The Apple iPhone
IDIS 619
Capstone Assignment
By
Harsh Jagpal
Brajesh Upadhyay
Subbaratnam Malladi
Tim Tang
Ajay Nilaver
January 10, 2007
DOW JONES REPRINTS
Apple Storms Cellphone Field
Cingular to Offer Service For High-End iPhone;
Obstacles: Price, Rivals
By LI YUAN and PUI-WING TAM
January 10, 2007; Page A3
The long-awaited announcement that Apple Inc. would offer a media-playing cellphone -- dubbed
the iPhone -- sent ripples through the telecom industry and pushed Apple's stock to a high, but it
also raised questions about the company's strategy to parlay its successful iPod music player as an
entry in the cutthroat handset market.
The device, priced up to $599 in addition to a two-year cellular service contract, allows users to
download and play iTunes music, browse the Web, send email and make calls. Equipped with a wide screen and a twomegapixel camera it can also link wirelessly to music headsets, stereo systems and Wi-Fi networks.
The iPhone, scheduled for release in June, could be a boost for AT&T Inc., the world's largest telecom operator, and its
Cingular Wireless unit, which has an exclusive multiyear deal for the U.S. market to provide cellphone service for the
device. The phone will be sold at Apple and Cingular stores, as well as on each company's Web site. Cingular hopes the
phone will attract high-end customers and give it an advantage over rival Verizon Communications Inc., which also is
trying to reposition itself as multimedia service provider.
The iPhone is the latest example of how lines between the entertainment and telecom industries are blurring. Verizon
Wireless recently began offering YouTube videos on cellphones, while Sprint Nextel Corp. produces its own TV
shows for cellphone screens. Comcast Corp. and other cable companies, are offering Internet calling services and have
partnered with Sprint to offer wireless service and television for cellphones.
The market for high-priced multimedia wireless devices has been growing fast. For example, BlackBerry wireless
email devices have been selling for several years for as much as $400 without such features as cameras or music
players. Consumers have also been willing to pay a premium for well-designed handsets, such as Motorola Inc.'s
RAZR, as a fashion statement. In Europe and Asia, where carriers don't subsidize handsets as much as in the U.S.,
many consumers pay upward of $500 for the latest handsets. What's more is that Apple's design and strong brand name
have allowed the company to charge more than its rivals for items from laptops to music players. And Cingular is
expected to promote the phone aggressively.
At this price point, "if anybody could pull it off, it will be Apple," says Hugues de la Vergne, handset analyst of the
research firm Gartner Inc.
However, whether the iPhone can match the success of the iPod remains to be seen. One potential stumbling block: The
price tag is high for the U.S. market, where as much as 80% of handsets sell for $99 or less, Mr. de la Vergne said.
Analysts say Apple is unlikely to lower the phone's price because it doesn't want to cannibalize its iPod business.
And while the iPhone appears unparalleled in its design, many equipment makers have pushed in the same direction:
SonyEricsson's Walkman phone, which sold more than 15.5 million units by the end of September, has a camera, video
and music player and a phone, for example, and one model is available free with some cellphone service subscriptions.
Motorola last week warned investors its 2007 revenue and profit would fall short of its own forecasts, even after the
company sold more than 50 million RAZR units. The price of the RAZR fell from
$500 to being offered free with service contracts. Apple could face a similar price
pressure over time, some analysts suggest.
Entering the cellphone market also carries risks that have left other large tech
companies bloodied. Microsoft Corp., for instance, had a tough time breaking into
the market with its cellphone software platform and still hasn't made significant
inroads into the market.
Apple also is wading into a market with very different dynamics from the consumerelectronics market in which it plays. While Apple is used to connecting directly with
customers through its stores and its Web site, access to consumers in the cellphone
market is largely controlled by wireless carriers.
Apple's historical model -- relying on sales of hardware -- would also be tough to
replicate in the cellphone industry, where carriers typically lure customers by
discounting handsets and earn most of their profit from the service. It also will be dealing with intense competition:
Many sub-$100 phones already offer music-playing capabilities. "Wireless is hard," says Mike Abramsky, an analyst at
RBC Capital Markets. "Success in this industry has confounded other companies like Microsoft and even Motorola at
times."
Apple's iPhone will compete in an increasingly crowded field of high-end smartphones that include Motorola's Q,
Research in Motion Ltd.'s BlackBerry Pearl and Palm Inc.'s Treo 750, all released in the past year and are targeted at
the consumer market.
Of course, Apple has a trump card: a loyal following in the downloadable music world. Apple introduced its iPod
player five years ago, and bolstered the device by creating an iTunes music store where consumers can download songs
for 99 cents. In recent years, Apple has added other content onto iTunes, including network TV shows such as
"Desperate Housewives," movies and music videos.
Adding to the drama of the iPhone's unveiling, which was shrouded in secrecy through the course of two and a half
years of development, the debut took place at the same time that the giant Consumer Electronics Show -- where Apple
rivals such as Microsoft typically put on a big show -- was unfolding in Las Vegas, dividing the attention of the tech
world. And to reflect its new role in the tech world, Apple changed its corporate name from Apple Computer Inc. to
Apple Inc.
As the iPhone announcement sparked fears that Apple, Cupertino, Calif., would steal market share, the stocks of
competitors dropped. Shares of RIM dropped 7.9%, while those of Palm dropped 5.7%. Shares of some larger telecom
equipment makers dropped as well, though not drastically. After the news, Apple's stock rose $7.10, or 8.3%, to $92.57
in 4 p.m. composite Nasdaq Stock Market trading.
--Sara Silver and Nick Wingfield contributed to this article.
Write to Li Yuan at li.yuan@wsj.com10 and Pui-Wing Tam at pui-wing.tam@wsj.com11
URL for this article:
http://online.wsj.com/article/SB116836172312771508.html
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I (B): Executive Summary
Strategic move – Apple, with Cingular as its exclusive service provider in the US, has entered
the mobile phone handset industry with introduction of its high end mobile phone handset names
iPhone, and essentially created a consumer smartphone segment. Apple’s move seems to have
caused the existing major mobile handset manufacturers to introduce there own consumer-centric
smart phones with high “user experience” features.
Key issues: The following are the key issues facing Apple and Cingular which may impact the
adoption of iPhone:
1. Launch of similar products by other mobile phone manufacturers could have the impact of
flooding the market with high-feature smart phones and diluting iPhone’s value proposition
2. So far, smartphones have been targeted more towards business users than consumers. It is not
clear as to how consumers might react to the iPhone upon its scheduled launch in June ’07
3. As compared to existing smartphones, the iPhone lacks some important features such as 3G
capability, security features, enterprise productivity applications support, expansion slots and
an open platform that allows compatibility with 3rd party software
4. The iPhone’s price points are higher compared with other handsets in this already subsidized
mobile phone handset industry
5.
The duration of the exclusive contract between Apple and Cingular is not clear and is
leading to speculation on the kind of partnership strategy that the firms are opting for – e.g.
Window or Option.
Final recommendations:
Short Term Recommendations: (1) Facilitate streaming content between iPhone and
iTunes to enhance value proposition;(2) Design Apple iPhone for CDMA subscribers to expand
market share and lock out competitors from entering into partnership with CDMA service
providers; (3) Offer capability to seamlessly switch between cellular and WiFi networks to
enhance value proposition to consumer.
Long Term Recommendations: (1) Enhance relationship with Cisco to enter into
corporate world with enhanced security and enterprise applications; (2) Enter into alliance with
Microsoft and third part ISV’s to enhance enterprise capabilities to enter into corporate world;
(3) Tightly integrate products and services of Apple iPhone, Apple TV, at&t to offer two-way
streaming audio-video content, so that Apple and Cingular offer a solution rather than a product.
II EXTERNAL ANALYSIS
II (A): Industry Definition
The Apple iPhone competes directly in the smartphone segment of the handset industry.
It combines an iPod, a smartphone and an internet communicator in one devicei. Unlike other
smartphones however, it lacks enterprise level features including support for enterprise business
software and security support thus making it unsuitable for corporate smartphone users. It
appears Apple is attempting to carve a new market segment – a smartphone for mainstream
consumers. Its exclusive partnership with Cingular will indirectly influence the wireless service
provider industry as subscribers start moving from other service providers to Cingular. The
Apple iPhone is expected to be introduced in the US in June 2007 in partnership with Cingularii
Wireless. Introduction to Europe is planned for late 2007 and Asia in early 2008.
Note on organization of Sections II & III: To improve the readability of the paper, Sections II
and III have been organized as follows: Part A focuses on Handset Manufacturers and Part B
focuses on Wireless Service Providers. However, since Macroeconomic Environmental Forces
Analysis provides the best insights when done holistically for both industries, we’ve started the
next section with this analysis. This is followed up with external and internal analysis of the
handset industry and wireless service industry. The Strategic Analysis section ties up the key
insights gained from these into a cohesive picture leading up to the final recommendations
II (C): Macro Environmental Forces Analysis, Economic Trends and Ethical Concerns.
1) Global trends: Wireless communication continues to be the hottest sector in the information
technology market today. The International Telecommunication Union (ITU) has “announced
that global cell phone usage has doubled over the past four years to nearly 1.5 billion consumers”
iii
. While the market penetration in the US is about 70%, there are certain European markets like
UK, Netherlands and Sweden, where the market penetration is almost 100%iv. The sales in the
high revenue markets of US and Europe are driven primarily by handset replacement with
consumer desire to gain access to new features driven by technological innovation. The handset
market grew by 11% in 2004, with most of the growth driven by young consumers, for whom
new technology promises new and more exciting social applications driven through cell phonesv.
The emerging markets (such as India, China, and Russia) on the other hand are not yet saturated.
In India for example, five million new subscribers signed up every month in 2005, while China
experienced a growth of 30% over the same time periodvi. Here, the primary driver for handset
sales is price due to the local economic conditions. However, as the market penetration in these
economies increases, there continues to be increased demand for additional feature offering.
These emerging markets promise a great growth potential for both the handset and wireless
service industries (accounting for 56% of all cell phone users and 79% usage growth as of 2006,
according to ITUvii). The potential of these markets is further highlighted by the fact that current
market penetration in India is less that 4% of the population, while in China it is 25% of the
populationviii.
2) Social trends: Cell phone and wireless service industry continue to present a great promise of
technology convergence. Globally, cell phone users continue to evolve as customers demand
handsets to be the multi-faceted communication device with support for new features (such as
camera, MP3 and video player, internet access, instant messaging, email access and other
entertainment content) as an integral part of the product and service offering. While certain
features like instant messaging continue to be more popular in certain countries and cultures (for
example in Europe and Japan) due to social etiquette, other features like music, video and game
playing have found worldwide acceptance. According to industry analysts at Jupiter Research,
mobile music downloads will generate more than $14 billion in global revenues by 2011, with
North America accounting for 18% of this revenue, up by 4% in 2006 ix. Also in Japan, for
example, there is a growing trend of listening to books and novels on cell phones, driven by
service plans that offer unlimited data transmissions at fixed reasonable rate. According to a
publishing company in this product category, sales of electronic books in Japan in FY05 doubled
to ¥9.4 billion from the previous year. There is also a growing global trend of cell phone users
discontinuing landline phone access with 22% of the cell phone users not using a landlinex at all.
This increases the usage of minutes of cell phone users and they tend to purchase more expensive
monthly minute packages, thus providing more revenue potential to the wireless service
providers. New, trendy, compact, high-end cell phones are also used as fashion accessories and
to reflect wealth and social status. In the US, there is a growing share of prepaid mobile users,
with the number of prepaid users doubling between 2002 and 2005 to about 28.9 million users
and
representing
about
15%
of
all
wireless
subscribers
in
2005,
according
to
Telecommunications Industries Association (TIA)xi. This has had a negative impact on revenues
for the wireless service provider industry. There is also an increasing usage of family plans,
which increases the subscribe base, but cuts significantly into Average Revenue Per Unit
(ARPU), a critical metric used by the wireless service industry to gauge the revenue generated by
a customer handset (the ARPU seeks to inform the service provider how effectively it is
leveraging the customer’s revenue potential).
3) Technological trends: Cell phone handsets have outpaced the rate of growth of wireless service
providers, since the year 2003 when the initial technological innovation of the camera phone
came out in the global market (Please see Exhibit II (C) 3: Technological Trends). Since then,
there has been an increased focus on providing data services like email, instant messaging and
high speed internet access. Data services have become an increasing part of the revenue pie of
service providers. As consumers are becoming increasingly dependent on using their handsets as
full-fledged communication devices rather than just cell phones, service providers are setting up
new network infrastructures to provide faster and better quality access to. An example of this is
the move by US service providers from 2G networks to 3G networks in 2005-2006 (like
Cingular, Verizon, Sprint and Nextel). The performance between a 2G and 3G network is
analogous to a move from dial-up internet to broadband internet accessxii. China recently
announced that it is in the process of conducting field tests for its 4G network and has put it into
trial commercial use until 2010xiii.
4) Governmental trends: In the US, the main regulatory role of the government in the wireless
industry is to allocate frequency bands for wireless communication. The US government agency
performing this function is the Federal Communications Commission (FCC). In recent years, the
US government has started auctioning specific frequency spectrums and generating handsome
revenues in the process. In August 2006, FCC’s auction of 1,122 licenses for advanced wireless
services (which would merge with 3G network and could be used for fixed or mobile broadband
applications) lead to total bids worth $13.6 billionxiv. The Chinese government has further eased
its regulations by offering licenses for 3G networks in order for state-owned phone companies to
prepare services in time for the 2008 Olympics in Beijing.
5) Ethical trends: The advent of wireless communication for data exchange has raised some serious
ethical issues related to security considerations. In 2004, a hacker “gained access to servers at TMobile systems for at least a year and used it to monitor U.S. Secret Service email, obtain
customer passwords and social security numbers, and download candid photos taken by sidekick
users, including Hollywood celebrities"xv. With the increased adoption of wireless networks in
areas like medical and financial information exchange, there is a whole industry that is evolving
and developing security solutions to secure this kind of data exchange. There is also the issue of
access to privacy with regards to consumer records, especially in the light of 9/11 attacks. There
is still a lot of work to be done, with regards to striking a balance between providing security,
and maintaining privacy of the consumer.
7) Demographic trends: According to figures from TIAxvi, from 2000-2005, the United States
population grew by 4.7%, while the mobile phone subscriber base grew by 100.3%. Research
shows that the highest penetration in the cell phone market is on account of the younger
generation, who are more active users and early adopters of new technological innovations. This
is because more individuals in the same household, namely spouses and children are buying new
phones. Data from Simmons Teen Survey indicates that cell phone use among teens has
increased from 37% in 2003 to 47% in 2005xvii. Research also highlights the importance of target
marketing to certain minorities in the US such as the Hispanics as they spend 50% more time on
cell phones than do Caucasians and also tend to more actively use multimedia features such as
camera, video, and internet accessxviii. The most important criteria when selecting a wireless
service are availability of free minutes in the plan, other family members that use the same
service provider and network quality. Income also plays an important role when it comes to
phone selection, with high median income members purchasing more expensive handsets. As
shown in the graph (Exhibit II (C) 2 (a) – Usage and Significance of Cell Phones) from
Mintel/Greenfield Onlinexix, with 35% of the population in the 25-44 years age group opting to
use a cell phone as their primary mode of communication, landlines are being rapidly substituted
by cellular phones. From another Mintel/Greenfield Online survey (Exhibit II (C) 2 (b) –
Reasons for choosing a cell phone), we conclude that across all age groups, consumers prefer to
opt for the phone that comes free (or is relatively inexpensive) with a phone plan. This is
followed by other criteria such as the look of the phone and the features which it offers (like mp3
player or a camera). It seems that almost two out of five consumers (Exhibit II (C) 2 (d) –
Reasons to change mobile phone service) are happy with their wireless service provider and are
not keen on changing service. But what is really interesting is that while almost 25% of the
consumers are not happy with their wireless service provider, they do not wish to switch
providers due to the hassle of deactivating their current account and activating a new one with
another service provider. This would typically involve cancellation penalties with the existing
provider and a new 1- or 2- year lock-in with the new provider. Based on a study of the features
used by genders (Exhibit II (C) 2 (d) – Usage of Mobile Phone), we conclude that besides the
basic functions of storing numbers and accessing voicemail, the other features like playing MP3
songs, taking pictures and playing games are still minimally used by most consumers. What is
also striking is that there is greater interest in data transfer related features (Exhibit II (C) 2 (f) –
Would like to use mobile features) as opposed to playing MP3 songs and videos. To conclude,
there continues to be a significant worldwide increase in adoption of mobile technologies. Firms
see new opportunities to compete in complementary services like providing streaming music,
video and data.
Part A – Handset Manufacturing Industry
II (B): Five Forces Analysis
The Level 1 and 3 analyses below use the following framework:
Each factor in each force, is scaled from 1 through 5, with 1 having a favorable impact on
the profits of the industry while 5 having an unfavorable impact on the profits of the industry. All
the factors for each force are prioritized and assigned a % weight with regards to its perceived
importance, and then a sum of weighted averages is taken for all factors to come up with an
overall rating between 1 and 5 for each force. This process is repeated for the Level 3 analysis to
come up with an overall attractiveness of the industry.
II (B) 1 & 2: Level 1 & Level 2 Analysis
Please see Exhibit II (B) 1 & 2 – Part A for a detailed Level 1 & Level 2 Analysis
II (B) 3: Level 3 analysis
From the levels 1 and 2 analyses, we conclude that the handset industry is in a mature
phase in established markets such as US and Europe while it is in a growth phase in emerging
markets like India and China. Overall, the handset industry is commoditized in the US and
Europe in the low-end segments and firms are increasingly competing on the basis of product
differentiation in the high end handset segment. In India and China, the infrastructure is still
being established to gain a higher market penetration. There is also an increasing role of
complements in the overall value proposition for the handset industry. Due to shrinking profit
margins, increased buyer power, availability of substitutes, and increased commoditization
(especially in the high volume handset segment), the overall handset industry is moderately
unfavorable, with an overall rating of 3.4 out of 5.
Competitive Force
Threat of rivalry
Effect on Industry
Moderately unfavorable, 3.4
Rank
4
Weight
20%
Barriers to entry
Supplier power
Buyer Power
Power of substitutes
Complementor Power
Overall
Moderately unfavorable, 3.6
Moderately favorable, 2
Moderately unfavorable, 3.6
Unfavorable, 4.2
Moderately favorable, 2.4
Moderately unfavorable, 3.4
6
5
1
3
2
15%
5%
35%
15%
10%
II (D): Competitor Analysis
II (D) 1: Firm’s Competitors
With the introduction of the iPhone as a new product in an existing industry category of
smartphones, Apple adds new competitors to its existing list of competitors. In his keynote
speech, Steve Jobs indicated that Apple plans to get 1% of the worldwide market share of the 1
billion cell phones which equals to 10 million units by 2008. Several players exist in the handset
manufacturing industry. Based on data (Exhibit 2D – Worldwide Handset Manufacturer Market
Shares (Yr. 2006 – By number of phones sold) from various sources, Nokia holds the number #1
position worldwide, followed by Motorola, Samsung, Sony Ericsson and LG. The CR 5 ratio is
80.6% while CR3 is 67%. Please see Exhibit II (D) 1 for the market share and the number of
handsets sold by these handset manufacturers.
II (D) 2: The firm’s primary competitors
Using the utility framework, the handset industry can be segmented as follows:
Basic: Users who use their phones to make and receive calls and text messages
Advanced: Along with the basic functionality, users who like to have added features such as
Radio, Games, Calendar, Camera, etc.
Fashion Conscious: This segment cares more about the look-and-feel of the product and buys
handsets (or replaces them) according to current fashion trends
Convenience: This segment cares more about carrying a single device that has features (WiFi,
GSM, Web Browser, emails). Smartphone fits into this category
Music Lovers: This segment contains people who like to listen to music and would prefer to have
the ability to play songs integrated into the handset
Corporate users: This segment contains those users who want to access corporate information
from anywhere. The RIM Blackberry fits into this category.
Based on this segmentation, we can now place the handset manufacturers in different
segments (Please see Exhibit II (D) 2 for this information). Based on the exhibit and the market
share information discussed earlier, Apple’s main competitors are:
Nokia, Motorola – as these firms have leading market share in handset industry
Palm, RIM – as they are the closest in functionality to Apple’s smartphone
LG and Samsung – as they have recently unveiled new product designs that have the look and
feel of an Apple iPhone
Sony Ericsson – as they integrate a cell phone and walkman style player and targets music lovers
II (D) 3: Business Level & Corporate Level Strategies & II (D) 4: Value and Cost Drivers,
Resources and Capabilities, Products and Number of Product Markets served
a) Nokia
Corporate and Business Level Strategy: Nokia has 11% of the cell phone market share in
USA. Nokia’s 9300 smartphone differs from the Apple iPhone in that it has a hard keyboard,
operates on the Symbian operating system and does not provide integrated features such as
Google maps. In order to maintain, protect and grow its market share, Nokia is known to respond
well to its competitors by coming out with products that are comparable to competitor products.
When Motorola introduced the RAZR, Nokia lost 12 percentage points market share to
Motorola. In response Nokia introduced its N76xx which was comparable with Motorola’s
RAZR. It is unclear yet if Nokia has been successful in capturing some market share from
Motorola in the thin phones segment. As Apple’s iPhone enters the Cingular stores, Nokia’s
smartphone is bound to lose some sales. With Apple’s iPhone introduction, since it will be
available only with Cingular service, Nokia will likely look into strategies to maintain its market
share. From Nokia’s annual report, its business level strategy is articulated as: “Nokia’s strategy
to be the most customer-focused product company is defined by four main imperatives”:
“Expand mobile voice business” – ‘Cost leadership’ by focusing on volume selling
“Enhance experiences for consumers” – ‘Broad differentiation’ by focusing on providing higher
quality materials, design, and features
“Bring more mobility to enterprises” – ‘Focused differentiation’ by collaborating with a range of
companies to provide enterprise-grade devices and solutions targeted for the enterprise
“Expand networks business” xxi – ‘Focused low-cost’ by reducing the total cost of ownership
Nokia’s corporate strategy is ‘Related Constrained’ since less than 70% of the revenues
come from any single business unit and each of these business units combine to give a complete
end-to-end solution. As such, these units share numerous links between them. For example, the
mobile phones unit is dependent on mobile networks and multimedia as an add-on functionality
and all these combine together to form an enterprise solution.
Value drivers: Nokia’s value drivers include its brand, broad range of products, tailored network
solutions and devices, geographical presence and Well Developed Logistics
Cost drivers: Its cost drivers include the cost of maintaining relationships with limited number
of service providers, cost of recruiting and retaining skilled employees, costs of 3rd-pary
intellectual licenses, etc.
Resources and capabilities (Please see Exhibit II (D) 4 – Part A (a) VRIO Analysis for Nokia):
Products and Number of product markets served: Nokia has 4 business groups: Mobile
Phones, Multimedia, Enterprise Solutions and Networks. It provides a wide range of products
and services in each of these different categories
b) Motorola:
Corporate and Business Level Strategy: Motorola is the #1 cell phone manufacturer in the US
and #2 worldwide with market shares of 44% & 21.3% respectivelyxxii (based on number of
handsets sold). 2006 year-over-year number of handsets sold globally represents a 49% growth
rate over 2005 (compared to 31% for Nokia) demonstrating a strong growth trend for Motorola
worldwide. The Mobile Devices business accounts for 66.2% of Motorola’s FY 2006 sales
(compared to 60.9% in 2005). Motorola’s business level strategy in the Mobile Device Business
is one of broad differentiation. Although Motorola had a phenomenal two-year streak of
success with the RAZR, lowering of prices of this product portfolio hit the company margins
significantly. Motorola is countering this by aggressively funding in new R&D
Value drivers: Motorola has a strong brand value. It continues to be an innovative firm that has
demonstrated increased spending in R&D and has won numerous awards and patents. It provides
complementary services such as the distribution of content through WiFi hot spots and kiosks,
and the iRadio service (radio via mobile phones). It exhibits strong commitment to corporate
governance and business ethics.
Cost drivers: Motorola continues to focus on its Supply Chain Management initiatives to drive
cost reductions with increased focus on procurement process improvements, reduced number of
suppliers, and increased inventory turnover. Motorola has reduced its facilities cost by means of
site consolidation, improved its account payables from 51 days in 2004 to 49 in Q2 ’06,
increased operating cash flow from $3.1B in 2003 to $4.4B in 2005, reduced debt from $7.6B in
2003 to $4.3 in Q2’06 and improved Return on Net Assets (RONA) from 8% in 2003 to 48% in.
As of 2006, approximately 35% of all mobile units shipped were manufactured by Electronics
Manufacturing Suppliers (EMS) and Original Design Manufacturers (ODM), with most of the
manufacturing done in Asia, China, Singapore and Malaysia.
Resources & Capabilities (See Exhibit II (D) 4 – Part A (b) VRIO Analysis for Motorola)
Products and number of product markets served: Motorola is organized around 3 key
business segments – Mobile Devices Business, Network and Enterprise, and Connected Home
Solutions. Each of these business units provides a very wide range of products and services
targeted at multiple market and price segments.
c) Palm:
Corporate and Business Level Strategy: As of 2006, Palm held 31% of the US smartphone
market and 5.3% of the global smartphone market. Of its two product lines, smartphones and
PDAs, the former accounts for 70% of its revenue, and therefore, indicates that Palm’s corporate
strategy is a ‘Dominant Business’. Its business level strategy of broad differentiation is
evident from its desire to “deliver a powerful computing experience in a simple and intuitive
manner” xxiii for a variety of end-user segments - “consumer, professional, business, education
and government users around the world” xxiv, and at the same time, seeking to differentiate its
products through complementary offerings like software and solutions.
Value drivers: Palm’s has several value drivers which enhance the value of its smart phones and
PDAs to its customers. Some of these values drivers are its smart phone and PDA technologies
which have improved the features and usability of its phone in the subsequent versions of its
devices; its large worldwide distributor network (100 distributors covering Europe, Latin
America, Canada, Asia Pacific, the Middle East and South Africa) which makes its devices
accessible to its customers worldwide; dedicated carrier account teams which provide sales,
training, marketing and technical support to help carriers sell Treos .
Cost drivers: Palm’s cost drivers are its economies of scale and scope between its two product
lines; its cost advantages via use of Original Design and Manufacturers (ODMs) to design,
develop and manufacture its products after internally completing product definition; and its
policy of not carrying backlog and fulfilling orders upon receiving orders from customers.
Resources & Capabilities (see Exhibit II (D) 4 – Part A (c) VRIO Analysis for Palm)
Products and number of product markets served: Palm offers the following products and
services: Treo smartphones, Handheld Computers, and Add-on Accessories
d) Research in Motion, Ltd.
Corporate and Business Level Strategy: “Research in Motion (RIM) is a designer and
manufacturer of integrated hardware, software and services that support multiple wireless
network standards”xxv. RIM holds 55% of the US smartphone market and 4.5% of the global
market. With its products and services centered around its BlackBerry devices, “RIM provides
platforms and solutions for access to information including email, phone SMS, messaging,
internet and intranet based applications. RIM technology also enables a broad array of third party
developers and manufacturers to enhance their products and services with wireless connectivity
to data” xxv. RIM’s initial business level strategy was focused differentiation since it sought to
serve corporate users in North America via its Blackberry devices and allied services. However,
it has been recently making attempts to alter its strategy to Mass Differentiation by targeting its
blackberry based products and services towards retail prosumers in addition to enterprises in
various regions of the world with its solutions. RIM aims to make this business level strategyxxvi
shift by “broadening its strategic alliances, promoting development of third party software,
expanding the global reach of its blackberry platform into enterprises as well as prosumer
markets, and pursuing its strategic relationships with industry leaders”. RIM’s corporate level
strategy is a ‘Single Business’ since most of its products and services revolve around its
blackberry smartphone.
Value drivers: RIM’s value drivers include its Blackberry technology which is has used to it
enhance the usability of its devices: its large (1000 strong) R&D which allows it to continue to
improve its technology; its partnership with 500 independent software vendors (ISVs) which
helps it provide more functionalities and features to its customers; its customer care facilities
which provide customer support; and its carrier relationships which make its devices available
with multiple carriers thereby providing its customers choice of phone service providers.
Cost drivers: RIM’s main cost driver is its vertical integration into software, enterprise
solutions, and services: This increases its ability to control its costs, and thereby increase the
firm’s surplus.
Resources and capabilities (see Exhibit II (D) 4 – Part A (d) – VRIO Analysis for RIM)
Products and number of product markets served: RIM’s products and services are
BlackBerry, BlackBerry Business Solutions, BlackBerry Connect, Internet Service and
BlackBerry® Enterprise Server and Smart Card Reader
e) Samsung:
Corporate and Business Level Strategy: Samsung Electronics is the world’s leading
manufacturer of CDMA handsets and the world’s third largest mobile phone manufacturer, with
a 11.6% market shared in 2006. Its other business segments include Digital media business,
Digital appliance business, Semiconductor business and LCD business, it and follows a ‘Related
Constrained’ corporate strategy with complementary business segments that leverage the
R&D and cost advantages. Samsung follows a business strategy of focused differentiation, by
targeting the high end handset market, releasing innovative products and diversifying models of
mega pixel phone, slim phone and W-CDMA phonexxvii. Samsung has established a Venture
Investment Team to focus on identifying, investing and partnering with start-ups, university
research departments, and established firms, whose technologies are of critical importance to
Samsung’s future growth. Please see Exhibit 2 (D) 3e for Samsung’s strategic alliances and
investmentsxxviii:
Value Drivers: Samsung positions itself as a leading brand name in the wireless handset
industry, especially in the emerging markets of India and China, and seeks to leverage this
position of advantage to establish a strong market position. It is striving hard and investing
heavily in R&D and technology innovation to define a unified platform of some of its in-house
wireless technology like WiBroxxix with emerging global wireless technology like 4G in order to
provide better products to its customers. It continues to focus on R&D with about 2,600 patents,
ranking second in the US patent filings in year 2006xxx. It has 2,700 PhD’s working in its R&D
facilitiesxxxi.
