Analysis of Apple Inc.

Abstract

Basic understanding of market structures may help in the analysis or comparison of a company. In a variety of business scenarios, knowing the status and history of a company will assist in better formulating key decisions in order to gain a better understanding. Often comparison to businesses' key rivals may be necessary before a solid conclusion can be completed. Without such knowledge, one may review a business and deem it to be successful or profitable. However, with a more educated review of a company, different business decisions may be made. To better understand the details of a market structure and its key characteristics, I will analyze Apple Inc., one of the major primary sellers in the current smartphone market. Through the review and comparison of Apple Inc. the reader will gain understanding of firms in an oligopolistic market. Additionally, readers will see the impact of key characteristics, such as marketing, competition and interdependence on firms in this market structure.

Keywords: oligopoly, apple inc., market structure, analysis

Company

The company I selected for review is Apple Inc. The company was founded on April 1, 1976 by Steve Jobs and Steve Wozniak with the original goal of making computers that were user-friendly (Apple Computer, Inc., n.d.). . Even though they started the company in a garage in Los Altos, California, their sales jumped to $7.8 million in 1978.

History and Location

During its early years, the co-founders were focused solely on personal computers, eventually producing a PostScript laser printer and one of the first desktop publishing programs ever in the mid-1980s (Sanford, n.d.). The company continued to grow, however, the competition increased as well. According to A brave new world: The 1980s home computer boom (2018), user-friendly computers such as Sinclair ZX Spectrum, Acorn Electron and Commodore 64 were invading homes. In an effort to combat the competition, Apple Inc. successfully launched a new type of computer, the Personal Digital Assistant (PDA), in 1991. Unfortunately, due to poor hand-writing recognition the product did not sell very well.

Nearly a decade after unveiling the PDA, Apple launched their first iPod (The complete history of Apple's iPod, 2011). This portable music player is said to have revolutionized the music industry. In my personal opinion, the launch of this product line saved the company from extinction. While the company experienced reasonable success with their line of personal computers, they did not maintain a strong enough market share. However, as the leader in portable music players, they opened a completely new market niche and have held on to a considerable share of that market even with the addition of many competitors.

In 2007, the company continued to innovate with the release of the first iPhone (Leigh, 2018). Jobs reportedly took the time to make fun of the current smartphones on the market . and showed off how simple the iPhone was to control with simple touch gestures (Apple iPhone sales 2018, n.d.). Approximately 218 million iPhones were sold in fiscal year 2018, estimating that in the first quarter of 2018 iPhone sales accounted for about 70% of Apple's total 61 billion United States dollar revenue. Their success is evident based on the (approximately) $5 billion headquarters Apple opened earlier this year in Cupertino, California (Moore, 2018).

Primary Industry

Apple Inc. designs, manufactures, and markets mobile communication and media devices, and personal computers. It also sells various related software, services, accessories, and third-party digital content and applications (AAPL Profile, 2018). Apple additionally offer support services such as:

1. iCloud, a cloud storage service for music, photos, contacts, calendars, mail, etc.
2. iTunes, a media player and library
3. App Store, digital distribution platform for Apple products
4. Apple Music, music and video streaming service
5. AppleCare, limited warranty coverage
6. Apple Pay, a cashless payment service
7. Apple TV, connects to TVs and provides digital content
8. Apple Watch, personal electronic device

Customer base

The company serves consumers, and small and mid-sized businesses; and education, enterprise, and government customers worldwide. It sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, Book Store, and Apple Music. The company also sells its products through its retail and online stores, and direct sales force; and third-party cellular network carriers, wholesalers, retailers, and resellers. Apple Inc. was founded in 1977 and is headquartered in Cupertino, California.

The latest CNBC All-America Economic Survey reports that 64% of Americans now own at least one Apple product, and that the average U.S. household now owns an average of 2.6 Apple products. CNBC first asked the question back in 2012, when the numbers were 50% and 1.6 products (Lovejoy, B., & EU, 2017).

