishkin, Jimmy Pittman, and
Adrian Ray under the direction of Professor Robert E. Hoskisson.

Apple Computer, Inc., by Robin Chapman and Robert E. Hoskisson. Reprinted by permission of the authors.

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No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

18

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1977.8 Within months, the recapitalized company intro-
duced the Apple II, the first computer to come with a sleek
plastic casing and color graphics.9 Annual sales increased
dramatically to $10 million, and the company began to
grow quickly in size, adding thousands of employees.10 On
December 12, 1980, Apple became a public company. On
the first day of trading, its share price increased from an
initial $22 offering to $29.11 By the end of the year, Apple
reached $100 million in annual sales.12 The fledgling com-
pany, however, soon faced some experienced competition.

In 1981, IBM released its first personal computer. IBM’s
sheer size ensured its domination of the young PC mar-
ket. Steve Jobs realized that Apple would have to move
fast in order to remain a viable company. Over the next
few years, the company released several new computer
models, most notably the Apple III and the Lisa. Neither
of these models sold particularly well.

In 1983, Jobs recruited Pepsi-Cola CEO John
Sculley as Apple’s president and CEO. Jobs hoped
that this change would bring more structure and

Exhibit 1 Consolidated Statements of Cash Flow

s

(In millions)

Three Fiscal Years Ended September 29

2007 2006 2005

Cash and cash equivalents, beginning of the year $ 6,392 $ 3,491 $ 2,969

Operating Activities: Net income 3,496 1,989 1,328

Adjustments to reconcile net income to cash generated
by operating activities:

Depreciation, amortization, and accretion 317 225 179

Stock-based compensation expense 242 163 49

Provision for deferred income taxes 78 53 50

Excess tax benefi ts from stock options — — 428

Gain on sale of Power School net assets — (4) —

Loss on disposition of property, plant, and equipment 12 15 9

Changes in operating assets and liabilities:

Accounts receivable, net (385) (357) (121)

Inventories (76) (105) (64)

Other current assets (1,540) (1,626) (150)

Other assets 81 (1,040) (35)

Accounts payable 1,494 1,611 328

Other liabilities 1,751 1,296 534

Cash generated by operating activities 5,470 2,220 2,535

Source: Apple’s 2007 Fiscal Year 10K, www.apple.com/investor.

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No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

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V organization to the young company.

13 Apple’s biggest
computer achievement, the Macintosh (Mac), was
released. After initially opposing it, Jobs had person-
ally taken on the task of developing the Mac, which
became the first PC featuring a graphical interface
and a mouse for navigation. Apple first presented
the now-famous Macintosh computer with a riveting
January 1984 Super Bowl commercial. The memorable
commercial featured an Orwellian 1984 world filled
with stoic human zombies, all watching a large-screen
image of “Big Brother.” A young woman rushes into
the room and dramatically destroys the screen. Apple
used this 1984 imagery to depict IBM’s computer
dominance being destroyed by the new Macintosh.14
With features that made the Mac easy to use for pub-
lishing and a marketing strategy that concentrated on
universities, the new computer sold very well, push-
ing Apple’s fiscal 1984 sales to an unprecedented $1.5
billion.15

Shake-Up
By 1985, however, Jobs and Sculley began to disagree
over the direction they wanted the company to take. After
Jobs’s attempt to remove Sculley failed, Jobs left Apple
in May to start his own new business, NeXT Computers.
Meanwhile, Microsoft benefited from Apple’s poor
negotiation of a contract that cleared the way for suc-
cessive versions of the Windows operating system to use
graphical user interface (GUI) technology similar to that
of the Mac. With this agreement, “Apple had effectively
lost exclusive rights to its interface design.”16

In 1990, Microsoft released Windows 3.0, the first
universal software that could run on nearly every PC
regardless of the manufacturer. Although Apple’s world-
wide sales had reached $7 billion by 1992, Apple soon
found itself fighting an uphill battle against the move-
ment toward standardized software. More and more
businesses and consumers wanted compatible operating

Exhibit 2 Apple Computer, Fourth-Quarter Fiscal 2007 10Q Report

Net Sales
(net sales in millions and unit sales in thousands)

Three Months Ended

12/29/07 12/30/06 Change

Net Sales by Operating Segment:

Americas net sales $ 4,298 $ 3,521 22%

Europe net sales 2,471 1,712 44%

Japan net sales 400 285 40%

Retail net sales 1,701 1,115 53%

Other segments net sales (a) 738 482 53%

Total net sales $ 9,608 $ 7,115 35%

Unit Sales by Operating Segment:

Americas Macintosh unit sales 841 625 35%

Europe Macintosh unit sales 705 491 44%

Japan Macintosh unit sales 91 70 30%

Retail Macintosh unit sales 504 308 64%

Other segments Macintosh unit sales (b) 178 112 59%

Total Macintosh unit sales 2,319 1,606 44%

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No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

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191

Net Sales
(net sales in millions and unit sales in thousands)
Three Months Ended
12/29/07 12/30/06 Change

Net Sales by Product:

Desktops (c) $ 1,515 $ 955 59%

Portables (d) 2,037 1,455 40%

Total Macintosh net sales 3,552 2,410 47%

iPod 3,997 3,427 17%

Other music-related products and services (e) 808 634 27%

iPhone and related products and services (f) 241 — NM

Peripherals and other hardware (g) 382 297 29%

Software, service, and other sales (h) 628 347 81%

Total net sales $ 9,608 $ 7,115 35%

Unit Sales by Product:

Desktops (c) 977 637 53%

Portables (d) 1,342 969 38%

Total Macintosh unit sales 2,319 1,606 44%

Net sales per Macintosh unit sold (i) $ 1,532 $ 1,501 2%

iPod unit sales 22,121 21,066 5%

Net sales per iPod unit sold (j) $ 181 $ 163 11%

iPhone unit sales 2,315 — NM

(a) During the third quarter of 2007, the Company revised the way it measures the Retail Segment’s operating results to a manner that is generally consistent
with the Company’s other operating segments. Prior period results have been reclassified to reflect this change to the Retail Segment’s operating results along
with the corresponding offsets to the other operating segments. Further information regarding the Company’s operating segments may be found in Notes to
Condensed Consolidated Financial Statements at Note 7, “Segment Information and Geographic Data.”
(b) Other Segments include Asia Pacific and FileMaker.
(c) Includes iMac, eMac, Mac mini, Mac Pro, Power Mac, and Xserve product lines.
(d) Includes MacBook, iBook, MacBook Pro, and PowerBook product lines.
(e) Consists of iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories.
(f) Derived from handset sales, carrier agreements, and Apple-branded and third-party iPhone accessories.
(g) Includes sales of Apple-branded and third-party displays, wireless connectivity and networking solutions, and other hardware accessories.
(h) Includes sales of Apple-branded operating system, application software, third-party software, AppleCare, and Internet services.
(i) Derived by dividing total Mac net sales by total Mac unit sales.
(j) Derived by dividing total iPod net sales by total iPod unit sales.

Source: Apple Company, 2007 4Q Form 10Q, hwww.apple.com/investor, 22.

Exhibit 2 Apple Computer, Fourth-Quarter Fiscal 2007 10Q Report (Continued )

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systems, but the Macintosh still ran exclusively on Mac OS,
a system not available to other computers. By 1993,
Apple’s board of directors replaced Sculley as CEO. Apple
moved through two CEOs over the next five years.

During this time, Apple partnered with IBM and
Motorola to produce the PowerPC chip, which would
run the company’s new line of PowerMacs, allowing it to
outperform computers powered by Intel microproces-
sors.17 Despite this and Apple’s attempts to reorganize,
losses mounted in 1996 and 1997. In December 1996,
Apple acquired NeXT, with the plan of using its technol-
ogy as the basis for a new operating system. After being
gone for more than a decade, Jobs returned to the com-
pany he had originally cofounded with Wozniak.