Cost Drivers: Samsung is complementing its focus on R&D by investing about 8.3% of its sales
in 2004, amounting to about $4.6 billion and with a headcount of about 32,000 associated in its
R&D organizationxxxii. It is investing and partnering with firms and university research centers to
gain access to leading technology research. It also continues to focus on implementing an
information management system, for its supply chain management initiative. It also recently
initiated a share buyback in Jan, 2007 with 2,800,00 common shares and 400,000 preferred
shares being bought back between Jan 16th 2007 and April 15th 2007xxxiii
Resources and Capabilities: (see Exhibit II (D) 4 – Part A (e) VRIO Analysis for Samsung)
Products and Number of product markets served:
Samsung’s business segments are Digital media business, Digital appliance business,
Semiconductor business, and LCDs. It serves several product markets in each of these categories.
f) LG:
Corporate and Business Level Strategy: LG Electronics is a Korean consumer electronics
company that comprises 4 business units: Mobile Communications; Digital Appliance; Digital
Display and Digital Media. Although LG considers that they have one Design Center with four
departments aligned with each business domainsxxxiv, there is no evidence of constraints between
the business domains. They may share resources, but each R&D and design department really
concentrates within their business domain. This suggests that LG’s corporate level strategy is one
of ‘Related Linked’. LG holds the 5th largest mobile handset market share worldwidexxxv. LG
has a vision of being the top 3 electronics / telecommunications company by 2010 xxxvi. To get
there, it has been focusing heavily on brand marketing. LG seems to be following Apple’s
footsteps in becoming the “creator of digital lifestyle.xxxvii” However, it is more focused on style
where as Apple is focused more on Human Engineering. This is evident from LG’s luxurious
line of mobile handsets starting from their small slim handset that is branded as “Chocolate Bar”
to its recently announced handset co-designed with fashion designer PRADAxxxviii that has a very
close resemblance to Apple’s iPhone. Because of the similarities, a lot of press coverage has
been received that compares the two phones. This may lead consumers to believe that the
PRADA Phone by LG is in direct competition with Apple iPhone. However, when we examine
the two phones closely, there are several significant differences (please see Exhibit II (D) 3f –
Part A). First, the target markets do not overlap until late 2007 when Apple iPhone gets
introduced into Europe. Although there was no mention of when the PRADA Phone by LG will
be available in the U.S., the phones may have to be unlocked for the European market due to
requirement from some local laws. Therefore, it is conceivable that users can purchase the
PRADA Phone by LG in Europe to use it in U.S. as soon as it is available in Europe. Although
LG is likely to tout that they have a head start on Apple in getting their phone out to the market
firstxxxix, the fact is that the PRADA Phone by LG will be sold next to PRADA designer hand
bags while the Apple iPhone will be sold in Apple stores, Cingular outlets and retail stores.
These distribution channels target two very different kinds of consumers. The PRADA Phone by
LG is aimed at people with wealth, who don’t mind spending over $700 for a designer phone.
This doesn’t suggest that the Apple iPhone is inexpensive (it will cost $499 to $599 with a 2 year
contract). However, technology enthusiasts are the ones that are interested in the Apple iPhone.
Based only on the information released from both Apple and LG press releases, the Apple
iPhone seems to have more technological advances and features than the PRADA Phone by LG.
Also, LG did not design the PRADA Phone in response to Apple iPhone. This was part
of LG’s overall business strategy of differentiating itself from other mobile phone makers. LG
wants to enhance their brand image. In doing so, it decided to partner with a fashion designer; in
this case, it was PRADA. And PRADA did not want to just brand an existing product; it wanted
to give the new phone “a very strong character and unique stylexl.” So, in looking at LG’s
luxurious mobile handsets such as PRADA Phone by LG or Chocolate Bar, it seems that LG’s
business strategy is 'focused differentiation’. However, when we look at the complete line of
LG mobile handsets, the business strategy seems to be more of ‘broad differentiation’ since
they have a complete line of inexpensive mobile phones.
Value Drivers: LG targets the premium market segment through the use of fashionable
designsxli. It has consistently strived to improve its brand image by promoting itself as a highquality manufacturer. It has striven to avoid brand dilution by selling its low-cost products under
its old Goldstar brand name. It is a leader in 3G technology and offers several complementary
products
Cost Drivers: When LG partners with Prada, this adds additional cost structure to the
development of the Prada mobile handset. This is because of the additional coordination required
between the two companies on various activities including design, sales, etc. However, the
partnership also brings in additional resources from Prada as well.
Resource and Capabilities (see Exhibit II (D) 4 – Part A (f) VRIO Analysis for LG)
Products and Number of product markets served: LG is organized along these 4 business
units: Mobile Communications, Digital Appliance, Digital Display and Digital Media. Each
business unit produces multiple products.
g) Sony Ericsson
Corporate and Business Level Strategy: Sony Ericsson Mobile Communications is a 50/50
joint venture (based on Sony’s superior capabilities in consumer electronics and Ericsson’s
leadership in technologyxlii) that was established in 2001xliii and is focused on providing mobile
solutions for customers worldwide. As of Q4 FY06, Sony Ericsson’s units shipped numbers were
up 46% to 74.8 million units in 2006xliv with an estimated global market share of about 8%xlv.
Out of these 74.8 million units, 60 million handsets were music phones while 21.6 million were
camera phonesxlvi. Sony Ericsson is leveraging Ericsson’s excellence in GSM and WCDMA
mobile networks in these emerging markets, with increasing levels of market penetration.
Ericsson also holds over 20,000 patents and is a major contributor to the GSM and WCDMA
technology standardsxlvii. As of FY05, 45% of Ericsson’s sales are from these emerging
marketsxlviii. Its corporate strategy is one of ‘dominant business’ (with Sony’s expertise in
handset design and Ericsson’s in establishing wireless infrastructure) with an array of products
targeted at focused differentiation due to their unique walkman style handsets with high
resolution cameras.
Value Drivers: Sony Ericsson has a strong presence in the GSM and WCDMA technology
market. The 50-50 partnership between Sony and Ericsson brings together the two
complementary skills of consumer product design from Sony and telecommunication and mobile
network infrastructure technology from Ericsson. Ericsson’s focus and presence in developing
infrastructure in the emerging markets is also a value driver as it creates a company focus in
areas which promise great potential growth in the coming years.
Cost Drivers: Ericsson continues to invest in an all-IP network for faster data access in
established markets such as Europe and in wireless infrastructure in emerging markets such as
India. Sony continues to invest heavily in R&D to develop products in high, mid and low price
segments to meet needs for established and emerging markets.
Resources and Capabilities (Exhibit II (D) 4 – Part A (h) VRIO Analysis for Sony Ericsson)
Products and Number of product markets served:
Sony: Numerous products and services in the following business segmentsxlix: Electronics,
Games, Entertainment, Financial Services, and others (Sony Communication Network, Sony
Music Entertainment, etc.)
Ericssonl:
Numerous
products
and
service
in
the
following
business
segments:
Telecommunication and wireless networks, Global Services, Multimedia and Sony Ericsson
Mobile Communications
h) Apple:
Corporate and Business Level Strategy: Apple has announced its plans of launching the Apple
iPhone in June 2007. It plans to capture 1% of the worldwide market share in cell phones by
2008 which equates to 10 million units. Apple’s corporate strategy is “Related Linked” since
less than 70% of its revenues come from any single business and different business units share
only a few components and technology between them. Apple introduces its products in niche
markets and charges a premium for its innovative product design and look-and-feel. Apple’s
business strategy in its Macintosh and iPod units is focused differentiation with a new product
launch. However, as the product moves into the mainstream market, Apple introduces lower-end
versions of the product with limited features (such as shuffle in portable music players and MAC
mini with support for common peripherals) and moves towards broad differentiation. Its other
offerings such as its iTunes music related products also follow focused differentiation since
iTunes can only be used with Apple’s products. Its software services and peripherals complete
the product portfolio and can also be classified as focused differentiation since they are unique to
Apple’s products. It is vertically integrated and designs and develops its own operating system,
hardware, application software, and services. Apple also provides its customers with quality
sales and after-sales support service. Apple sells many of its products directly to its customers
through its own website or company-operated stores. Once a customer buys an Apple product,
the customer is locked in during the life of the product, since many of parts compatible with
Apple’s computers or iPod are available only through Apple’s stores/website/support services.
Value drivers:
Technology: Apple has the breadth of technology and delivers competitive products into the
marketplace. It is vertically integrated and produces its own hardware and software and focuses
on delivering on “user experience”.
Quality: Apple aims at providing high-quality products, sales and after-sales support service
Breadth of line- Apple has a very broad line of products
Geography – Apple does not have wide geographic presence and has limited its presence to
Americas, Europe, Japan, UK and has its retail outlets open in these countries also.
Brand/reputation – High. Apple takes the industry in which it is operating by a buzz purely
because it comes out with innovative and cool products that are easy to use and intuitive. Apple’s
products generate a “wow” effect among consumers.
Network externalities – With the integration of iPhone with iTunes, greater usage of iTunes will
result in making iTunes a defacto standard in delivering media.
Complements – MAC OS, iPod and iTunes, iPhone and iTunes, iPhone and Cingular
Retail store outlets: Apple has retail store outlets in malls to show off its products. When it
generates foot traffic into the stores, consumers look into other products and consumers have a
one-stop shop for all of Apple’s products thereby leveraging sales across products.
Innovative Brand Reputation: Apple had a history of producing innovative products such as
Macintosh and iPod through their Humane Engineering goals
Quality Sales: Apple offers high quality pre- and post-sales support through its Apple
Store. Apple “believes a high-quality buying experience with knowledgeable
salespersons that can convey the value of the Company’s products and services greatly
enhances its ability to attract and retain customers
Confidentiality: By having a very tight control in Apple’s development strategy, Apple is
able to take its time to develop the product, and have total control of the announcement of
the product.
Cost drivers:
Economies of scope – Apple tries to achieve economies of scope. For example, it first introduced
iPod and then introduced lower versions of the product using the same technology. Similarly in
personal computing side, Apple uses the same technology in the backend.
Vertical integration- Apple achieves vertical integration by developing its own operating system,
hardware, application software, and services and strives to provide superior ease-of-use,
seamless integration, and innovative industrial design
Lawsuits: Apple incurs costs from potential or current lawsuits such as consumers not being able
to play purchased songs from iTunes across devices.
Resources and capabilities: (see Exhibit II (D) 4 – Part A (g) – VRIO Analysis for Apple)
Products and number of product markets served:
Apple’s products include Hardware (e.g. Macintosh line), Music Products and Services (iPod
line, iTunes), Peripheral products (e.g. displays), Software products (e.g. Mac OS), and
Professional Applications (e.g. video editing software)
II (D) 5: Compare firms using Value minus Cost (Willingness to Pay) framework
Please see Exhibit II (D) 5a for the WTP analysis. The Value portion for each of the
manufacturers was calculated based on surveys that were sent to around 80 participants across a
diverse demographic (different age groups, professions, social interests, etc.). A copy of the
surveys are available in Exhibit II (D) 5c (Part A & B), and a graphical breakdown of V, P & C
in Exhibit II (D) 5b. However, we faced some challenges in trying to ascertain the costs
associated with smartphone manufacture. Most companies don’t break their costs down at this
level of detail. Some do present relevant financial information for their mobile business unit but
this wouldn’t be a reliable measure to perform an apples-to-apples comparison since some
companies such as Palm and RIM focus almost exclusively on smartphones while others like
Nokia and Motorola focus on a broad range of mobile handsets across multiple segments. We
has also not been able to get any reliable information on what Apple’s cost structures related to
the iPhone might look like. We did come across one reportli from iSuppli that tries to estimate
what the input costs for the iPhone might be and estimate margins based on this. However, we
haven’t considered this report for the V-C analysis since (i) it is a single data point from one
analyst (ii) it doesn’t account for other costs that Apple will incur as part of its iPhone business
including marketing costs, labor costs, etc. As a result, the WTP exhibit is primarily useful for
two purposes: (i) to provide an insight into the type of value that customers attribute to these
different handset manufacturers and their products (ii) get a sense of what margins Apple’s
competitors in the smartphone space (if we were to assume that RIM & Palm’s data was
indicative) are experiencing.
II (D) 6: Comparative Financial Analysis
Financial ratio analysis provides us an opportunity to quantify and analyze operational
performance of the handset and wireless service industries. The financial analysis for the handset
(Exhibit II (G) – Part A – Comparative analysis of handset manufacturers) involved the
following categories of ratios and financial numbers which were closely analyzed over a period
of five yearslii, dependent on the financial data available:
Liquidity Ratios-Current Ratio, Quick Ratio
Asset Turnover Ratio-Inventory Turnover
Financial Leverage Ratios-Debt Ratio, Debt-To-Equity Ratio
Profitability Ratios- Gross Profit Margin, ROA, ROE
Growth Rates and other operational ratios- Sales growth rate, Cost of Sales, Net Income growth
rate, R&D/Sales
Apple has experienced unprecedented sales and income growth in years 2004 (33.38%
and 68.27% sales growth and 285.51% and 399.25% in income growth over 2004 and 2005) on
account of its portable digital music player iPod success, followed by the video iPod in 2005. But
with the commoditization of iPod with its reduced iPod Nano price, low price iPod shuffle
offering and increased competition from handset manufacturers with built in mp3 players in
handsets, the sales and income in 2006 have shown a flattening trend. By successfully keeping
its Cost of Sales increase, comparatively lower than its revenue growth, Apple has further
strengthened its income growth. Apple displays favorable Current Ratio (averaged 2.72 over last
five years), and Quick Ratio (averaged 2.69 over last five years) as compared to its competitors
and also the industry standards, providing a favorable liquidity position. Looking at comparable
firm, Motorola is a close second in these ratios to Apple, with Nokia close behind. RIM has
higher liquidity ratios than Apple, Motorola and Nokia, although that can be attributed to its
comparatively smaller firm size and fewer product lines, leading to lower inventory levels.
Apple’s inventory turnover is an area of potential improvement for Apple. Although its inventory
turnover is favorably much higher than the industry standards, it has been gradually declining
over years, while the ratio for its competitors like Motorola, RIM and Palm has been increasing.
Some plausible reasons for this decline could be Apple’s introduction of Intel-based Macintosh
computersliii and increased store openingsliv. Also, Apple’s Debt to Equity (0.723 for Apple in
2006) and Debt Ratios (0.42 for Apple in 2006) are increasing although they are less than its
competitors like Motorola, Sony, Nokia and LG, though RIM and Palm are better positioned
than Apple for the same ratios. The increase is primarily driven due to increase in Accounts
Payable and Non-current liabilities, year-over-year for Apple, indicating that Apple is
increasingly funding its operations through Debt rather than Equity. These ratios are critical for
long term solvency of the firm, are closely watched by the investor community and hence need
to be paid close attention by Apple. Gross Profit Margins (average of 28.14% over last five
years) for Apple are below the industry average (34.2%). Apple continues to strive for increased
Gross Profit Margins over last five years improving from 27.9% in 2002 to 29% in 2006,
primarily driven by increased sales. Motorola’s Gross Profit Margins which stand at 29.7% as of
2006, while Nokia is ahead of the two at about 35% gross profit margin as of 2006. RIM
continues to enjoy the highest level of Gross Profit Margin at about 55.2% as of 2006, primarily
driven by the worldwide expansion of its Blackberry handset which is now available over 160
networks in over 60 countrieslv.The growing gross profit margin attractiveness of the high end
handset segment as shown by Nokia and RIM, may have been one of the drivers for Apple to
enter this industry. The Return on Assets (average of 5.69% over last five years) and Return on
Equity (average of 9.25% over last five years) ratios also are attractive for Apple as compared to
the competitors and the industry (1.5% and 5.5% respectively for the industry). Again for Apple
this has been due to the immense success of the iPod. Over 2006, Apple’s ROA has been
reasonably flat (11.5% in 2005 and 11.6% in 2006), as income increases at the same rate as the
assets, in line with its move to commoditize iPod. Hence overall, financially, Apple is strongly
positioned in the handset industry to compete aggressively with its competitors like RIM, Palm,
Nokia and Motorola etc., with the caveat that this favorable position has been achieved by Apple,
primarily on account of its tremendous success with the iPod music and video player series.
II (D) 7: Implications
Apple has entered the highly competitive smartphone industry with its new offering,
iPhone.. It is set to change the dynamics of the smartphone industry by creating a new consumer
segment for smartphones. So far, smartphones were mainly used by corporate users to access
office applications such as Email, web browsing and have the device integrated with cell phone.
On the other end of spectrum are mainstream consumers who would like to have one device to
play MP3 songs and to make calls. With Apple’s iPhone, it has integrated the two segments with
its product offering and has designed the product to appeal to users for whom “Experience”
matters most. Competitors such as LG Prada are already marketing mobile phones with the look
and feel of an iPhone (although they lack many applications and OS integration that iPhone
promises. Other competitors such as RIMlvi are increasing their offering in consumer space and
for the business users (Pearl and BlackBerry 8800) and have a reach with 225 network carrierslvii
who earn hefty profits on selling blackberry devices. RIM is also expanding its offering through
additional network carriers worldwide. Palm is a close contender since its TREO is regarded as a
feature rich product among consumers. However, its recent announcementslviii of exploring
options and hiring a former Apple engineer send mixed messages and it is unclear if Palm will
stay in the competition or quit. The industry is clearly evolving to offer cell phones with better
user experience and feature rich products and competitors are trying to tie up complementary
offerings. For example, a music company in Europe started offering its music through streaming
audio directly into cell phones thereby freeing up the drag on revenues caused by credit card
processinglix. So Apple has caused a shakeup in the handset industry and in the service provider
industry in the way in which they offer services. Apple will meet stiff competition from RIM
which currently holds 50% of smartphone segment and from Nokia and Motorola (who are
traditionally market share leaders in handset industry) as they introduce smartphones to protect
their market shares. If Apple Inc. is successful in developing a whole new consumer segment of
smartphone users, it would have the first mover advantage and capture the market share while
traditional players work on bringing a similar user experience to penetrate this new segment.
Although RIM may still continue to be a leader in the enterprise smartphone business, since
enterprises generally move slowly towards a new product due to switching costs, there may be a
small segment of powerful players in the enterprise segment who may strongly recommend that
iPhone be supported on their corporate networks. This will be a challenge for RIM as Apple
gains entry into the enterprise market. Also, as Cisco and Apple settled their trademark dispute,
they agreed to work together “in the areas of in the areas of security, and consumer and
enterprise communications."lx This partnership with Cisco may further strengthen Apple’s ties in
the enterprises. Apple’s exclusive partnership with Cingular (or the new at&t) may also open
doors for new ways to share music, download music as Apple and Cingular continue to work
closely to offer new product feature and service offerings to their consumers. Thus Apple is
strongly positioned against competition with its strong product offering, and partnerships with
Cingular and Cisco. Apple made a calculated judgment to unveil its iPhone 6 months before
entering the market. This has helped created product and brand awareness and lot of speculation
and hype about the product. As Apple studies the competition and strategic moves by
competitors during this time frame, Apple gets to make the final call of what new “cool” features
will be introduced in the first version of iPhone thereby taking the industry by a storm. Apple’s
iPhone is driven by software, so adding new features is a comparatively smaller incremental
effort. However, Apple has to live up to its expectations and brand image for the product to be
successful.
II (E): Intra-Industry Analysis
II (E) 1: Strategic groups in the industry
Strategic groups in the smartphone manufacturer industry can be analyzed along two
dimensions- Mobile Operating Systems (Exhibit II (E) 1a – Smartphone Operating System
Adoption Landscape )and Features/Applications available on the phone.
Mobile Operating Systems (Exhibit II (E) 1b – Smartphone Industry Map)
Along this dimension, the smartphone devices are arranged according to the extent of
their integration (tight, proprietary) with the mobile operating systems. The major mobile
Operating Systemslxi are as follows:
Symbian: holds 72.8% market share and is supported by Siemens, Samsung, Sony Ericsson,
Panasonic and Nokia
Linux: Open source operating system that holds 16.7% of the market and is supported by
independent vendors of Linux as well as by smartphone manufacturers
Windows Mobile: from Microsoft, accounts for 5.6% market share
Blackberry OS: has 2.8% market share and has been developed in house by RIM
Palm OS: holds 1.8% market share and owned by Palm Source which in turn is owned by Access
OS X Tiger/Leopard: Apple’s mobile operating system, no market share at present
There are three subgroups within the smartphone producer industry based on the choice
of operating system. There is some overlap among these categories, i.e. a device manufacturer
may belong to more than one subgroup simultaneously.
No OS agenda: These are the companies that have not invested in operating systems
development themselves, and use operating systems developed by other software vendors who
are not their competitors in the device space. Motorola and HP are two examples of such
companies: these companies normally use a version of Windows Mobile OS or a version of the
Linux OS, although recently, there has been a shift towards Windows
Collaborative OS: These companies have formed alliances to jointly develop and promote a
mobile OS. Linux and Symbian are examples of such a strategy. The use of Symbian is not
limited to companies in the alliance – it can be licensed to other smartphone producers as well.
Additionally, promoters of Symbian are free to use other independent operating systems like
Windows and Linux.
Proprietary OS: These companies have developed their own proprietary operating systems.
Apple, with its OS X Tiger Mobile OS and RIM with its BlackBerry OS are examples of such a
strategy. These companies believe that a very tight integration between their devices and the
software running on it provides more value to the customers than using 3rd-party operating
systems.
Features/Applications
Along this dimension, the smartphone producers are arranged according to the relative
strength and multiplicity of features and applications available on their smartphone devices.
Based on this criterion, phone devices can be divided into the following three groups
Low: Such features include web browser, camera and text messaging/SMS
Mid: Multimedia (video player, music player) and GPS in addition to ‘low’ features
High: push email, calendar, word processor, spreadsheet, security software, 3G+ compliance
and Wi-Fi capabilities in addition to ‘mid’ features
Smartphone devices normally correspond to the Medium or High categories of features
and applications. Exhibit II (E) 1 depicts the positions of various smartphones producers on these
two dimensions. The strategic groups resulting from this analysis are as follows
Group 1- Medium feature, very high integration
Group 2- High feature, low integration
Group 3- High feature, medium integration
Group 4- High feature, very high integration
Group 5- Very high feature, medium integration
Group 6- Very high feature, high integration
II (E) 2: Threats, Opportunities & Mobility Barriers of Strategic Groups
The following sections describe the particulars of these strategic groups, like size,
threats, opportunities and mobility barriers.
Group 1- Medium feature, very high integration (e.g. Apple):
This strategic group is currently unique to Apple iPhone. Although the size of this group
is presently 0 (since the launch of the iPhone is still about 3 months away), the iPhone aims to
capture 1% of the worldwide mobile phone market. The threats to this strategic group, which
may potentially cause the mobile phone subscribers to opt for other smartphones, are as follows
Medium (not high) features and applications: The device is not 3G compliant, as most other
smartphones are. This would cause slower device performance. The browser would be Apple
Safari, and not the market leaders like Internet Explorer or Mozilla Firefox. Additionally, very
few external applications would be available.
Investment in OS X: In-house investments would need to be made continuously in the operating
system to keep it current relative to other mobile operating systems
Highly priced device
Opportunities for this strategic group:
Leverage the powerful brand - the strength of the iPod brand would arouse strong curiosity
amongst mobile phone users and allow the iPhone to gain traction in the market
Move to group 4 or 6: Enhance speed capability, work w/ ISVs on porting other applications,
particularly those of interest to corporate users
Mobility barriers: Movement across operating systems strategic groups (i.e. to high/very high
feature, high integration) to capture additional customers, especially corporate customers, would
require investments in software applications that work on its proprietary operating system OS X.
The cost to develop such software in-house would be high. Apple does not possess a strong
relationship with ISVs and so that option would require time and effort.
Group 2- High feature low integration (e.g. LG):
This group comprises companies that provide most features associated with smartphones
but they have not invested in an operating system (proprietary or collaborative) themselves.
These companies use commercially available ‘independent’ operating systems like Windows
Mobile and Linux. The threats to these companies are –
OS stability issues: Windows Mobile, the most common OS for this group, is prone to frequent
freezing and crashing
Application interoperability- Interoperability among the 3rd party applications that are used on
these devices is unsatisfactory
The strengths of group 4, 5 and 6 companies
Opportunities for this strategic group:
Leverage in-house technological expertise to enhance the device features
Leverage the relationships with ISVs to enhance applications interoperability
Mobility Barriers:
The ‘top’ players of the market have gained a large market share and continue to innovate
(enhance s/w and hardware capabilities) at a furious pace
Group 3- High feature medium integration (e.g. Motorola, Sony Ericsson):
This group is comprised of companies that provide features and applications similar to
group 2, but have a higher level of integration (i.e. medium level) between the devices and the
mobile operating system. These companies have a foothold in group 2 as well as group 4, i.e.
their devices can work with multiple operating systems (collaborative like Symbian as well as
‘independent’ like Windows Mobile and Linux)
Threats to group 3:
Multiple bets- porting devices on collaborative as well as ‘independent’ operating systems may
be perceived as a ‘confused’ and costly strategy
May hurt market share if the customer preference is for high integration
Intellectual property related issues: Since the promoters of collaborative mobile operating
systems, like Symbian and Linux, are competitors of each other, there may be limits to how
much technology they can contribute to the common OS effort, which may limit the quality of
such operating system
Duplicated effort: Since Linux is already available as the open source OS to which these
companies, other mobile device makers and the worldwide mobile device developer pool
contributes, there is a concern that the resources expended on Symbian may be unnecessary
From that standpoint, making devices to work with this OS may turn out to be a wasted effort
Low market share of Symbian in the US: although a market leader worldwide, Symbian has only
6% of the US market. The devices based on this technology may see lower growth in the US
Device adoption may be hampered due to higher number of mobile applications available for
group 2 devices
Opportunities for group 3:
‘Hedged’ bet- collaborative OS as well as ‘independent’ OS (Windows Mobile, Linux). This can
be advantageous if the companies can adjust ‘the sails’ quickly if customer preference turns in
one direction
Leverage the relationship w/ other groups via membership in Linux and Symbian efforts
Ability to pool in resources of multiple companies in the space, to design and develop an
enterprise grade operating system
Potential of Symbian becoming an open, universal standard. This can enhance the adoption of
group 3 devices
Mobility Barriers: This is the best group to be in from a mobility perspective, since these
companies have invested in collaborative OS, and at the same time they have expertise in making
devices that can work with ‘independent’ operating systems like Windows Mobile and Linux.
These companies can easily switch to very high feature, low integration group.
Group 4- High feature very high integration (e.g. RIM):
This group is currently unique to RIM due to its proprietary BlackBerry OS and the
BlackBerry device. It accounted for 53%lxii of the 5.2 million smartphones shipped in the US last
year. Blackberry provides high features but lacks word processor, spreadsheet and PDF
capabilities. The software on the BlackBerry is mostly proprietary and developed in-house.
Threats to group 4:
Unavailability of ‘standard’ applications
High costs of in-house applications development to keep up with the competitors with low H/WS/W integration
Difficulty of integration of blackberry OS into Windows OS environment
Growth of Windows Mobile OS and its adoption by many major smartphone makers
Opportunities for group 4:
Highlight the superior performance of in-house apps
Leverage the brand penetration to upsell the next higher versions of the mobile devices
Participate in the industry consortia (e.g. Symbian, Linux) for promotion of industry standard
operating systems and applications
Mobility barriers:
Strong competitors who span multiple strategic groups
Move to low H/W-S/W integration groups would require manufacturing devices compatible with
‘independent’ operating systems like Windows Mobile, and foregoing the proprietary advantage
Group 5- Very high feature, medium integration (e.g. Samsung, Palm):
This strategic group is comprised of firms that make feature- and application-rich
devices, have invested in collaborative operating systems and at the same time support
‘independent’ operating systems as well. For examples, Samsung is part of the consortium
supporting the Symbian operating system. It also supports Windows Mobile operating system on
its devices. Since its divestiture of Palm OS as part of Palm Source to Access, Palm has moved
from very high integration to medium integration. This shift is evidenced in Palm’s use of Palm
OS for Treo 650 and Windows Mobile for Treo 700. In an interesting move, Palm has acquired
the rights to a version of Palm OS (Garnet) from Access and has said it will continue
development of Palm OS.
Threats to group 5:
similar to group 2
Opportunities for group 5:
Ability to move to group 4 and compete strongly with RIM by controlling a key aspect (OS)
of a smartphone.
Availability of large (~20000) applications for the Windows Mobile OS
Mobility barriers: This group can move to either side of the H/W-S/W integration spectrum,
and therefore enjoys that flexibility.
Group 6- Very high feature, high integration (e.g. Nokia):
This groups is comprised of companies that make feature- and application-rich devices and have
also invested in a common mobile operating system (Symbian in the case of Nokia).
Threats to group 6:
Devices with in-house and proprietary operating systems that can integrate the software
applications for better usability and performance
Opportunities for group 6:
Rising popularity of collaborative and independent mobile operating systems
Devices with Wi-Fi and cellular network interoperability
Mobility Barriers:
A move to low H/W-S/W integration group would require a shift of strategy and additional costs
to port the devices on common operating systems.
II (E) 3: Other Competitive Dynamics
Disruptive Technologies
Push email technology
Dual mode technology: switching between cellular and Wi-Fi networks
Browsers tailored for the smartphone screen: Firefox Minimo, IE Mobile
RIM’s licensing of BlackBerry Connect service that lets Motorola, Nokia, and Palm smartphones
receive BlackBerry push e-mail
Mobile device convergence – phone, camera, music player, video player, laptop
Expansion of cellular bandwidth and technologies like EV-DO
Standards
Linux standardization projects, e.g. LiPS, ALP
Symbian development by a mobile device maker consortium
Growing Market Opportunity/Industry Trends
200 million smartphones expected to ship globally in 2009lxiii
Smartphones replacing laptops as the mobile computing device
Enterprise applications moving to the smartphone
Mobile versions of apps from ISVs- e.g. Oracle, Salesforce.com, SAP, Sybase.
Competitive Dynamics
Motorola and Nokia catching up w/ Palm in the prosumer smartphone market
Efforts to improve battery life
Partnerships with software developerso
Motorola’s attempts to encourage developers to build applications for Windows Mobile via
its Fast Track Center web site which gives developers access to business and product
development services from Motorola and its partners.
o
Motorola’s CanvasM, a JV with Tech Mahindra for custom wireless business applications
o
Palm’s Palm Developer Network, including Palm OS and Windows Mobile developers to
offer technical, business, and marketing support and compatibility testing services
II (E) 4: The firm’s competitive position before and after the strategic move
Prior to its iPhone announcement, Apple had never been a player in the mobile phone
maker industry. Apple’s claims to fame have been its Mac line of computers with its Mac OS
operating system and user-friendly graphical user interface, and more recently, its iPod line of
music players and the iTunes music download service. In the former, it was competing with
other computer manufacturers like IBM, HP, Dell etc, and in the latter, its competitors are
Creative, Rio, Sandisk, Rhapsody, etc. Of late, almost all major mobile phone manufacturers
have begun to integrate a digital music player (MP3 player) in their devices. Although iPod was
a huge success for Apple, this device convergence (of mobile phones with music playing
capabilities) was posing a long term threat to Apple. The introduction of the iPhone provides a
higher-end extension to Apple’s iPod product line and allows Apple to take on mobile phone
manufacturers on their own turf. This widens Apple’s competitive landscape significantly. This
seems to be a well thought-out and carefully orchestrated strategy on Apple’s part as evidenced
by its name change to Apple Inc that was announced along with its iPhone introduction.
II (F): Threats and Opportunities Analysis
II (F) 1: Emerging threats and opportunities
In addition to those covered under six forces analysis and the macro environmental
analysis, the following are the threats and opportunities for the smartphone industryThreats
High obsolescence rate for mobile phones, which requires frequent introduction of new devices.
This increases the costs of developing, manufacturing and marketing of mobile phones in
general and smartphones in particular
Entry of ‘regular’ mobile phone manufacturers into the smartphone industry and more claimants
for the ‘pie’- this is evident from mobile phone makers like Motorola, Samsung LG, and now
Apple that are entering the smartphone market
Consolidation in the service provider sector, US and worldwide – most mobile phone service
providers are consolidating or merging with stronger parents. Such consolidation would allow
the new, ‘big’ companies to demand higher price discounts, and therefore, would drive down
the profit margins of the phone makers in general and smartphone makers in particular.