Major determinants of demand

Although Apple Inc. has a variety of products and services, they are still highly dependent on a consumer's income as well as their preference. Apple iPhones for example do have a huge amount of users that are so loyal to the brand; they are willing to still purchase the product as the price increases. This was proven last year when the newest iPhone to hit the market cost $1,000 (Bradshaw, September 2017). This new phone also revealed other determinants of demand, which is supply of components, which Apple faced in October of 2017 when it was not able to meet all of its customers' orders due to limited supply. After pre-ordering their phones, some customers waited more than 4 weeks to receive it (Bradshaw, October 2017). A final determinant is the price of related goods, in this case Samsung smart phone. While many customers were waiting 3-4 weeks for a new Apple product, others may choose to find a suitable alternative (Bradshaw, September 2017).

Demand elasticity

For the purpose of this section of the discussion, I will focus solely on the iPhone, which is one of the numerous products and services sold by Apple Inc. This makes sense since we previously learned that iPhone sales accounted for 70% of Apple's revenue. The iPhone would not be considered an essential good (a good without which you could not survive), however, its demand curve is almost that of an essential item. Meaning, an increase in the product price does not affect the demand very much. Consumers are almost willing to pay whatever the price is (Archanco, 2017). A different article suggested that since Apple is frequently releasing new models, that consumers have become less sensitive to price changes over time which is allowing Apple to price its products higher and higher (Kamesh, 2018).

Market Structure

Apple Inc is an oligopoly. An oligopoly is a market structure in which a select few companies have significant influence over an industry (Kramer, 2018). An oligopoly will have key characteristics including mutual interdependence, advertising and dealing with competition (Oligopoly and Its Most Famous Examples, 2018).

Interdependence

A recent study shows that the smartphone market is controlled by 3 major firms, Apple, Samsung and Huawei (Global smartphone market share 2018, n.d.). Each of these major players in the market must strategically coordinate their price increases and launches of new products with what the other firms are doing. Since the Apple iPhone was first released in 2007, there has been a new model released each calendar year (Haselton, 2017). This release structure requires the other major players in the market to modernize their products to keep their consumers interested.

Advertising

Advertising is a powerful instrument in the hands of an oligopolist. A firm under oligopoly can start an aggressive advertising campaign with the intention of capturing a large part of the market. (Top 9 Characteristics of Oligopoly Market, 2016). Advertising provides two key pieces, first attracting new customers to the firm's product and second keeping current customers from considering alternate products. In 2015 alone Apple Inc. spent $1.8 billion on advertising so clearly it is a huge part of being a major player in this market (Spanier, G. (n.d.).

Dealing with competition

Competition is another key characteristic of the oligopoly market structure since a move by one seller immediately affects the rivals (Top 9 Characteristics of Oligopoly Market, 2016). This requires all sellers to pay close attention to their rivals' actions so they are ready to counter-move. In the case of Apple, it was previously mentioned that they have a consistent schedule to release new products. This level of innovation requires its rivals to continue to release new devices with new features or quickly be made obsolete.

Pricing Power

Warren Buffet once said that pricing power was the ""single most important decision in evaluating a business,"" pointing out that ""if you've got the power to raise prices without losing business to a competitor, you've got a very good business"" (Sun, 2018). Buffet explains that Apple was a ""consumer product"" story instead of a tech one -- and that its loyal customers would keep paying premiums for the devices every year, even as the market became saturated with cheaper devices. Apple has proved their pricing power by consistently releasing a new product model each year and an increasingly higher price. Not only have the prices of the iPhone increased through the years, but the quantity sold has increased as well (Apple iPhone sales 2018, (n.d.).

Sales and profit growth

The sales and profit growth rates for Apple, Samsung and Huawei are listed below. These 3 companies are the top firms in the smartphone industry (Global smartphone market share 2018, n.d.). Based on the information provided in comparing these 3 companies, I believe they confirm the oligopolistic market structure for this industry. In 2015, Apple does well and they realize a profit growth rate of 35.14%. In this same year, Samsung has a -19.01% growth rate and Huawei has a -14.84% growth rate. This means when Apple is doing well and selling more to its consumers, the other two top competitors are seeing a decline in profit. Conversely, in 2016 Apple realized a -14.43% profit growth rate, while Samsung had 19.90% profit growth and Huiwei has 4.18% profit growth. This concurs with the iPhone sales per year, seeing a slight decrease in the number of devices sold in 2016 (Apple iPhone sales by year 2007-2018, n.d.). These comparisons also help us to see that Samsung is a significantly larger company based on the sales and profit numbers. This of course is because smart phones are not the only product these 3 companies produce.