Jobs’s Return
One of the first problems Steve Jobs moved to fix was
the ongoing dispute between Apple and Microsoft over
the Windows graphical user interface (GUI). Microsoft
not only paid an undisclosed amount to Apple, but also
made its Office 98 suite compatible with Macintoshes.18
Jobs then proceeded to change the company’s sales strat-
egy in 1997 to encompass direct sales—both online and
by phone. In a flurry of product releases, Apple intro-
duced the new generation of PowerMacs, PowerBooks,
and the highly anticipated iMac and iBook, which were
less expensive computers aimed at the low-end com-
puter market. After an entire year without showing a
profit, the first quarter of 1998 began three years of prof-
itable quarters for Apple.19

Jobs stated that he wanted to transform the com-
pany by making the Mac “the hub of [the consumers’]
digital lifestyle.” To do this, Apple introduced iLife in
2002, a software suite including applications such as
iPhoto, iMovie, iTunes, and eventually the iPod. With
the advent of Napster and peer-to-peer music sharing,
Apple saw a way to capitalize on the emerging trend
of cheap music downloads by creating a legal online
music distribution network. iTunes would be the key
to exploiting this market. Once downloaded by way
of iTunes, music could then be transferred only to an
iPod (due to encryption). With iTunes, Apple has quite
possibly revolutionized the distribution of music and
hopes to do the same with the distribution of movies
on demand. Similar changes may be expected with the
iPhone in the mobile or smartphone industry segments
and with Apple TV in the mobile media and set-top box
industry segments.

iTunes: Apple’s Online
Music Store
Apple ventured into the market of legal downloads with
the introduction of its iTunes Music Store.20 iTunes
offers downloads at a specified price without requir-
ing a subscription or monthly fees. Originally offered

Exhibit 3 Select Apple Product Releases

1976 Apple I

1977 Apple II

1980 Apple III

1983 Lisa

1984 Macintosh Graphical user interface (GUI)

1986 Macintosh Plus

1987 Macintosh II

1991 Macintosh Quadra PowerBook 100

1994 PowerMac 6100

1997 PowerBook G3

1998 iMac

1999 iBook

2001 iTunes
iDVD
iPod

2003 iLife suite
iTunes 4 (online music store w/200,000
downloadable songs)

2004 iPod Mini
eMac
iPod (Click Wheel)
iPod (U2 Special Edition)
iPod Photo

2005 iPod Shuffl e
iPod nano
iPod color
iPod with video

2006 MacBook
Mac mini

2007 Apple TV
iPhone

Source: www.apple-history.com.

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No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

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193

exclusively on Apple’s own Mac, iTunes can now be
installed on PCs as well. The idea behind iTunes was to
provide a solution to the illegal pirating of music and
software from rival sources such as Kazaa.

iTunes offers its users a selection of more than 6 mil-
lion songs, with new songs continually added.21 Titles are
from just about every genre of music. Users can perform
a search by type of music, artist name, or title of track
or album. Each song available can be previewed with-
out making a purchase. Purchasers have the option of
purchasing an entire album or single songs. Each song is
$0.99, and a complete album starts at $9.99. Downloads
can be made not only to a Mac or PC, but also directly
to an iPod. All new song additions are encoded in AAC
format, which many say is superior to MP3, although
iTunes does still carry the MP3 format on some of its
older selections.

Once songs are downloaded, they are stored as a
digital music library. As this collection grows, this list
of songs can be arranged in many different ways. Songs
can be arranged by personal rating, artist, or genre. This
feature allows for a customizable playlist for playback or
burning to a CD.

In addition iTunes offers a collection of more than
10,000 audiobooks ranging in price from $2.95 to $15.95,
including many different language lessons. Also avail-
able are downloadable versions of public radio shows.
Gift certificates are also available in different denomina-
tions and can be sent electronically through e-mail.

As previously mentioned, in its first week of exis-
tence, the number of downloads from iTunes surpassed
the 1 million mark. This feat is amazing considering
that at the time of iTunes’ introduction, the download
service was available only for the Mac. In addition, at
that time, Mac users comprised less than 5 percent of
U.S. computer users.22 When iTunes became available
for use on the PC, sales increased even more rapidly.
iTunes PC downloads reached the 1 million mark in
three days, less than half the time it took for the Mac ver-
sion. But the success of iTunes is not measured in num-
ber of downloads sold per day or week, since after pay-
ing royalties, Apple makes only approximately 10 cents
per song. iTunes is simply used as a means to boost the
sale of iPods, iPhones, and Apple TVs, which generate
a substantial profit per sale. For example, the iPod has
been labeled “the profit machine” for Apple, as it tends
to produce a 50 percent profit margin, per unit, before
marketing and distribution costs.23

iTunes, iPod, iPhone, and Apple TV
iPod
For music lovers, the iPod is the greatest invention since
the Walkman. With up to 160 GB of storage, it allows
users to carry up to 40,000 songs or 200 hours of video
wherever they go.24 There are currently four different
iPod styles: the iPod shuffle, iPod classic, iPod nano,
and iPod touch. iPod owners can purchase accessories
such as the armband, the radio remote, and the uni-
versal dock and remote to make using the iPod even
more enjoyable. In 2007, with more than 100 million
products sold, the closest competitor to Apple’s iPod
had only 8 percent of the market share, leaving Apple
with the vast majority. While others are seeking to sim-
ply duplicate the complementary and innovative rela-
tionships between iPod and iTunes, Apple continues
to innovate with new products such as the iPhone and
Apple TV.25 (See Exhibit 4 for more details about the
iPod products.)

iPhone
In first-quarter 2007, Apple launched its “revolutionary”
product, the iPhone. The iPhone combines three con-
cepts popular with consumers: a mobile phone, a wide-
screen iPod, and an Internet communication device. The
iPhone brags “an entirely new user interface based on
a large multi-touch display and pioneering software,”
which users can control with just their fingers.26 The
iPhone’s default Internet browser will be Apple’s own
Safari,** but it is open to other software as well.27 The
iPhone allows for 8 hours of talk time, 24 hours of audio
playback time, and 10 days of standby time.28 Apple sold
1 million iPhones less than three months after this prod-
uct was available to consumers. Apple expects this trend
to continue during 2008 and to reach sales of 10 million
iPhones, stealing 1 percent of the mobile phone market
share.29

Apple TV
In addition to the iPhone, Apple also introduced the
Apple TV in 2007. With this product, Apple intends
to revolutionize the Internet video industry, as it did
with the music download industry. Users can download
movies and TV shows via the iTunes online service or
via YouTube as well as view digital photos and home
videos.30 Some negative hype claims that the Apple TV
will be a flop just like the Apple III and the Power Mac

** Safari is Apple’s Internet browser that was introduced in 2003. It is part of Apple’s strategy to gain more market share by having both hardware and soft-
ware products. Apple suggests that Safari is the fastest browser available. It blocks pop-up advertising and has a built-in text reader that reads the site pages
aloud. In addition to being the default browser for the iPhone, it is the default browser for the iPod Touch and the Mac computer. Safari’s user share was esti-
mated to be 6 percent in early 2008. (P. Festa, 2003, Welcome to the browser jungle, Safari, CNET News, www.news.com, January 7; 2008, Wikipedia, http://
en.wikipedia.org.)

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T
V Cube. Some of the features that made the first edition

unpopular include the following:

Users are not able to download a movie from iTunes •
directly to their TV; they have to download it to their
PC first.
It requires an HDTV, but the movies that can be •
downloaded are of such low resolution that the pic-
ture looks fuzzy and old-fashioned.
It has no DVD drive. •

Steve Jobs announced at the Macworld Conference &
Expo in January 2008 that the upgraded version of Apple
TV will allow owners to order movies directly from the
TV rather than having to download to the PC.31 Also,
critics do compliment the fact that the Apple TV plays a
slideshow of digital photos.32

The price to rent a movie using Apple TV is $2.99 for
library titles, $3.99 for new releases, and $1 extra to view
the movie in high definition.33

One key component that must be in place to have
good media content for the three products mentioned
is the relationship that Apple has with each of its media
and phone service suppliers.