Opportunities
Large potential market size and low penetration of the smartphone industry provides profit
opportunities for the device manufacturers as well as service providers
Opening of the consumer and prosumer sectors to the smartphone industry with falling and/or
subsidized (mostly by carriers) device prices – this would help bring in relatively more price
sensitive buyers into the smartphone market
Expansion of mobile internet bandwidth and connectivity technology – (3G, 4G technology) – as
connecting to internet via smartphones becomes easier and the carriers provide higher speeds,
the use of smartphones for personal as well as business use would become more widespread
Smartphone replacing laptops as the mobile computing device of choice for corporate users- this
phenomenon will increase the usage of smartphones, and as a result, their sale
Emerging markets – most prominently India, China and Southeast Asia see more and more
economic growth and as their internet and cellular telephony infrastructure expands, so will the
use of smartphones. This will provide new avenues of growth for smartphone manufacturers
Proliferation of original design and manufacturer (ODM) companies – these companies allow
smartphone makers to turn most of their fixed costs of design and manufacture of their devices
to variable costs by allowing them to outsource these activities. This allows the smartphone
makers to achieve greater cost efficiencies and economies of scale.
II (F) 2: Implications for strategy
The threats described above would limit the profitability of the smartphone
manufacturers. However, the opportunities listed above would allow them to enter new markets
and reach new users. This would necessitate the need on the part of smartphone makers to utilize
the business strategy of mass differentiation while holding on to their advantages in their niche
markets. For example, RIM's Blackberry smartphone devices have been targeted mainly at
business users. However, of late, RIM has been making efforts to reach out to consumers by
enhancing its user interface while still retaining its business user base by enhancing its corporatefriendly features.
II (G): Summary of External Analysis
The Industry analysis indicates that the handset industry in general is moderately
unfavorable. However, the smartphone industry, a sub-segment of handset industry, is under
penetrated. The competitor analysis indicates that handset manufacturers of smartphone industry
concentrate their efforts on corporate users. Apple has found a segment within smartphone
segment whose needs are not met by the current handset players. Apple has chosen to enter the
consumer smartphone segment where it faces little or no competition in terms of the unique
offering that it brings to the table. With the iPhone offering, Apple has positioned itself
according to the needs to the consumer segment. However, consumers in general are price
sensitive and Apple can initially cater to the needs to early adopters and tech-savvy consumers
due to their technical expertise and high price point. During this phase, other smartphone
competitors can use the cross-elasticity of demand to attract mainstream smartphone consumers
due to their low price points. Our analysis indicates that all handset manufacturers (both general
and smartphone) follow the leader and try to imitate their products and enter the new market
segments and there is little differentiation between the existing products (Please see Exhibit II
(G) – Part A for a comparison of the handset manufacturers). Apple is in a financially stronger
position compared to its competitors. Its financial ratios fare better than competitors and industry
standards.
III: INTERNAL ANALYSIS
Internal Analysis – Part A – Apple
III (A): Business Definition/Mission
In 1987, Apple’s goal was as followslxiv:
“Our goal is to enhance our position as the innovator and premiere manufacturer of personal computer –
the value leader, not the price leader. We intend to continue our strong sales growth worldwide. We will do this by
concentrating on two key strengths:
Human Engineering – We build “friendly” products whose simplicity and ease of use make them natural
extensions of their owners. First and foremost, we build computers for people.
Customer Service – We’ve created a worldwide network of servicing retailers, distribution sites, and
technical support center unmatched in the industry. Our ability to provide product and support when and where our
customer need them is critical to our success”.
Today, Apple’s goal is not much different from 1987 except it has extended its business
from computers to digital devices. Apple wants to extend its Human Engineering into integrating
today’s digital devices, and creating a Digital Lifestylelxv. This is reflected in Apple’s mission
statementlxvi:
“Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal
computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its awardwinning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the
digital media revolution with its iPod portable music and video players and iTunes online store, and will enter the
mobile phone market this year with its revolutionary iPhone.”
III (B): Firm’s Management Style
Steve Jobs’ management style is reflective of the company’s management style – Apple
is a very entrepreneurial and aggressive. Through various ex-Apple employee interviews with
the media, we found out that Steve Jobs is a very tough boss to work for. He is a strong critique
of product designs, due to the importance he places on the usability of their devices. The
designers continue to work hard to improve their designs. Upon product completion, Steve Jobs
would tell marketing that they have this wonderful thinglxvii. By motivating people through
constructive criticism, Steve Jobs is able to get the best out of his employees. However, much of
the Apple internal management details are very confidential. “Most of what Apple's engineers
are fiddling with won't make it out of the lab, of course. Jobs himself will determine what does.
Though he has ceded some control to trusted aides as he has matured as a manager, he still
makes the final call on products” lxviii. Steve Jobs is fanatical about leaking company information.
One of things that they tell new employees is “If you leak, we will find you, we will fire you, we
will sue you and we will prosecute you”lxix. This culture seems to be reflected in employee
behavior when we attempt to interview them. They simply refuse to give any information about
Apple. "Apple has sued several suspected leakers or their abettors. Jobs also compartmentalized
the company so that the vast majority of employees, even most managers, don't know what their
colleagues are working on. Each product has several code names--a different one in each
department. "Teams doing components have no idea what product they're for," says an Apple
engineer. Jobs, former execs say, also has been known to plant false rumors internally; if they
leak, he knows who talked."lxx
III (C): Organizational Structure, Controls and Values
III (C) 1: Firm’s organizational structure
Apple claims to be organized along functional lineslxxi (please see exhibit Exhibit III (C)
1). However, one of the direct-report to the Apple CEO is the Senior Vice President of iPod
Division. This suggests that Apple has a Hybrid, Matrix or Network Organizational Structure.
However, we do know that Steve Jobs has compartmentalized the company so that majority of
the employees and managers don’t know what other groups are working onlxxii. This further
reinforces Steve Jobs’ efforts in maintaining confidentiality within the company.
III (C) 2: Controls used to monitor/appraise employee behavior and performance
As advised by a former VP of Apple, the company has an "in your face" culture.
Employees are expected to have "a lot of face time" with their managers. The managers monitor
the performance of their employees very closely and hold them "really really accountable" . As
an example, product managers are expected to provide precise customer requirements for
products and features to the engineering team based on which products are designed. Also, they
are expected to provide reasonably accurate sales quantity forecasts to the operations
organization based on which products are manufactured. If the customers do not like the product
or features and the sales forecasts are "way off", the product marketing manager could be fired.
III (C) 3: Firm’s organizational values
From Apple’s 1987 Value Statement documentlxxiii, we can see that they have retained
most of their values to-date. These values are reflective of the innovative products and services
that Apple is providing today.
III (D): Strategic Position Definition
III (D) 1a: Corporate Level – Firm’s business portfolio
Apple is in the following businesses: Macintosh Computers, iPod, other music related
products, peripherals, software and services.
Apple’s core competence is leveraging its human engineering to deliver stylish and user
friendly electronic products, and in effectively marketing these products.
III (D) 1b: Corporate Level – Firm’s Corporate Level Strategy
Please see Exhibit III (D) 1b for Apple’s 2006 revenue (in $ million) in its respective
businesses. Although the Macintosh and iPod may be developed in isolation, the end product
shows that there is tight integration between the software and hardware. And in the software
area, it had to work on Macintosh, Window PC and iPod. So, the hardware development of iPod
and Macintosh may be separated, but the software is the glue. This suggests that Apple’s
corporate strategy is one of as ‘Related Linked’. Given the fact that the iPhone is an iPod with
added mobile phone capability, its introduction will not change Apple’s Related Linked
corporate strategy.
III (D) 1c: Corporate Level – Recent acquisitions, mergers or divestments
Apple believes in organic growth. According to jobs, “Software is the user experience”
and Apple doesn’t like to depend on Independent Software Vendors to design that experience.
As such there have been no major acquisitions in the past. For example, many of the applications
developed by Apple were for MAC based applications that attempt to cater to the creative and
entertainment aspects of the user community. As such, when Apple’s request to create a video
editing program was rejected by Adobe systems, Apple launched its own project to create Final
Cut Prolxxiv. Apple also ventured into the retail space and opened about 160 stores in USA,
Canada, UK and Japan. Many times, people would walk into a retail store to buy an iPod, test
drive other MAC products and would end up buying a computer to go with the iPod. Apple
estimated that the foot traffic in its stores totaled 50 million in fiscal year of 2005. lxxv
III (D) 1d: Corporate Level – Recent alliances, partnerships or joint ventures
Apple has allied with Cingular as the sole service provider for the iPhone within the US.
Please see Exhibit III (D) 1d-1 for the analysis of synergies between Apple & Cingular
As part of trademark settlement dispute over iPhone, Cisco and Apple have decided to
work together in the areas of security, consumer and enterprise communications. Please see
Exhibit III (D) 1d-2 for the analysis of synergies between Apple & Cingular
III (D) 1e: Corporate Level – Evaluate the firm’s business portfolio
Please refer to Exhibit III (D) 1e for Apple’s BCG matrix.
Apple’s Macintosh business has a minor share of the personal computer market lxxvi while
the market is slowing down in growthlxxvii. This puts Apple’s Macintosh in the Dog category
(Exhibit III (D) 1e – Apple’s Business Portfolio Analysis using the BCG matrix). However,
Macintosh generates 38% of Apple’s FY’06 revenuelxxviii. So the Mac is really a Pet. Apple’s
iPod business had 28% market share of all MP3 players in 2005lxxix. It is expected that the MP3
player market will grow from 26.4 million units from 2004 to 700 million units in 2009lxxx. This
puts the iPod in the Stars category. According to Steve Jobs, Apple wants to capture 1% of the
mobile handset market by 2008. This is a relatively small market share. And the mobile phone
market had grown 22.5% from 2005 to 2006lxxxi. Hence, iPhone is in the ‘Question Mark’
category. Although iTunes was originally created to fit into the iPod sales and offer a way to
download music legally, iTunes was originally referred to as the “razor-and-blade” model with
“variable element (iTunes) serving as the loss leader for profit-driving durable good”lxxxii.
However, for iTunes to be profitable, it needs a large number of users of iPod and iPhone. iTunes
fits well into the concept of scalability continuum where iTunes content is “Information intensive
without labor intensive customization”. Media companies are rushing to offer their content on
iTunes and size (in terms if media available) adds to the value of the network. Thus with iTunes,
Apple has created a network effect and with more users of iPod and iPhone, iTunes will move
from a ‘Question Mark’ to a Cash Cow.
III (D) 2a: Business Level – Define the generic business level strategy for each business
Apple’s business level strategy is Broad Differentiation. Apple’s goal is to be a “value
leader, not price leaderlxxxiii” for “students, educators, creative professionals, businesses,
government agencies, and consumers”lxxxiv. Apple can only provide value leadership through
product differentiation. Although Apple has been trying to set Macintosh’s business level
strategy to Broad Differentiation, it has traditionally been sold to mainly students and creative
professional, which realistically put Macintosh’s business level strategy to be Focused
Differentiation. The iPod and music related businesses are truly a Broad Differentiation business
level strategy. By offering iTunes to be available on both Macintosh and Window PC, the iPod is
usable by more diverse masses. The simple design of iPod, and easy access to large list of online music and other iTunes media content such as videos, audiobooks, TV shows truly
differentiates the iPod from other MP3 players. The iPhone is intent to replicate the success of
iPod and also address the concern that handsets with integrated MP3 player are eating away the
market share of iPod and iTunes.
III (D) 2b: Business Level – Fit between business level and corporate level strategy
Apple’s strategy is to be 2nd to market and focus on enhancing the “user experience” of the
products. Apple single mindedly focuses building easy-to-use products such as the MAC, iPod
and now the iPhone. Apple’s fit between business level and corporate level strategy can be
classified as a “Simple Consistency” fit.
III (D) 2c: Business Level – Change in business level strategy based on strategic move
Although Apple intends the iPhone to be a ‘Focused Differentiation’ product with its
high price point and catering to users who want to have a converged device for the iPod, handset
and internet communicator, initially, the iPhone is restricted to a limited group of users. The
limitations are price and service provider. iPhone is relatively expensive compared to currently
available handsets, and will be only with Cingular service. Apple may imitate its strategy of iPod
and move from focused to broad differentiation with its iPhone offering as mainstream
consumers start gaining interest in the product. Since Apple is defining a new customer segment
in the consumer space of “consumer smartphones”, it will be at an added advantage if it quickly
moves the iPhone from focused differentiation to broad differentiation and starts subsidizing the
iPhone early on to gain market share in an already competitive handset industry.
III (D) 3a: Resources & Capabilities – Analyze to determine V-P, Value & cost drivers, etc.
Please see earlier section II (D) 3h for Apple’s value & cost drivers, etc.
III (D) 3b: Resources & Capabilities – How V-C will change based on strategic move
Although an iSuppli analyst estimates that 4GB iPhone would cost $246lxxxv, it is not
clear what the real cost is since Apple has not sold any iPhones to add to its COGS. However, we
do know that the 4GB iPhone will be sold for $499. According to Steve Jobs, today’s users have
to buy an iPod and smartphone to get close to the features of iPhone. A 4GB iPod costs
consumers $199, and an average smartphone with 2 year contract costs $299lxxxvi. So, Apple is
pricing 4GB iPhone at $499 with 2 year contract. However, iPhone provides more value than a
iPod and smartphone combined.
iPhone Values: Please see exhibit III (D) 3b – Part A
With the additional features and ease of use, iPhone definitely increases the buyer surplus (V-P).
III (D) 3c: Resources & Capabilities – Value Chain exhibit
Please see Exhibit III (D) 3c – Part A for the Value Chain Analysis for Apple
III (D) 3d: Resources & Capabilities – VRIO Analysis
Please see earlier section Exhibit II (D) 4 – Part A (g)
III (D) 3e: Resources & Capabilities – How is the firm retaining customers?
Traditionally Apple has retained its customers through a cult-like following. However,
with the introduction of iPod, their customer segment has expanded rapidly outside of their cult
followers. Apple is able to retain this new segment of customers through its excellent “human
engineered” products and after-sale support. Apple seems to be able to retain customers through
its excellent user interfaces. However, this is impeded by the relatively higher price of its
products. Take the Macintosh computer for example. For a relatively similar performing
computer, a consumer will pick a Windows PC. However, if the consumer had a chance to really
use a Macintosh extensively, the superior user experience for would compel the consumer to stay
with the Macintosh in spite of its higher cost. Therefore, to entice users to use the Macintosh,
Apple focuses on educational institutes. Apple either donates or sells to educational institutes,
where future computer users get their first exposure to computer. This builds on their positive
experiences and promotes usage of Apple products. Starting with the iPod, Apple has also well
understood its product life cycle and has continuously innovated its product lines to cater to a
wider segment of customers.
III (D) 3f: Resources & Capabilities – Apply frameworks from other classes
Apple focuses on value-driven product development, rather than price leadership. Apple
closely watches unmet market needs in terms of usability of devices and develops products to
make complex tasks simple. It then charges a premium for these products and usually is
successful at it, due to the convenience factor of its products as compared to the substitutes.
Apple develops consumer products which compete on basis of their form and possession factors
in terms of sources of utility framework. For example with the iPod, Apple introduced a slim
version of a music player with lots of disk space and an easy-to-use interface. It soon became a
fashion accessory to carry around when listening music and became a substitute phrase for MP3
players (possession factor). Although with the iPod, Apple started with a push strategy of
product positioning, with the iPhone there seem to be more elements of pull than push, with a lot
of curiosity driving the pre-launch demand for iPhone. This has happened due to the immense
success with the product design of iPod and its mass appeal. Apple is also using analysts,
partners, bloggers and its website as a means of promoting its product line and has pre-empted
the competitors in the handset market with its innovative design and new features like touch
keypad, visual voicemail and wide screen LCD format with its iPhone. It continues to use direct
and distribution channels depending upon the product. If the product is sophisticated such as
Macintosh computers, the product is sold through Apple Stores in addition to its online store,
where there are knowledgeable experts that can demonstrate the value of the Macintosh. If the
product is simple like iPod, which does not required technical experts, then they are sold through
major retailers, along with its own Apple Stores and online store. Apple has also developed
complementary platforms like iTunes for its consumer products like iPod, iPod Video and now
iPhone, to provide exclusive content for its products driving their appeal for the end consumer.
This also provides an incremental revenue stream for Apple in the long run and helps positions
itself as a leading provider of consumer needs in music, video and wireless communication
businesses, in terms of devices and content. An analysis of Apple’s strategy using the 4Ps
framework shows that it develops products that exploit an unmet market demand, and prices the
products based on the value proposition of these devices. Apple typically will price its product
higher than competitors with comparable functionalities. This is because Apple believes its
human engineering of its products adds additional value. To promote its premium values,
Apple’s message from advertisements to its Apple Stores is “simplicity”. Its background for its
ads and stores is just plain white. There are no flashy colors or a flashy environment. It is just
plain white, which accents on the simplicity of its product solutions.
III (E): Financial Analysis
III (E) 1: Financial Analysis – Analyze performance over past 5 years
Please see section II D 6
III (E) 2: Financial Analysis – Conduct valuation using an alternative technique
Relative Valuation for Apple
Choice of Comparables
Apple, Inc. operates in multiple industries- digital music players (iPod), personal
computers (Mac desktops and laptops), music download service (iTunes), Operating Systems
(OS X) and with the announcement of iPhone, in the smartphone maker industry as well.
Therefore, the following comparables, which are used for Apple’s relative valuation, represent
all of these industry sectors
Smartphones- Palm (PALM), Research in Motion (RIM)
Digital Music Player- Creative (CREAF), Sandisk (SNDK)
Personal Computers- Dell (DELL), Gateway (GTW)
Music Download- Napster (NAPS), CNET (CNET)
Operating Systems- Microsoft (MSFT)
Estimating Valuation Ratios for the Comparables
We have used four valuation ratios in comparing Apple with the comparable companies:
Enterprise value to Sales, Enterprise value to EBITDA, Market value of equity to Book value of
equity, and PE (price to earnings per share). Enterprise value is the adjusted market value of the
firm, sometimes referred to as the true value of the firm. Enterprise value is obtained by adding
debt to the market value and subtracting the cash and cash equivalents. To estimate Apple’s
enterprise value in comparison with its comparables, we use the ratios Enterprise value to Sales
and Enterprise value to EBITDA. The relationship between market value of equity to book value
of equity is often used as a measure of how over or undervalued a stock is. The ratio of price to
earnings per share (PE ratio) is mostly used to compare different companies to see how
expensive they are as compared to their comparables. In estimating Apple’s market value, we
use the ratios market value to book value and price to earnings per share. We have used Yahoo
finance to obtain values for computing the valuation ratios (see Exhibit 2). The trailing twelve
months data is used for sales, EBITDA and book value. Most recent quarter data is used for
shares outstanding, debt, cash and cash equivalents.
Estimation of Enterprise Value and Equity Value for Apple
The enterprise value and equity value for Apple are calculated as follows: For each set of
ratios determined for the comparables in Exhibit III (E) 2, the average is computed. This average
value is then multiplied with the value of the denominator of the ratio for Apple, to compute the
value of the numerator of the ratio.
Enterprise Value
The average for the ratio of Enterprise Value/Sales is multiplied with the Sales for Apple
to estimate the Enterprise Value for Apple. Similarly, another value of Enterprise Value for
Apple is calculated by using the average of the ratio Enterprise Value/EBITDA for the
comparables and multiplying it with the EBITDA for Apple. The Enterprise Value of Apple is
computed as the average of these two values.
Equity Value
The average of the ratio Market Value/Book Value for the comparables is multiplied with
the Book Value for Apple to determine one measurement of the Equity Value for Apple. The
average of the Price/Earnings (PE) ratio for the comparables is multiplied with the earnings per
Share (EPS) to obtain an estimate of the PE ratio for Apple, which in turn in multiplied with the
number of shares outstanding for Apple to derive the second measure of Equity Value for Apple.
The average of these two values is determined to be the Equity Value for Apple.
Adjustments
The section ‘Adjustments’ of Exhibit III (E) 2 shows the median metrics for Revenue
Growth, Projected EPS Growth (for 2007 and 2008) and Operating Margin for the comparables,
along with the percentage by which these measures for comparables differ from those for Apple.
We notice that, relative to the median for comparables, Apple exceeds the revenue growth and
operating margin growth but trails in EPS growth. Subjective adjustments of 5%, -5%, -5% and
5% respectively are applied to these measures to arrive at a net adjustment of 0%.
Final Values for Enterprise Value and Equity Value for Apple
The Enterprise Value and the Equity Value for Apple computed above are increased by
the adjustment factor of 5% derived in the previous section, to determine the adjusted estimates
of these values for Apple. These computations are depicted in the table below.
VALUATION
ENTERPRISE VALUE
EQUITY VALUE
BY COMPARABLES
$ 62,762 M
$ 62,130 M
ADJUSTMENT
0%
0%
ADJUSTED VALUATION
$ 62,762 M
$ 62,130 M
Please see Exhibit III (E) 2 for detailed explanation of the comparable analysis
III (E) 3: Financial Analysis – Scenario Analysis (Exhibit II (D) 6 – Apple’s valuation using
scenario analysis)
We used EVALlxxxvii to value Apple Inc. using DCF valuation under the following
scenarios. The rationale for choosing the scenarios is given below. (Please see Exhibits II (D) 6,
a-g for the scenarios below)
1. Apple achieves a realistic goal of meeting 1% of overall handset market share (10 million units),
corresponding iTunes sales go up and high end iPod sales are cannibalized - We selected this
scenario as the base case scenario taking Steve Jobs key note speech as reference. In this
scenario we assumed that Apple gets 1% market share in 2008 and 7% market share by 2015.
2. Apple does not introduce iPhone - Here we have assumed a scenario where Apple does not
introduce iPhone and iPod sales are cannibalized since cell phones are coming up with integrated
MP3 players.
3. Apple introduces iPhone and it is an exceptional success - In this scenario we assumed that
Apple is successful in creating the niche market for consumer smartphones and that Apple can
realize market share of 2% by 2008 and 14% by 2015
4. Apple introduces iPhone and it does not live up to the hype created - In this scenario we assume
that Apple’s iPhone does not live up to the consumer expectations from Apple and that the
product is a failure either in terms of price or in terms of usability. In this scenario Apple gets
only 0.4% of market share by end of 2008 and 1.5% market share by 2015
5. Apple introduces iPhone but fails to add content to iTunes - Although iTunes incurs significant
cost for Apple with majority of revenues going to music companies and credit card processing,
iTunes will be profitable if there are large number of users on iTunes. Currently Apple’s
revenues from iTunes are increasing in the order of 100%. If Apple fails to add content to
iTunes, not only will it lose revenues (since scale drives revenues) but number of users of iPod
and iPhone will reduce thereby failing to add new subscribers. For simplicity of the model, we
have left the market share assumption as 1% by 2008 and 7% by 2015.
6. Apple introduces iPhone but iPhone is commoditized - Apple commoditize iPhone from 2008
onwards and the average selling price with 2 year contract with Cingular is $299. This is a
scenario if Cingular is successful in negotiating with Apple to reduce the price for new
subscribers in order to gain more subscribers from rivals such as Verizon and T-Mobile.
7. Apple introduces iPhone but fails to keep its COGS in control - In this scenario we have assumed
that COGS increases tremendously due to processing fee while providing content on iTunes.
COGS has been maintained at the current rate of 70% throughout the forecast horizon and
beyond.
The summary of assumptions made for coming up with DCF valuation is given in Exhibit
III (E) 3b. Weighted Average Cost of Capital (WACC): Broadly speaking, a firm uses either debt
or equity to finance its assets. WACC is the average of the costs of these two sources of
financing, each of which is weighted based on its respective proportion. WACC can be
considered as the overall required return on the firm as a whole.
WACC = Re * E/V + Rd * D/V * (1 - T)
Cost of Equity: “A firm's cost of equity represents the compensation that the market demands in
exchange for owning the asset and bearing the risk of ownership”
lxxxviii
. Cost of Equity is
calculated using the Capital Asset Pricing Model (CAPM). Per the CAPM,
Cost of Equity = Risk-Free rate + Beta x (Market Risk Premium)
ke = rf + β*(rm – rf)
Computing Cost of Equity
Risk Free Ratelxxxix
Market Premiumxc
Betaxci
Cost of Equity
rf
rm – rf
β
ke = rf + β*(rm – rf)
5.44%
7.17%
1.4
15.48%
The WACC is taken as Cost of Equity since Apple Inc. has zero debt and we anticipate
that Apple will continue to follow the strategy of having no debt in its books. Apple Inc does
have some operating leases which can potentially be classified as long term debt and total
minimum lease payments for the next five years and thereafter is given as $1154 million xcii.
Even if we assumed a conservative number of 5% as cost of debt, given the operating lease is
$1154 million and market cap for Apple Inc. is 77 Billion, it has a very minor impact on the
WACC. (WACC changes to 15.32% from 15.48% if we assume Debt). So all the valuations in
different scenarios, we have used cost of equity as the WACC (15.48%).
The valuation of Apple under these various scenarios is given below
Apple’s valuation using Scenario Analysis
Scenarioxciii
Realistic goal of 1% market share
iTunes reduced content
No iPhone
Commoditize iPhone
Exceptional Success
COGS out of control
Stock Price
$102.30
$33.31
$34.56
$101.91
$317.34
$58.78
Equity Value (in Billion)
96.93
39.32
40.36
96.60
276.49
45.92
Sensitivity Analysis: Under each of these scenarios we arrived at different valuations for Apple
Inc. In each of these scenarios we then adjusted the WACC, COGS/Sales ratio, SG&A/Sales
ratio, R&D/Sales ratio, Terminal growth rate and next year growth rate to arrive at the range of
valuations under each of these scenarios. The Exhibit III (E) 3a gives the high and low end
valuation numbers that we calculated under these scenarios. We have not done sensitivity
analysis for the scenario where Apple fails to keep its COGS under control as COGS is one of
the parameters we are varying in the sensitivity analysis. After analyzing all these scenarios, it is
evident that Apple’s valuation is adversely affected if it fails to keep pace with adding content on
iTunes. Even in the case where Apple does not introduce iPhone, since consumers will start
buying cell phones with other MP3 players, the revenues from iTunes will reduce. So iTunes is a
sustained competitive advantage for Apple and it should try to defend iTunes through future
product and service offering. Apple loses this competitive advantage if it is forced to open up its
iTunes to outsiders as is currently being discussed in the European Commissionxciv.
Part B – Wireless Service Provider Industry
II (B) 1: Level 1 Analysis & Level 2 Analysis
Please see Exhibit II (B) 1 & 2 – Part B for a detailed Level 1 & Level 2 Analysis
II (B) 3: Level 3 Analysis
From levels 1 and 2 analysis, we conclude that the wireless service industry in high
revenue markets of US and Europe are coming under increasing pressure to provide value-added
services at increasingly lower costs. The wireless service firms are driving to attain economies of
scale by increasing their subscriber base and through addition of low-cost value added services in
order to justify high capital costs for new technologies like 3G and 4G. Some firms are also
attaining these economies of scale by means of acquisition of other wireless firms. Hence overall
the wireless service industry is more moderately unfavorable than the handset industry with an
overall rating of 3.7 out of 5.
Competitive Force
Threat of rivalry
Barriers to entry
Supplier power
Buyer Power
Power of substitutes
Complementor Power
Overall
Effect on Industry
Moderately unfavorable, 4
Moderately unfavorable, 3.9
Moderately Unfavorable, 3.8
Moderately unfavorable, 3.4
Moderately unfavorable, 4.0
Moderately favorable, 2.0
Moderately unfavorable, 3.7
Rank
2
3
5
1
4
6
Weight
25%
15%
10%
20%
20%
10%
II (D): Competitor Analysis
a) Cingular: Cingular has entered into an exclusive contract with Apple to supply wireless
service in the US to Apple’s iPhone. This arrangement with Cingular adds another dimension of
competition to Apple in the service industry. The main suppliers of mobile phone service in the
US are Cingular, Verizon, Sprint, T-Mobile, Alltel and Nextel. Apple’s tie up with Cingular will
likely force other mobile phone service providers to get contracts with other smartphone
manufacturers and to compete on products and services that are at least comparable in features
with the Apple’s iPhone. For instance, since the introduction of Motorola’s RAZR in the fourth
quarter of 2004, Motorola has taken 12 percentage points from Nokia capturing a total of 44%
market share in US cell phone industry. This example illustrates how consumers are moving
towards having more trendy handsets which provide style in addition to added functionality. As
consumers get interested in Apple’s iPhone, many of them may be forced (and be willing) to
switch cell phone providers and sign a two year contract with Cingular. This will eat into the
existing market share of other mobile phone service providers. So there will be a lot more
pressure from the service providers on handset manufacturers to provide value (in terms of
additional features and making handsets that are comparable to iPhone) which may ultimately
lead to exclusive contracts between other handset manufacturers and mobile phone service
providers. Please see Exhibit II (D) 1 for the market share of mobile phone service providers is
given below. Verizon, T-Mobile and Sprint Nextel appear to be the closest competitors to
Cingular. Sprint-Nextel and Verizon share similar market shares, are the next big players in the
service provider industry and are in the CDMA industry. T-Mobile has lower market share but is
an emerging threat to Cingular since it is the only other major GSM provider and also has
international presence. International business travelers who prefer to have their phones working
in different countries usually prefer to go with GSM phones as GSM-based technologies are
available in more countries. Cingular was primarily held by SBC and Bellsouth with ownership
interests of 60% and 40%. With SBC’s acquisition of AT&T Corp. and Bellsouth, Cingular will
now be positioned under the new AT&T Inc. brand name. AT&T corporate strategy is “give
customers anytime access to all of their communications services on simple-to-use devices that
go wherever they go. Our goal is to be the only communications and entertainment company our
customers will ever want.”xcv AT&T will be selling Cingular wireless services under AT&T
name and will be providing Cingular with a global presence. AT&T’s corporate strategy can be
defined as “Related Linked”. AT&T’s business comprises of Business and Wholesale (48%),
Wireless (24%), Consumer (24%), Directory and Other (4%). We have classified their strategy
as ‘related linked’ since their businesses can operate independently, i.e., wireless division has
little interaction with Business and Wholesale and yet fits (‘Simple Consistency’) into their
overall strategy of becoming a single-stop shop for all communication needs. They are linked in
that the independent units share the common brand name and communication from wired and
wireless devices with plans such as AT&T unity plan. “AT&T Unity plans are part of the
company's strategy to simplify the process of purchasing and using communications services,
while combining wireless/wireline services in ways that provide tangible benefits for
customers”xcvi. AT&T’s corporate umbrella is shown in Exhibit II (D) 1a – Part B. Since the
Apple iPhone will primarily be sold by the wireless division of the new AT&T, we focus only on
the business level strategy of Cingularxcvii. Cingular offers consumer services such as postpaid
voice service, prepaid voice service and data services. It focuses its marketing and sales efforts
on postpaid voice services since it locks in the consumers for one or two year contract periods
and gives incentives such as subsidized handsets due to the low churn rate. Postpaid voice
service strategy can be classified as “Broad Differentiation”. According to Cingular’s 10-K filed
on 02/24/06, “significant component of our strategy consists of developing value-added plan
features, ancillary services, unique equipment devices and promotions to attract and retain
postpaid subscribers”. Cingular’s prepaid voice service is targeted towards niche markets such as
youth markets, families and small business segment, and follows the strategy of “Focused
Differentiation”. Cingular’s prepaid voice service generates higher revenue per minute but
generates substantial subscriber churn rate and lower revenues per subscriber. The data services
segment is a growing segment and follows a ‘Broad Differentiation’ business level strategy.
