Innovation
Handout #9
A Closer Look at Apple's Business Model
By Alexander Schmid (March 3, 2014)
Apple Inc.’s business model is a fascinating case to look at. A close-up quickly reveals its complexity. Think of its hardware
(e.g., iMac, iPhone or iPad), its software (e.g., Final Cut Pro, Aperture or Logic Pro), its licenses (e.g., Apple Store
Merchandise, “Made for iPhone” (MFI)-Program), the App-Store etc. And Apple invests a considerable amount of cash flow in
the financial markets.
Apple knows more than one way to earn money, and it’s undoubtedly successful: In 2013, Apple generated revenues of about
$174 billion, which is a 5.7 percent increase compared to 2012. Apple’s quarterly revenues by product category are shown on
the right.
However, the Cupertino, Calif.-based computer manufacturer and seller will eventually face the same problem of market
saturation as do others in the industry, despite its strong brand and loyal evangelists. In North America for example -- Apple’s
home market -- the last quarter in 2013 brought no growth compared to the Christmas sales in 2012 (YoY). Accordingly, Apple
faces a strong pressure to innovate technologically, but also in terms of revenue sources.
And that’s what Apple is good at.
Recent developments by Apple support that trend. Or what do you think the fingerprint scanner is for? Security, surely. But
what security? Jim Edwards’ headline on Business Insider puts it straight: “The Fingerprint Scanner On The New iPhone Is
About Money, Not Security.” Through the fingerprint scanner, the smartphone becomes the key to the mobile wallet, according
to Edwards. It significantly increases consumers’ trust in mobile payment methods, including app store or in-app purchases, but
also payment over near field communication (NFC).
For the future, this would mean no more credit card swipes, signatures and passwords. The potential behind this is astonishing.
By now, Apple makes a substantial amount of money as a digital retailer. Strengthening its vendor lock-in, in 2013 customers
spent more than $10 billion at its App Store.
Furthermore, the growth figures indicate it to be a sustainable pillar of Apple’s business. Year-over-year comparison by quarter,
no other Apple product category has grown so steadily throughout 2013 as the e-commerce. On average, it was more than 20
percent (see figure on the left).
Considering the revenue streams of Apple, the “Touch ID” is a promising step to secure its business model of providing
computer hardware. No other tech company controls the value chain from hardware manufacturing onto the software, including
the physical stores and the e-commerce platforms, as well as Apple.
Seems to be a good starting position for the future.
Retrieved from: http://scn.sap.com/community/business-trends/blog/2014/03/03/a-closer-look-at-apples-business-model
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Apple's Business Model Is Backwards — And It Works Like Crazy
By Chris Taylor (Oct. 24, 2013)
Give away the razor handles, make money on the razor blades. That was received wisdom in business for much of the 20th
century: If you hook your customers with a free or very cheap product below cost, you can charge a lot more for the necessary
add-ons to that product.
Videogame companies have been doing exactly that for years: sell the consoles for less than what they cost to manufacture,
then offer games for $50 a pop. The whole PC ecosystem was arranged this way: laptops and desktops were as cheap as you
could make them, while users spent the big bucks on theirWindows, Office and other software licenses.
But what became abundantly clear at the iPad Air launch event yesterday, where Apple announced that Mac OS X Mavericks
and iWork would be free, is this:Apple has the exact opposite business model, and it is doubling down on it. Its equivalent of
razor handles (Macs, iPads, iPhones) will always be the big ticket item. They will never be discounted. But once you've bought
one, Apple will supply a constant stream of excellent razor blades — the apps, and now the OS itself — for free.
Legions of management consultants will tell you this shouldn't work. But it has worked like crazy so far. And if Apple's latest
twist on it succeeds, the big question is how its competitors — software companies, for the most part — will strike back.
Steve Jobs' Dirty Little Secret
When did Apple adopt this business model? It started with the iPod in 2001. Prior to the iPod, MP3 players had been hideous
and hard to use; they looked like compact disc players or bricks. The iPod had far less storage than they did. It was far more
expensive, at $399. And suddenly everyone wanted one.
Two years later, Steve Jobs introduced the iTunes Store, selling songs for 99 cents a pop. That seemed low at the time, and I'll
never forget what Jobs told me when I pointed that out. "The dirty little secret of all this is there's no way to make money on
these stores," he said — because 65 cents of each song went straight to the music company. The rest barely covered Apple's
overhead. Why not jack the price? "Because we're selling iPods," Jobs says, grinning.
Apple has stayed on that trajectory. Its hardware would be the must-have luxury item, no matter how many times analysts told
the company it needed to produce entry-level products. The iPad mini is the most expensive 7-inch tablet out there. The cheap
and cheerful iPhone 5C is the closest Apple has ever come to a cut-price product (and consumers, it seems, aren't all that keen).
But the iOS is forever free, iWork and iLife are free with purchase, and paid apps are on life support.