Service Suppliers: iTunes,
Apple TV, and iPhone
iTunes
iTunes has agreements with all five major record labels
(BMG, EMI, Sony Music Entertainment, Universal,
and Warner Bros.) as well as more than 200 indepen-
dent labels. These agreements allow iTunes to sell the
music owned by these labels and pay the record label
each time a song is downloaded. This deal is consid-
ered a reseller agreement, meaning that Apple is not
licensing content from these labels, but rather buying
it wholesale and reselling it to consumers.34 Apple gets
to keep its share, while the portion the label receives
must be divided among many parties including artists,
producers, and publishers. Labels earn approximately
70 cents per song sold on iTunes. This figure may seem
small, but it is still greater than losing money to the
millions of illegal downloads that nearly crippled the
music industry.

The revenues for record label companies have been
dropping in the past year due to tough market condi-
tions, and Apple has introduced a strategy that may
help increase revenues by at least a small percentage.
It has already contracted with EMI to make its entire
catalog available to iTunes’ users in two formats, the
traditional download option, which includes the Fair-
play digital rights management (DRM) software and
DRM-free versions. The DRM software limits the

number of times a song can be copied, which decreases
the quality of the song. The DRM-free versions would
deliver greater quality music but would require a
higher price tag. iTunes will start the DRM-free songs
at $1.29 per song versus the traditional $0.99 per song.
Other record labels may enter into the same agreement
with Apple depending on how successful this strategy
is with EMI.35

NBC recently cancelled its agreement with Apple to
provide its TV shows on iTunes due to pricing disputes.
Walt Disney Studios previously offered its new releases,
and Paramount, Metro-Goldwyn-Mayer (MGM), and
Lionsgate allowed older library titles to be purchased on
iTunes, but the supplier agreements have changed with
the launch of Apple TV.36

Apple TV
Apple did not have an easy time finalizing with movie
studios contracts that will allow Apple to sell movies on
iTunes for use on the iPod and Apple TV. Not only were
the studios concerned about losing significant revenues
from the sales of DVDs and Blu-ray discs, but some
studios urged Apple to require a watermark on digi-
tal video for it to play on its devices. Their concern is
heightened given the pirating experienced in the music
download business. One movie-studio executive said,
“Our position is, if you want our content, you have to
protect our business.” Apple, however, responded that
it trusts its consumers not to play pirated movies.37

The limited number of movie downloads available on
iTunes would significantly diminish the success of Apple
TV. Thus, Apple’s CEO was persistent in his negotiations
with the movie studios. Jobs announced at the Macworld
Expo in 2008 that Apple had reached agreement with
each of the following major studios: Twentieth Century
Fox, The Walt Disney Studios, Warner Bros., Paramount,
Sony Pictures Entertainment, MGM, Lionsgate, and
New Line Cinema.38 Despite NBC’s issues with Apple
concerning TV shows, Universal Pictures (owned by
NBC and General Electric) has agreed to allow Apple to
rent its movies via iTunes.

The supplier agreement between Apple and the
movie studios is that new movies will not be available for
rent until 30 days after the DVD is distributed. Within
a 24-hour period, customers will be able to watch a film
as many times as they like once the movie is started.
Movies that are downloaded but not started will not be
available for viewing after 30 days.39

iPhone
Cingular was selected as the exclusive wireless carrier
for the iPhone in the United States because, according
to Steve Jobs, Cingular is the best and most popular car-
rier in the United States.40 Together these companies

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©2010 – ALL RIGHTS RESERVED – Southwestern Cengage Learning
No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

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195

developed the Visual Voicemail feature that allows users
to listen to the voicemails they prefer rather than having
to listen to all messages in succession. Since the agree-
ment was made between Cingular and Apple, Cingular

was acquired by AT&T. iPhone owners are required to
sign a two-year service agreement with AT&T. AT&T
offers four different plans, with monthly fees ranging
from $59.99 to $119.99. All plans include the visual

Exhibit 4 iPod Product Descriptions

Capacity1 1GB Up to
240
songs

4GB Up to 1,000 songs,
up to 3,500 pho-
tos, up to 4 hours
of video, or some
of each

80GB Up to 20,000
songs, up to
25,000 photos,
up to 100 hours
of video, or
some of each

8GB Up to 1,750 songs, up
to 10,000 photos, up
to 10 hours of video,
or some of each

2GB Up to
500
songs

8GB Up to 2,000 songs,
up to 7,000 pho-
tos, up to 8 hours
of video, or some
of each

160GB Up to 40,000
songs, up to
25,000 photos,
up to 200 hours
of video, or
some of each

16GB Up to 3,500 songs, up
to 20,000 photos, up
to 20 hours of video,
or some of each

32GB Up to 7,000 songs, up
to 25,000 photos, up
to 40 hours of video,
or some of each

Price 1GB
2GB

$49
$69

4GB
8GB

$149
$

199

80GB
160GB

$249
$349

8GB
16GB
32GB

$299
$399
$499

Color
display

2-inch 2.5-inch 3.5-inch Multi-Touch

Wireless
data2

Wi-Fi (802.11b/g)

Battery
life3

Up to 2 hours of
audio

Up to 24 hours of audio
Up to 5 hours of video

Up to 40 hours of audio
Up to 7 hours of video

Up to 22 hours of audio
Up to 5 hours of video

1. 1 GB = 1 billion bytes; actual formatted capacity is less. Music capacity is based on 4 minutes per song and 128-Kpbs AAC encoding; photo capacity is
based on iPod-viewable photos transferred from iTunes; video capacity is based on H.264 1.5-Mbps video at 640-by-480 resolution combined with 128-Kbps
audio; actual capacity varies by content.
2. Internet access is required; broadband is recommended; fees may apply.
3. Testing was conducted by Apple in August 2007 using preproduction hardware and software. For audio playback, the playlist contained 358 unique audio
tracks consisting of content imported from CDs using iTunes (128-Kbps AAC) and content purchased from the iTunes Store (128-Kbps AAC); all settings were
default except that Ask to Join Networks was turned off for iPod touch. For video playback, video content was purchased from the iTunes Store; all settings
were default except that Ask to Join Networks and Auto-Brightness were turned off for iPod touch. Battery tests are conducted with specific iPod units; actual
results may vary. Rechargeable batteries have a limited number of charge cycles and may eventually need to be replaced (see www.apple.com/support/ipod/
service/battery). Battery life and number of charge cycles vary by use and settings. See www.apple.com/batteries for more information.

Source: www.apple.com/ipod/whichipod.

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No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

196
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T
V voicemail, unlimited access to the Internet, and roll-

over minutes.41

Hardware
Concerning its hardware suppliers, Apple is usually not
forthcoming with this information. However, a disas-
sembled iPhone reveals that the microprocessor chip is
supplied by Samsung; Philips, Texas Instruments, and
Linear Technology all play a role in providing the bat-
teries, and many other companies provide chips that are
central to the camera, display, and motion sensor.42

Many companies have expressed frustration in
working with Apple because Steve Jobs is very clear on
his vision for his products and can tend to be control-
ling. Maintaining good supplier relationships and keep-
ing enough control to provide the quality of products
expected of Apple is a balance that Apple will have to
find in order to stay ahead of its competitors.

Competitors
iTunes
Since the October 2003 launch of iTunes.com for
Windows, Apple has faced a multitude of competitors.
During the late 1990s, the emergence of music sharing
came about with Napster, a freeware program offering
free downloads using peer-to-peer transfers. Peer-to-
peer transfers allow users to connect directly with other
users without the need for a central point of manage-
ment.43 However, in recent years due to legal proceed-
ings, Napster and all other competitors have become a
subscription service similar to iTunes.