Sales and profit growth per company

The sales and profit growth rate comparisons for each company.

The information calculated in the above charts was retrieved from these sources: (Apple Income Statement, n.d.; Huawei Income Statement, Samsung Income Statement, n.d.).

Federal investigations

The Department of Justice and the Securities and Exchange Commission did start an investigation in early 2018 on Apple Inc. iPhones to determine whether Apple Inc. violated securities laws concerning its disclosures about a 2017 software update that slowed older iPhone models. After a few weeks, Apple admitted to a software update that was designed to slow down the performance of older phones in an effort to increase battery life. As part of its public apology, Apple cut the prices of battery replacements in its stores to $29, a $50 discount (The Justice Department Is Investigating Apple for Slowing Down iPhones, n.d.).

Be sure that your final submission addresses each of the points above. In addition, be sure to proofread. Grammar and spelling errors will negatively impact your grade!

References

AAPL Profile | Apple Inc. Stock. (2018, November 20). Retrieved November 22, 2018, from https://finance.yahoo.com/quote/aapl/profile/

A brave new world: The 1980s home computer boom. (2018, January 20). Retrieved from https://www.historyextra.com/period/20th-century/a-brave-new-world-the-1980s-home-computer-boom/

Apple Computer, Inc. (n.d.). Retrieved from https://www.loc.gov/rr/business/businesshistory/April/apple.html

Apple Income Statement. (n.d.). Retrieved November 26, 2018, from https://quotes.wsj.com/AAPL/financials/annual/income-statement

Apple iPhone sales 2018. (n.d.). Retrieved November 20, 2018, from https://www.statista.com/statistics/263401/global-apple-iphone-sales-since-3rd-quarter-2007/

Apple iPhone sales by year 2007-2018. (n.d.). Retrieved November 26, 2018, from https://www.statista.com/statistics/276306/global-apple-iphone-sales-since-fiscal-year-2007/

Archanco, E. (2017, March 30). The Price Elasticity of the iPhone Demand. Retrieved November 23, 2018, from https://thetechnalyzer.com/price-elasticity-of-the-iphone-demand/

Bradshaw, T. (2017, September 10). Apple tests customer loyalty with $1,000 iPhone. Retrieved November 23, 2018, from https://www.ft.com/content/4a85a978-94ef-11e7-a9e6-11d2f0ebb7f0

Bradshaw, T. (2017, October 27). Demand for Apple's iPhone X exceeds supply. Retrieved November 23, 2018, from https://www.ft.com/content/11385c32-babb-11e7-8c12-5661783e5589

Global smartphone market share 2018. (n.d.). Retrieved November 26, 2018, from https://www.statista.com/statistics/271496/global-market-share-held-by-smartphone-vendors-since-4th-quarter-2009/

Haselton, T. (2017, June 29). Here's every iPhone released, in order, and what changed along the way. Retrieved November 26, 2018, from https://www.cnbc.com/2017/06/29/every-iphone-released-in-order.html

Huawei Annual Income Statement. (n.d.). Retrieved November 26, 2018, from https://quotes.wsj.com/CN/XSHE/000793/financials/annual/income-statement

Kamesh. (2018, March 18). Demand elasticity of iPhones – The Drake Equation – Medium. Retrieved November 26, 2018, from https://medium.com/the-drake-equation/demand-elasticity-of-iphones-1e3a7bbb9eac

Kramer, L. (2018, May 31). What are some current examples of oligopolies? Retrieved November 26, 2018, from https://www.investopedia.com/ask/answers/121514/what-are-some-current-examples-oligopolies.asp

Leigh. (2018, November 08). The History of the iPhone. Retrieved November 20, 2018, from https://historycooperative.org/the-history-of-the-iphone/

Lovejoy, B., & EU. (2017, October 10). 64% of Americans now own an Apple product, up from 50% in 2012. Retrieved November 22, 2018, from https://9to5mac.com/2017/10/10/cnbc-all-america-economic-survey/