Now the same story is playing out on the Mac side, too. We're meant to lust after the luxuriously produced Mac Pro and
Macbook Pro; even the entry-level Macbook Air is a highly-machined, thousand-dollar thing of beauty. But once you're inside
the walled garden, it seems, you will now get every Mac OS update for free.
The price of Mac OS X has been declining for years; Mountain Lion brought it as low as $29. We should have seen free
coming.
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Make More Free
There are areas where the company isn't implementing this strategy as aggressively as it should. The most obvious: iCloud. A
paltry 5GB of free storage, when Google offers 30GB and Microsoft gives you 200 GB of free storage? C'mon, Apple. (The
downside to Microsoft's offer: you have to buy a Surface.)
It's cool that Pages, Numbers, Keynote and Garage Band are free with any new Mac or iOS device. But if Apple really is trying
to challenge Google Docs with its iCloud collaboration, then Pages at least should be free for everyone.
Then there's iTunes Match — which not only needs to be free, but given its history of errors (my Mac at home is stuck
uploading the same songs to Match, no matter how many times I reset it), we should probably be paid to use it.
Retrieved from: http://mashable.com/2013/10/23/apple-free-software-expensive-hardware/
--------------------------------------------------------------------------------------- -----------------------------------------------------------------Samsung versus Apple: Dueling business models
By Marc Brien, VP Research, DOMICITY LTD. (January 4, 2013)
Samsung versus Apple in smartphones, tablets and other cloud access devices is a battle that is increasingly inflaming the
imagination of the business press and other industry observers. It is also interesting to watch the changes that the struggle is
driving in the Samsung and Apple business models.
The ascent of Samsung Electronics is something we have been analyzing for a long time. Domicity’s report, The Rise of Korea
in the Electronics Market, was published back in 1988. Even then, it was clear that Samsung was a breed apart and would
become a significant thorn in the side of the global IT and electronics establishment.
After defeating the Japanese leaders in both semiconductors and consumer electronics, an emboldened Samsung is now intent
on biting into Apple’s share of the smartphone, tablet and PC markets. Samsung is clearly causing Cupertino problems, as
evidenced by a rolling series of Apple lawsuits against the Korean behemoth.
The Apple business model
Apple and Samsung Electronics are vying for the same prize using significantly different business models. Apple’s is a
classic virtual integration model, with a high proportion of the inputs for its products sourced from external suppliers. Samsung
is currently the most vertically integrated supplier in the electronics market, particularly focused on building price-performance
competitiveness through internal development and supply of key component inputs.
Take a look at the table below which compares the Apple and Samsung income statements for the four quarters of calendar
2012 and at the graph which compares each company’s cash from operations over the past five calendar years.
Apple has been able to keep R&D and Cost of Revenue expenses relatively low as a proportion of Revenue by outsourcing
most aspects of the hardware piece — component production as well as assembly. Outsourcing hardware provision radically
reduces the amount of money that Cupertino must lay out for R&D and capital expenditures.
Margins are kept high by focusing on a few sleekly designed premium-priced products. These are designed to effectively
showcase its highly-featured, proprietary software architecture. Demand for Apple products is skillfully stimulated through
leading-edge advertising and promotion and a sales strategy that has turned the company’s glossy retail outlets and reseller
counters into one of the places to be.
One quibble with the Apple business model … it is high risk. All of the company’s relative handful of eggs are in the
consumer cloud and the cloud access device basket.
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Apple’s level of risk is beginning to increase. Its outsized profits and growth are attracting fierce competition from: Google and
the Android ecosystem, Microsoft and its Windows partners, and last but far from least, Samsung. The Korean giant has placed
a large foot in both the Windows and Android/Chrome camps. It is also promoting its products as the lead mobile platform for
the newer Tizen (promoted with Intel) and Ubuntu Linux operating system alternatives.
The Samsung business model
Apple has made focus a virtue. The company gets virtually all its revenue from cloud access devices, plus related peripherals
and services.
The Samsung business model is more cautious. Following in the footsteps of a strategy pioneered by NEC, Sony and other
Japanese producers, the Korean leader’s strategy features a high level of vertical integration through a strong semiconductor
and components business.
The components sector feeds multiple downstream product markets. Samsung Electronic’ s strength in flat panel displays, plus
memory, logic, sensors, LED light sources, lithium ion batteries (through a sister company) drives competitiveness in a range
of downstream product units: mobile phones, tablets, and PCs; laser printers and MFPs; infrastructure equipment for cellphone
carriers; digital cameras; TVs and related visual display products; plus refrigerators, washing machines and other “digital”
household appliances. Strength in components will also enable expansion into new fields such as medical electronics, or
even data center hardware.
The upshot is that instead of getting all its revenue from cloud access devices and related services, like Apple, cloud access
devices and related markets only account for a bit more than half of Samsung’s total revenue.