Napster. In May 1999, 19-year-old Shawn Fanning cre-
ated Napster while studying at Northeastern University.
The name Napster came from the Internet “handle” he
had used as a programmer. He created a type of soft-
ware that allowed music fans anywhere to “share” MP3s
in one forum. During the first year of service, Napster
was obtaining more than 250,000 new users a week while
maintaining a free service.44 This software creation led
to the ever-growing controversy of the availability of
MP3s on the Internet. Music sharing exploded in the
late 1990s, and Napster’s servers were overloaded with
millions of requests a day for media downloads. Music
artists considered this new “sharing” forum to be a con-
tinuous copyright violation. Fanning soon became the
target of their animosity and became one of the most
disliked people in the music industry.

During 2000, Napster was in and out of court and
was finally slated to shut down on July 26, 2000. The
decision was reversed two days later on July 28, 2000.45
In 2001, Konrad Hilbers, a 38-year-old German, became

CEO of the rapidly declining music file-sharing site. In
June 2001, Napster had more than 26 million users, but
growth was declining fast, going from 6.3 billion to 2.2
billion minutes used a day. On March 7, 2002, Napster
closed its servers while opting to implement a fee-based
service to comply with the federal judge’s decision. On
June 3, 2002, Napster filed for Chapter 11 bankruptcy in
an effort to secure court-ordered protection from credi-
tors. This move was part of the overall financial restruc-
turing strategy of Bertelsmann AG, which was proceed-
ing with its takeover of the once popular file-sharing sys-
tem. By July 2003, Roxio, Inc., had acquired Napster and
was planning a Napster 2.0 launch for December 2003.
Napster 2.0 is a successful, legal fee-based service.46

Through restructuring and quality legal represen-
tation, Napster finally has a legal base that is expected
to stand. Currently, Napster 4.0 is online with content
agreements from five major record labels and hundreds
of independent labels; therefore, its library is made up
of more than 5 million songs. Members have unlimited
access to the library for $12.95 per month. Napster 4.0
now accommodates the use of its software for Mac and
Linux users.

Kazaa. Sharman Networks Limited was founded in
January 2002 as a private limited company. Sharman
Networks develops and markets world-class Internet
applications. Kazaa Media Desktop and Kazaa Plus are
products of Sharman Networks. Sharman Networks
earns revenue by soliciting companies to advertise on
its software. Users that prefer ad-free use of the software
can purchase an upgrade, Kazaa Plus for $29.95. This
upgrade will also allow for greater search capabilities
and more download sources.47

Being Australian-based, the company avoided legal
intervention in allowing the file sharing, but in 2005, the
Federal Court of Australia ruled that Kazaa had know-
ingly allowed users to illegally download copyrighted
songs. The company was charged to change its software
to prohibit copyrighted music or videos from being
shared.48 Kazaa owners agreed to pay the four major
record labels (Universal Music, Sony BMG, EMI, and
Warner Music) $100 million.49

Kazaa Media Desktop is a program rumored to be lit-
tered with spyware and ad-based programs that “infect”
consumer systems; thus many users have become wary
of accessing Kazaa’s site.50

RealNetworks, Inc. RealNetworks, through its
RealPlayer Music Store, sought a price war with Apple
by dropping the price to $0.49 per song and $4.99 per
album compared to Apple’s price of $0.99 and $9.99,
respectively. Analysts indicated that RealNetworks was

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No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

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197

pricing below the cost of purchasing the music from the
record companies, and eventually it did increase its price
to $0.99 per song; however, it still offers, select songs
for $0.49 a track. As part of its battle to reduce Apple’s
market share, RealNetworks launched technology called
Harmony, which allows RealNetworks users to trans-
late songs purchased from RealPlayer Music Store into
a format that can be played on an iPod. It also allows
RealNetworks music to be played on Microsoft for-
mats.51 RealPlayer is a RealNetworks medium through
which it competes in the video-on-demand market.
Video can be downloaded from the Web to an iPod, PC,
CD, and DVD. RealPlayer customers can subscribe to its
SuperPass membership, which combines the benefits of
RealPlayer and the RealPlayer Music Store. The $14.99
monthly fee provides subscribers with $10.00 worth of
music downloads and full-length movies per month.

Sony. Sony started a music download service called
Connect in the spring of 2004. Despite its efforts to com-
pete in the music downloading market, it did not realize
significant success; thus, Connect closed at the end of
March 2008.52 Instead, Sony is focusing its attention on
gaining market share in the video download segment.53

Virgin Media. Virgin offers more than 15,000 record
labels in addition to computer games and videos and
Blockbuster movies. Similar to iTunes, customers can
listen to a 30-second sample before purchase and down-
load exclusive tracks through Virgin’s V2 music label
before the tracks are released to the general public.54

Wal-Mart. Wal-Mart launched its own online music
store. It is currently the number-one music retailer in the
nation, followed by iTunes.55 Initially Wal-Mart offered
music in MP3 format for $0.88 per song, $0.11 cheaper
than Apple, but currently it offers songs for $0.94 and
albums starting at $7.88.56

Yahoo! Music Unlimited. Subscribers to Yahoo!
Music Jukebox have access to more than 2 million songs.
Users can listen to 150 LAUNCHcast radio stations or
download songs to any PC. After paying a monthly $6.00
fee, subscribers pay only $0.79 per song. Nonsubscribers
can also download songs for $0.99 each.57 At this time,
Yahoo! offers only music on its site; video and TV shows
are not available.

Apple TV
Amazon Unbox. The Amazon Unbox was introduced
in 2006. Users download films or TV shows to the
Amazon Unbox Player or on Windows Media Player.
In addition, Amazon established a partnership with

TiVo in 2007 that allows consumers to purchase mov-
ies or TV shows through Amazon’s Unbox and send
it to the TiVo machine to view. Amazon’s service is
similar to its competitors in that once a movie or show
is downloaded, it must be viewed within 30 days and
once it is started, it must be viewed within 24 hours.
Amazon also has agreements with most of the major
movie studios such as Paramount Pictures, Universal
Studios, Warner Bros., CBS, and Fox.58 NBC contracted
with Amazon to offer its TV shows for download after
NBC cancelled its agreement with Apple for the iTunes
service.59

CinemaNow. This company seemed to have been
ahead of the game, entering the video download mar-
ket in 1999. It was the first to offer pay-per-view mov-
ies from the major Hollywood studios, the first to offer
Download-to-Own services, and the first distributor of
Burn-to-DVD movies. It is headquartered in Marina
Del Rey, California, and its library consists of more than
10,000 movie titles, television programs, music concerts,
and shorts. It has enabled users to download movies to
the Microsoft Xbox 360 video game console as part of
its strategy of providing multiple platforms on which
to download movies. It has recently been creating joint
ventures to differentiate itself in the industry. It origi-
nated as a distributor of videos via the Internet and has
progressed most recently to wireless Internet “infotain-
ment,” a new feature available in select new car models.
Its agreement with USTelematics, Inc. will allow it to
offer a package of features and functions, including the
creation of a mobile Wi-Fi Internet hotspot to enable
online computer usage in the car, as well as DVD, mov-
ies, TV, Xbox, and other computer games.60

Disney. Disney, through an agreement made with
Microsoft in 2007, offers movie download service for
use on the Xbox 360. This service is one of the few that
offers movies in high-definition format. Consumers
have access to the Walt Disney Studios library, including
titles from Walt Disney Pictures, Touchstone Pictures,
Hollywood Pictures, and Miramax Films.61

HP. HP announced at the beginning of 2008 that it
had reached an agreement with Sony Pictures Home
Entertainment (SPHE) to deliver movies on demand.
HP’s manufactured-on-demand service will produce a
DVD of any movie, TV show, or other content offered
through SPHE. HP believes this service will aid movie
studios in trying to match supply and demand for mov-
ies it sells on DVD. The current list of items available for
order are classic TV shows never released on DVD, for-
eign movies, specialty cable programming, independent

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©2010 – ALL RIGHTS RESERVED – Southwestern Cengage Learning
No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

198
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T
V movies, specialty genres such as religion and education,

and recently broadcast TV shows.62

Movielink. Recently acquired by Blockbuster,
Movielink began in 2002 and was owned by five of
the top movie studios: Universal Studios, Paramount
Pictures, Sony Pictures, MGM, and Warner Bros. It
operates as a subsidiary of Blockbuster and offers 3,300
movie titles.63 Consumers who purchase a movie from
Movielink must view it using a computer, a TV con-
nected to a computer, or an Xbox 360 game console or
via a set-top box company.