According to Cingular’s 10-K, “Cingular focuses on improving the customer experience through
deploying advanced data capable devices, enhancing the user interface on these devices and
making the provisioning of data services on these devices as seamless as possible. To foster the
continued growth in the consumer data business, we (Cingular) continue to upgrade the tools and
applications that facilitate greater usage.” Cingular is also involved in equipment sales but this is
only to complete the product portfolio by making hardware and services available in single stop
shop.
Cingular also provides Corporate Wireless Solutions, Enterprise Voice Services,
Enterprise Data Service, Reseller service and Equipment sales (such as PDA’s and wireless PC
cards) and follows the strategy of “Focused Differentiation”. Cingular also has access to licenses
and technology for their networks through which they provide their services.
Value Drivers:
Technology: After merging with at&t, Cingular now has the technology capabilities to transform
itself into a solution provider for IP services. Cingular enhances its network with GPRS, EDGE
and UMTS network nodes to have customers experience higher data and video speed services
Quality: Cingular offers superior quality content delivery will fewer dropped calls, is branded
(and lives up to the expectation) with terms such as “Raising the Bar”, “Allover”, etc.
Breadth of Line: Due to its merger with at&t, the new at&t offers broad product line with
infrastructure to support, local, long-distance calling, wireless voice and data services, DSL
broadband lines, directory publishing.
Geography: at&t has wide geographical presence. at&t’s IP networks are available in 127
countries and is present across USA.
Brand/Reputation: The brand reputation for Cingular is high especially under the new at&t
umbrella. Cingular has also associated itself with terms such as “Raising the Bar”, “Allover” and
“More Bars in More Places”.
Network Externalities: With each new customer being added, Cingular’s network infrastructure
is being utilized to a greater extent without the need to invest in adding additional resources.
Complements: There are a variety of services, both voice and data, that enhances the ability to
sell their services
Large Subscribers: Because Cingular provides free mobile-to-mobile calls to any Cingular
phones, a large subscription base means that there are more chances to call someone that is also a
Cingular subscriber for free.
GSM Technology: GSM Technology is the most widely used cellular technology in Europe and
Asia. By selecting GSM technology, Apple can easily reach into the international market with
minimal change to the design. In the United States, the largest GSM network service provider is
Cingular. Hence, Cingular’s GSM network was an easy choice for Apple.
Cost Drivers: Scale Economies: Cingular achieves economies of scale by adding more
consumers since it utilizes the same infrastructure to deliver wireless services.
Scope Economies: Cingular leverages same technology across global geographies but may have
to invest capital in constructing new towers. Economies of scope are high
The Learning Curve: Under the new corporate umbrella, the learning curve can lower the costs
across various communication services.
Low Input costs: Greater subsides on handsets as handset manufacturers are willing to subsidize
their handsets to gain entry into #1 market player in voice/data services
Vertical Integration: at&t is vertically integrated in the sense that landline and wireless service is
available within the same corporate umbrella.
Resources and Capabilities: Exhibit II (D) 4 – Part B a – VRIO Analysis for Cingular
Products and Number of product markets served:
at&t has businesses in retail and wholesale landline telecommunications, managed networking,
wireless services, yellow and white page advertising and electronic publishing.
b) Sprint-Nextel Corporation: Sprint Nextel Corporation is a holding company with operations
conducted mainly by its subsidiaries. Sprint-Nextel provides wireless and wireline
communication products and services to businesses, individuals and government agencies. It
provides mobile telephone and wireless data services on networks that utilize CDMA and
integrated Digital Enhanced Network (iDEN). It offers post-paid (under brand name NexTel) and
pre-paid wireless services (under brand name Boost Mobile)xcviii. They are the providers of long
distance services and one of the largest carriers of Internet traffic over all-digital long distance
Tier 1 Internet Protocol (IP) Network. A large number of protocols such as MPLS, Frame relay,
ATM and Managed network services run over their network to cater to the needs of Residential,
Multinational Corporations, business and other communication customers. They also provide
local exchange telephone service (local, long distance and data services such as DSL) to 7.4
million customers. Sprint Nextel’s Corporate Strategy is “Single Business”
Business segments:
Wireless: the business level strategy is “Focused Differentiation”.
Long Distance: the business level strategy is “Broad Differentiation”.
Local: the business level strategy is “Mass Customization”
Value Drivers: Sprint Nextel’s value drivers are its large network and wireless spectrum assets
which allows Sprint to offer to its customers an “array of broadband wireless and integrated
communications services”, its digital wireless network in all 50 states and 297 of the 300 largest
U.S. metropolitan areas, and its choice of technologies (CDMA and iDEN ) to its customers.
Cost Drivers: Sprint Nextel’s cost drivers are its economies of scale and scope (which are now
comparable to competitors- AT&T and Verizon) resulting from acquisition of Nextel, the
resulting cross-selling opportunities with Nextel’s customers and other cost savings
opportunities- higher volume discount from suppliers due to larger size, reduced network
operating costs due to co-location of cell sites, reduced SG&A expenses due to combining of
customer service, and marketing/sales and fulfillment savings.
Resources and Capabilities: Exhibit II (D) 4 – Part B b – VRIO Analysis for Sprint Nextel
Products and Number of product markets served: Sprint Nextel has the following three lines
of business: Wireless phone service, Long distance landline phone service and Local landline
phone service
c) T-Mobile: “T-Mobile is a group of mobile phone corporate subsidiaries (all under the
ownership of Deutsche Telekom) that operate GSM and UMTS networks in Europe and the
United States. The "T" stands for "Telekom."xcix. The corporate level strategy of T-Mobile can be
categorized as “Related Linked” since the revenues from either of these business units is less
than 70% of total revenues and these business units share only a few links. For example,
Broadband/Fixed network unit shares little links with Mobile communications division and these
both divisions in turn complete the portfolio of Business Customers division. T-Mobile’s
Business level strategy is “Broad differentiation” since mobile industry is a mass market industry
but T-Mobile distinguishes itself through high-quality customer service and focusing its offering
for specific segment needs (such as 5 favorites, offering mobile TV during FIFA world cup etc
Value Drivers:
Technology: T-Mobile focuses on continuously upgrading its networks to offer the best quality
Quality: T-Mobile offers superior quality services – both in terms of network services and
customer service and it won the “Mobile Operator of the Year” award.
Breadth Of Line: T-Mobile offers end to end business solutions both broadband and mobile
communications when combined with other subsidiaries of Deutsche Telekom.
Service: “T-Mobile offers exceptional service and “T-Mobile USA has been recognized by J. D.
Power & Associates for the 5th time in a row for highest ranking customer service in wireless.” c
Customization: T-Mobile offers high level of customization and has both prepaid and post paid
services and flexibility to choose from variety of voice and data plans
Network Externalities: With each new customer being added, their standard equipment and
services are utilized without the need to add additional resources. (high network externalities)
Complements: Availability of variety of services (both voice and data) & DSL solutions helps
them build end to end solution with Business Customers.
Cost Drivers:
Scale Economies: Cingular achieves economies of scale by adding more consumers since it
utilizes the same infrastructure to deliver wireless services.
Scope Economies: Cingular leverages same technology across global geographies but may have
to invest capital in constructing new towers. Economies of scope are high
Low Input costs: Greater subsides on handsets as handset manufacturers are willing to subsidize
their handsets to gain entry into wireless service providers’ networks.
Vertical Integration: They own and operate GSM, UMTS, EDGE networks and offer variety of
voice and data plans
Resources and Capabilities: Exhibit II (D) 4 – Part B c – VRIO Analysis for T-Mobile
Products and Number of product markets served: Deutsche Telekom operates in Mobile
communications (voice and data), provides Broadband/Fixed network, offers end-to-end
solutions to business customers and has a group headquarters division that handles the real-estate
issues. Geographically they are present in Europe (with 52.9% of revenues coming from
Germany and 24.2% revenues from rest of Europe) and North America.
d) Verizon: Verizon Communication Inc. is a direct competitor with AT&T in everyway.
Verizon Communication competes in the same business sectors as AT&T: Domestic Telecom
(local & long distance phone services and DSL), Domestic Wireless, Information Services
(yellow pages), and International (investment in foreign wireline and wireless services) ci.
Verizon’s domestic wireless business (Verizon Wireless) competes directly with AT&T’s newly
acquired Cingular wireless business. They both provide the most wireless coverage in the United
States. Verizon Wireless is the #2 wireless provider after AT&T Mobility (formerly Cingular)
with 51 million subscribers. On the surface Verizon Communication’s corporate level strategy
looks like Related Linked, because each business has the same brand name and provide single
billing. However, the actual service provided is like Unrelated-businesses. Verizon Domestic
Telecom purely concentrates in wireline business, while Verizon Wireless purely concentrates in
cellular business. Verizon’s revenue for 2005 revenue was pretty much split between Verizon
Domestic Telecom and Verizon Wireless businesses. Verizon Wireless business level strategy is
broad differentiation. Verizon Wireless is trying to capture the all the mobile phone users in the
United States by differentiate themselves with better wireless network technology, EV-DOcii, and
more content such as V-CASTciii. However, the wireless service industry is very competitive.
Verizon believe Network reliability, capacity and coverage, Pricing, Customer Service, Product
Development, Distribution and Capital Resources are important competitive factors to the
wireless industryciv: These are very much the same factors that Cingular is focusing on cv. Many
of the features and functions that Verizon is trying to differentiate itself from the competition are
easily replicable by the competition; hence, many of the features and functions are becoming
commoditized, which is driving the service providers to become low cost leaders.
Value Drivers:
Verizon Wireless offers more exciting choices of handsets than Cingular
such as LG Chocolate in various different “flavors” (aka colors). Because handsets are required
to have GPS locator for 911, Verizon Wireless took advantage of the build-in GPS to offer VZ
Navigator and Chaperone features. The VZ Navigator provides turn-by-turn instructions to
specific location; while the Chaperone allows family members to locate the handset in real-time
including notifying parents of when a child’s handset enter or exiting a zone such as school.
Verizon Wireless also offers a wide range of ring tones, music, video clips and live broadcast of
video, music and games (V Cast) via their “Get it now” feature. The access of V Cast streaming
video is made possible by Verizon’s EV-DO 3G technology.
Cost Drivers: Verizon Wireless has the typical cost driver of subsidizing handsets to guarantee
retention of customers. Also, Verizon need to build the infrastructure to provide VZ Navigator,
Chaperone, “Get it now” and V-Cast features to the customers. Many of the “Get it now”
contents require getting licenses to distribute such as music and video.
Resources and Capabilities: Exhibit II (D) 4 – Part B d – VRIO Analysis for Verizon
Products and Number of product markets served: Verizon Wireless offers a variety of mobile
handsets, voice plans and data plans for individuals, businesses and government users. In
additional to traditional text messaging, Verizon offers video & picture messaging, Mobile IM
and Mobile Email. Other features that Verizon offers are ring tones, music, games, video Clips,
mobile TV, mobile Web & email.
II (D) 6: Comparative Financial Analysis
Financial ratio analysis provides us an opportunity to quantify and analyze operational
performance of the wireless service industry involved using the following categories of ratios
and financial numbers which were closely analyzed over a period of five years, dependent on the
financial data available (Please see Exhibit II (D) 6 – Part B for a detailed analysis)
Liquidity Ratios-Current Ratio, Quick Ratio
Asset Turnover Ratio-Inventory Turnover
Financial Leverage Ratios-Debt Ratio, Debt-To-Equity Ratio
Profitability Ratios- Gross Profit Margin, ROA, ROE
Growth Rates and other operational ratios- Sales growth rate, Cost of Sales, Net Income
growth rate, R&D/Sales
Special Ratios: Average revenue per unit, Subscriber churn rate, Subscriber growth rate
Over the years, the wireless industry in the US has become significantly competitive and
this has led to slow growth rates, lower gross and net profit margins and increased industry
consolidation. Also, the firms are now competing on the basis of network and customer service
quality and by partnering with handset firms to provide value-added data services, which have
comparatively lesser market penetration in the US. The firms are also heavily investing in
improved infrastructure to provide these value-added data services by moving from 2G and 2.5G
networks towards 3G networks, which shall also provide them with the ability to provide
complementary services like Wi-Fi access in US and Europe. The firms are also investing in the
wireless infrastructure in emerging markets to gain increased market penetration. Wireless
service firms also faced increased regulation in Europe due to the implementation of EU
framework across countries’ telecom sector. In the US, as of 2006, Cingular compares very
closely with Verizon in terms of its liquidity ratios. Over a period of five years, while these ratios
have declined for Cingular on one hand, the same ratios have increased for Verizon, especially
since 2005. This can be attributed towards the acquisition of AT&T wireless by Cingular in Oct
2004cvi as these firms continue to work on synergies in terms of capital assets like cell sites and
redundant network facilities. Cingular has been capitalizing on its reduced debt ratio over last
five years and is favorably positioned against its competitors like Verizon and T-Mobile with
regards to this ratio, indicating that it has done a better job at utilizing debt to acquire assets.
From the Debt-To-Equity ratios, Cingular has also done a much better job than its competitors by
funding its growth through its equity rather than its debt, leading to a lower Debt-To-Equity
ratio. Verizon, T-Mobile and Sprint Nextel though have outperformed Cingular in their gross
profit margins over last five years and this should be a serious cause of concern for Cingular. The
same is true for its return on assets and return on equity ratios which have been declining over
time and are very much unfavorably positioned against Cingular. This can be attributed to
increased investment by Cingular in upgrading its networks from 2G to 3G and due to its
strategy to acquire a larger subscriber base and reduce the churn rate, in order to remain
competitive. From the ratio analysis the root cause of concern for Cingular seems to be that the
cost of sales are increasing faster than the revenue, having an adverse impact on its income and
reducing its ROA, and ROE. Also the critical metric of Average Revenue Per Unit or ARPU
used by wireless service providers to measure performance indicates that ARPU for Cingular has
been steadily declining over last five years while the same has been increasing for Verizon,
expect a small decline in 2005. In addition, the customer churn rate for Cingular is higher than
that of Verizon, indicating that Cingular needs to work harder on providing better network
capabilities to its user along with attractive pricing and customer service to retain these
customers. The bright spot for Cingular is that it has managed to beat Verizon in increasing its
customer base since 2004 and continues to enjoy this lead, although even this margin is
slimming. This is especially significant as Cingular sees its future growth driven by a larger
subscriber basecvii and increased ARPU derived from these subscribers due to value added
servicescviii. Overall Cingular faces a comparatively much more challenging financial position
than Apple, in a highly competitive wireless service industry and is striving to attain economies
of scope and scale, reduce redundant resources with increased synergies due to the AT&T
wireless acquisition, and increase investment in developing 3G network infrastructure to provide
high quality value added services for its customerscix. The partnership with Apple towards
exclusive distribution of iPhone seems a strategic move to re-invigorate its current subscriber
base to renew their contracts, attract new subscribers from Verizon and other wireless service
providers and encourage users towards subscribing for higher margin data services.
II (D) 7: Implications of above elements (Wireless Service Provider Industry)
Service provider industry is highly competitive with each of the major players competing
for luring subscribers from one another. Usually one firm comes up with attractive rates and
plans and others try to copy the model. All the service providers pressurize the handset
manufacturers to subsidize their handsets. Under these circumstances, service providers are faced
with limited choices to set themselves apart. For example, T-Mobile differentiates itself in terms
of best customer service and Cingular wants to differentiate itself by having exclusive ties with
Applecx. The partnership with Apple will also bring customers to Cingular from Verizon and
Sprint Nextel and T Mobile thereby increasing the market share of Cingular. This exclusive
arrangement between Apple and Cingular will also increase the rivalry between firms as firms
try to keep subscribers with incentives or tie up with new players such as LG Prada. Cingular
however should watch for the possible imitation of exclusive deal strategy and work with Apple
in providing complete solution or value added services such as WiFi cellular network switching
capability or streaming audio content and thereby leveraging its partnership and building on it.
II (E): Intra-industry Analysis for Wireless Service Providers
The mobile phone service providers can be divided into strategic groups based on various
criteria- bundles of telecom services (voice, data, mobile broadband, landline) provided,
geographic footprint, international v/s domestic focus, affiliations with mobile handset
manufacturers, service delivery technology platform, the ‘generation’ of mobile service provided
(e.g. 2G, 2.5G, 3G) etc. From an iPhone strategy perspective, the pertinent criterion is the service
delivery technology platform. Based on this, the major strategic groups of the mobile phone
service provider industrycxi and their brief descriptions are as follows:
TDMA (Time Division Multiple Access)- First generation (1G) technology, and the carrier
offering this platform have migrated to GSM or WCDMA
GSM (Global System for Mobile Communication)- Second generation (2G) technology and
most widely used technology platform in the world. Used in the US by: Cingular Wireless
and T-Mobile
CDMA (Code Division Multiple Access) – 2G technology developed by Qualcomm, and
used in Asia and North America. Used in the US by: Verizon Wireless, Sprint Nextel, Alltell,
US cellular
WCDMA (Wideband Code Division Multiple Access)- It is the third generation (3G)
technology using a core network build on GSM and air interface based on CDMA. Used in
the US by: Cingular Wireless, T-Mobile
iDEN (Integrated Dispatch Enhanced Network- Developed by Motorola, it supports voice,
text/numeric messaging, fax and data. Used in the US by: Nextel (acquired by Sprint)
As is clear from above, there are some overlaps among the different strategic groups, i.e.
one service provider may belong under more than one group.
II (F): Threats and Opportunities Analysis for Wireless Service Providers
II F: Threats and Opportunities – service providers
The following are some of threats that service provider industry faces
Mature state of mobile phone industry in the US, Europe, Japan- the penetration in the is
almost 70%, indicating lack of substantial growth opportunities
Infrastructure upgrade costs due to technology ‘generation’ improvements- service providers
have to upgrade their infrastructure to offer higher generation voice and data service. E.g.
evolution from 2g to 2.5 G and 3G
The following are some of the growth opportunities that the service provider industry can utilize
High growth in the emerging economies- with the economic growth rate in India and Chin
(accounting for 30% of the population of the world) averaging 8-10% per year, the mobile
phone industry has been enjoying high growth rates.
Device convergence- Mobile phones and evolving into smartphones with many features for
productivity and entertainment. Smartphones are likely to replace laptops as the preferred
mobile computing device. This trend would allow the service providers to offer more value
added services in addition to their voice offerings.
Improvements in the wireless infrastructure, improving voice and connection quality
Enhancements to the service delivery technology to carry non voice data over the cellular
networks- in conjunction with device convergence phenomenon, this area offers a growth
opportunity for the service providers
Consolidation in the service provider sector- offers opportunity to realize synergies among
merged entities, thereby lowering the costs and boosting the revenues and profits
II (G): Summary of External Analysis
The service provider industry is moderately unfavorable. However existing service
providers have found ways to differentiate themselves. These activities are easily imitated by
competitors and hence the success of service providers lies in being able to come up with new
offerings and locking in customers with first mover advantage. Cingular has successfully
managed to come up with unique strategies to emerge as market leader in this Industry. Its
original move to combine Cingular and AT &T to get greater network coverage and emerge into
a service provider with fewest dropped calls, got Cingular a lot of subscribers. Next, its move to
work with competitors such as T-Mobile and act as complementor to T-Mobile by allowing it to
access some of its network infrastructure for a licensing fee allows it to generate incremental
revenues and meet its financial objectives. Next, it tapped into exclusive partnership with Apple
to gain first mover advantage by catering to consumer smartphone segment. Its unique position
to be able to partner with Apple and allow Apple to make decisions on handset signals that it is
willing to change its traditional working ways to generate greater value to its consumer. Cingular
is positioned as “access based positioning” and serves the consumers who want access to GSM
network. Cingular is better off by partnering with Apple and offering unique features such as
visual voice mail to generate superior value for its customers. Cingular and Apple have entered
into partnership with a “window option” strategy and depending on the success of iPhone and
unique service offering, may move into “options strategy” if the iPhone meets the financial and
market share objectives of both the firms. With this partnership with Apple, Cingular is uniquely
positioned with a resource (association with Apple) that can take Cingular to new levels of
subscriber base and enhance its market leadership position – a capability that all of its
competitors currently lack.
III: Internal Analysis – Cingular
III (A): Business Definition/Mission
Cingular provides wireless cellular services to individual, business and government users.
III (B): Firm’s Management Style
There is very little information about Cingular management style. However, through their
organizational structure, it seems that they are more marketing and sale focused.
III (C): Organizational Structure, Controls and Values
III (C) 1: Firm’s organizational structure
Even though AT&T acquired Cingular, it seems that AT&T is keeping Cingular as a
separate entity. This is evident by the fact that Cingular CEO, Stanley Sigman, is not an AT&T
executive officercxii. Cingular seems to be organized along functional and geographical
structurecxiii. This is the most logical structure, because of the geographic coverage that Cingular
has. Cingular needs to manage the sales and support regionally, since they are a “service”
provider.
III (C) 2: Controls used to monitor/appraise employee behavior and performance
There is not enough publicly available data to determine what kinds of controls are used
at Cingular. However, Cingular’s Values are Customers, Integrity, Performance, Teamwork and
Peoplecxiv.
III (C) 3: Firm’s organizational values
III (D): Strategic Position Definition
III (D) 1a: Corporate Level – Firm’s business portfolio
Cingular’s primary business is providing voice services and data services via cellular
wireless technology.
III (D) 1b: Corporate Level – Firm’s Corporate Level Strategy
Over 90% of Cingular’s core business is from Voice Services, and less than 10% from
Data Servicescxv. So, Cingular’s corporate level strategy is Dominant Business.
III (D) 1c: Corporate Level – Recent acquisitions, mergers or divestments
Although Cingular was recently purchased by AT&T, there are no significant
organizational changes. This is because, prior to the acquisition, AT&T already owned 60% of
Cingular as a separate holding company. AT&T (formerly SBC), had used Cingular as their
extension into wireless market. With the complete acquisition, AT&T now has more control in
integrating its marketing strategies. This is evident in their new “AT&T Unity Plan”, where users
can place calls for free to any AT&T wireline or wireless customers.
III (D) 1d: Corporate Level – Recent alliances, partnerships or joint ventures
Apple decided to ally with Cingular as the sole service provider for the iPhone within the
United States. Please see Exhibit III (D) 1d-1 for the analysis of synergies between Apple &
Cingular
III (D) 1e: Corporate Level – Evaluate the firm’s business portfolio
Please refer to Exhibit III (D) 1e for Cingular’s BCG matrix.
With the average revenue per users (ARPU) for voice service declining for the past 5
years and being the largest subscribers in the U.S., Cingular’s voice services is categorized as a
Cash Cow. Being late with 3G technologies, wireless broadband users are opting for Verizon’s
CDMA services. This combined with RIM’s dominance in data service; Cingular’s data service
market share is relatively low. However, there is a potential for high market growth as more
users are taking internet on the go. Therefore, Cingular’s data service is in “Question Mark”
category.
III (D) 2a: Business Level – Define the generic business level strategy for each business
Cingular is trying to have a Broad Differentiation business level strategy. However,
strong competition is forcing Cingular toward Cost Leadership. Cingular is aiming for the mass
market. However, many of the products and services differentiations are easily duplicated by
competitors. The VRIO analysis indicates brand name and integrated voice, wireless, wired
services as sustained competitive advantage. One method Cingular’s attempt to provide value is
to offer a wide selection of handsets that will only work with Cingular network. The issue with
this model is the conflict with the handset manufacturers, who would like to sell their handsets to
all users regardless of service provider. Because the handset manufacturers rely on service
providers as their main distribution channel, the handset manufacturers have reluctantly ceded
some design control over the handsets to the service providers such as having service providers’
logo on the handset, special buttons to directly access service providers’ complementary
services, and locking the handset, so it would only work on the service provider’s network.
Because of the control of service provider over handset manufacturers, as soon as there is a new
handset model developed for one service provider, the other service provider will demand for
similar or better model just to stay in-step or ahead of the competitor. Eventually, all the service
providers will have the same popular handsets, and thus eliminate any competitive advantage
with its handset offering. The Apple iPhone on the other hand is a major victory for Cingular
since Apple has an exclusive deal with Cingular to offer iPhone to work with Cingular network
only. This will help put Cingular’s business level strategy back in Broad Differentiation
III (D) 2b: Business Level – Fit between business level and corporate level strategy
Because voice service is the dominant business for Cingular, Cingular attempts to model
its data service plan similar to the voice service plans. Therefore, Cingular achieves the simple
consistency fit. However, because data service is an optional service or some handsets just don’t
support data services, Cingular did not achieve the second order of activities are reinforcing fit.
III (D) 2c: Business Level – Change in business level strategy based on strategic move
Since the voice service is a matured business, there is no change in the voice business
level strategy. As for the data services, iPhone’s initial version is using Cingular’s 2.5G
technology, so there is no change in data services business level strategy as well when the iPhone
is released.
III (D) 3a: Resources & Capabilities – Analyze to determine V-P, Value & cost drivers, etc.
Value & Cost Drivers: Please refer to earlier Section II (D) 1 – Part B
III (D) 3b: Resources & Capabilities – How V-C will change based on strategic move
With the introduction of iPhone available exclusively on Cingular network, this
significantly increases the value of Cingular with minimal increase in cost. Overall iPhone
should work on Cingular network with no changes to Cingular’s network. However, with
iPhone’s Visual Voicemail, Cingular will need to provide Voicemail services that users can see
the list of voicemail that is in their mailbox. This is quite different from today’s voicemail
system, where users must listen/skip through each message in sequence.
III (D) 3c: Resources & Capabilities – Value Chain exhibit
Please see Exhibit III (D) 3c
III (D) 3d: Resources & Capabilities – VRIO Analysis
Please see earlier section Exhibit II (D) 4 a
III (D) 3e: Resources & Capabilities – How is the firm retaining customers?
Most wireless service providers, including Cingular, try to retain customers through
product differentiation, but because of the high competitiveness of the wireless service industry,
the best method of retaining customers is having the customers to sign a service contract that
typically last 2 years. This locks the users to the service provider for the length of the contract.
Any breach of the contract, the user is required to pay heavy penalty. As an incentive to sign a
lengthy contract, the service provider would offer subsidized handsets. So times, the provider
will offer the most popular handset for free to ensure a 2-year commitment.
IV: ANALYSIS OF THE EFFECTIVENESS OF THE STRATEGY (Refer to Exhibit V for a
decision tree analysis of options available to Apple in regard to the iPhone offering)
IV (A): Will Strategic move allow the firm to address or change industry conditions?
From the Five Forces Analysis of the handset industry we see that although the handset
industry as a whole is a moderately unattractive industry, we do see a great growth potential in
the high end smartphone segment of this industry, in US and Europe. Apple's iPhone catalyzes
this growth rate due to its keen appeal to the non-corporate segment of the smartphone industry.
This catalysis shall happen by appealing to a new consumer space comprising of people who
were either unhappy with the user experience on the current spectrum of smartphones or were
just not in the high end smartphone segment, daunted by the multitude of non-intuitive features
available on the current smartphones (consisting of consumers seeking use of advanced features,
fashion conscious consumers, consumers looking for convenience and music lovers, from
customer analysis done as part of competitor analysis section) . From the "Cost Advantage
Independent of Scale" perspective this move creates a higher bar for the smartphone
manufacturers by creating this cost advantage in terms of expertise in creating multi-functional
but simpler handsets. This move by Apple further accentuates the fact that there are profits to be
potentially made in this seemingly unfavorable industry, not necessarily on volume basis, but on
"differentiation" basis. This would also further strengthen the importance of "complements" like
iTunes as a solid platform for long term competitiveness of any firm competing in this industry,
especially with iPhone's exceptional user interface and its appeal to the end consumer for using
the device to view photos, videos and listening to music, besides making and/or listening to
phone calls. As discussed in the paper before with Nokia's move to introduce the mobile tablet
N800, we also may see "boundaries disappearing" between handset manufactures and computer
industry, in order to curtail moves by firms into each other's market space. This also opens up
firms like RIM and Palm to potential market erosion due to these new breed of fancy, easy to use
smartphones, and as discussed in the competitor analysis, they need to leverage their expertise
and experience in this business with regards to corporate users and extend it to provide
smartphones in the new consumer space. There is already a move in this direction, as discussed
in the implications section of the competitor analysis, with RIM introducing its Blackberry 8800
and Palm hiring design engineer from Apple to help them with the design of their next
generation smartphones. Both from the perspective of handset manufacturers and wireless
service providers, the strategic move by Apple to control the overall design of the handset,
independent of Cingular, setups up a new dynamic in the mobile industry as a whole. It needs to
be seen how the dynamics of other handset manufacturers' control over the handset design
evolves, but we already see the need for service providers to "partner" closely with handset
manufacturers to be able to come up with innovative handset designs in order to gain market
share, which is increasingly becoming more critical, with heavy infrastructure investments by the
wireless firms, as has been discussed in the competitor and financial analysis sections earlier.
Hence from the Five Forces perspective, there is increasing role for "complements" in the
wireless industry, with regards to the need for better designed handsets. Also in the not so long
term, wireless firms would also need to ramp up their infrastructure in the US, from 2G and 2.5G
to 3G in order to extend the usability of these new smartphones, as they become more popular
with consumers who are beyond the traditional corporate user. This is especially attractive
customer space for wireless service provider as unlike corporate users, there are much higher
profits to be made here especially if there are increased partnership synergies between the
handset manufacturers, wireless service industry and the content providers. Wireless firms would
also like to leverage resources like iTunes to provide the content necessary to attract the
consumers in this new space, to upgrade them from medium and high end phones to high end
smartphones. Apple’s move to introduce iPhone will create a new consumer segment for
smartphones – a place that was traditionally held by enterprise users. Data usage has been
increasing in US and international markets and there has been an increasing demand for
converged devices. Apple with its new offering caters to these needs to consumers and offers a
product to enhance the user experience. It will drive the current handset manufacturers to
enhance the user experience, tie up with complementary services and change their handset
designs. Currently a lot of handset manufacturers are changing their product designs to offer
wide screen displays, touch screens instead of keypad, offering white color blackberries and
trying to imitate by speculating what an iPhone will look like. Traditional handset firms are
getting handheld computing such as Nokia’s N800 Internet Tabletcxvi and considering options
such as acquiring Palm to gain a stronger foothold in smartphone industrycxvii. Handset
manufactures’ with weak design skills are tying up with fashion houses such as Prada (LG
Prada). As Apple offers this integrated device, consumers’ perceptions may change and
consumers may be interested in trying new features such as email on the go that may peak up the
data usage and open a whole new revenue stream for the service providers. Apple may also tie up
with the service providers to deliver content directly to the smartphones instead of using a PC in
between (currently iTunes works with PC and audio/video are then downloaded to
iPod/iPhone).All these implications suggest that Apple entered a mature handset industry and
caused a disruption in the industry. This disruption can be categorized as “sustaining innovations
or technology” disruption. There will be a period of disruption and disequilibrium as other
handset manufacturers try to catch up with Apple on design and delivering user experience
(Please see Exhibit IV (A)). Apple’s financial analysis and scenario analysis suggests that it is
extremely important for Apple to maintain content in its iTunes store and also reduce the COGS.
By partnering with Cingular, Apple may be making this move to increase the content offering
through streaming audio video from service providers and/or reducing its COGS by bypassing
the credit card processing fee that is normally involved with every purchase of content on
iTunes.
IV (B): Does firm have sufficient resources to implement the strategic move and satisfy
objectives?