Samsung overpowered its Japanese competitors over the past twenty years by outspending them in most areas of the value
chain, in particular R&D, capital expenditures, marketing and promotion, sales channels. The company is now leaning on the
same formula in its fight with Apple. Even though revenue levels for the two companies were comparable, in calendar 2012
Samsung spent:
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
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$10.0-billion on R&D to Apple’s $3.6-billion
$29.5-billion on selling and administrative costs (SG&A), which included $11.3-billion for advertising, promotion
and other marketing expenses; by comparison Apple’s SG&A spending was $10.3-billion for calendar 2012, with
approximately $1.0-billion for advertising
$20.0-billion on capital expenditures versus $10.4-billion for Apple
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
While it is true that Samsung’s spending in these areas is spread across all of its main business lines, it is also true that a
growing proportion of resources are being devoted to the universe of cloud access devices and related software, peripherals and
services, where Apple plays. As well, some of the capital spending and R&D money that is invested in other business lines,
notably the components businesses, strengthens Samsung’s competitiveness in cloud access devices. Investment in broadband
mobile phone infrastructure helps Samsung learn which direction cell phone operators want to take wireless networks.
Samsung’s business model comes with a cost. High spending on R&D and factories for its components and a diversified range
of downstream products provide long-term stability. But it also means Samsung, at the moment, cannot hope to achieve the
same rate of company-wide profitability as Apple, with its tight focus on a narrow set of products. However, if Samsung’s
formula works as well as it has in other markets, its heavy investment in R&D, capital expenditures, marketing, and sales
channels will steadily sap Apple’s market share and much of its profitability, signs of which are beginning to appear.
Samsung versus Apple: both are having to tune their business models
Like other market players, Samsung is finding Apple’s level of growth and profitability irresistible, causing it to throw some
caution to the wind. At the risk of losing a degree of diversification, Samsung is devoting more resources to the cloud access
device market and tilting its overall business in that direction.
Samsung’s revenue from smartphones, tablets, PCs, and related peripherals — Apple’s addressable market — grew from
roughly 40% of total company-wide revenue in its 2008 December quarter to more than 55% for the same quarter in
2012. Skewing its business model in favor of cloud access devices means that Samsung Electronics is spending even more
R&D, capital expenditure and marketing money on related technology, and related supply and demand chain activities.
Competing with Apple is also driving Samsung to invest at accelerating levels in software and cloud-based value-added. One
key goal of these efforts is to be able to pull sensor-generated data from all Samsung mobile and consumer electronics products
— data that can be sold to various types of business partners. Another goal is to better integrate the universe of Samsung
mobile and consumer electronics products, in the manner of Apple’s generally well-integrated product portfolio.
Apple still enjoys a lead over Samsung in cloud access device and related revenue. In calendar 2012, Apple’s revenue was
$165.7-billion compared to approximately $90-billion for Samsung across the same universe of products. But, it is the
difference in operating income that really explains why Samsung appears so targeted on Apple’s market share. For calendar
2012, Apple’s operating income was some $55-billion while Samsung’s OI for the similar range of products was less than $19billion. Apple’s extreme profitability will drive Samsung to continue its focal shift in favor of cloud access devices (and related
components, peripherals and services) at the expense of its other downstream businesses.
As the Samsung versus Apple battle intensifies, Apple is also being forced to make some changes. Samsung’s immense
strength in semiconductors, flat panel displays, and batteries provides the wherewithal to build superior hardware. It also turned
Samsung into Apple’s most important components supplier. Apple reportedly purchased some $8-billion of Samsung
components in 2012. Every time Apple sells an iPhone or other product, it puts money in Samsung’s pocket. The reverse is not
true.
And the high degree of reliance on Samsung as a components supplier has given its Korean rival a window into Apple’s
product development and production plans.
Apple is clearly unhappy with helping to fund Samsung’s assault on its market share and with providing insight into its product
planning. Cupertino is countering by becoming more involved in the design of the components in its products (discussed in our
next post) and by signing up alternative suppliers to replace Samsung components in its supply chain. This strategy is not
without risk. Apple is swapping out parts from the strongest components supplier in the market, in favor of those from lesser
suppliers that Samsung has bested. (Nokia is also reportedly working to drive Samsung components out of its supply chain.)
As well, Apple must continue to strengthen its software and cloud offerings in the face of competition from Samsung partners,
Google and Microsoft. The doomsday scenario for Apple is if Samsung can grab a significant lead in hardware and if Google
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and/or Microsoft, develop superior software and cloud offerings. Apple is already experiencing great pressure from Samsung
Android phones and tablets. Windows 8 on Samsung PCs, smartphones and tablets may yet become a problem.
In this battle of sharply differentiated business models, Apple has been setting the pace. But Samsung is on the move and
continues to impress 25 years after Domicity’s original report on the Korean electronics industry. It does not take too much of a
stretch to envision Samsung ultimately overtaking Apple in the race for cloud access device market share leadership. This
would be accomplished by offering superior hardware platforms that effectively leverage the cloud software and services
ecosystems of Google, Microsoft, and others.
Retrieved from: http://www.domicity.com/2013/04/samsung-versus-apple/