Netflix. Like many of its competitors, Netflix has
teamed up with a technology company, LG, to become
a stronger player in the video-on-demand market. In
January 2008, Netflix announced that through LG’s set-
top box, customers can stream movies directly on their
TVs. The device is expected to be available in the second
half of 2008.64 In the meantime, Netflix subscribers can
stream to their PC an unlimited number of movies per
month, unconstrained by hourly limits, for a monthly fee
with plans starting at $8.99 per month. The on- demand
library offers viewers the option of 6,000 titles of movies
and TV shows.65

Sony. In the United Kingdom and Ireland, Sony
offers video-on-demand service through its PlayStation
Portable device. It has partnered with British Sky
Broadcasting to provide the movies.66 It also offers this
service in Japan, but it is currently not available in the
United States.

Vudu. Vudu, headquartered in Santa Clara, California,
entered the video-on-demand market in April 2007.67
Vudu’s black box connects to the TV and Internet, and
the built-in hard drive gives users the option of view-
ing 5,000 movie titles instantly. The box costs $400. The
service has no monthly service charge, but a rental costs
$2.00 to $4.00 per movie. As such, Vudu claims to be the
cure-all for the movie rental business; it saves customers
from running back and forth from the video store or
waiting for the movie to come in the mail from Netflix
or Blockbuster; it offers more movie titles than video-
on-demand providers; and it is more functional than
Internet download services because it does not require
a PC. Similar to Vudu’s competitors, once a movie is
downloaded, it must be viewed within 24 hours.

Vudu offers movies from all major Hollywood studios.
But since it is subject to the distribution windows, the time
frame in which select movies are available may not match
consumer demand. Only some movies have previews, and
some are available only for purchase and not for rent.68

Wal-Mart. In December 2006, Wal-Mart entered
the movie download segment of the entertainment
industry, but only a year later it exited the business
because it had not caught on with consumers. Raul
Vasquez, Wal-Mart’s CEO for walmart.com, stated
that the download service was an experiment. “We
want to understand what the customers want. And I
think what we learned is that the initial experience of
buying and downloading content needs to be better.
We thought it was going to be easier for the customer
to understand.”

iPhone
Motorola. Motorola has been a long-time leader
in mobile phone sales in the United States. However,
since Apple’s iPhone and Research In Motion’s (RIM)
Blackberry have been gaining ground, the leader is fall-
ing hard and fast. Motorola’s RAZR phone has lost its
popularity, and its smartphone made in partnership
with Microsoft, the Motorola Q, has not performed as
expected. Motorola announced in January 2008 that it is
seeking alternatives for its handset business, most likely
a divestiture.69

Palm. Despite the fact that Palm sold 689,000 Treos
in the first quarter of 2007, a 21 percent increase from
the previous year, Palm is struggling to remain a major
player in the smartphone market amid the success of
the Blackberry and the iPhone. The competition with
the iPhone is especially fierce since AT&T is the phone
service provider for both products. Palm introduced its
Centro in October 2007 as a low-cost strategy to increase
market share. Although the Centro sells for $99, it does
not have all of the features of the iPhone. But cost-
conscious consumers may choose it over the iPhone
given the iPhone’s $399 price tag.70

Research In Motion. The Blackberry created by
Research In Motion (RIM) has been a popular prod-
uct among corporate consumers who mainly needed
e-mail service and a calendar. To stay in the competitive
game, however, RIM has been adding features to make
its product more appealing to users who want the fun
features in addition to the features that aid in their work.
Blackberrys now have cameras and can play music. There
is a rumor that RIM is going to introduce a Blackberry
9000, which will have a touch-sensitive screen, making
it similar to the iPhone.71 Conversely, Apple has recently
released tools that make its iPhone more corporate-user
friendly, and it will now be compatible with Microsoft’s
Exchange platform.72

Exhibit 5 illustrates a comparison of the product
features for the iPhone relative to its key competitors.

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No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

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©2010 – ALL RIGHTS RESERVED – Southwestern Cengage Learning
No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

200
C

as
e
1
4:
A
p
p
le
C
o
m
p
u
te
r,
In
c.
: M
ai
n
ta
in
in
g
t
h
e
M
u
si
c
B
u
si
n
e
ss
W
h
ile
In
tr
o
d
u
ci
n
g
iP
h
o
n
e
a
n
d
A
p
p
le

T
V iPod

Some of the iPod’s major competitors include Rio Karma,
Dell Digital Jukebox DJ, Samsung Napster YP-910GS,
and the Gateway Jukebox Player DMP-X20 (see Exhibit
6).73 Some of the differences from the iPod include a lon-
ger battery life, such as a 16-hour battery life for the Dell
MP3 player. The weight also varies from one competitor
to the next, ranging from 7.7 ounces to 5.5 ounces. (For
a detailed list of the major competitors’ specifications,
see Exhibit 7.)

The Microsoft Zune premiered in the fall of 2006.
Due to its lack of tremendous success, in the fall of 2007,
Microsoft exerted great energy in combating the suc-
cess of the iPod with its improved Zune. The Zune offers
options of 4, 8, or 80 gigabytes of storage with prices
ranging from $150 to $300. The newest edition of the
Zune is smaller, has a better viewing screen, and allows
users to wirelessly synchronize the gadget with the music
on their computers. It also includes a touch-sensitive pad
that allows users to navigate through songs with more
precise control than the iPod, according to Microsoft
executives.74 But critics suggest that the Zune does not
pose a significant threat to the iPod because it does not
offer any significant technological breakthroughs.75 Only
1.2 million Zunes sold during 2007 while Apple sold
more than 41 million iPods. Apple’s success can likely
be attributed to its marketing competency.

Marketing
Up until this point, Apple’s marketing endeavors have
earned it awards, product sales, and a devoted base
of customers, both new and old. In 2003, Apple was
awarded Advertising Age’s Marketer of the Year for its
upbeat, original, and (most importantly) memorable
advertisements for both its iPod and iTunes.76 Apple
has been hailed as one of the best marketers by many
different sources and has had a reputation over the
years of being a brand that can gain customers through
its well-thought-out and carefully executed marketing
strategies.

Marketing has been one of Apple’s strengths; how-
ever, staying on top of the game will become more
difficult as Apple develops a broader range of products
and markets them to the mainstream customer rather
than just the “tech-savvy fanatics” in fields such as edu-
cation and design.77 “The customer base is now more
diverse, including students and mainstream consum-
ers, and it’s harder to satisfy as a whole,” says Lopo L.
Rego, a marketing professor at the University of Iowa.78
Business leaders today have a daunting job in balancing
shareholder demands and running a successful com-
pany. Businesses want to market new products aggres-
sively to try and ensure their products’ success. Apple

heavily promoted the iPhone when it was introduced in
July 2007. Customer and investor expectations, due to
Apple’s reputation, boosted the stock price. But when
customers don’t believe that the marketing promises
have been delivered, stock price, brand equity, and
investor confidence are significantly affected.79 Apple’s
success lies in a carefully thought-out plan.