From an exhaustive industry, competitor, comparative financial and internal analysis we
can conclude that Apple possesses financial and non financial resources to aggressively execute
its strategy. Apple’s deliberate move from its traditional computer hardware and software
business to focus on digital lifestyle of the consumer is very well supported by its introduction of
iPhone in partnership with Cingular. Apple’s recent success with its iPod has provided it with the
much needed financial and market leverage to enter the competitive landscape of handset
manufacturers and face stiff challenge from the traditionalists in this industry like Motorola and
Nokia, besides from strong niche players like Palm and RIM. Its increased spending year over
year in R&D along with an attractive liquid position provides Apple the stable platform to
compete in the short run. It’s attractive long term ratios in terms of operational and management
performance including its financial leverage, profitability ratios and growth rate provide it the
much needed operational and management competence to be successful in the handset industry.
We believe that due to increased convergence of mobile phone, music player, video player,
online browsing capabilities, and similar technological competence of the major players like
Apple, Motorola, RIM, Palm and Nokia, a firm that can provide a better user experience shall
have a position of sustainable competitive advantage in this market space. From the VRIO
analysis of all the major firms, we see that aside from the corporate niche, Apple has the skill
sets and a history of providing products and software with an outstanding degree of ease of use,
whether it is their Macintosh platform or its more recent music and video iPod. From the product
and competitor analysis we conclude that with iPhone, Apple has strategically positioned its
product as a smartphone for the tech savvy, high end consumer but not necessarily for a
corporate user. We believe this helps Apple carve out a new consumer space for its iPhone,
without directly competing in the “traditional corporate” smart phones consumer segment where
RIM and Palm have a solid market presence. This kind of a position allows Apple to attract a
new segment of consumers, in addition to some corporate users with its initial launch and
establish a strong position, and at the same time not directly compete with RIM and Palm. It is
also a move in line with the fact that Apple’s iPod product offering was facing some stiff
competition with music and video playing capabilities becoming a standard feature in the high
end handset segment. This strategic move accentuates the fact that Apple has made a long-term
commitment to move into the digital lifestyle consumer space, and away from its computer
hardware and software business, by changing its name from Apple Computers Inc., to Apple
Inc.cxviii in an effort to align its business objectives and resources towards this new direction.
Apple also believes that to be successful in this consumer space, consumer experience shall be a
critical element, and all facets of the iPhone offering seem to complement that focal point. It has
strategically partnered with Cingular with the largest subscriber base in the United States and
leverage the use of GSM network which is the most widely used network across the globe. Its
partnership is further strengthened by the fact that Cingular was behind the popular introduction
of Motorola RAZR in Nov 2004cxix, which set the precedence of attractive looking handsets with
a seamless integration of music and video capabilities. Hence Apple can leverage that success of
Cingular’s, to promote the iPhone in the US. Comparing the financials for Apple and Cingular
with their respective competitors, it is evident that Apple is the dominant partner in the
partnership due to the current business dynamics between Cingular and Verizon. Although
Cingular has the largest subscriber base in the US, Verizon has been shrinking this gap
successfully and has outperformed Cingular in terms of its gross profit margins, ROA, ROE,
control on cost of sales, debt ratio and subscriber churn rate. Finally, Cingular’s effort to
compete in the long term by increasing its subscriber base, as stated in its recent annual report cxx,
further makes the need for a product like iPhone for Cingular, more obvious. The partnership
with Cingular has also provided Apple, an unprecedented control over the design of the handset,
unlike its competitorscxxi. By initially restricting third party software products’ access to the
iPhone’s OSX platform, Apple seeks a great user experience, by ensuring there are no software
integration glitches with its initial product launch. We already see competitors like Nokia, RIM
and Palm becoming wary of Apple’s entry in this market space. Nokia is trying to send a strong
retaliatory signal to Apple by entering Apple’s traditional industry with its introduction of N800
mobile computing internet tabletcxxii. RIM partnered with Cingular’s rival T-Mobile to launch
Blackberry Pearl last September, which is its first consumer focused high end smartphonecxxiii,
and has more recently partnered with AT&T to launch Blackberry 8800 as the next generation
Pearl at a much lower price than iPhone, although this particular offering has been reviewed by
some as a smartphone with a crammed keyboard and smaller screencxxiv, bringing to the forefront
again, the importance of user experience. Palm on the other hand, has been much more defensive
and has in fact been in the news recently potentially looking for buyers or private equity
investors, in face of increased challenges from Nokia and Motorola, with Apple as the new
entrantcxxv. The presence of Apple as a strong player in this segment is further highlighted by the
fact the Palm has recently hired a software design engineer from Apple, who helped design the
iPodcxxvi.
IV (C): Define overall effectiveness of the firm’s strategy.
Apple has never been a technology pioneer. Its strategy has been that of being second to
the market with products based on established technology but with a much better user interface
than currently available. It decision of moving into smartphone market makes perfect sense from
the perspective of the ongoing mobile computing device convergence, proliferation of multi
function and multi feature smartphone devices, and smartphones slowly replacing laptops as the
mobile computing device of preference. Smartphones are integral to the emerging trend of the
digital lifestyle. The market opportunity for such devices is large and continues to grow. Apple
has had tremendous success with its iPod product line. However, phone manufacturers have
begun to bundle MP3 players into their phones. Apple may have perceived this as a medium to
long term threat. Its introduction of iPhone could be construed as its retaliatory response to
mobile phone manufacturers by invading their turf. Most of the phones from the current
smartphone makers have been geared more towards corporate users than consumers. Apple’s
approach of targeting consumers first is novel from that perspective, and aims to essentially
create a smartphone consumer space in line with its vision of the digital lifestyle. iTunes is likely
continue as a complement to iPhone. With its renowned R&D and industrial engineering teams
and its large cash reserves, Apple certainly possesses the human as well as financial means to
execute its iPhone strategy. These resources would also allow it to adjust its strategy in response
to any changes in market dynamics with regard to smartphones. The GSM technology seems
more widespread and is growing faster in the US as well as internationally. Apple’s decision to
produce a GSM-compatible phone makes sense from that perspective. However, the CDMA
technology is more suited to high bandwidth mobile computing applications, therefore, Apple
may have to introduce a CDMA version of iPhone is future. Apple’s choice of Cingular as the
exclusive retailer in the US for the iPhone makes sense initially, since Cingular is the largest
mobile phone service provider in the US. However, in the long run, especially when (and if) it
decide to introduce a CDMA version, it may have to tie up with Verizon Wireless which is a
CDMA shop. From the perspective of Cingular, its status as the initial exclusive retailer of
iPhone, would be a great opportunity for it to lure customers towards its higher end data services,
and help drive its revenue up. However, there are varying opinions on the length of this period of
exclusivity , and therefore, it is not very clear as to how long Cingular would be able to capitalize
on the iPhone buzz.
IV (D): Highlight any other critical issues
The following some other critical issues that could potentially impact the iPhone:
In view of the recently announced delay in Apple’s iTV launch, there are concerns that iPhone
may be delayed as well. This may be detrimental for Apple since that would allow other recently
announced smartphone offerings to capture the benefits of the buzz created by the iPhone
announcement.
People generally expect superior user interface from Apple’s products, and Apple would have to
try hard to live up to those expectations.
There have been unsubstantiated media reports that, due to supply chain constraints, Apple may
be able to fulfill only 8 million out of its projected target of 10 million devices by year 2008. If
that does happen, it may keep Apple from realizing the benefits of the likely iPhone craze.
As discussed in the intra industry analysis, Apple belongs under ‘medium feature very high
integration’ strategic group. Apple is ‘lighter’ in terms of features and that may slow its adoption
among the more feature sensitive customers. If Apple insists on controlling most of the
applications and features on iPhone, in terms of developing them in house, then evolution to
higher versions of iPod, with more features and applications, may be slower. This may prove to
be advantageous to those competitors of iPhone that come with ‘independent’ operating systems
like Windows Mobile or Linux. Apple’s reputation of products with superior user interface may
not be able to buy it reprieve from such potential competitive onslaught.
Per the BCG matrix, iPod is Apple’s cash cow. Apple’s pricing of iPhone- $499-$599 seems to
have been arrived at to avoid cannibalizing iPod sales. The idea may be to target iPhone at
consumers wanting to upgrade to a version of iPod higher than the most feature-rich iPod
available currently.
Apple has been able to address one potential hurdle in its iPhone launch with the settlement of
Cisco’s lawsuit against it. The interoperability arrangement with Cisco, and consequent potential
of collaboration on Wi-Fi interconnectivity and security-related features of iPhone may hasten
corporate adoption of iPhone.
If Apple loses Steve Jobs on account of the options backdating issues, then the discipline that he
has set within Apple and the authority that he has in making final calls on products will be on
someone else and it is not clear if person would be able to come up with a prudent choice of
products similar to how Jobs does it
IV (D): Highlight any other critical issues
Apple and Cingular’s partnership is bound to take the handset industry and service
provider industry to new levels. Apple’s entry into the handset industry has already signaled the
competition to put their act together and to put user experience at the forefront of their design.
Competitors such as RIM are trying to increase the reach of their devices and competitors of
Cingular may be willing to encourage that move as there is no certainty in the kind of response
the partnership with Cingular and Apple will generate in the consumer space. There has been no
specific move by the competitors of Cingular in response to iPhone introduction and they may be
willing to wait and see if their consumers will break the contract and go to Cingular or switch to
Cingular after their contract ends.
Short Term Recommendations:
a) Facilitate streaming content on iPhone from iTunes: Apple and Cingular should utilize their
resources and facilitate offering streaming content on iPhone. Currently users have to use a PC to
buy content from iTunes and then upload it on iPod or iPhone. This incurs cost for Apple since it
hardly makes any money from the revenue generated when users buy a track on iTunes.
According to Jobs, “Of the 99 cents that Apple collected per song, 65 cents went to the music
label that owned it, 22 cents went toward the credit card processing. That left Apple with only
about a dime of revenue per track, from which Apple had to pay for its website, along with other
direct and indirect costs.”cxxvii By working with Cingular in providing the streaming content,
Apple and Cingular will be in a win-win situation. From a value minus cost perspective, the costs
for Apple will go down as Apple will not have to pay for the credit card processing. It can work
out a way with Cingular to incorporate purchasing iTunes content with one of their plans and
generate a new pricing model. Cingular will benefit since its revenues will increase as consumers
will be forced to buy data plans. The value proposition of this solution will increase for
consumers as consumers will not have to use a PC to download songs or video and they can
directly purchase media content from iTunes on the go. Thus, it will increase V-C for iPhone.
Competitors will find it tough to compete with this model since handset manufacturers lack the
iTunes capability. However, service providers such as Verizon, T-Mobile and Sprint-Nextel will
be forced to partner to companies like Omnifone to provide music on the go. The handset
manufacturers will have to make their handsets capable of handling streaming music. There will
a lot of consolidation or partnerships in the service provider industry and mobile music
companies to match up to what iTunes provides for consumers. This will increase the added
pressure on the handset manufacturers as they will have to address the handset subsidization
along with feature enhancements of their handsets. For this model to be successful, Apple has to
work with media companies to keep iTunes up to date with media and increase the media
content in terms of TV shows being offered or new songs being available. iTunes can only be
profitable when it addresses the question of scalability and consumers will be willing to buy the
value proposition of “music on the go” that is tied to their cellular network plan.
b) Coming up with a iPhone CDMA version: Apple can consider coming up with CDMA version
for iPhone since the subscriber base for CDMA subscribers is huge (25% for Verizon and 24%
for Sprint Nextel) as opposed to 27% held by Cingular. The competition in service provider
industry will be at the same stage as it is now as subscribers will have little incentive to move
across carriers. However, Apple will have little control over either of these service providers to
force them to implement any features that are needed for enhancing the user experience of any
solution (such as visual voicemails or streaming media content). Apple’s cost structure will
increase as it provides support for GSM and CDMA phones and hence its V-C will reduce.
Cingular will not generate any added benefit if Apple decides to go with CDMA phones and its
Value will decrease (from where it is today due to exclusive contract with Cingular). Currently
Apple iPhone has generated a stir in GSM handset makers. However, its move to enter CDMA
markets will create a stir in handset manufacturers in countries like China and Hong Kong where
CDMA is pre-dominant. Apple will face increase competition from across the globe if it enters
both CDMA and GSM handset markets.
c) Focus on seamless switchability between cellular and WiFi networks: Apple already has WiFi
capability on its iPhone. By developing a capability to seamlessly move between cellular and
WiFi networks, Apple increases its value proposition of enhancing the user experience. Cingular
can use this capability to enhance its existing relationship with enterprises as it can offer this
solution to enterprises on other phones. Thus it increases Value for both the firms, The initial
infrastructure costs may increase to offer this solution but over the long run costs will stabilize.
So the V-C for consumers will increase. Apple’s competitors will benefit from this solution as
well so consumers looking for this solution alone will not greatly benefit from Apple. Cingular
will be in a superior position than its competitors and service providers may enhance their
offering to match up this solution.
Long Term Recommendations:
a) Deepening relationship with Cisco to enter the corporate world: Apple can enhance its
relationship with Cisco and build capability on iPhone that have enhanced security and enterprise
software support. Apple can use its partnership with Cingular to enhance its product offering in
corporate world through the tie-ups that Cingular has with enterprises. Apple iPhone is a high
end product and it may not appeal to price sensitive consumers. Apple iPhone is mainly a
smartphone for consumer segment and by entering into corporate world, Apple can maintain its
price point without having to commoditize the phone as enterprises are less price sensitive. Sales
of Apple iPhone will increase and the value will increase as iPhone matches up with the security
and enterprise capabilities of other existing smartphones and it will narrow the gap between
iPhones and other existing smartphones. The costs incurred in developing and maintaining these
features will be shared by both the firms and hence the cost implication will be low. The V-C
will increase for enterprise users as they get the benefit of enhanced “user experience” and
“added security”. The other smartphone competitors will begin to loose their market share in
enterprises as Apple sets a foothold among enterprise users and may concentrate their efforts on
consumer space as consumers are more price sensitive. There may be no added benefit for
Cingular except that its existing users may move to Apple iPhone and still keep their corporate
plans. Competitors such as Verizon and Sprint Nextel may see their tie up’s with enterprise
customers decrease because of this move.
b) Expand relationship with MSFT/3rd-party ISVs to enter the corporate world: Another long-term
recommendation is for Apple to work with independent ISV’s or Microsoft to provide
applications such as Microsoft office and other capabilities that will enhance the usability of
iPhone for corporate users. Although this may involve compromising some of the “user
experience” aspect that Apple cares about since it loses control of these features to third party
vendors, it will increase iPhone usage in corporate world.
This will also increase how iPhone compares with existing smartphones in the corporate world.
However, this will only generate a way to enter the corporate world but it will not set Apple
apart from other smartphones manufacturers except for “user experience” which the handset
manufacturers are anyway trying to catch up to.
c) Integration between Apple TV, AT&T & iPhone (two-way streaming) so that Apple provides a
solution (as opposed to products): This recommendation calls for increased levels of contribution
to partnership from both Apple and Cingular where these firms work effectively to provide a
complete solution. For example, content can be downloaded to iPhone directly from iTunes
without having to use a PC. When user wants to view a movie or some other media, the user can
use iPhone while on the go and switch the content to Apple TV later and be able to watch the
movie on the home TV. Similarly if content is downloaded to Apple TV, then user can move the
content to iPhone and possibly connect it to car audio/video and be able to listen/watch during
travel or while the user is away from home. This two way audio/video streaming will enhance
the value of Apple iPhone and Apple TV as a combined solution. The costs to implement the
solution are significantly less when compared to the benefits that the solution will generate in
terms of increased sales of the device, increased usage of data content and increased
functionality that the devices will produce. Hence this increases the V-C of iPhone and
Cingular’s data service. The competitors will not be able to match up to this solution as they lack
both iPhone “user experience” aspect and also device like “Apple TV”. Since Apple controls
both these devices, it can make the interaction between these devices seamless as opposed to any
other solution provided by third party solution providers for generic smartphones.
International Recommendations:
a) Launch 3G phones in Europe: Europe is heavy on data usage and Europe is ahead in
implementation of 3G networks. A few providers are talking about getting into 4G networks.
Apple’s success in Europe depends on if it’ll be able to deliver 3G phones in Europe. Mobile
music providers like Omniphone are already offering streaming audio to cell phones and handset
manufacturers like Nokia and Motorola already offer 3G capable handsets in Europe. LG Prada
has already started selling phones that look similar to iPhone in Europe. Given these competitive
dynamics, Apple will be best positioned to enter Europe with a 3G phone. Apple may not have
the same leverage it had with Cingular in service provider space in Europe and Network
operators in Europe may not be willing to enter into exclusive partnerships with Apple. Europe
also like USA sells locked phones and Apple is bound to work with some service provider and
sell its phones. There were talks about Apple approaching Vodaphone to sell iPhone but
Omnifone also offers its streaming audio through Vodaphone so the value demanded by
European consumers will be much more than US counterparts.
b) Enter emerging Markets (China & India): In the long run, Apple should enter emerging markets
such as India and China. For example, when we had sent our survey, it had accidentally reached
someone in India and he was very interested in purchasing iPhone and started asking questions
like when will it be available in India, which operator will carry it etc. There is a strong market
for iPhone in India with the spending power of individuals increasing and luxury goods making
way into the households. Apple will have to enhance its iTunes content to cater to these market
needs. Apple has limited presence it terms of retail stores in India and China and this is one
market where economically well off may be interested in buying iPhone. There is also a socioeconomic factor that plays a role where owning an iPhone can be a symbol of prestige for users.
Most of the players like Nokia and Motorola have presence in India but smartphone players like
RIM and Palm have limited or no presence in these countries. As such, there maybe other
competitors who provide smartphones but none that have the vertical integration of Apple. India
and China are also providers of unlocked cell phones so Apple can go independently into these
markets without necessarily having to tie up with any of the network operators.
V (B) 1: Implementation of 1 short-term and 1 long-term recommendation
Short term recommendation: “Facilitate streaming content on iPhone from iTunes”
As explained in section V-A above, this feature would allow iPhone users to download
content from iTunes without going through a credit card billing transaction. To enable this
mechanism, Apple would need to setup a billing arrangement with the service provider (which
currently is Cingular) wherein the latter would add the iTunes content purchase price to the
subscriber’s bill, and pay that amount to Apple. Cingular would need to setup a payment
gateway at its end for this. The suggested timeline for introduction of this feature is six months to
a year. The implementation of this “streaming” feature would result in tighter integration
between iPhone and iTunes, and produce higher customer satisfaction. This would enhance the
buyers surplus. This feature would, in essence, open another channel for iTunes sales and
increase revenues. Additionally, avoiding the 22 cents credit card fee due to billing routed via
Cingular would also add to Apple’s bottom line. Some issues may potentially arise from the
introduction of this feature. Cingular may insist on sharing a part of the iTunes revenue.
However, Apple is the ‘stronger’ partner in the exclusive service provider deal with Cingular.
Apple can use that leverage to convey that Cingular is already benefiting by iPhone users
downloading iTunes content using (and paying for) Cingular’s data services. Apple can,
however, agree to share a small portion of its 22 cents savings with Cingular, in exchange for
exclusivity (i.e. Cingular would not provide this billing service to any other online
music/entertainment content distribution service). Another potential issues could be slow
download speeds on iPhone, since iPhone is not 3G compliant. However, despite this handicap,
this feature still allows the iPhone user to download the content “on-the-go” without having to
enter the credit card number for the transaction. Additionally, Cingular could be persuaded to
improve its data services infrastructure to provide better download speeds, since faster
downloads would allow more wireless iTunes downloads and consequently, more revenues for
Cingular. The iTunes website would have to be modified to allow this kind of “streaming”
content for iPhones, and that would cause Apple to incur additional costs. However, Apple does
have resources and capabilities on hand to be able to provide this feature. However, the cost of
this retrofit can be recovered from the savings on the credit card transaction fees which are 22
cents for a 99 cents download.
Long term recommendation: “Deepening the relationship with Cisco to enter the corporate
users space”
Building on the momentum generated with the settlement of Cisco’s lawsuitcxxviii against
it, Apple should further strengthen its relationship with Cisco. Per this settlement
cxxix
, both
Apple and Cisco can use the iPhone moniker on their products worldwide and “will explore
opportunities for making their products work better together in the areas of security, and
consumer and enterprise communications.” Security features on iPhone are believed to be
inadequate for its use as a client device for applications of interest to business users. Data
security is a big concern for corporations. Accessing corporate information via an unsecured
client device (like a mobile phone) can potentially cause this data to be compromised.
Additionally, there are very few productivity applications (word processor, spreadsheet, PDF
viewer etc.) available on iPhone. These issues are likely to impede iPhone’s adoption by business
users due to corporations’ concerns with data security. Apple’s collaboration with Cisco would
help it address these shortcomings of the iPhone. In order to realize the benefits of this
settlement, Apple would need to initiate the formation of a task force with representation from
Apple’s iPod engineering team and Cisco’s security and communication engineering teams. A
higher level coordination committee, involving both companies’ directors and VPs of
engineering, should be setup to settle any disputes that might arise out of discussions on the
features and applications and on sharing pertinent intellectual property. The task force and the
coordination committees should be setup immediately. However, the outcome of the
collaboration, namely a ‘smarter’ iPhone with better security and enterprise application
capability, would be available only in the long term- in more than about a year. This arrangement
would involve allocation of engineering as well as management resources on Apple’s side, and
would therefore, add to the cost. This may require Apple to potentially invest more than the
current R&D expense of 13% its sales. This would reduce Apple’s surplus. However, there are
several benefits to this collaboration. This arrangement in essence would augment Apple’s in
house product development team via greater resource complementarity with Cisco’s resources.
The exposure to Cisco’s engineers would also allow Apple’s engineers and product designers to
gain more expertise on computer networking and internet technology. iPhone’s security features
would be improved, thereby encouraging and accelerating its adoption by business users. This
would result in higher revenues and profits for Apple. Due to the high reputation of Cisco in the
internet devices arena, Apple’s association with it would create a more positive image for iPhone
and help position it as a business-feature-friendly secure mobile computing device. Due to
Cisco’s strengths in networking area, collaboration with it would also help Apple address the
recommendation on seamless Wi-Fi and cellular network switchover which has been discussed
above. If Apple manages to convert this collaboration with Cisco into an exclusive arrangement,
this would create barriers to imitation for other smartphone manufacturers. Due to Apple’s
existing relationship with Cingular Wireless, the exclusive service provider in the US for
iPhones, there is a potential for this collaboration to evolve into a three way alliance. If that
happens, iPhone features could be tuned and enhanced further for corporate use. These benefits
would raise the value of iPhone to corporate users, and would allow Apple to justify the current
prices which are deemed high. It may also allow Apple to change higher prices, thereby
increasing its surplus.
V (B) 2: Changes that should be made to firm’s V-C position to support recommendation
The short term recommendation of streaming iTunes content on iPhone is in line with
Apple’s current value drivers of technology, delivery, brand reputation, network externalities and
complements. The streaming feature requires an extension to its iTunes technology as the online
delivery channel. Providing this user friendly feature would enhance the usability of iPhone with
respect to iTunes and strengthen appeal of iTunes as a complement and a (positive) network
externality for iPhone. As described above, this recommendation would enhance the value to the
customer as well as, eventually, reduce Apple’s costs. This would result in higher buyer’s
surplus as well as higher firms’ surplus. Apple’s existing resources and capabilities (e.g. its
industrial design, marketing, engineering and sales infrastructure) can be leveraged for
introducing the streaming feature. This streaming feature itself, as well as its seamless design
would help retain (i.e. encourage download of iTunes content from iPhone) customers. Also, this
feature does not call for any changes to Apple’s organizational structure, reward systems, culture
or leadership. However, the value chain interactions would change slightly since the iTunes
revenues resulting from the streaming feature would be collected by the service provider and
paid back to Apple. In the existing model, the payment for iTunes is made directly to Apple via
credit cards or the PayPal service. Apple’s relationship of exclusive service provider for iPhone
in the US can be extended to this iTunes delivery model as well, as described above. To extend
this model (of delivering the iTunes content through the service providers) globally, Apple
would have to establish such relationships (preferably exclusive) with service providers in the
international market as well. Such exclusive arrangements with service providers would server as
the barriers to entry. The cost of building and maintaining these relationships would consume
some of the extra revenues earned with the streaming model. Apple’s cost driver of its
negotiation skills/power would need to be leveraged in its relationship with the service providers
in the US as well as internationally. For the long term recommendation of collaboration with
Cisco, Apple would have to leverage its existing value drivers of technology, quality, brand
reputation and complements. Apple deals with multiple external partners, especially in the
manufacturing, supply chain and fulfillment domains. It has added service providers to this list
via its exclusive relationship with Cingular. However, Apple has not had much exposure to
working in an environment of ‘equal’ partnership in a technology-sharing setting. The Cisco
partnership would also figure in Apple’s value chain. Apple would have to develop another value
driver of partnership skills to make this settlement with Cisco fruitful. This partnership would
require Apple to dilute its culture of secrecy in favor of a win-win technological collaboration
with Cisco. This deal does not necessarily call for a major organizational change. However,
Apple may have to hire people skilled in the external collaboration management to run this
partnership. It would need to implement mechanisms to measure the success of the partnership
and to provide suitable rewards. If Cisco can be persuaded to make this collaboration and
exclusive arrangement with Apple, then that would serve as a barrier to imitation by other
smartphone manufacturers (since building those features would require the competitors to invest
in such technology themselves or partner with one of Cisco’s smaller rivals like Juniper or
Extreme Networks). Since the features built in collaboration with Cisco would be targeted
mainly towards business users, these features themselves as well as Cisco’s and Apple’s
combined reputation would serve as a customer retention tool.
VI.
CONCLUSIONS
Apple has made a strategic choice to re-align its market position from a true computer
hardware and software firm towards a firm which would focus on understanding the needs of the
consumer electronics industry, and leverage its resources towards establishing itself as a leading
provider of consumer friendly devices. Apple has taken the first steps in this direction by
successfully establishing itself in this new dimension with its iPod and iTunes offering, and is
striving to repeat that success manifold with its iPhone offering. With all the analysis we have
done, we believe that iPhone should be a successful product for Apple and its success can be
further extended by Apple’s ability to identify and work with critical partners and allies towards
developing a platform of consumer solutions and not just consumer devices. Having analyzed its
historic successes and organizational excellence, it is important to point out that Apple today
finds itself in a new industry dynamics space where it needs to collaborate its innovative efforts
with external firm like Cingular and Cisco to remain competitive in this landscape in the long
run. Hence Apple will need to develop skills to work closely with its partners to identify and
leverage synergies towards developing an entire platform of consumer solutions, which it has not
had to do in its past. Apple has all the resources and skills to do well as a stand-alone firm, but it
is yet to be seen how successful it is in developing and leveraging strategic partnerships and
alliances in this highly competitive consumer market place. Also as our analysis indicates, Steve
Jobs has a strong influence in Apple’s current success and in the long run, it would be interesting
to see how Apple handles itself as an innovative firm in absence of Steve Jobs at its helm. So to
conclude, as of today, we would recommend Apple as a good investment, based on its past
success, current market position, organizational skills and of course, a strong leader such as
Steve Jobs as its dynamic CEO.
Exhibit II (A): Diagram of the mobile phone industry
Exhibit II (B) 1 – Part A: Level 1 Analysis for Handset Manufacturer Industry
Threat of rivalry – Handset manufacturer
Factors Underlying
Rivalry
Response
Effect on
Industry
Strength
Rank
Are Entry Barriers High?
No
Moderately
Unfavorable
4
6
5%
Outsourcing of handset manufacturing and mostly
software based proprietary technology
Are Exit Barriers High?
Yes
Moderately
Unfavorable
4
8
10%
The handset market leaders like Nokia, RIM, and
Palm are primarily focused on handsets
Somewhat
Moderately
Favorable
2
4
Is Product Differentiation
High?
Yes
Moderately
Favorable
2
1
Is the diversity of
Competitors Low?
Yes
Moderately
Unfavorable
4
9
5%
Manufacturers provide similar basic product
offerings and are all in the telecommunication
industry
Is Capacity Added in
Large Increments?
Somewhat
Moderately
Unfavorable
4
7
5%
Reduces handset costs and helps attain
economies of scale, especially in the low end
handset segment
Is Industry Growth Rate
High?
Somewhat
Moderately
Unfavorable
4
2
15%
In US and Europe driven by replacement of
handsets, while in emerging markets driven by
market penetration
Is Number of Competitors
High?
Yes
Moderately
Unfavorable
4
3
15%
CR3 for FY06 is 67%cxxx. Although there are few
top players in the overall handset industry, there
are numerous smaller players in the high end
handset segment of this industry
Are Fixed Costs higher
versus the variable costs
Yes
Unfavorable
5
5
Moderately
3.4
Is Demand High?
OVERALL RIVALRY
Weight
15%
20%
10%
Reasoning
The low end handset market is reasonably
saturated in US and Europe, but high demand for
smartphones driven by handset replacement in US
and Europe. New subscribers in emerging markets
for low end handsets
Although there is very little differentiation based on
basic functionalities, there is increased space for
differentiation based on style and user interface,
especially in the high end handset segment
The R&D costs and manufacturing costs (even with
outsourcing) are comparatively higher to variable
costs
LEVEL
Unfavorable
Barriers to entry – Handset manufacturers
Factors Underlying
Barriers to Entry
Response
Effect on
Industry
Strength
Rank
Are there Economies of
Scale?
Yes
Moderately
Unfavorable
4
4
20%
Reduces the cost of handsets, increases the volume and creates a barrier to
entry at basic handset level
Is Product Differentiation
High?
Yes
Moderately
Favorable
2
3
20%
Although there is very little differentiation based on basic functionalities, there
is increased space for differentiation based on style and user interface,
especially in the high end handset segment,
Is there Cost Advantage
Independent of Scale?
No
Moderately
Favorable
2
2
5%
No proprietary technology access
Are Capital Requirements
High?
No
Moderately
Favorable
2
6
8%
Outsourcing of parts reduces the capital requirement
Is there Access to
Distribution Channels?
Yes
Moderately
Unfavorable
4
5
20%
Exclusive contracts with wireless service providers
Is there a High Change of
Competitor Retaliation?
Yes
Unfavorable
5
1
25%
Competitive landscape of competitors
Governmental Barriers to
Entry?
No
Moderately
Favorable
2
7
2.5%
No specific restrictions in handset manufacturing
Moderately
Unfavorable
3.6
OVERALL BARRIERS TO
ENTRY LEVEL
Weight
Reasoning
Supplier power – Handset manufacturers
Factors Underlying
Supplier Power
Response
Effect on
Industry
Strength
Rank
Weight
Many buyers and
few suppliers?
No
Moderately
Favorable
2
1
15.00%
There are a larger number of part suppliers to handset manufacturers
Is there a High
Chance of Vertical
Integration?
No
Moderately
Favorable
2
3
10.00%
Part manufacturers are not keen on manufacturing hand sets
Is Product
Differentiation
High?
No
Moderately
Favorable
2
2
10%
High Percentage
Volume Sold to the
Firm?
Yes
Moderately
Favorable
2
7
20.00%
Firms can use bargaining on volume basis and attain cost advantage
Is the Supplier
Strategically
Important for the
Firm?
No
Moderately
Favorable
2
4
20.00%
Numerous suppliers available
Is the Firm
Strategically
Important for the
Supplier?
Yes
Moderately
Favorable
2
5
20.00%
Fewer handset manufacturers as compared to the number of suppliers
Are the Substitute
Firms Available to
Supplier?