Moore, A. (2018, February 21). Video shows drone crashing on to Apple Park's roof. Retrieved November 20, 2018, from https://www.macworld.co.uk/feature/apple/complete-guide-apple-park-3489704/

Oligopoly and Its Most Famous Examples. (2018, March 06). Retrieved November 26, 2018, from https://www.luckscout.com/oligopoly/

Samsung Annual Income Statement. (n.d.). Retrieved November 26, 2018, from https://quotes.wsj.com/KR/XKRX/005930/financials/annual/income-statement

Sanford, G. D. (n.d.). Apple-history.com. Retrieved November 19, 2018, from https://www.apple-history.com/

Spanier, G. (n.d.). Apple ad spend rises 50% to record $1.8 billion. Retrieved November 26, 2018, from https://www.campaignlive.com/article/apple-ad-spend-rises-50-record-18-billion/1370742

Sun, L. (2018, January 25). 3 Tech Giants with Incredible Pricing Power. Retrieved November 26, 2018, from https://www.fool.com/investing/2018/01/25/3-tech-giants-with-incredible-pricing-power.aspx

The complete history of Apple's iPod. (2011, October 25). Retrieved November 20, 2018, from https://www.cnet.com/pictures/the-complete-history-of-apples-ipod/

The Justice Department Is Investigating Apple for Slowing Down iPhones. (n.d.). Retrieved November 26, 2018, from https://fortune.com/2018/01/30/justice-department-apple-iphone-slow-down-investigation/

Top 9 Characteristics of Oligopoly Market. (2016, August 29). Retrieved November 26, 2018, from https://www.economicsdiscussion.net/oligopoly/top-9-characteristics-of-oligopoly-market/7342

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DONE:

- Identify the company by name and location

Apple - Cupertino, CA

https://www.loc.gov/rr/business/businesshistory/April/apple.html

https://www.apple-history.com/

https://www.cbsnews.com/pictures/apple-headquarters-cupertino-spaceship-campus/

https://www.businessinsider.com/apple-park-visitor-center-tour-photos-2018-6

Identify the firm's primary industry -- https://finance.yahoo.com/quote/aapl/profile/

oApple Inc. designs, manufactures, and markets mobile communication and media devices, and personal computers. It also sells various related software, services, accessories, and third-party digital content and applications.

Describe the firm's customers (households, businesses, schools, governments, etc...)

https://www.reuters.com/article/us-apple-results-users/apples-user-base-grows-but-analysts-probe-for-more-detail-idUSKBN1FM09R

https://markets.businessinsider.com/news/stocks/apple-stock-price-customer-base-still-has-long-runway-for-growth-2018-3-1019604731

Explain the major determinants of demand for the firm's primary product(s) or service(s)

https://www.thebalance.com/five-determinants-of-demand-with-examples-and-formula-3305706

Does the firm face elastic or inelastic demand with respect to its primary product(s) or service(s)? Why? Be sure to include a discussion of the key factors affecting the price elasticity of demand.

https://thetechnalyzer.com/price-elasticity-of-the-iphone-demand/

https://shireengantaylorian.blogspot.com/2013/06/apple-inc.html

How would you describe the market structure of the industry in which your firm operates? You should address the key characteristics of that market structure, and how those characteristics pertain to your company. Make sure that you pick the correct market structure and are able to relate the market characteristics.

Does the firm have pricing power? Why or why not?

https://www.fool.com/investing/2018/01/25/3-tech-giants-with-incredible-pricing-power.aspx

Calculate the company's sales and profit growth rates for the past three years. Do the same for the firm's key rivals. Have the firm's growth rates matched its rivals? Summarize the company's performance relative to its rivals.

https://www.nasdaq.com/symbol/aapl/pe-growth-rates

Has the Department of Justice (DOJ) or the Federal Trade Commission (FTC) taken action recently against this firm? Report any major findings.

https://fortune.com/2018/01/30/justice-department-apple-iphone-slow-down-investigation/

https://appleinsider.com/articles/18/05/10/justice-department-sides-with-apple-in-app-store-fee-antitrust-filing-with-supreme-court "

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