Marketing Plan
A marketing plan begins with design of the product.80 In
an industry of low profit margins and cost cutting, Apple
takes a different approach to the design of its products.
While competitors are doing everything they can to keep
costs down, Apple does what it can to make its product
different. In 2007, for the third year in a row, Apple was
named as the Most Innovative Company by Business-
Week.81 Its CEO, Steve Jobs is “a legend for his design
sense.”82 Even employees of one of Apple’s biggest com-
petitors, Microsoft, have recognized Apple’s dominance
in the design of eye-catching products. The employees
created a mock promotion for the iPod had it been cre-
ated by Microsoft and circulated it on YouTube.83

Steve Jobs is essential to the public relations and
promotional aspect of Apple, especially with the iPod.84
He maintains relationships with the media and has been
called the “public face and champion of the brand.”85
He is an expert when it comes to talking with the press,
maintaining relationships with magazine editors, and
continually creating new relationships.86 Because of his
dynamic, high-energy personality, he usually holds a
new idea that he is energetic about and is always ready
and willing to share the idea to gain exposure.

Jobs also takes action in response to customer feed-
back to show that he is listening and concerned. For
example, three months after the iPhone was available
in stores, Apple cut the price of this product by one-
third. This was a strategic move to increase demand and
meet sales goals; it was not the result of a faulty product.
Consumers who had purchased the iPhone in the first
three months for the higher price expressed great dissat-
isfaction. Jobs responded by promising these consumers
a $100 Apple store credit.87

A more recent advantage in Apple’s marketing strat-
egy is its retail stores. Apple has opened more than 200
retail stores located worldwide. At the time that Apple
opened its first retail store in 2001, analysts predicted
that Apple would report huge losses and shut the store
within two years. At the time, no computer manufac-
turer had proved profitable in running its own branded
store.88 However, Apple’s retail stores contributed an
estimated $200 million, 15 to 16 percent of its prof-
its during the past two years (see Exhibit 8).89 Apple’s
philosophy behind the stores is brand exposure. Apple
believes that the more people can touch an Apple product

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©2010 – ALL RIGHTS RESERVED – Southwestern Cengage Learning
No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

C
ase
14: A
p
p
le
C
o
m
p
u
te
r, In
c.: M
ain
tain
in
g
th
e
M
u
sic B
u
sin
e
ss W
h
ile
In
tro
d
u
cin
g
iP
h
o
n
e
an
d
A
p
p
le
T
V

201

and see what it can do with their own eyes, the greater
the potential market share.90 In addition, the stores pro-
vide free group workshops, personal training, and per-
sonal assistance for Apple customers.91

Apple offers a One-to-One program for an annual
fee of $99; subscribers can attend a tutorial session
with an Apple expert for an hour once a week for one
year. Apple customers can also consult with the staff
at the “Genius Bar” by appointment. The Genius Bar
is where Apple product users meet face-to-face with
Apple’s “geniuses” for answers to technical questions
and for problem troubleshooting. In addition, cus-
tomers wanting to purchase a new computer or other

equipment can schedule an appointment with a shop-
ping assistant, who helps ensure that the customer
selects the right equipment for his or her needs. Apple
has apparently struck a chord with customers because
its staff conducts more than 50,000 training sessions
per week.92 “Apple has become the new gathering
place,” said Steven Addis, chief executive of Addis
Creson, a brand strategy and design firm in Berkeley.
“You can’t help but get caught up with it when you
first walk in.”93

As so eloquently stated in a USA Today article,
“Apple’s arsenal of attention-getting tools holds lessons
for any company: design cool, innovative products. Have

Exhibit 6 Products of Competitors to iPod

Creative Nomad
Jukebox Zen NX (20 GB)

Samsung Napster
YP-910GS (20 GB)

Rio Karma (20 GB)

iRiver iHP-120
Dell Digital Jukebox

DJ (20 GB)

Gateway Jukebox Player
DMP-X20 (20 GB)

Source: http://reviews.cnet.com/4520-6497-5093864.html.

CHE-HITT-09-0102-Case-014.indd 201CHE-HITT-09-0102-Case-014.indd 201 11/13/09 7:43:01 PM11/13/09 7:43:01 PM

©2010 – ALL RIGHTS RESERVED – Southwestern Cengage Learning
No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

202
C

as
e
1
4:
A
p
p
le
C
o
m
p
u
te
r,
In
c.
: M
ai
n
ta
in
in
g
t
h
e
M
u
si
c
B
u
si
n
e
ss
W
h
ile
In
tr
o
d
u
ci
n
g
iP
h
o
n
e
a
n
d
A
p
p
le
T
V

a streamlined product line. Invest in memorable ads. Work
your customer base to make customers feel special and cre-
ate word-of-mouth agents. Most important: keep the world
and media surprised, to generate gobs of attention.”94

Finally, Apple has garnered major success for
iPod and iTunes by way of strategic partnerships with
other well-known brands. Apple has created market-
ing agreements with Volkswagen of America, Burton
Snowboards, Nike, and Starbucks. By affiliating itself
with different brands, Apple gains consumer confi-
dence as well as exposure through marketing partner
advertisements.

Strategic Agreements
All of the strategic agreements that are currently known
by the public are agreements related to the iPod. It
remains to be seen what alliances or joint ventures Apple

enters in order to create awareness for the iPhone and
Apple TV.

Volkswagen. In early 2003, Volkswagen of America
(VW) offered a free iPod to customers who purchased
a 2003 hardtop Beetle 10. The ad campaign was aptly
named “Pods Unite.”95 The deal brought iPod enthusi-
asts (and people who just wanted to learn more about
the iPod) into the Volkswagen stores, and both products
benefited from the advertisement. For three months,
iPods were shown in Volkswagen showrooms.96 Also,
the Volkswagen sold iPod connectivity wiring and a
cradle for the iPod to be used in the new VW Beetle.97
Because both brands are known for unique design, it is
likely that the promotion brought in consumers who
highly value the design aspect of a product, whether it is
a car or a digital music player.

Exhibit 7 Details of Products of Competitors to iPod

Basic Specs Creative
Nomad
Jukebox Zen
NX (20 GB)

Samsung
Napster
YP-910GS
(20 GB)

Rio Karma
(20 GB)

iRiver
iHP-120

Dell Digital
Jukebox DJ
(20 GB)

Gateway
Jukebox Player
Product DMP-
X20 (20 GB)

Product type Digital player Digital player /
recorder / radio

Digital
player

Digital player /
voice recorder /
radio

Digital player /
voice recorder

Digital player /
voice recorder /
radio

PC interface(s)
supported

Hi-Speed
USB

Hi-Speed USB Hi-Speed
USB

Hi-Speed USB Hi-Speed USB Hi-Speed USB

Flash memory
installed

8 MB

Info unavailable Info
unavailable

Info unavailable Info
unavailable

Info unavailable

Storage
capacity

20 GB 20 GB 20 GB 20 GB 20 GB 20 GB

Digital formats
supported

MP3 MP3 MP3 MP3 MP3 MP3

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203

In the fall of 2007, rumors came out that Apple and
VW were in discussions about furthering their relation-
ship to create an iCar. This car would feature products
that Steve Jobs fashioned. No details have been specified
by either company’s leaders.98

Burton Snowboards. In January 2004, Burton released
a snowboarding/snow-skiing jacket made especially for
use with the iPod (Exhibit 9). The jacket has a built-in
iPod control electronic system on the sleeve of the jacket
so that the wearer can operate the iPod without remov-
ing gloves, digging in pockets, or fumbling with zippers.99
The iPod rests in a protected chest pocket in the inner
lining of the jacket. With this jacket, Apple places a prod-
uct into the hands of those who use iPods and creates
exposure for the iPod by way of young snowboarders
and skiers showing off and wearing the special jacket.