Yes
Moderately
Unfavorable
4
6
2.50%
Do the suppliers
earn low profits?
Yes
Moderately
Favorable
2
8
2.5%
Moderately
Favorable
2
OVERALL
SUPPLIER POWER
LEVEL
Reasoning
Firms can switch suppliers without concern of product differentiation
Supplier can sell parts to other firms as there are no technological constraints
As the hardware for handsets is not highly differentiated, the profits are comparatively
low for suppliers
Buyer power – Handset manufacturers
Factors Underlying
Buyer Power
Is Buyer
Concentration
High?
Response
Yes
Effect on
Industry
Strength
Rank
Unfavorable
5
5
Is the Market
Growth Rate High?
Somewhat
Moderately
Favorable
2
4
Is the Firm’s
Product
Strategically
Important to the
Buyer?
Somewhat
Moderately
Favorable
2
3
Is the Buyer
Strategically
Important to the
Firm?
Yes
Unfavorable
5
2
Are there
Substitutes
Available for the
Buyer?
Yes
Unfavorable
5
1
Is there a High
Need of the Firm to
Fill Capacity?
Yes
Moderately
Unfavorable
4
11
Is there High Threat
of Vertical
Integration from
Customer?
No
Favorable
1
10
Is Buyer Price
Sensitivity high?
Yes
Unfavorable
5
6
Is the Buyer
switching costs
high?
Yes
Moderately
Unfavorable
4
7
Is the product a
significant portion
No
Moderately
Favorable
2
8
Weight
5.00%
Reasoning
Buyers are increasingly demanding and also receiving higher levels of functionality at
lower prices.
15.00%
For different reasons though, with growth in US and Europe driven by handset
replacement to have access to latest technology and in emerging markets driven by low
market penetration,
5.00%
Buyer needs the phone to use wireless service, but there are enough options available
with different value propositions depending on feature based bundling
15.00%
15.00%
5.00%
5.00%
Each buyer helps attain economies of scale
There are handsets with varying value proposition in terms of features and price
providing options. Also there is increased competition from landline companies, Wi-Fi
and cable companies.
To attain economies of scale and reduce costs to make the product attractive to
customers
Customers are not keen to manufacture handsets
10%
The buyers in all markets are price sensitive. Corporate and high end users are less
price sensitive but their market size comparatively is much smaller
10%
The buyer in most cases has to pay a contract cancellation fee which can be a
significant amount. This is partially offset by service providers’ rebates and the facility to
keep the telephone number when switching
10%
The basic handsets are free with a new contract for most subscribers and handsets are
also heavily subsidized
of buyer’s costs?
Does buyer have
full information?
No
OVERALL BUYER
POWER LEVEL
Favorable
1
Moderately
Unfavorable
3.6
9
5%
The buyer is usually not aware of the full retail price of handsets and the profitability
margins associated with it
Power of substitutes – Handset manufacturers
Factors Underlying
Supplier Power
Response
Effect on
Industry
Strength
Rank
Are there
Substitutes
Available for the
Buyer?
Yes
Unfavorable
5
1
60%
Various substitutes like landlines, VoIP, walkie-talkie, Satellite phone, email internet
etc
Are the Substitute
Firms Available to
Supplier?
Yes
Moderately
Unfavorable
4
2
20%
The suppliers can supply similar hardware to telecom firms for other purposes like
internet access, Wi-Fi access etc
Buyer’s propensity
to substitute high?
No
Moderately
Favorable
2
3
20%
In developed markets like US and Europe, people do not wish to substitute their
handsets with landlines, although this is not true for emerging markets where landline
is still popular cheaper means to communicate
Moderately
Unfavorable
4.2
OVERALL POWER
OF SUBSTITUTES
LEVEL
Weight
Reasoning
Complementor power – Handset manufacturers
Factors Underlying
Buyer Power
Is Operating System
critical to handset
performance
Response
Yes
Effect on
Industry
Strength
Rank
Weight
Reasoning
Moderately
Unfavorable
4
1
20%
Operating systems like Windows Mobile, Linux and Symbian are accessible to all
handset manufacturers for a licensing fee.
Are software
applications critical
to handset
performance
Yes
Moderately
Favorable
2
2
20%
Exclusive access to user friendly software applications on handsets provide the
necessary product differentiation
Do accessories play
a critical role in
handset
attractiveness
Yes
Moderately
Favorable
2
7
20%
User friendly accessories widen the spectrum of usability for handsets
Are MP3 and Video
Player capabilities
critical to handsets
Yes
Moderately
Favorable
2
3
15%
Increasingly becoming more important in high end handsets and smartphones and
access to exclusive content is a major asset
Are dimensions and
weight critical to
handset
performance
Yes
Moderately
Favorable
2
4
10%
The dimensions and weight of the handset are also becoming increasingly important
with more features and increased utility
Is internet browsing
critical to handset
performance
Yes
Moderately
Favorable
2
5
10%
The feature is critical in smartphones
Is battery power
critical to handset
performance
Yes
Moderately
Favorable
2
6
5%
Increased usage needs longer lasting batteries
Moderately
Favorable
2.4
OVERALL
COMPLEMENTOR
POWER LEVEL
Exhibit II (B) 2 – Part A: Level 2 Analysis for Handset Manufacturer Industry
II (B) 2a: Threat of Rivalry
The handset manufacturer and wireless service provider industries are in the mature phase of industry growth in the United
States and Europe with a high degree of consolidation. This is not true for some Asian markets, especially India and China, where the
industry is still in the growth stage and presents a significant opportunity. In India, more than five million new cell phone subscribers
are signing up every month, while China has experienced growth of 30% over 2005cxxxi. (redundant w/ earlier section)
Within the US and European markets, the firms competing in the industries are primarily competing on product differentiation,
as the penetration levels in the US are at about 70% while in some of the European nations like UK, Netherlands and Sweden, it is
almost 100%cxxxii. In US and Europe, there is a growing demand for smartphones. Handset manufacturers have realized that in
addition to competing on price basis by producing large volumes of low-end handsets, there are potential profits to be achieved by
producing lower volumes of high-end mobile devices that are capable of doing much more than just a mobile phone. Due to these high
profits in these niche low-volume high-end markets, globally the number of competitors in the handset industry still remains
reasonably high, although the market is dominated by a few big players. (highlighted portions redundant w/ earlier section)
With regards to China and India, the firms are competing to gain incremental market share in a relatively nascent, fast-growing
market. The primary driver in India and China is price. Hence, the overall industry growth continues to be attractive across the globe.
To attain economies of scale and reduce handset costs in the low-end handset segment, manufacturers tend to add capacity in
large increments. In the high-end handset segment, the volume is considerably lower. For example, in India, handset sales are
expected to grow to 500 million by 2010cxxxiii. On the other hand, in the smartphone segment, the number of handsets shipped
worldwide in Q3 of FY05 was approximately 12.5 millioncxxxiv.
Diversity of competitors is comparatively low in the handset manufacturing industry, as most of the players are from the
telecommunication industry and provide similar product offerings in terms of basic handset functionality. Some firms though, such as
Samsung and Sony are diversified into different (and in some cases complementary) business ranging from semiconductor to
consumer electronics.
Product differentiation is low at the basic handset level though it is high in the US and European markets where sales are
driven by handset replacement to gain access to new features and style
Demand continues to be strong across the globe, although for different reasons. The demand in US and Europe is driven by
desire for new technology with demand growing by 210% in 3Q of FY05 as compared to 3Q of FY04, while in China and India, is
driven by the need to communicate.
Fixed costs for the handset industry are comparatively higher than variable costs, especially due to increased R&D associated
with reducing handset form factor and increased functionality.
Exit barriers are high for the handset manufacturing industry as big players such as Nokia, RIM and Palm are primarily
focused in the handset market, although there are a few exceptions like Samsung and Sony which are into other business segments like
semiconductors and consumer electronics as well.
Entry barriers are low due to the business model adopted by most manufacturers where they have outsourced the part
manufacturing to other firms and are primarily involved in the assembling stage of the handset manufacturing process. Also there are
not many proprietary technologies which cannot be imitated by new entrants.
Overall, threat of rivalry remains moderately unfavorable to a new entrant in the handset manufacturing industry.
II (B) 2B: Barriers to Entry
As handset manufacturers buy parts from number of suppliers and assemble them together to provide end features, there are no
specific cost advantages independent of scale with regards to access to any intellectual property or proprietary technology. The
innovative technologies being developed are quickly imitated by the competitors and hence do not act as a barrier to entry.
This is offset though by high chances of competitor retaliation, competitor access to distribution channels and economies of
scale. Entrants need to provide an exceptional level of product differentiation, have access to service providers and an outstanding
brand name to gain entry in the highly competitive handset manufacturing industry. For example, RIM has created a consumer space
for itself in the corporate world, by providing an entire infrastructure for the corporate users to be able to get access to corporate email,
and other important content on their mobile handsets. Sony on the other hand has leveraged its brand name in consumer electronics to
design its popular walkman-based handsets.
Overall, barriers to entry are moderately unfavorable to a new entrant in the handset manufacturing industry.
II (B) 2c: Supplier Power
When compared with handset manufacturers, there are a large number of parts suppliers, most of them based out of Taipei,
Taiwan and Mexico. At the same time, there’s frequent cross-selling of handset parts across handset manufacturers which offsets any
dominance they may have over their suppliers to a great extent. For example, Ericsson’s Mobile Platform division supplies handset
parts to its Sony Ericsson joint venture with Sony, while at the same time supplying to Sharp and Compalcxxxv.
The profits for the suppliers are comparatively low due to standardized components used across a majority of the handsets.
The chance of vertical integration with regards to parts suppliers entering the handset manufacturing industry is low, although
there is some history of big players like Ericsson partnering with firms like Sony, to enter the handset consumer space. Product
differentiation in the form of parts is very low and hence provides the ability for handset manufacturers to switch suppliers relatively
easily, if need be.
Overall, the lack of ability of suppliers to influence the handset manufacturers is moderately favorable to the handset
manufacturing industry.
II (B) 2d: Buyer Power
The buyer concentration levels are low as the demands are widespread across different global markets. The handset
manufacturing growth rate is somewhat high on account of several key factors: the surge in demand for replacement handsets in the
US and Europe, continued technology innovations, and the ability of the handset manufacturers to deliver these features at a
reasonable price to high-end consumer market segments. This is highlighted by the fact that the CAGR of 3GSM subscribers in
Europe has been a staggering 330% over the last couple of years, while in the US the number of subscribers using their handsets for
listening to music, watching video or surfing the internet shows the highest potential for growthcxxxvi. Growth is also driven by low
levels of market penetration in the emerging markets of India and China.
There are reasonable switching costs for the new consumer, especially in the high-end handset market, with regards to
cancellation of contract with their current service provider, the potential purchase of a new handset and the lock-in associated with a
new contract with the new service provider (these costs are comparatively low for existing customers who are usually upgraded to
high-end handsets for a two year contract renewal without any contract cancellation fee).
These disadvantages to the consumer are offset by the fact that there are numerous options available to them in terms of
different value propositions with regards to features and price. For example, a user who does not wish to use the internet or play
MP3/videos has numerous choices of handsets with much lower costs (and in some cases free) with a contract. Increasingly, handset
firms are unable to charge a premium on features such as MP3/video playing support as these features are becoming commoditized.
Also, consumers in the US can now transfer their telephone numbers from one provider to the next, thus eliminating the costs
associated with a changed number when switching service providers. There is also a strategy adopted by some handset manufacturers
like Nokia to compete on volume basis, which increases the buyer power by forcing the manufacturers to attain economies of scale.
Since a certain demand needs to be generated in order for volume manufactures to sustain reasonable profits, they are beholden to
higher buyer power in these segments.
There is no threat of vertical integration in terms of customers entering the handset manufacturing industry.
Overall, buyer power is moderately unfavorable to the handset industry.
II (B) 2e: Threat of substitutes
There are a number of substitutes available for the buyer such as mobile computers, the internet, landlines, VoIP etc. Hence,
the ability of substitution by the buyer is high.
However, the buyer propensity to substitute is comparatively low unless the buyer is unhappy with the service or is looking to
get out of an expensive contract.
On the supply side, there are comparatively few consolidated buyers for the parts, and hence they do not have the same level of
substitutability as buyers.
Overall, the power of substitutes is high and unfavorable to the handset industry.
II (B) 2f: Role of complements
Numerous vendors have access to mobile operating systems like Windows Mobile, Symbian, Linux, etc. through licensing
policies of the providers of the OS. This can be offset by the capabilities of the handset manufacturers to provide a wide array of
exclusive, user-friendly software applications. For example, RIM has gained inroads into the corporate mobile workspace by
providing an entire infrastructure to meet corporate needs. Music and video playing capabilities can be easily replicated by
competitors although having exclusive access to content does provide a competitive edge. For example, iTunes can provide Apple
with a significant competitive edge for its iPhone offering due to exclusive access to music, video and news libraries. Other handset
factors such as dimensions, weight and battery life are also gaining importance. For example, on its E888 handset, Samsung competes
based on its small size and weightcxxxvii.
Overall, the complementor power is moderately favorable to the handset industry.
Exhibit II (B) 1 – Part B: Level 1 Analysis for Wireless Service Provider Industry
Threat of Rivalry – Wireless service industry
Factors
Underlying
Rivalry
Response
Are Entry Barriers
High?
Yes
Moderately
Favorable
2
3
10%
The infrastructure costs are very high for wireless networks
Are Exit Barriers
High?
No
Moderately
Unfavorable
4
4
10%
Wireless service providers can sell the infrastructure to other wireless service providers.
They can also use the same technology for different services
Is Demand High?
No
Moderately
Unfavorable
4
5
20%
The current markets in US and Europe are in mature stage, while emerging markets are
yet to be developed to spike demand
Is Product
Differentiation
High?
No
Moderately
Unfavorable
4
7
10%
The basic voice technologies across globe are same, although the differences between
2G, 3G 4G are primarily for data users
Is the diversity of
Competitors Low?
Yes
Moderately
Unfavorable
4
9
15%
Most of the competitors are exclusively in the wireless market
Is Capacity Added
in Large
Increments?
Yes
Moderately
Unfavorable
4
8
5%
Any new infrastructure in a new location opens up large geographical markets
Is Industry
Growth Rate
High?
No
Moderately
Unfavorable
4
6
10%
The current markets of US and Europe are mature and the emerging markets are in
early growth phase with five million new cell phone subscribers are signed up every
month, while China has experienced growth of 30% over 2005cxxxviii
Is Number of
Competitors
High?
Yes
Moderately
Unfavorable
4
1
5%
Globally there are a large number of wireless service providers
Are Fixed Costs
higher versus the
variable costs?
Yes
Unfavorable
5
2
15%
The fixed costs are high to setup the initial wireless infrastructure
Moderately
Unfavorable
4
OVERALL
RIVALRY LEVEL
Effect on
Industry
Strength
Rank
Weight
Reasoning
Barriers to Entry – Wireless service industry
Factors Underlying
Barriers to Entry
Response
Effect on
Industry
Strength
Rank
Are there
Economies of
Scale?
Yes
Moderately
Unfavorable
2
1
10%
Economies of scale are realized due to large subscriber base and high
investment costs
Is Product
Differentiation
High?
No
Moderately
Unfavorable
4
5
20%
The basic technologies across globe are CDMA and GSM
Is there Cost
Advantage
Independent of
Scale?
No
Moderately
Favorable
4
6
10%
There are only two wireless service protocols used across the globe-GSM and
CDMA and hence there are no exclusive technological advantages to any
particular firm
Are Capital
Requirements High?
Yes
Unfavorable
5
2
25%
High infrastructure costs and hence large subscriber base needs to be acquired
to justify these high capital costs
Is there Access to
Distribution
Channels?
Yes
Moderately
Unfavorable
2
7
15%
Access to cell phone manufacturers. Also exclusive contracts for specific models
of cell phones
Is there a High
Chance of
Competitor
Retaliation?
Yes
Unfavorable
5
4
15%
Competitors have the ability and intent to retaliate to maintain their market share
as they are in a mature industry
Governmental
Barriers to Entry?
Yes
Moderately
Unfavorable
2
3
5%
FCC regulations and access to exclusive bandwidths
Moderately
Unfavorable
3.9
OVERALL
BARRIERS TO
ENTRY LEVEL
Weight
Reasoning
Supplier Power – Wireless service industry
Factors
Underlying
Supplier
Power
Effect on
Industry
Strength
Rank
No
Moderately
Unfavorable
4
1
20%
There are numerous buyers and suppliers with many
suppliers cross selling telecommunication equipment.
Is there a
High Chance
of Vertical
Integration?
No
Unfavorable
5
3
10%
Some chance of suppliers of wireless equipment entering the
wireless service industry. Example Samsung
Is Product
Differentiation
High?
Yes
Moderately
Unfavorable
4
2
15%
The hardware for the wireless supplier is dependent on the
wireless protocol being used. CDMA or GSM
High
Percentage
Volume Sold
to the Firm?
No
Moderately
Unfavorable
4
7
10%
The hardware developed for wireless service providers works
on two basic protocols: CDMA and GSM, and hence the
hardware can be sold to any firm that uses that protocol.
Is the
Supplier
Strategically
Important for
the Firm?
Yes
Moderately
Unfavorable
4
4
15%
Wireless firms need the hardware to operate
Is the Firm
Strategically
Important for
the Supplier?
Yes
Moderately
Favorable
2
5
15%
It is a high capital contract and hence attractive to the
hardware providers
Are the
Substitute
Firms
Available to
Supplier?
Yes
Moderately
Unfavorable
4
6
10%
The hardware developed for wireless service providers works
on two basic protocols: CDMA and GSM, and hence the
hardware can be sold to any firm that uses that protocol.
Do the
suppliers earn
low profits?
No
Moderately
Unfavorable
4
8
5%
The suppliers invest heavily in R&D for newer technologies
and hence charge a premium for new kind of wireless
equipment
Moderately
3.8
Many buyers
and few
suppliers?
OVERALL
Response
Weight
Reasoning
SUPPLIER
POWER
LEVEL
Unfavorable
Buyer Power – Wireless service industry
Factors Underlying
Buyer Power
Response
Effect on
Industry
Strength
Rank
Weight
Reasoning
Is Buyer
Concentration High?
No
Favorable
1
5
10%
Buyer demands are widespread across the globe
Is the Market Growth
Rate High?
No
Moderately
Unfavorable
4
4
15%
Slowing growth in US and Europe and emerging markets are yet to be fully
exploited
Is the Firm’s Product
Strategically
Important to the
Buyer?
Yes
Moderately
Favorable
2
3
10%
Buyer has to subscribe to wireless service to use handset
Is the Buyer
Strategically
Important to the
Firm?
Yes
Unfavorable
5
2
5%
Each buyer helps attain economies of scale
Are there Substitutes
Available for the
Buyer?
Yes
Moderately
Unfavorable
4
1
5%
There are wireless service providers with varying value proposition in
terms of services and price
Is there a High Need
of the Firm to Fill
Capacity?
Yes
Moderately
Unfavorable
4
6
5%
To attain economies of scale and reduce costs to make the service
attractive to customers
Is there High Threat
of Vertical Integration
from Customer?
No
Favorable
1
7
5%
Customers cant develop wireless networks
Is Buyer Price
Sensitivity high?
Yes
Unfavorable
5
8
15%
Buyers in both developed and emerging markets are price sensitive
Is the Buyer
switching costs
high?
Yes
Unfavorable
4
9
10%
In most cases buyer has to pay a contract cancellation fee although this is
offset partially by allowing the users to keep their telephone number
Is the product a
significant portion of
buyer’s costs?
Yes
Unfavorable
4
10
10%
It is a recurring cost for the buyer and hence the buyer is sensitive to the
price factor
Does buyer have full
information?
No
Favorable
2
11
10%
The buyer does not know the costs associated with wireless service and
related profit margins
OVERALL BUYER
POWER LEVEL
Moderately
Unfavorable
3.4
Power of Substitutes – Wireless service industry
Factors Underlying
Supplier Power
Are there Substitutes
Available for the Buyer?
Response
Yes
Effect on
Industry
Strength
Rank
Weight
Reasoning
Somewhat
Unfavorable
4
1
90%
There are number of substitutes like VoIP and landlines, although in developed markets users may not substitute with these
products due to mobility reasons
Are the Substitute Firms
Available to Supplier?
Yes
Moderately
Unfavorable
4
2
5%
Hardware equipment firms sell to various wireless service providers
Buyer’s propensity to
substitute high?
No
Moderately
Favorable
2
3
5%
The buyers usually need to pay a cancellation fee and are not very comfortable with it, unless the service is really bad or the buyer
is out of a contract
Moderately
Unfavorable
4.0
OVERALL POWER OF
SUBSTITUTES LEVEL
Complementor Power – Wireless service industry
Factors Underlying
Buyer Power
Functionality
driven handsets
critical to wireless
service providers?
Response
Yes
Effect on
Industry
Strength
Rank
Weight
Reasoning
Moderately
Favorable
2.5
1
30%
More functionality drives more consumers towards wireless service providers
Technological
advances helping
in developing
faster data
transmission
critical to wireless
service providers?
Yes
Moderately
Favorable
2.5
3
20%
Increasingly becoming popular in US and Europe, but not so in emerging markets where
wireless service is used primarily to communicate
Access to content
which can be used
by consumers
critical to wireless
service providers?
Yes
Moderately
Favorable
2.5
4
20%
Exclusive content becoming more important in US and Europe with increased data
usage
Low cost
technological
advances critical to
wireless service
providers?
Yes
Favorable
1
2
30%
Low cost to consumers is an attractive proposition across the globe
Moderately
Favorable
2.0
OVERALL
COMPLEMENTOR
POWER LEVEL
Exhibit II (B) 1 – Part B: Level 2 Analysis for Wireless Service Provider Industry
II (B) 2a: Threat of Rivalry
Globally there are a large number of wireless service providers. The growth in the high revenue markets of US and Europe is
slowing down, with US expecting an inflation-adjusted growth of 7.3% annually till 2011 in the wireless service industrycxxxix. The
emerging markets are still in the early stage of growth. Also, as there are few standard available technologies (CDMA and GSM) to
wireless service providers, there is little product differentiation.
The fixed costs are comparatively much higher than variable costs, due to expensive capital costs associated with telecom
equipment.
The exit barriers though are somewhat low as the infrastructure could be sold to other wireless service firms and could also be
leveraged to provide other value-added services like mobile internet access.
Hence, due to little product differentiation and slowing market conditions in high revenue markets of US and Europe, overall
threat of rivalry remains high and is moderately unfavorable for a new entrant in the wireless service industry.
II (B) 2b: Barriers to Entry
Due to the high initial capital costs and large subscriber base, economies of scale need to be realized by the wireless service
providers to become a competing force. Also wireless service providers have exclusive access to handset manufacturers and hence the
distribution channels for their service. With increased focus in established markets of US and Europe on new feature driven handsets,
having exclusive access to popular, function driven handsets can be an asset. New entrants also need to get the FCC approval and
exclusive access to frequency bandwidth. Lastly, this is a maturing market in the high revenue segments in US and Europe and hence
chances of retaliation by existing players are very high.
Hence overall barriers to entry remain high and are moderately unfavorable for a new entrant in to the wireless service
industry.
II (B) 2c: Supplier Power
There are numerous suppliers who can provide the necessary hardware equipment to the wireless service provider firms with
increased cross selling of wireless equipment. For example, Samsung Networks and Telecommunication division of Samsung
Electronics, supplies telecommunication equipment to both AT&T and Sprintcxl. Also, as there are only two distinct wireless service
protocols (CDMA and GSM), the hardware can be used for multiple wireless service providers.
Suppliers for the specialized wireless equipment invest heavily in R&D, and due to high capital costs can charge higher
premium.
Hence the overall ability of suppliers to influence the wireless service is moderately unfavorable to the wireless service
industry.
II (B) 2d: Buyer Power
The wireless service industry is experiencing slow growth in the high revenue markets in US and Europe as of now. US sales
of mobile phone service are forecast to increase at an inflation-adjusted annual rate of 7.3% till 2011cxli. This dynamic might change
with the emerging markets where growth is about to take off. Buyers have numerous substitute options and this is very important to
the wireless service industry firm to attain economies of scale in order to justify high capital investments for future infrastructure
improvements. For example, one of Cingular’s strategic moves is to focus on increasing its customer base so as to justify investing in
its upgrade from 2G to 3G networks in the UScxlii. Firms are also attaining economies of scales through acquisitions of wireless service
firms (e.g. Cingular acquiring AT&T wireless in 2004) to gain access to the network infrastructure and provide better services to end
consumerscxliii. The wireless service fee for the buyer is a recurring cost and hence the buyer is sensitive to this factor.
Hence overall buyer power is moderately unfavorable to the wireless service industry.
II (B) 2e: Power of substitutes
There are large numbers of substitutes available to the buyer with increased competition from landline companies, cable
television operators, Wi-Fi and VoIP providerscxliv, although this is partially offset by the advantages of mobile communication and
the fee associated with breaking the contract with the wireless firm.. Also, the supplier has the option of selling handsets to other
wireless service providers, beyond a usual initial contract period.
Hence overall the power of substitutes is unfavorable to the wireless service industry.
II (B) 2f: Complementor power
There is increased data usage by handset users in the US and Europe leading to an increased demand for wireless networks to
provide adequate bandwidth and exclusive content to the end users. Highly functional handsets are also a complement to the industry
to provide the data access in a user friendly manner. Low cost technological advances in wireless networks are also considered
important by the end user due to widespread use of the mobile devices.
Hence complementor power is moderately favorable for wireless service industry.
Exhibit III (E) 2: Apple’s Valuation using Comparable Analysis
Comparable Analysis:
Source: Yahoo Finance, Value Line
Shares outstanding (M)
Price (on 02/16/07)
Market Value of Equity ($M)
Long-term Debt ($M)
Cash & cash equivalents ($M)
Enterprise Value ($M)
Sales ($M)
EBITDA ($M)
Book Value/Share ($)
Book value of Equity ($M)
EPS ($)
Enterprise Value/Sales
Enterprise Value/EBITDA
Market Value/Book Value
Price/EPS
VALUATION (averages)
ENTERPRISE
EQUITY
PALM
102.09
16.09
1642.63
0.00
518.41
1124.22
1540.00
133.86
9.85
1005.38
15.08
0.73
8.40
1.63
1.07
RIMM
185.70
138.82
25778.87
6.90
893.45
24892.32
2670.00
843.34
12.37
2296.74
14.38
9.32
29.52
11.22
9.66
CREAF
83.39
6.50
542.04
192.00
234.41
499.63
1120.00
(0.41)
5.28
439.88
13.43
0.45
(1227.58)
1.23
0.48
SNDK
210.85
40.13
8461.41
1150.00
2810.00
6801.41
3260.00
792.63
22.59
4763.73
15.46
2.09
8.58
1.78
2.60
DELL
2230.00
24.39
54389.70
504.00
8070.00
46823.70
57880.00
4430.00
1.38
3077.40
25.96
0.81
10.57
17.67
0.94
GTW
317.75
1.94
616.44
300.00
490.73
425.71
3980.00
8.88
0.69
218.61
12.53
0.11
47.94
2.82
0.15
NAPS
45.00
3.94
177.30
0.00
80.90
96.40
108.73
(35.16)
2.02
90.68
2.42
0.89
(2.74)
1.96
1.63
CNET
149.80
9.27
1388.65
139.10
61.70
1466.05
387.69
66.71
1.77
265.30
2.59
3.78
21.98
5.23
3.58
MSFT
9790.00
28.74
281364.60
0.00
26400.00
254964.60
46060.00
17940.00
3.75
36683.13
4.70
5.54
14.21
7.67
6.11
AVERAGE
2.63
20.66
5.69
2.91
AAPL
862
84.83
73112.43
0.00
11870.00
61242.43
20680.00
3440.00
13.05
11249.13
23.99
2.96
17.80
6.50
3.54
VALUE ($M)
54,469
71,056
64,020
60,241
$ 62,762 M
$ 62,130 M
Adjustments:
CURRENT PERFORMANCE
REVENUE (TTM)
PROFIT MARGIN (TTM)
OPERATING MARGIN (TTM)
EPS
EXPECTED GROWTH
Revenue Forecast '07
Revenue Forecast '08
EPS Forecast '07
EPS Forecast '08
REVENUE Growth '07 (YOY)
Revenue Growth '08 (YOY)
EPS Growth '07
EPS Growth '08
PALM
1,540
5.61%
6.85%
0.82
RIMM
2,670
17.43%
27.22%
2.45
SNDK
3,260
6.1%
17.1%
0.96
DELL
57,880
5.1%
6.9%
1.28
GTW
3,980
0.2%
-0.5%
0.08
NAPS
109
-30.10%
-36.3%
-0.76
CNET
388
2.02%
3.15%
0.05
MSFT
46,060
25.86%
36.20%
1.17
Median
2,965
5.36%
6.85%
0.89
AAPL
20,680
11.74%
14.63%
2.76
Diff
597.5%
119.2%
113.6%
210.1%
1570
1770
0.64
0.72
1.95%
12.74%
-22.0%
12.5%
3030
4320
3.34
4.59
13.48%
42.57%
36.3%
37.4%
4120
4910
1.19
2.53
26.38%
19.17%
24.0%
112.6%
57640
59960
1.15
1.30
-0.41%
4.02%
-10.2%
13.0%
4150
4290
0.10
0.12
4.27%
3.37%
25.0%
20.0%
109
150
(0.93)
(0.67)
0.02%
37.66%
22.4%
-28.0%
432.31
478.94
0.16
0.25
11.51%
10.79%
220.0%
56.3%
50550
56430
1.47
1.70
9.75%
11.63%
25.6%
15.6%
3,575
4,305
0.90
1.01
7.01%
12.19%
24.48%
17.82%
24290
30560
3.21
3.78
17.46%
25.81%
16.30%
17.76%
149.0%
111.8%
-33.4%
-0.4%
Note : Creative (CREAF) has been excluded from the calculations for adjustments since the full information on its revenue forecast for 2007 and 2008 is not available.
Final Valuation:
VALUATION
BY COMPARABLES
ADJUSTMENT
ADJUSTED VALUATION
Adjustment
5%
10%
-5%
-5%
0%
ENTERPRISE VALUE
EQUITY VALUE
$ 62,762 M
$ 62,130 M
5%
5%
$ 62,762 M
$ 62,130 M
Exhibit III (E) 3a – Part 1: Apple’s valuation using Scenario Analysis
a) Apple achieves a realistic goal of meeting 1% of market share (10 million units), corresponding iTunes sales go up and high end iPod sales are cannibalized.
Segment
iPhone
mkt share
revenue(in millions)
2007
2008
2009
2010
2011
2012
2013
2014
2015
0.30%
1%
1.50%
2%
3%
5%
6%
6.50%
7%
1677
2795
3913
2795
5590
11180
5590
2795
2795
60%
58%
50%
47%
40%
revenue growth
iPod
Unit Growth
Revenue Growth
Revenues
Computers
Revenue Growth
Revenues
Other Music Related Products and Services
Revenue Growth
Revenues from Cingular in terms of subscription
Total Sales Growth Projections
Company Name
Forecast Horizon
Estimated
Price/Share=$102.47
Fiscal Year End
Date
47%
40%
33%
2%
2%
2%
2%
27976.86
39167.6
52092.9
53134.76
54197.46
55281.41
56387.04
15%
12%
9%
5%
4%
2%
2%
2%
1%
8481.25
9499
10353.91
10871.61
11306.47
11532.6
11763.25
11998.52
12118.5
150%
180%
110%
90%
80%
40%
30%
15%
15%
13195
27709.5
52648.05
94766.49
132673.1
172475
198346.3
228098.2
0%
0%
0%
0%
0%
0%
0%
0%
0%
Revenues
1100
1100
1100
1100
1100
1100
1100
1100
1100
Revenue Growth
19%
22%
17%
8%
2%
2%
2%
2%
2%
Revenues
1522.01
1856.852
2172.517
2346.318
2393.245
2441.11
2489.932
2539.731
2590.525
Unit Sales
3000000
8000000
15000000
20000000
30000000
50000000
60000000
65000000
70000000
Revenue Growth
Software Service and Other Sales
54%
19031.87
4712.5
Revenues
Peripherals and Other Hardware
61%
12358.36
Revenues
13.5
36
67.5
90
135
225
270
292.5
315
Revenues
29864.62
47513.73
73293.28
109018.6
167384.1
212286.6
247885.7
272353.4
303404.3
Revenue Growth
54.61879
59.09704
54.25707
48.74292
53.53724
26.82599
16.76936
9.870585
11.40094
APPLE COMPUTER INC
10 Years
TERM
YEAR
Actual
Actual
Actual
Actual
Actual
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
9/30/2001
9/30/2002
9/30/2003
9/30/2004
9/30/2005
9/30/2006
9/30/2007
9/30/2008
9/30/2009
9/30/2010
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
0.016
0.017
0.059
0.213
0.201
0.056
0.003
0.027
0.073
0.142
0.237
0.273
0.301
0.348
0.387
7.1%
8.1%
33.4%
68.3%
38.7%
54.6%
59.1%
54.3%
48.7%
53.5%
26.8%
16.8%
9.9%
11.4%
5.0%
70.0%
70.7%
70.9%
69.7%
71.0%
70.5%
70.1%
69.6%
69.1%
68.7%
68.2%
67.7%
67.2%
66.8%
66.3%
Implied Return on
Equity
Income Statement
Assumptions
Sales Growth
Cost of Goods
75.1%
Sold/Sales
R&D/Sales
8.0%
7.8%
7.6%
5.9%
3.8%
3.7%
8.0%
7.5%
7.1%
6.0%
5.6%
4.0%
4.0%
3.9%
3.9%
3.8%
SG&A/Sales
Dep&Amort/Avge
PP&E and Intang.
Interest
Expense/Avge Debt
Non-Operating
Income/Sales
21.2%
19.3%
19.5%
17.2%
13.3%
12.6%
18.0%
22.2%
21.1%
20.0%
18.0%
15.0%
14.0%
13.8%
13.6%
13.3%
18.1%
14.9%
19.0%
20.9%
18.9%
19.1%
19.3%
19.5%
19.7%
19.9%
20.1%
20.3%
20.5%
20.7%
20.9%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.5%
0.7%
1.1%
0.4%
1.2%
1.9%
1.5%
1.6%
1.5%
1.5%
1.4%
1.4%
1.3%
1.3%
1.2%
1.2%
Effective Tax Rate
Minority
Interest/After Tax
Income
28.8%
25.3%
26.1%
27.9%
26.4%
29.0%
30.0%
29.4%
28.9%
28.3%
27.8%
27.2%
26.7%
26.1%
25.6%
25.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
80.9%
75.5%
73.6%
66.0%
59.3%
52.3%
55.0%
52.2%
49.4%
46.7%
43.9%
41.1%
38.3%
35.6%
32.8%
30.0%
8.7%
9.8%
12.3%
9.3%
6.4%
6.5%
7.2%
8.5%
9.3%
8.8%
8.4%
7.9%
7.4%
6.9%
6.5%
6.0%
0.3%
1.1%
1.3%
1.7%
1.7%
2.0%
1.8%
1.8%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
6.2%
7.7%
8.0%
8.6%
7.0%
14.9%
14.1%
13.3%
12.5%
11.8%
11.0%
10.2%
9.4%
8.6%
7.8%
7.0%
19.9%
22.7%
26.3%
24.7%
18.3%
18.3%
24.0%
22.0%
20.0%
18.0%
16.8%
15.7%
14.5%
13.3%
12.2%
11.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
13.4%
13.0%
14.5%
14.8%
12.2%
16.0%
15.6%
15.2%
14.9%
14.5%
14.1%
13.7%
13.4%
13.0%
12.6%
12.2%
10.5%
10.8%
10.8%
8.5%
5.9%
6.6%
8.0%
10.0%
12.0%
8.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.1%
1.8%
1.2%
0.7%
0.9%
1.0%
1.2%
1.8%
2.0%
1.8%
1.6%
1.3%
1.1%
0.9%
0.7%
5.9%
3.0%
2.4%
2.3%
2.4%
6.4%
5.0%
3.0%
2.9%
2.9%
2.8%
2.7%
2.6%
2.6%
2.5%
2.4%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Other Income/Sales
Ext. Items & Disc.
Ops./Sales
Pref. Dividends/Avge
Pref. Stock
Balance Sheet
Assumptions:
Working Capital
Assumptions
Ending Operating
Cash/Sales
Ending
Receivables/Sales
Ending
Inventories/COGS
Ending Other Current
Assets/Sales
Ending Accounts
Payable/COGS
Ending Taxes
Payable/Sales
Ending Other Current
Liabs/Sales
Other Operating
Asset Assumptions
Ending Net
PP&E/Sales
Ending
Investments/Sales
Ending
Intangibles/Sales
Ending Other
Assets/Sales
Other Operating Liability
Assumptions
Other
Liabilities/Sales
Deferred Taxes/Sales
Financing
Assumptions
Current Debt/Total
Assets
Long-Term
Debt/Total Assets
Minority
Interest/Total Assets
Preferred Stock/Total
Assets
Dividend Payout
Ratio
5.0%
4.0%
3.8%
3.6%
4.3%
3.8%
5.0%
6.0%
4.0%
3.8%
3.7%
3.5%
3.4%
3.3%
3.1%
3.0%
0.0%
0.0%
4.5%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.3%
5.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Estimated Price/Share=$102.47
Company Name: APPLE COMPUTER INC
Required Valuation Parameters (to compute value of common equity):
----------------------------------------------------------------------------->
Enter Cost of Equity Capital:
---------------------------->
Enter Value of Contingent Claims on Common Equity ($000):
--------------------------------------------------------------------------->
Enter Date of Valuation:
------------>
Enter Dilution Factor for Splits Occurring Since Latest Fiscal Year End:
Optional Valuation Parameters (to compute value to all investors):
Enter Cost of Debt: ---------------------------------------------------------------------------------------------->
Enter Cost of Preferred Stock: ----------------------------------------------------------------------------->
Implied Cost of Equity Calculator
This calculator solves for the cost of equity capital that generates a given price/share.
To use the calculator, enter a price, hit return and click the 'Calculate' button.
Price/Share
$102.47
1.000000
=
15.48%
11,506,945
3/10/2007
1.00
0.00%
0.00%
b)Apple does not introduce the iPhone
Segment
iPod
2007
2008
2009
2010
2011
Unit Growth
68%
50%
40%
35%
25%
Revenue Growth
61%
48%
38%
33%
12358.36
18290.37
25240.71
15%
12%
9%
8481.25
9499
150%
180%
4712.5
13195
Revenues
Computers
Revenue Growth
Revenues
Other Music Related Products and Services
Revenue Growth
Revenues
Peripherals and Other Hardware
Revenue Growth
Revenues
Software Service and Other Sales
Revenue Growth
Total Sales Growth Projections
Company Name
Forecast Horizon
Estimated
Price/Share=$34.63
Fiscal Year End
Date
2012
2013
2014
2015
28%
2%
2%
2%
2%
33570.15
42969.79
43829.19
44705.77
45599.89
46511.89
5%
4%
2%
2%
2%
1%
10353.91
10871.61
11306.47
11532.6
11763.25
11998.52
12118.5
110%
90%
80%
40%
30%
15%
15%
27709.5
52648.05
94766.49
132673.1
172475
198346.3
228098.2
0%
0%
0%
0%
0%
0%
0%
0%
0%
1100
1100
1100
1100
1100
1100
1100
1100
1100
19%
22%
17%
8%
2%
2%
2%
2%
2%
Revenues
1522.01
1856.852
2172.517
2346.318
2393.245
2441.11
2489.932
2539.731
2590.525
Revenues
28174.12
43941.23
66576.64
100536.1
152536
191576
232534
259584.4
290419.1
Revenue Growth
45.86653
55.96308
51.51294
51.0081
51.72258
25.59395
21.3795
11.63289
11.87849
APPLE COMPUTER INC
10 Years
TERM
YEAR
Actual
Actual
Actual
Actual
Actual
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
9/30/2001
9/30/2002
9/30/2003
9/30/2004
9/30/2005
9/30/2006
9/30/2007
9/30/2008
9/30/2009
9/30/2010
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
0.016
0.017
0.059
0.213
0.184
0.182
0.185
0.181
0.200
0.238
0.267
0.293
0.323
0.356
0.397
7.1%
8.1%
33.4%
68.3%
38.7%
30.0%
28.0%
23.0%
20.0%
17.0%
14.0%
12.0%
10.0%
7.0%
5.0%
70.0%
70.7%
70.9%
69.7%
71.0%
70.5%
70.1%
69.6%
69.1%
68.7%
68.2%
67.7%
67.2%
66.8%
66.3%
Implied Return on
Equity
Income Statement
Assumptions
Sales Growth
Cost of Goods
Sold/Sales
R&D/Sales
75.1%
8.0%
7.8%
7.6%
5.9%
3.8%
3.8%
3.8%
3.8%
3.8%
3.8%
3.8%
3.8%
3.8%
3.8%
3.8%
3.8%
SG&A/Sales
Dep&Amort/Avge
PP&E and Intang.
Interest
Expense/Avge Debt
Non-Operating
Income/Sales
21.2%
19.3%
19.5%
17.2%
13.3%
13.3%
13.3%
13.3%
13.3%
13.3%
13.3%
13.3%
13.3%
13.3%
13.3%
13.3%
18.1%
14.9%
19.0%
20.9%
20.9%
20.9%
20.9%
20.9%
20.9%
20.9%
20.9%
20.9%
20.9%
20.9%
20.9%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.5%
0.7%
1.1%
0.4%
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
1.2%
Effective Tax Rate
28.8%
25.3%
26.1%
27.9%
26.4%
26.4%
26.4%
26.4%
26.4%
26.4%
26.4%
26.4%
26.4%
26.4%
26.4%
26.4%
Minority
Interest/After Tax
Income
Other Income/Sales
Ext. Items & Disc.
Ops./Sales
Pref.
Dividends/Avge
Pref. Stock
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
75.5%
73.6%
66.0%
59.3%
52.3%
55.0%
52.2%
49.4%
46.7%
43.9%
41.1%
38.3%
35.6%
32.8%
30.0%
9.8%
12.3%
9.3%
6.4%
6.5%
7.2%
8.5%
9.3%
8.8%
8.4%
7.9%
7.4%
6.9%
6.5%
6.0%
1.1%
1.3%
1.7%
1.7%
2.0%
1.8%
1.8%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
7.7%
8.0%
8.6%
7.0%
14.9%
14.1%
13.3%
12.5%
11.8%
11.0%
10.2%
9.4%
8.6%
7.8%
7.0%
22.7%
26.3%
24.7%
18.3%
18.3%
24.0%
22.0%
20.0%
18.0%
16.8%
15.7%
14.5%
13.3%
12.2%
11.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
13.0%
14.5%
14.8%
12.2%
16.0%
15.6%
15.2%
14.9%
14.5%
14.1%
13.7%
13.4%
13.0%
12.6%
12.2%
10.8%
10.8%
8.5%
5.9%
6.6%
8.0%
10.0%
12.0%
8.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.1%
1.8%
1.2%
0.7%
0.7%
0.7%
0.7%
0.7%
0.7%
0.7%
0.7%
0.7%
0.7%
0.7%
0.7%
3.0%
2.4%
2.3%
2.4%
6.4%
5.0%
3.0%
2.9%
2.9%
2.8%
2.7%
2.6%
2.6%
2.5%
2.4%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
4.0%
3.8%
3.6%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
0.0%
4.5%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Balance Sheet
Assumptions:
Working Capital
Assumptions
Ending Operating
Cash/Sales
80.9%
Ending
Receivables/Sales
8.7%
Ending
Inventories/COGS
0.3%
Ending Other
Current Assets/Sales
6.2%
Ending Accounts
Payable/COGS
19.9%
Ending Taxes
Payable/Sales
0.0%
Ending Other
Current Liabs/Sales
13.4%
Other Operating
Asset Assumptions
Ending Net
PP&E/Sales
10.5%
Ending
Investments/Sales
0.0%
Ending
Intangibles/Sales
0.0%
Ending Other
Assets/Sales
5.9%
Other Operating Liability
Assumptions
Other
Liabilities/Sales
0.0%
Deferred
Taxes/Sales
5.0%
Financing
Assumptions
Current Debt/Total
Assets
0.0%
Long-Term
Debt/Total Assets
5.3%
Minority
Interest/Total Assets
0.0%
Preferred
0.0%
Stock/Total Assets
Dividend Payout
Ratio
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Estimated Price/Share=$34.63
Company Name: APPLE COMPUTER INC
Required Valuation Parameters (to compute value of common equity):
----------------------------------------------------------------------------->
Enter Cost of Equity Capital:
---------------------------->
Enter Value of Contingent Claims on Common Equity ($000):
-------------------------------------------- -------------------------------->
Enter Date of Valuation:
------------>
Enter Dilution Factor for Splits Occurring Since Latest Fiscal Year End:
Optional Valuation Parameters (to compute value to all investors):
Enter Cost of Debt: ---------------------------------------------------------------------------------------------- >
Enter Cost of Preferred Stock: ----------------------------------------------------------------------------->
Implied Cost of Equity Calculator
This calculator solves for the cost of equity capital that generates a given price/share.
To use the calculator, enter a price, hit return and click the 'Calculate' button.
Price/Share
$34.63
1.000000
=
0.0%
0.0%
15.48%
11,506,945
3/10/2007
1.00
0.00%
0.00%
0.0%
0.0%
c) Apple introduces the iPhone and it is an exceptional success
Segment
2007
iPhone
2008
2009
0.70%
2%
4.00%
6%
8%
3913
7267
11180
11180
11180
Unit Growth
60%
58%
50%
47%
40%
Revenue Growth
61%
54%
47%
40%
33%
12358.36
19031.87
27976.86
39167.6
15%
12%
9%
5%
8481.25
9499
10353.91
160%
200%
180%
4901
14703
0%
0%
1100
1100
mkt share
revenue(in millions)
2010
2011
2012
2013
2014
2015
10%
11%
12.00%
14%
11180
5590
5590
11180
2%
2%
2%
2%
52092.9
53134.76
54197.46
55281.41
56387.04
4%
2%
2%
2%
1%
10871.61
11306.47
11532.6
11763.25
11998.52
12118.5
150%
120%
80%
40%
30%
15%
41168.4
102921
226426.2
407567.2
570594
741772.2
853038.1
0%
0%
0%
0%
0%
0%
0%
1100
1100
1100
1100
1100
1100
1100
revenue growth
iPod
Revenues
Computers
Revenue Growth
Revenues
Other Music Related Products and Services
Revenue Growth
Revenues
Peripherals and Other Hardware
Revenue Growth
Revenues
Software Service and Other Sales
Revenue Growth
Revenues from Cingular in terms of subscription
Total Sales Growth Projections
19%
22%
17%
8%
2%
2%
2%
2%
2%
Revenues
1522.01
1856.852
2172.517
2346.318
2393.245
2441.11
2489.932
2539.731
2590.525
Unit Sales
7000000
20000000
40000000
60000000
80000000
1E+08
1.1E+08
1.2E+08
1.4E+08
Revenues
31.5
90
180
270
360
450
495
540
630
Revenues
32307.12
53547.73
94131.68
167856.5
304858.8
487405.6
646229.7
818821.9
937044.1
67.26%
65.75%
75.79%
78.32%
81.62%
59.88%
32.59%
26.71%
14.44%
Revenue Growth
Company Name
Forecast Horizon
Estimated
Price/Share=$317.81
Fiscal Year End
Date
APPLE COMPUTER INC
10 Years
TERM
YEAR
Actual
Actual
Actual
Actual
Actual
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
9/30/2001
9/30/2002
9/30/2003
9/30/2004
9/30/2005
9/30/2006
9/30/2007
9/30/2008
9/30/2009
9/30/2010
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
0.016
0.017
0.059
0.213
0.201
(0.005)
0.023
(0.057)
(0.074)
(0.129)
0.147
0.219
0.283
0.361
0.419
7.1%
8.1%
33.4%
68.3%
38.7%
67.26%
65.75%
75.79%
78.32%
81.62%
59.88%
32.59%
26.71%
14.44%
5.0%
70.0%
70.7%
70.9%
69.7%
71.0%
70.5%
70.1%
71.0%
72.0%
74.0%
69.0%
68.3%
67.7%
67.0%
66.3%
Implied Return on
Equity
Income Statement
Assumptions
Sales Growth
Cost of Goods
Sold/Sales
R&D/Sales
SG&A/Sales
75.1%
8.0%
7.8%
7.6%
5.9%
3.8%
3.7%
8.0%
7.5%
7.1%
6.0%
5.6%
4.0%
4.0%
3.9%
3.9%
3.8%
21.2%
19.3%
19.5%
17.2%
13.3%
12.6%
22.0%
21.0%
25.0%
26.0%
27.0%
20.0%
17.0%
15.3%
13.0%
12.0%
Dep&Amort/Avge
PP&E and Intang.
Interest
Expense/Avge Debt
Non-Operating
Income/Sales
Effective Tax Rate
Minority
Interest/After Tax
Income
Other Income/Sales
Ext. Items & Disc.
Ops./Sales
Pref. Dividends/Avge
Pref. Stock
Balance Sheet
Assumptions:
Working Capital
Assumptions
Ending Operating
Cash/Sales
Ending
Receivables/Sales
Ending
Inventories/COGS
Ending Other Current
Assets/Sales
Ending Accounts
Payable/COGS
Ending Taxes
Payable/Sales
Ending Other Current
Liabs/Sales
Other Operating
Asset Assumptions
Ending Net
PP&E/Sales
Ending
Investments/Sales
Ending
Intangibles/Sales
Ending Other
Assets/Sales
Other Operating Liability
Assumptions
Other
Liabilities/Sales
18.1%
14.9%
19.0%
20.9%
18.9%
19.1%
19.3%
19.5%
19.7%
19.9%
20.1%
20.3%
20.5%
20.7%
20.9%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.5%
0.7%
1.1%
0.4%
1.2%
1.9%
1.5%
1.6%
1.5%
1.5%
1.4%
1.4%
1.3%
1.3%
1.2%
1.2%
28.8%
25.3%
26.1%
27.9%
26.4%
29.0%
30.0%
29.4%
28.9%
28.3%
27.8%
27.2%
26.7%
26.1%
25.6%
25.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
80.9%
75.5%
73.6%
66.0%
59.3%
52.3%
55.0%
52.2%
49.4%
46.7%
43.9%
41.1%
38.3%
35.6%
32.8%
30.0%
8.7%
9.8%
12.3%
9.3%
6.4%
6.5%
7.2%
8.5%
9.3%
8.8%
8.4%
7.9%
7.4%
6.9%
6.5%
6.0%
0.3%
1.1%
1.3%
1.7%
1.7%
2.0%
1.8%
1.8%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
6.2%
7.7%
8.0%
8.6%
7.0%
14.9%
14.1%
13.3%
12.5%
11.8%
11.0%
10.2%
9.4%
8.6%
7.8%
7.0%
19.9%
22.7%
26.3%
24.7%
18.3%
18.3%
24.0%
22.0%
20.0%
18.0%
16.8%
15.7%
14.5%
13.3%
12.2%
11.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
13.4%
13.0%
14.5%
14.8%
12.2%
16.0%
15.6%
15.2%
14.9%
14.5%
14.1%
13.7%
13.4%
13.0%
12.6%
12.2%
10.5%
10.8%
10.8%
8.5%
5.9%
6.6%
8.0%
10.0%
12.0%
8.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.1%
1.8%
1.2%
0.7%
0.9%
1.0%
1.2%
1.8%
2.0%
1.8%
1.6%
1.3%
1.1%
0.9%
0.7%
5.9%
3.0%
2.4%
2.3%
2.4%
6.4%
5.0%
3.0%
2.9%
2.9%
2.8%
2.7%
2.6%
2.6%
2.5%
2.4%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Deferred Taxes/Sales
Financing
Assumptions
5.0%
4.0%
3.8%
3.6%
4.3%
3.8%
5.0%
6.0%
4.0%
3.8%
3.7%
3.5%
3.4%
3.3%
3.1%
3.0%
Current Debt/Total
0.0%
0.0%
4.5%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Assets
Long-Term
Debt/Total Assets
Minority
Interest/Total Assets
Preferred Stock/Total
Assets
Dividend Payout
Ratio
5.3%
5.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Estimated Price/Share=$317.81
Company Name: APPLE COMPUTER INC
Required Valuation Parameters (to compute value of common equity):
----------------------------------------------------------------------------->
Enter Cost of Equity Capital:
---------------------------->
Enter Value of Contingent Claims on Common Equity ($000):
-------------------------------------------- -------------------------------->
Enter Date of Valuation:
------------>
Enter Dilution Factor for Splits Occurring Since Latest Fiscal Year End:
Optional Valuation Parameters (to compute value to all investors):
Enter Cost of Debt: ---------------------------------------------------------------------------------------------->
Enter Cost of Preferred Stock: ----------------------------------------------------------------------------->
Implied Cost of Equity Calculator
This calculator solves for the cost of equity capital that generates a given price/share.
To use the calculator, enter a price, hit return and click the 'Calculate' button.
Price/Share
$317.81
1.000000
=
15.48%
11,506,945
3/10/2007
1.00
0.00%
0.00%
d)Apple introduces the iPhone and it doesn’t live up to the hype created
Segment
iPhone
2007
2008
2009
2010
2011
2012
2013
2014
2015
0.30%
0.40%
0.50%
0.60%
0.70%
1.00%
1.20%
1.35%
1.50%
1677
559
559
559
559
1677
1118
838.5
838.5
Unit Growth
60%
58%
50%
47%
40%
Revenue Growth
61%
54%
47%
40%
33%
2%
2%
2%
2%
12358.36
19031.87
27976.86
39167.6
52092.9
53134.76
54197.46
55281.41
56387.04
15%
12%
9%
5%
4%
2%
2%
2%
1%
8481.25
9499
10353.91
10871.61
11306.47
11532.6
11763.25
11998.52
12118.5
110%
100%
90%
60%
30%
30%
30%
15%
15%
3958.5
7917
15042.3
24067.68
31287.98
40674.38
52876.69
60808.2
69929.43
0%
0%
0%
0%
0%
0%
0%
0%
0%
1100
1100
1100
1100
1100
1100
1100
1100
1100
mkt share
revenue(in millions)
revenue growth
iPod
Revenues
Computers
Revenue Growth
Revenues
Other Music Related Products and Services
Revenue Growth
Revenues
Peripherals and Other Hardware
Revenue Growth
Revenues
Software Service and Other Sales
Revenue Growth
Revenues from Cingular in terms of subscription
Total Sales Growth Projections
19%
22%
17%
8%
2%
2%
2%
2%
2%
Revenues
1522.01
1856.852
2172.517
2346.318
2393.245
2441.11
2489.932
2539.731
2590.525
Unit Sales
3000000
4000000
5000000
6000000
7000000
10000000
12000000
13500000
15000000
Revenues
13.5
18
22.5
27
31.5
45
54
60.75
67.5
Revenues
29110.62
39981.73
57227.08
78139.2
98771.1
110604.9
123599.3
132627.1
143031.5
50.72%
37.34%
43.13%
36.54%
26.40%
11.98%
11.75%
7.30%
7.84%
Revenue Growth
Company Name
Forecast Horizon
Estimated
Price/Share=$42.80
Fiscal Year End
Date
APPLE COMPUTER INC
10 Years
TERM
YEAR
Actual
Actual
Actual
Actual
Actual
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
9/30/2001
9/30/2002
9/30/2003
9/30/2004
9/30/2005
9/30/2006
9/30/2007
9/30/2008
9/30/2009
9/30/2010
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
0.016
0.017
0.059
0.213
0.201
0.056
0.001
0.026
0.069
0.128
0.222
0.267
0.298
0.341
0.387
7.1%
8.1%
33.4%
68.3%
38.7%
50.72%
37.34%
43.13%
36.54%
26.40%
11.98%
11.75%
7.30%
7.84%
5.0%
75.1%
70.0%
70.7%
70.9%
69.7%
71.0%
70.5%
70.1%
69.6%
69.1%
68.7%
68.2%
67.7%
67.2%
66.8%
66.3%
8.0%
7.8%
7.6%
5.9%
3.8%
3.7%
8.0%
7.5%
7.1%
6.0%
5.6%
4.0%
4.0%
3.9%
3.9%
3.8%
21.2%
19.3%
19.5%
17.2%
13.3%
12.6%
18.0%
22.2%
21.1%
20.0%
18.0%
15.0%
14.0%
13.8%
13.6%
13.3%
18.1%
14.9%
19.0%
20.9%
18.9%
19.1%
19.3%
19.5%
19.7%
19.9%
20.1%
20.3%
20.5%
20.7%
20.9%
Implied Return on
Equity
Income Statement
Assumptions
Sales Growth
Cost of Goods
Sold/Sales
R&D/Sales
SG&A/Sales
Dep&Amort/Avge
PP&E and Intang.
Interest
Expense/Avge Debt
Non-Operating
Income/Sales
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.5%
0.7%
1.1%
0.4%
1.2%
1.9%
1.5%
1.6%
1.5%
1.5%
1.4%
1.4%
1.3%
1.3%
1.2%
1.2%
Effective Tax Rate
Minority
Interest/After Tax
Income
28.8%
25.3%
26.1%
27.9%
26.4%
29.0%
30.0%
29.4%
28.9%
28.3%
27.8%
27.2%
26.7%
26.1%
25.6%
25.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Other Income/Sales
Ext. Items & Disc.
Ops./Sales
Pref.
Dividends/Avge
Pref. Stock
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
75.5%
73.6%
66.0%
59.3%
52.3%
55.0%
52.2%
49.4%
46.7%
43.9%
41.1%
38.3%
35.6%
32.8%
30.0%
9.8%
12.3%
9.3%
6.4%
6.5%
7.2%
8.5%
9.3%
8.8%
8.4%
7.9%
7.4%
6.9%
6.5%
6.0%
1.1%
1.3%
1.7%
1.7%
2.0%
1.8%
1.8%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
7.7%
8.0%
8.6%
7.0%
14.9%
14.1%
13.3%
12.5%
11.8%
11.0%
10.2%
9.4%
8.6%
7.8%
7.0%
22.7%
26.3%
24.7%
18.3%
18.3%
24.0%
22.0%
20.0%
18.0%
16.8%
15.7%
14.5%
13.3%
12.2%
11.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
13.0%
14.5%
14.8%
12.2%
16.0%
15.6%
15.2%
14.9%
14.5%
14.1%
13.7%
13.4%
13.0%
12.6%
12.2%
10.8%
10.8%
8.5%
5.9%
6.6%
8.0%
10.0%
12.0%
8.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.1%
1.8%
1.2%
0.7%
0.9%
1.0%
1.2%
1.8%
2.0%
1.8%
1.6%
1.3%
1.1%
0.9%
0.7%
3.0%
2.4%
2.3%
2.4%
6.4%
5.0%
3.0%
2.9%
2.9%
2.8%
2.7%
2.6%
2.6%
2.5%
2.4%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
4.0%
3.8%
3.6%
4.3%
3.8%
5.0%
6.0%
4.0%
3.8%
3.7%
3.5%
3.4%
3.3%
3.1%
3.0%
Balance Sheet
Assumptions:
Working Capital
Assumptions
Ending Operating
Cash/Sales
80.9%
Ending
Receivables/Sales
8.7%
Ending
Inventories/COGS
0.3%
Ending Other
Current Assets/Sales
6.2%
Ending Accounts
Payable/COGS
19.9%
Ending Taxes
Payable/Sales
0.0%
Ending Other
Current Liabs/Sales
13.4%
Other Operating
Asset Assumptions
Ending Net
PP&E/Sales
10.5%
Ending
Investments/Sales
0.0%
Ending
Intangibles/Sales
0.0%
Ending Other
Assets/Sales
5.9%
Other Operating Liability
Assumptions
Other
Liabilities/Sales
0.0%
Deferred
Taxes/Sales
5.0%
Financing
Assumptions
Current Debt/Total
Assets
Long-Term
Debt/Total Assets
Minority
Interest/Total Assets
Preferred
Stock/Total Assets
Dividend Payout
Ratio
0.0%
0.0%
4.5%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.3%
5.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Estimated Price/Share=$42.80
Company Name: APPLE COMPUTER INC
Required Valuation Parameters (to compute value of common equity):
----------------------------------------------------------------------------->
Enter Cost of Equity Capital:
---------------------------->
Enter Value of Contingent Claims on Common Equity ($000):
-------------------------------------------- -------------------------------->
Enter Date of Valuation:
------------>
Enter Dilution Factor for Splits Occurring Since Latest Fiscal Year End:
Optional Valuation Parameters (to compute value to all investors):
Enter Cost of Debt: ---------------------------------------------------------------------------------------------->
Enter Cost of Preferred Stock: ----------------------------------------------------------------------------->
Implied Cost of Equity Calculator
This calculator solves for the cost of equity capital that generates a given price/share.
To use the calculator, enter a price, hit return and click the 'Calculate' button.