Nike. Nike and Apple have teamed up to create a
smart running shoe. When runners combine a pair of
Nike athletic shoes, an iPod nano, and the iPod Sport
Kit, they are able to track their run in real time, with
time, distance, pace, and calories burned displayed on
the iPod. The iPod Sport Kit became available in 2006.
Users’ playlists can be selected based on the desired
workout. If runners need a sudden burst of energy, they
can press the Power Song button. An additional feature
is the voice feedback that tells runners when they reach
a personal best, whether it is in regard to pace, distance,
time, or calories burned.100 The personal data can be

uploaded to Nike’s Web site, and runners can compete
virtually against one another.101 The most recent part-
nership between Nike and Apple will shift to the gym.
Teaming up with gym equipment makers and 24-Hour
Fitness and Virgin Athletic Clubs, Apple and Nike will
allow club members to plug their iPod nanos into the
cardio equipment to track workouts, upload the infor-
mation to Nike’s Web site, and set goals based on per-
sonal history or to compete with others tracked on the
Web site.102

Starbucks. In September 2007, Starbucks and Apple
announced a joint venture that allows Starbucks cus-
tomers to access (at no cost) the iTunes Wi-Fi Music
store at more than 600 participating Starbucks loca-
tions. Customers can browse, search, and preview all
songs available on the iTunes store, including the “Now
Playing” service, which displays the name of the song
playing at that moment in Starbucks. “Getting free access
to the iTunes Wi-Fi Music Store and the ‘Now Playing’
service at Starbucks is a great way for customers to dis-
cover new music,” said Steve Jobs.103 If customers have
to leave the Starbucks store before the download of a
song is complete, their personal computer will complete
the download automatically at a later time. Every song
purchased in a Starbucks participating location syncs
back to the users’ computer the next time they connect.

In addition to these agreements with domestic com-
panies, Apple is seeking opportunities to create demand
for its products in the global market.

Exhibit 8 Retail Sales as a Contribution to Overall Apple Revenue

1999

in
m

ill
io

n
s

$0

$1,800

$3,600

$5,400

$7,200

2000 2001 2002

Revenues Without Retail

Retail Contribution to Apple Revenues

Revenues With Retail

2003 2004 2005 2006 2007

Source: 2007, Retail Stores’ Importance Highlighted, http://ifoapplestore.com, August 17.

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©2010 – ALL RIGHTS RESERVED – Southwestern Cengage Learning
No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

204
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Going Global
To stay on top of its game, Apple is pursuing oppor-
tunities to sell the iPhone globally. Apple has a goal of
capturing 1 percent of the global cell phone business by
the end of 2008. It already has partnership agreements
with cell phone carriers in France, Germany, and Great
Britain. It has also entered the Middle East and Africa
regions, ranking fifth next to Nokia, Research In Motion,
HTC, and Motorola.104 Considering that Japan is one of
the world’s largest and most demanding mobile phone
markets with almost 100 million mobile phone users,
Steve Jobs has been meeting with officials in Japan in
hopes of making a partnership agreement with some
of the major telecommunications companies in Japan.
This market will be difficult to penetrate, as many other
foreign companies have tried unsuccessfully to compete
with the 10 domestic handset makers in Japan. Some
analysts wonder whether Apple will be able to develop
a relationship with the Japanese carriers due to Apple’s
tight control over the design of the phone, but others
believe Apple will succeed. Apple already has a positive
brand image in Japan related to the Macintosh computer
and the iPod and has seven Apple retail stores already
in place.105

Stephen Kobrin, a Wharton Multinational manage-
ment professor explained in a recent interview that com-
panies that are high-tech and driven by technology that
demands that they expand into many countries simulta-
neously are “born global.” He clarifies by further stating,
“Companies that are born global ‘tend to have high-tech

products that immediately find acceptance in many dif-
ferent cultures and societies.’”106 Thus, it is likely that the
iPhone will experience success in many different markets,
as will the Apple TV and other new products that Apple
may launch when they become part of its global strategy.

Future Opportunities
and Challenges
As Apple tries to expand its product line to include
media and software in addition to hardware and as it
tries to reach many different consumers rather than
its traditional niche of “cult followers,” the tech-savvy
consumers who work in fields such as education and
design, the company will find it more difficult to keep
a positive brand image among all consumers. The tech-
nology and entertainment industries are constantly and
rapidly changing. Will Apple be able to keep its reputa-
tion related to innovative design and continually launch
products that will be the “latest hit”? Competition
has become extremely fierce in the technology sec-
tor, and Apple needs to be concerned not only about
major competitors, but also about start-up companies.
For example, in relation to the iPhone, GotVoice is a
Web-based company that allows subscribers to record
voicemail messages in MP3 format and send those mes-
sages to their e-mail account to view the subject line
and the message length. This capability rivals Apple’s
Visual Voicemail on the iPhone, and the service is free
unless users prefer to pay $10 to avoid ad pop-ups.107

Exhibit 9 Complementary Product Advertised with iPods

Source: www.burton.com/Burton/gear/products.asp?productID=728.

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©2010 – ALL RIGHTS RESERVED – Southwestern Cengage Learning
No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

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205

Interestingly, GotVoice has an advantage over Apple’s
Visual Voicemail in that it works not only with cell
phones, but also with home and work phones.108 It will
be a challenge for Apple to maintain its competitive

advantage in new product hardware and to create strong
relationships with powerful suppliers of media and other
services as well as fend off startups such as GotVoice in
software and other areas.

NOTES

D. Leonard, 2003, Songs in the key of Steve, 1. Fortune, April 28.
D. Chmielewski & M. Quinn, 2007, Technology; Movie studios fear 2.
the sequel to iPod; They see risk that new Apple TV signals effort
to control distribution, Los Angeles Times, June 11, C1.
R. E. Hoskisson, 2007, Strategic Focus: Apple: Using innovation to 3.
create technology trends and maintain competitive advantage, Hitt,
Ireland, & Hoskisson, Strategic Management: Competitiveness and
Globalization, 8th Edition.
Ibid.4.
Apple history, www.apple-history.com/frames.5.
Ibid.6.
L. Kimmel, 1998, Apple Computer, Inc.: A History, www.geocities7.
.com/Athens/3682/applehistory.html.
Ibid.8.
http://apple-history.com.9.
Apple Computer History Weblog, http://apple.computerhistory.org.10.
L. Kimmel, 1998, Apple Computer, Inc.: A history.11.
Apple Computer History Weblog.12.
http://apple-history.com.13.
Ibid.14.
Apple Computer History Weblog.15.
http://apple-history.com.16.
Ibid.17.
Ibid.18.
Ibid.19.
http://www.apple.com/itunes.20.
2008, iTunes store, www.apple.com/itunes/store/, January 8.21.
P. Hardy, 2003, Apple launches Windows-based iTunes, 22. Music &
Copyright Magazine, October 29.
A. Hesseldahl, 2005, Unpeeling Apple’s Nano, 23. BusinessWeek,
www.businessweek.com, September 22.
2007, www.apple.com.24.
R. E. Hoskisson, Strategic Focus: Apple.25.
2007, Apple reinvents the phone with iPhone, Apple Inc. press 26.
release, www.apple.com/pr/library/2007/01/09iphone.html,
January 9.
K. Allison, 2007, Apple encroaches on Window’s turf, 27. The Financial
Times, www.ft.com, June 11.
2007, iPhone delivers up to eight hours of talk time, Apple Inc. 28.
press release, www.apple.com/pr/library/2007/06/18iphone.html,
June 18.
2007, In three months, iPhone sales top a million, 29. New York Times,
www.nytimes.com, September 11.
Ibid.30.
M. Quinn & D. C. Chmielewski, 2008, Studios join Apple’s movie-31.
rental service, Los Angeles Times, www.latimes.com, January 16.
B. Schlender, 2007, The trouble with Apple TV, 32. Fortune, June
11,155(11): 56.
2008, www.apple.com/appletv/rentals.33.
W. Cohen, www.rollingstone/news/newsarticle.asp?nid =18075.34.
K. Regan, 2007, EMI revenue falls but DRM-free iTunes sales 35.
promising, Ecommerce Times, www.ecommercetimes.com,
August 6.
M. Garrahan & K. Allison, 2007, Apple signs film deal with Fox 36.
studio, Financial Times, www.ft.com, December 27.
D. C. Chmielewski & M. Quinn, 2007, Technology; Movie studios 37.
fear the sequel to iPod; They see risk that new Apple TV signals
effort to control distribution, Los Angeles Times, June 11, C1.

2008, Apple premieres iTunes movie rentals with all major film 38.
studios, Apple press release, www.apple.com/pr/library,
January 15.
M. Quinn & D. C. Chmielewski, Studios join Apple’s movie-rental 39.
service.
2007, Apple chooses Cingular as exclusive U.S. carrier for its 40.
revolutionary iPhone, Apple Inc. press release, www.apple.com/pr/
library/2007/01/09cingular.html, January 9.
2008, www.apple.com/iphone.41.
A. Hesseldahl, 2007, Take the iPhone apart, 42. BusinessWeek, www
.businessweek.com, July 2.
2001, Napster’s History, http://w3.uwyo.edu/~pz/nap2.htm.43.
2001, The history of the Napster struggle, www44.
.theneworleanschannel.com/news/457209/detail.html.
2003, Napster 2.0 to launch by Christmas, www.roxio.com/en/45.
company/news/archive/prelease030728.jhtml.
Ibid.46.
J. Ketola, 2003, Kazaa Plus service launched, www.afterdawn.com, 47.
August.
2008, Wikipedia, http://en.wikipedia.org/wiki/kazaa.48.
2006, Kazaa settlement, 49. BBC News, http://news.bbc.co.uk., July 27.
2003, Kazaa Usage Map, http://tools.waglo.com/kazaa.50.
N. Wingfield, 2004, Price war in online music, 51. Wall Street Journal,
www.wsj.com, August 17.
2008, http://musicstore.connect.com.52.
Y. I. Kane, 2007, Sony to challenge Apple in TV, movie downloads, 53.
Wall Street Journal, www.online.wsj.com, September 4.
2008, www.virgin.com/VirginProducts/Shopping/Musicdownloads54.
.aspx.
2008, iTunes now the number two music retailer in the United 55.
States, Apple press release, www.apple.com/pr/library.
2008, http://musicdownloads.walmart.com.56.
2008, http://music.yahoo.com.57.
B. Stone, 2007, Amazon and TiVo in venture to put downloaded 58.
movies on TV, New York Times, www.nytimes.com, February 7.
G. Sandoval, 2007, NBC says goodbye to Apple, hello to Amazon, 59.
www.news.com, September 4.
2008, CinemaNow Inc., 60. BusinessWeek, http://investing.
businessweek.com, March 14; 2008, www.cinemanow.com; 2008,
Wikipedia, http://en.wikipedia.org; A. Gonsalves, 2007, Information
Week, www.informationweek.com, July 18.
2007, The Walt Disney Studios to offer movie rentals on demand 61.
through Xbox Live starting now, MicrosoftNews, www.microsoft
.com/presspass, July 10.
2008, HP and Sony Pictures Home Entertainment announce 62.
manufactured-on-demand content licensing agreement, HP News
Release, www.hp.com/hpinfo/newsroom, January 24.
2007, Blockbuster acquires Movielink, 63. New York Times, www
.nytimes.com, August 9.
2008, Netflix and LG unveil video-on-demand service, 64. Appliance
Magazine, www.appliancemagazine.com, January 7.
2008, Netflix now offers subscribers unlimited streaming of movies 65.
and TV shows on their PCs for the same monthly fee, Netflix press
release, www.netflix.mediaroom.com, January 14.
Leipzig, 2007, PSP (PlayStation Portable) video download service, 66.
Sony Computer Entertainment Europe press release, www.scei
.co.jp/corporate/release, August.
2008, Wikipedia, http://en.wikipedia.org.67.

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No part of this work covered by the copyright hereon may be reproduced or used in any form except as may be permitted by the license terms herein.

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D. Pogue, 2007, High-speed video store in the living room, 68. New
York Times, www.nytimes.com, September 6.
J. Goldman, 2008, Motorola hangs up on handsets, www.cnbc69.
.com, January 31; A. Hasseldahl, 2008, Blackberry vs. iPhone:
Who wins? BusinessWeek, www.articles.moneycentral.msn.com,
January 3.
E. M. Rusli, 2007, Palm wilts, 70. Forbes, www.forbes.com, October 2.
A. Hesseldahl, 2008, Blackberry vs. iPhone: Who wins?71.
J. Goldman, 2008, iPhone vs. Blackberry: Apple launches new 72.
software, www.cnbc.com, March 6.
www.reviews.cnet.com/html.73.
N. Wingfield, 2007, Microsoft tunes its Zunes to catch up with iPod, 74.
Wall Street Journal Online, www.wsj.com, October 3, D8.
Ibid.75.
A. Cuneo, 2003, Apple transcends as lifestyle brand, 76. Advertising
Age, December 15.
2007, A bruise or two on Apple’s reputation, 77. BusinessWeek, www
.businessweek.com, October 22.
Ibid.78.
J. Quelch, 2007, How marketing hype hurt Boeing and Apple, 79.
Harvard Business, http://discussionleader.hbsp.com, November 2.
Ibid.80.
J. Smykil, 2007, 81. BusinessWeek names Apple most innovative,
http://arstechnica.com, May 6.
L. Gomes, 2006, Above all else, rivals of Apple mostly need some 82.
design mojo, Wall Street Journal, May 24, B1.
Ibid.83.
Cuneo, Apple transcends as lifestyle brand.84.
Ibid.85.
Ibid.86.
2007, In 3 months, iPhone sales top a million.87.
R. Stross, 2007, Apple’s lesson for Sony’s stores: Just connect, 88. New
York Times, www.nytimes.com, May 27.

Ibid.; 2007, Retail stores’ importance highlighted, http://89.
ifoapplestore.com, August 17.
Cuneo, Apple transcends as lifestyle brand.90.
www.apple.com/findouthow/retail/.91.
J. Boudreau, 2008, Apple tutorial classes help create bond with 92.
customers, The Mercury News, www.mercurynews.com, March 3.
Ibid.93.
J. Graham, 2007, Apple buffs marketing savvy to a high shine, 94.
USA Today, www.usatoday.com, March 3.
Wong.95.
Ibid.96.
Ibid.97.
C. Campellone, 2007, Apple and Volkswagen team up for possible 98.
iCar, http://media.www.theloquitur.com, September 20.
Ibid.99.
www.apple.com/ipod/nike/run.html.100.
E.C. Baig, 2006, Apple, Nike exercise iPods to track workouts, 101.
USA Today, www.usatoday.com, May 23.
2008, Nike, Apple plug iPods into gym equipment, 102. USA Today,
www.usatoday.com, March 4.
2007, Apple and Starbucks announce music partnership, Apple 103.
press release, www.apple.com/pr/library, September 5; http://www
.apple.com/itunes/starbucks.
N. Gohring, 2008, Apple beats Microsoft and Motorola in 4Q 104.
phone sales, IDG News Service, February 6.
Y. I. Kane & N. Wingfield, 2007, For Apple iPhone, Japan could 105.
be the next big test, Wall Street Journal Online, www.wsj.com,
December 19, B1.
2007, What makes a global leader? 106. India Knowledge at Wharton,
http://knowledge.wharton.upenn.edu/india, October 4.
M. S. Lasky, 2007, iPhone versus your phone: Tips to avoid iPhone 107.
envy, PC World, www.pcworld.com, June 27.
2008, www.gotvoice.com.108.

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