Price/Share
$42.80
1.000000
=
15.48%
11,506,945
3/10/2007
1.00
0.00%
0.00%
e) Apple introduces the iPhone but fails to add content to iTunes store
Segment
iPhone
2007
2008
2009
2010
2011
2012
2013
2014
2015
0.30%
1%
1.50%
2%
3%
5%
6%
6.50%
7%
1677
2795
3913
2795
5590
11180
5590
2795
2795
Unit Growth
60%
58%
50%
47%
40%
Revenue Growth
61%
54%
47%
40%
33%
2%
2%
2%
2%
12358.36
19031.87
27976.86
39167.6
52092.9
53134.76
54197.46
55281.41
56387.04
15%
12%
9%
5%
4%
2%
2%
2%
1%
8481.25
9499
10353.91
10871.61
11306.47
11532.6
11763.25
11998.52
12118.5
110%
100%
80%
60%
30%
20%
10%
5%
3%
3958.5
7917
14250.6
22800.96
29641.25
35569.5
39126.45
41082.77
42315.25
mkt share
revenue(in millions)
revenue growth
iPod
Revenues
Computers
Revenue Growth
Revenues
Other Music Related Products and Services
Revenue Growth
Revenues
Peripherals and Other Hardware
Revenue Growth
Revenues
Software Service and Other Sales
Revenue Growth
Revenues from Cingular in terms of subscription
Total Sales Growth Projections
Forecast Horizon
Estimated
Price/Share=$33.38
Fiscal Year End
Date
0%
0%
0%
0%
0%
0%
0%
0%
1100
1100
1100
1100
1100
1100
1100
1100
19%
22%
17%
8%
2%
2%
2%
2%
2%
Revenues
1522.01
1856.852
2172.517
2346.318
2393.245
2441.11
2489.932
2539.731
2590.525
Unit Sales
3000000
8000000
15000000
20000000
30000000
50000000
60000000
65000000
70000000
Revenues
13.5
36
67.5
90
135
225
270
292.5
315
Revenues
29110.62
42235.73
59834.38
79171.48
102258.9
115183
114537.1
115089.9
117621.3
50.72%
45.09%
41.67%
32.32%
29.16%
12.64%
-0.56%
0.48%
2.20%
Revenue Growth
Company Name
0%
1100
APPLE COMPUTER INC
10 Years
TERM
YEAR
Actual
Actual
Actual
Actual
Actual
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
9/30/2001
9/30/2002
9/30/2003
9/30/2004
9/30/2005
9/30/2006
9/30/2007
9/30/2008
9/30/2009
9/30/2010
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
0.016
0.017
0.059
0.213
0.201
0.056
0.002
0.025
0.067
0.129
0.222
0.250
0.287
0.331
0.387
7.1%
8.1%
33.4%
68.3%
38.7%
50.7%
45.1%
41.7%
32.3%
29.2%
12.6%
-0.6%
0.5%
2.2%
5.0%
70.0%
70.7%
70.9%
69.7%
71.0%
70.5%
70.1%
69.6%
69.1%
68.7%
68.2%
67.7%
67.2%
66.8%
66.3%
Implied Return on
Equity
Income Statement
Assumptions
Sales Growth
Cost of Goods
Sold/Sales
R&D/Sales
SG&A/Sales
75.1%
8.0%
7.8%
7.6%
5.9%
3.8%
3.7%
8.0%
7.5%
7.1%
6.0%
5.6%
4.0%
4.0%
3.9%
3.9%
3.8%
21.2%
19.3%
19.5%
17.2%
13.3%
12.6%
18.0%
22.2%
21.1%
20.0%
18.0%
15.0%
14.0%
13.8%
13.6%
13.3%
Dep&Amort/Avge
PP&E and Intang.
Interest
Expense/Avge Debt
Non-Operating
Income/Sales
18.1%
14.9%
19.0%
20.9%
18.9%
19.1%
19.3%
19.5%
19.7%
19.9%
20.1%
20.3%
20.5%
20.7%
20.9%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.5%
0.7%
1.1%
0.4%
1.2%
1.9%
1.5%
1.6%
1.5%
1.5%
1.4%
1.4%
1.3%
1.3%
1.2%
1.2%
Effective Tax Rate
Minority
Interest/After Tax
Income
28.8%
25.3%
26.1%
27.9%
26.4%
29.0%
30.0%
29.4%
28.9%
28.3%
27.8%
27.2%
26.7%
26.1%
25.6%
25.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Other Income/Sales
Ext. Items & Disc.
Ops./Sales
Pref.
Dividends/Avge
Pref. Stock
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
75.5%
73.6%
66.0%
59.3%
52.3%
55.0%
52.2%
49.4%
46.7%
43.9%
41.1%
38.3%
35.6%
32.8%
30.0%
9.8%
12.3%
9.3%
6.4%
6.5%
7.2%
8.5%
9.3%
8.8%
8.4%
7.9%
7.4%
6.9%
6.5%
6.0%
1.1%
1.3%
1.7%
1.7%
2.0%
1.8%
1.8%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
7.7%
8.0%
8.6%
7.0%
14.9%
14.1%
13.3%
12.5%
11.8%
11.0%
10.2%
9.4%
8.6%
7.8%
7.0%
22.7%
26.3%
24.7%
18.3%
18.3%
24.0%
22.0%
20.0%
18.0%
16.8%
15.7%
14.5%
13.3%
12.2%
11.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
13.0%
14.5%
14.8%
12.2%
16.0%
15.6%
15.2%
14.9%
14.5%
14.1%
13.7%
13.4%
13.0%
12.6%
12.2%
10.8%
10.8%
8.5%
5.9%
6.6%
8.0%
10.0%
12.0%
8.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.1%
1.8%
1.2%
0.7%
0.9%
1.0%
1.2%
1.8%
2.0%
1.8%
1.6%
1.3%
1.1%
0.9%
0.7%
3.0%
2.4%
2.3%
2.4%
6.4%
5.0%
3.0%
2.9%
2.9%
2.8%
2.7%
2.6%
2.6%
2.5%
2.4%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
4.0%
3.8%
3.6%
4.3%
3.8%
5.0%
6.0%
4.0%
3.8%
3.7%
3.5%
3.4%
3.3%
3.1%
3.0%
Balance Sheet
Assumptions:
Working Capital
Assumptions
Ending Operating
Cash/Sales
80.9%
Ending
Receivables/Sales
8.7%
Ending
Inventories/COGS
0.3%
Ending Other
Current Assets/Sales
6.2%
Ending Accounts
Payable/COGS
19.9%
Ending Taxes
Payable/Sales
0.0%
Ending Other
Current Liabs/Sales
13.4%
Other Operating
Asset Assumptions
Ending Net
PP&E/Sales
10.5%
Ending
Investments/Sales
0.0%
Ending
Intangibles/Sales
0.0%
Ending Other
Assets/Sales
5.9%
Other Operating Liability
Assumptions
Other
Liabilities/Sales
0.0%
Deferred
Taxes/Sales
5.0%
Financing
Assumptions
Current Debt/Total
Assets
Long-Term
Debt/Total Assets
Minority
Interest/Total Assets
Preferred
Stock/Total Assets
Dividend Payout
Ratio
0.0%
0.0%
4.5%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.3%
5.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Estimated Price/Share=$33.38
Company Name: APPLE COMPUTER INC
Required Valuation Parameters (to compute value of common equity):
----------------------------------------------------------------------------->
Enter Cost of Equity Capital:
---------------------------->
Enter Value of Contingent Claims on Common Equity ($000):
-------------------------------------------- -------------------------------->
Enter Date of Valuation:
------------>
Enter Dilution Factor for Splits Occurring Since Latest Fiscal Year End:
Optional Valuation Parameters (to compute value to all investors):
Enter Cost of Debt: ---------------------------------------------------------------------------------------------- >
Enter Cost of Preferred Stock: ----------------------------------------------------------------------------->
Implied Cost of Equity Calculator
This calculator solves for the cost of equity capital that generates a given price/share.
To use the calculator, enter a price, hit return and click the 'Calculate' button.
Price/Share
$33.38
1.000000
=
15.48%
11,506,945
3/10/2007
1.00
0.00%
0.00%
f) Apple introduces the iPhone but it gets commoditized
Segment
2007
iPhone
2008
2009
0.30%
1%
1.50%
2%
3%
1677
1495
2093
1495
2990
Unit Growth
60%
58%
50%
47%
40%
Revenue Growth
61%
54%
47%
40%
33%
12358.36
19031.87
27976.86
39167.6
15%
12%
9%
5%
8481.25
9499
10353.91
150%
180%
110%
4712.5
13195
0%
0%
1100
1100
mkt share
revenue(in millions)
2010
2011
2012
2013
2014
2015
5%
6%
6.50%
7%
5980
2990
1495
1495
2%
2%
2%
2%
52092.9
53134.76
54197.46
55281.41
56387.04
4%
2%
2%
2%
1%
10871.61
11306.47
11532.6
11763.25
11998.52
12118.5
90%
80%
40%
30%
15%
15%
27709.5
52648.05
94766.49
132673.1
172475
198346.3
228098.2
0%
0%
0%
0%
0%
0%
0%
1100
1100
1100
1100
1100
1100
1100
revenue growth
iPod
Revenues
Computers
Revenue Growth
Revenues
Other Music Related Products and Services
Revenue Growth
Revenues
Peripherals and Other Hardware
Revenue Growth
Revenues
Software Service and Other Sales
Revenue Growth
Revenues from Cingular in terms of subscription
Total Sales Growth Projections
19%
22%
17%
8%
2%
2%
2%
2%
2%
Revenues
1522.01
1856.852
2172.517
2346.318
2393.245
2441.11
2489.932
2539.731
2590.525
Unit Sales
3000000
8000000
15000000
20000000
30000000
50000000
60000000
65000000
70000000
Revenues
13.5
36
67.5
90
135
225
270
292.5
315
Revenues
29864.62
46213.73
71473.28
107718.6
164784.1
207086.6
245285.7
271053.4
302104.3
54.62%
54.74%
54.66%
50.71%
52.98%
25.67%
18.45%
10.51%
11.46%
Revenue Growth
Company Name
Forecast Horizon
Estimated
Price/Share=$102.07
Fiscal Year End
Date
APPLE COMPUTER INC
10 Years
TERM
YEAR
Actual
Actual
Actual
Actual
Actual
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
9/30/2001
9/30/2002
9/30/2003
9/30/2004
9/30/2005
9/30/2006
9/30/2007
9/30/2008
9/30/2009
9/30/2010
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
0.016
0.017
0.059
0.213
0.201
0.056
0.003
0.027
0.073
0.141
0.236
0.275
0.302
0.348
0.387
7.1%
8.1%
33.4%
68.3%
38.7%
54.62%
54.74%
54.66%
50.71%
52.98%
25.67%
18.45%
10.51%
11.46%
5.0%
75.1%
70.0%
70.7%
70.9%
69.7%
71.0%
70.5%
70.1%
69.6%
69.1%
68.7%
68.2%
67.7%
67.2%
66.8%
66.3%
8.0%
7.8%
7.6%
5.9%
3.8%
3.7%
8.0%
7.5%
7.1%
6.0%
5.6%
4.0%
4.0%
3.9%
3.9%
3.8%
21.2%
19.3%
19.5%
17.2%
13.3%
12.6%
18.0%
22.2%
21.1%
20.0%
18.0%
15.0%
14.0%
13.8%
13.6%
13.3%
18.1%
14.9%
19.0%
20.9%
18.9%
19.1%
19.3%
19.5%
19.7%
19.9%
20.1%
20.3%
20.5%
20.7%
20.9%
Implied Return on
Equity
Income Statement
Assumptions
Sales Growth
Cost of Goods
Sold/Sales
R&D/Sales
SG&A/Sales
Dep&Amort/Avge
PP&E and Intang.
Interest
Expense/Avge Debt
Non-Operating
Income/Sales
Effective Tax Rate
Minority
Interest/After Tax
Income
Other Income/Sales
Ext. Items & Disc.
Ops./Sales
Pref. Dividends/Avge
Pref. Stock
Balance Sheet
Assumptions:
Working Capital
Assumptions
Ending Operating
Cash/Sales
Ending
Receivables/Sales
Ending
Inventories/COGS
Ending Other Current
Assets/Sales
Ending Accounts
Payable/COGS
Ending Taxes
Payable/Sales
Ending Other Current
Liabs/Sales
Other Operating
Asset Assumptions
Ending Net
PP&E/Sales
Ending
Investments/Sales
Ending
Intangibles/Sales
Ending Other
Assets/Sales
Other Operating Liability
Assumptions
Other
Liabilities/Sales
Deferred Taxes/Sales
Financing
Assumptions
Current Debt/Total
Assets
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.5%
0.7%
1.1%
0.4%
1.2%
1.9%
1.5%
1.6%
1.5%
1.5%
1.4%
1.4%
1.3%
1.3%
1.2%
1.2%
28.8%
25.3%
26.1%
27.9%
26.4%
29.0%
30.0%
29.4%
28.9%
28.3%
27.8%
27.2%
26.7%
26.1%
25.6%
25.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
80.9%
75.5%
73.6%
66.0%
59.3%
52.3%
55.0%
52.2%
49.4%
46.7%
43.9%
41.1%
38.3%
35.6%
32.8%
30.0%
8.7%
9.8%
12.3%
9.3%
6.4%
6.5%
7.2%
8.5%
9.3%
8.8%
8.4%
7.9%
7.4%
6.9%
6.5%
6.0%
0.3%
1.1%
1.3%
1.7%
1.7%
2.0%
1.8%
1.8%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
6.2%
7.7%
8.0%
8.6%
7.0%
14.9%
14.1%
13.3%
12.5%
11.8%
11.0%
10.2%
9.4%
8.6%
7.8%
7.0%
19.9%
22.7%
26.3%
24.7%
18.3%
18.3%
24.0%
22.0%
20.0%
18.0%
16.8%
15.7%
14.5%
13.3%
12.2%
11.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
13.4%
13.0%
14.5%
14.8%
12.2%
16.0%
15.6%
15.2%
14.9%
14.5%
14.1%
13.7%
13.4%
13.0%
12.6%
12.2%
10.5%
10.8%
10.8%
8.5%
5.9%
6.6%
8.0%
10.0%
12.0%
8.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.1%
1.8%
1.2%
0.7%
0.9%
1.0%
1.2%
1.8%
2.0%
1.8%
1.6%
1.3%
1.1%
0.9%
0.7%
5.9%
3.0%
2.4%
2.3%
2.4%
6.4%
5.0%
3.0%
2.9%
2.9%
2.8%
2.7%
2.6%
2.6%
2.5%
2.4%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.0%
4.0%
3.8%
3.6%
4.3%
3.8%
5.0%
6.0%
4.0%
3.8%
3.7%
3.5%
3.4%
3.3%
3.1%
3.0%
0.0%
0.0%
4.5%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Long-Term
Debt/Total Assets
Minority
Interest/Total Assets
Preferred Stock/Total
Assets
Dividend Payout
Ratio
5.3%
5.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Estimated Price/Share=$102.07
Company Name: APPLE COMPUTER INC
Required Valuation Parameters (to compute value of common equity):
----------------------------------------------------------------------------->
Enter Cost of Equity Capital:
---------------------------->
Enter Value of Contingent Claims on Common Equity ($000):
-------------------------------------------- -------------------------------->
Enter Date of Valuation:
------------>
Enter Dilution Factor for Splits Occurring Since Latest Fiscal Year End:
Optional Valuation Parameters (to compute value to all investors):
Enter Cost of Debt: ---------------------------------------------------------------------------------------------- >
Enter Cost of Preferred Stock: ----------------------------------------------------------------------------->
Implied Cost of Equity Calculator
This calculator solves for the cost of equity capital that generates a given price/share.
To use the calculator, enter a price, hit return and click the 'Calculate' button.
Calculate
Calculate
Price/Share
=
$102.07
1.000000
15.48%
11,506,945
3/10/2007
1.00
0.00%
0.00%
g) Apple introduces the iPhone but fails to keep COGS under control
Company Name
Forecast Horizon
Estimated
Price/Share=$58.73
Fiscal Year End
Date
APPLE COMPUTER INC
10 Years
TERMINAL
YEAR
Actual
Actual
Actual
Actual
Actual
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
Forecast
9/30/2001
9/30/2002
9/30/2003
9/30/2004
9/30/2005
9/30/2006
9/30/2007
9/30/2008
9/30/2009
9/30/2010
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
0.016
0.017
0.059
0.213
0.201
0.051
(0.009)
0.010
0.049
0.108
0.197
0.225
0.244
0.276
0.302
7.1%
8.1%
33.4%
68.3%
38.7%
54.6%
59.1%
54.3%
48.7%
53.5%
26.8%
16.8%
9.9%
11.4%
5.0%
70.0%
70.7%
70.9%
69.7%
71.0%
70.9%
70.8%
70.7%
70.6%
70.5%
70.4%
70.3%
70.2%
70.1%
70.0%
Implied Return on
Equity
Income Statement
Assumptions
Sales Growth
Cost of Goods
Sold/Sales
R&D/Sales
75.1%
8.0%
7.8%
7.6%
5.9%
3.8%
3.7%
8.0%
7.5%
7.1%
6.0%
5.6%
4.0%
4.0%
3.9%
3.9%
3.8%
SG&A/Sales
Dep&Amort/Avge
PP&E and Intang.
Interest
Expense/Avge Debt
Non-Operating
Income/Sales
21.2%
19.3%
19.5%
17.2%
13.3%
12.6%
18.0%
22.2%
21.1%
20.0%
18.0%
15.0%
14.0%
13.8%
13.6%
13.3%
18.1%
14.9%
19.0%
20.9%
18.9%
19.1%
19.3%
19.5%
19.7%
19.9%
20.1%
20.3%
20.5%
20.7%
20.9%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.5%
0.7%
1.1%
0.4%
1.2%
1.9%
1.5%
1.6%
1.5%
1.5%
1.4%
1.4%
1.3%
1.3%
1.2%
1.2%
Effective Tax Rate
Minority
Interest/After Tax
Income
28.8%
25.3%
26.1%
27.9%
26.4%
29.0%
30.0%
29.4%
28.9%
28.3%
27.8%
27.2%
26.7%
26.1%
25.6%
25.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Other Income/Sales
Ext. Items & Disc.
Ops./Sales
Pref.
Dividends/Avge
Pref. Stock
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
80.9%
75.5%
73.6%
66.0%
59.3%
52.3%
55.0%
52.2%
49.4%
46.7%
43.9%
41.1%
38.3%
35.6%
32.8%
30.0%
8.7%
9.8%
12.3%
9.3%
6.4%
6.5%
7.2%
8.5%
9.3%
8.8%
8.4%
7.9%
7.4%
6.9%
6.5%
6.0%
0.3%
1.1%
1.3%
1.7%
1.7%
2.0%
1.8%
1.8%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
6.2%
7.7%
8.0%
8.6%
7.0%
14.9%
14.1%
13.3%
12.5%
11.8%
11.0%
10.2%
9.4%
8.6%
7.8%
7.0%
Balance Sheet
Assumptions:
Working Capital
Assumptions
Ending Operating
Cash/Sales
Ending
Receivables/Sales
Ending
Inventories/COGS
Ending Other
Current Assets/Sales
Ending Accounts
Payable/COGS
Ending Taxes
Payable/Sales
Ending Other
Current Liabs/Sales
Other Operating
Asset Assumptions
Ending Net
PP&E/Sales
Ending
Investments/Sales
Ending
Intangibles/Sales
Ending Other
Assets/Sales
Other Operating Liability
Assumptions
Other
Liabilities/Sales
Deferred Taxes/Sales
Financing
Assumptions
Current Debt/Total
Assets
Long-Term
Debt/Total Assets
Minority
Interest/Total Assets
Preferred Stock/Total
Assets
Dividend Payout
Ratio
19.9%
22.7%
26.3%
24.7%
18.3%
18.3%
24.0%
22.0%
20.0%
18.0%
16.8%
15.7%
14.5%
13.3%
12.2%
11.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
13.4%
13.0%
14.5%
14.8%
12.2%
16.0%
15.6%
15.2%
14.9%
14.5%
14.1%
13.7%
13.4%
13.0%
12.6%
12.2%
10.5%
10.8%
10.8%
8.5%
5.9%
6.6%
8.0%
10.0%
12.0%
8.0%
6.0%
6.0%
6.0%
6.0%
6.0%
6.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.1%
1.8%
1.2%
0.7%
0.9%
1.0%
1.2%
1.8%
2.0%
1.8%
1.6%
1.3%
1.1%
0.9%
0.7%
5.9%
3.0%
2.4%
2.3%
2.4%
6.4%
5.0%
3.0%
2.9%
2.9%
2.8%
2.7%
2.6%
2.6%
2.5%
2.4%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.0%
4.0%
3.8%
3.6%
4.3%
3.8%
5.0%
6.0%
4.0%
3.8%
3.7%
3.5%
3.4%
3.3%
3.1%
3.0%
0.0%
0.0%
4.5%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
5.3%
5.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Estimated Price/Share=$58.73
Company Name: APPLE COMPUTER INC
Required Valuation Parameters (to compute value of common equity):
----------------------------------------------------------------------------->
Enter Cost of Equity Capital:
---------------------------->
Enter Value of Contingent Claims on Common Equity ($000):
-------------------------------------------- -------------------------------->
Enter Date of Valuation:
------------>
Enter Dilution Factor for Splits Occurring Since Latest Fiscal Year End:
Optional Valuation Parameters (to compute value to all investors):
Enter Cost of Debt: ---------------------------------------------------------------------------------------------->
Enter Cost of Preferred Stock: ----------------------------------------------------------------------------->
Implied Cost of Equity Calculator
This calculator solves for the cost of equity capital that generates a given price/share.
To use the calculator, enter a price, hit return and click the 'Calculate' button.
15.48%
11,506,945
3/10/2007
1.00
0.00%
0.00%
Calculate
Calculate
Price/Share
=
$58.73
1.000000
Exhibit III (E) 3a – Part 1: Apple’s valuation using Scenario Analysis
1. Apple achieves a realistic goal of meeting 1% of market share (10 million units) and corresponding iTunes sales go up and high
end iPod sales are cannibalized
Estimated price per share
(in $)
WACC
Equity Value
(in $ Billion)
15%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
102.30
810.83
518.27
373.19
287.05
230.31
190.33
160.79
138.19
120.41
106.13
94.45
84.76
76.62
69.71
63.79
96.93
688.57
444.27
323.13
251.20
203.82
170.44
145.77
126.90
112.05
100.13
90.37
82.28
75.49
69.72
64.77
2%
4%
6%
8%
10%
12%
14%
93.36
105.42
122.59
148.96
194.61
292.78
656.41
20%
25%
30%
35%
40%
45%
50%
55%
65.61
75.27
86.95
101.01
117.86
137.97
161.90
190.26
89.46
99.54
113.87
135.89
174.01
255.99
559.63
11.51
66.29
74.36
84.11
95.85
109.92
126.72
146.70
170.38
Terminal year sales growth
This years sales growth
60%
65%
70%
223.74
262.15
309.37
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
0.72
16.52
32.32
48.12
63.92
79.71
95.91
111.31
127.11
142.91
158.70
174.50
190.30
206.10
10%
60%
103.29
152.09
Terminal Year's ROE
This years ROE
COGS (next year to terminal year)
71% to 30%
71-40%
71-50%
71-60%
71-70%
71-80%
530.79
412.79
294.79
176.67
58.63
-59.41
SG&A (next yr - terminal yr)
40-15%
35-15%
30-15%
25-15%
20-15%
15-15%
30-10%
34.31
35.13
50.46
62.55
82.00
96.44
107.59
198.34
230.41
269.84
11.51
12.11
25.30
38.50
51.69
64.88
78.07
91.60
104.46
117.65
130.84
144.03
157.22
170.42
183.61
0.00
97.76
138.51
11.51
11.51
454.74
356.21
257.67
159.04
60.47
-38.10
11.51
11.51
40.16
40.84
53.64
63.74
79.98
92.04
101.35
25-10%
15-10%
R&D/Sales
20-10%
15-10%
10-10%
20-5%
15-5%
10-5%
10-15%
15-20%
117.12
153.58
109.31
139.76
11.51
5.18
16.63
28.08
54.24
65.69
77.14
-20.98
-81.49
-7.58
6.13
19.85
51.17
64.88
78.60
-38.90
-111.36
2. Apple does not introduce iPhone - Here we have assumed a scenario where Apple does not introduce iPhone and iPod sales are
cannibalized since cell phones are coming up with integrated MP3 players.
Estimated price per share
(in $)
WACC
Equity Value
(in $ Billion)
15.48%
7.00%
15.00%
21.00%
34.56
335.40
37.85
11.50
2.00%
8.00%
14.00%
28.37
45.72
203.77
20.00%
25.00%
40.00%
60.00%
70.00%
29.36
37.17
71.36
155.11
133.97
40.37
291.57
43.11
21.11
0.00
35.20
49.68
181.66
11.51
36.02
42.55
71.10
141.03
123.38
156.92
123.21
89.50
55.80
22.09
-11.62
142.54
114.39
86.24
58.10
29.95
1.80
Terminal year sales growth
This years sales growth
COGS (next yr - terminal yr))
71% to 30%
71-40%
71-50%
71-60%
71-70%
71-80%
SG&A (next yr - terminal yr)
40-15%
35-15%
30-15%
25-15%
20-15%
15-15%
30-10%
25-10%
15-10%
R&D/Sales (next yr - terminal yr)
20-10%
15-10%
10-10%
20-5%
15-5%
10-5%
10-15%
15-20%
-4.27
1.98
8.23
14.48
20.73
26.98
24.88
31.13
43.62
7.94
13.16
18.38
23.60
28.82
34.04
32.28
37.50
47.93
-6.18
0.07
6.32
10.47
16.72
22.97
-10.32
-33.22
6.35
11.57
16.78
20.25
25.47
30.69
2.89
-16.23
3. Apple introduces iPhone and it is an exceptional success - In this scenario we assumed that Apple is successful in creating the niche
market for consumer smartphones and that Apple can realize market share of 2% by 2008 and 14% by 2015
Estimated price per share
(in $)
WACC
Equity Value
(in $ Billion)
15.48%
7.00%
8.00%
12.00%
15.00%
16.00%
21.00%
317.34
3936.38
2398.92
699.32
352.21
283.59
90.03
276.49
3298.46
11.51
11.51
305.61
11.51
86.68
2.00%
8.00%
14.00%
238.58
459.27
2469.35
20.00%
25.00%
40.00%
60.00%
5.66
13.74
45.66
81.79
210.73
395.01
2073.49
11.51
16.23
22.98
49.63
79.80
Terminal year sales growth
This years sales growth
70.00%
COGS
71% to 30%
71-40%
71-50%
71-60%
71-70%
71-80%
SG&A (next yr - terminal yr)
40-15%
35-15%
30-15%
25-15%
20-15%
15-15%
30-10%
25-10%
15-10%
R&D/Sales
20-10%
15-10%
10-10%
20-5%
15-5%
10-5%
10-15%
15-20%
127.02
1398.57
1100.66
802.82
504.98
207.14
-90.70
117.57
11.51
1179.38
930.61
681.90
433.19
184.48
-64.23
176.48
205.92
198.49
213.18
257.37
286.81
367.01
396.45
455.33
158.88
183.46
177.26
189.53
226.43
251.01
317.98
342.57
391.74
115.74
121.11
126.47
115.74
121.11
279.49
-26.54
-184.92
108.16
112.64
117.12
108.16
112.64
244.90
-10.66
-142.92
4. Apple introduces iPhone but fails to add content to iTunes - Although iTunes incurs significant cost for Apple with majority of revenues going to music
companies and credit card processing, iTunes will be profitable if there are large number of users on iTunes. Currently Apple’s revenues from iTunes are
increasing in the order of 100%. If Apple fails to add content to iTunes, not only will it lose revenues (since scale drives revenues) but number of users of iPod
and iPhone will reduce thereby failing to add new subscribers. For simplicity of the model, we have left the market share assumption as 1% by 2008 and 7% by
2015.
Estimated price per share
Equity Value
WACC
(in $)
(in $ Billion)
15.48%
33.31
39.32
7.00%
462.62
397.80
12.00%
81.89
79.89
15.00%
37.90
43.15
18.00%
15.15
24.16
21.00%
1.63
12.87
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
24.51
29.87
37.48
49.17
69.38
112.84
273.73
31.97
36.45
42.80
52.57
69.44
105.73
240.08
20.00%
25.00%
50.00%
70.00%
23.36
25.45
86.26
250.93
31.01
32.76
83.54
221.04
214.70
164.73
114.76
64.79
14.83
-35.14
190.79
149.06
107.34
65.61
23.89
-17.84
11.51
-29.12
-11.89
5.34
15.35
25.36
35.37
29.09
39.10
59.12
-12.81
1.58
15.97
24.33
32.68
41.04
35.80
44.16
60.88
-15.75
-12.97
-2.96
0.77
10.78
-1.65
0.68
9.04
12.15
20.51
Terminal year sales growth
This years sales growth
COGS
71% to 30%
71-40%
71-50%
71-60%
71-70%
71-80%
SG&A (next yr - terminal yr)
40-15%
35-15%
30-15%
25-15%
20-15%
15-15%
30-10%
25-10%
15-10%
R&D/Sales
20-10%
15-10%
10-10%
20-5%
15-5%
10-5%
10-15%
15-20%
20.79
-25.05
-60.47
28.87
-9.41
-38.99
5. Apple introduces iPhone but iPhone is commoditized - Apple commoditizes iPhone from 2008 onwards and the average selling
price with 2 year contract with Cingular is $299. This is a scenario if Cingular is successful in negotiating with Apple to reduce the
price for new subscribers in order to gain more subscribers from rivals such as Verizon and T-Mobile.
Estimated price per share
(in $)
WACC
Equity Value
(in $ Billion)
15.48%
7.00%
8.00%
12.00%
15.00%
16.00%
21.00%
101.91
1186.87
730.70
220.63
112.95
91.16
27.61
96.60
1002.57
11.51
11.51
105.82
11.51
34.56
2.00%
8.00%
14.00%
79.31
142.63
719.39
77.73
130.61
612.22
20.00%
25.00%
40.00%
60.00%
70.00%
11.72
20.62
55.06
96.43
144.28
21.29
28.73
57.48
92.03
131.99
527.62
410.32
293.07
175.79
58.51
-58.71
452.10
354.15
256.24
158.30
60.37
-37.52
62.14
69.24
76.34
83.44
89.37
63.40
69.33
75.26
81.18
86.14
Terminal year sales growth
This years sales growth
COGS
71% to 30%
71-40%
71-50%
71-60%
71-70%
71-80%
SG&A (next yr - terminal yr)
40-15%
35-15%
30-15%
25-15%
20-15%
15-15%
30-10%
25-10%
15-10%
R&D/Sales
20-10%
15-10%
10-10%
20-5%
15-5%
10-5%
10-15%
15-20%
95.29
124.05
131.15
143.59
91.08
115.10
121.03
131.41
29.22
33.69
38.70
79.45
83.92
88.40
-12.06
-66.76
35.91
39.64
43.82
77.85
81.59
85.33
1.44
-44.24
Exhibit II (C) 6: Macro-economic trends
a)
b)
Source: Percentage change of Telecom employment during 1998-2002 from Bureau of Economic Analysis
Source: 1991-2002 changes in GDP/capita and US Telecom Revenues, from US Securities and Exchange Commission and Economic
History Services
Exhibit II (C) 2: Social Trends
Exhibit II (C) 3: Technological Trends
Graph: U.S. mobile phone sales, by service and handsets, 2001-06 (Source: Mintel/CEA/TIA/CTIA)
Exhibit II (D) 1: Worldwide Market Share by Manufacturer (Yr. 2006)
Manufacturer
Nokia
Motorola
Samsung
Sony Ericsson
LG
RIM
Palm
Nextel
Sprint
Kyocera
Sanyo
Audiovax
Panasonic
HTC
HP IPAQ
Other
Total
Market Share
(All cell phones)
34.1%
21.3%
11.6%
7.3%
6.3%
0.4%
0.5%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
19.3%
100%
Number of Handsets sold
(All cell phones)
348 M
217 M
118 M
74.8 M
64.4 M
4.04 M
4.8 M
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
197 M
1,018.8 M
Market Share
(All smartphones)
44.4%
5.4%
n/a
n/a
n/a
4.5%
5.3%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
100%
Number of smartphones sold
40 M
4.9 M
n/a
n/a
n/a
4.04 M
4.8 M
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
90 M
Exhibit II (D) 2: Mobile Handset segmentation according to utility framework
Price /
Functionality
Low
Basic
Advanced
Fashion
Conscious
Convenience
Music Lovers
Corporate users
- Nokia
(several models)
- Motorola
(several models)
- Motorola RAZR
- Nokia N76
- RIM Pearl
- Palm Treo
- Samsung Blackjack
- Nokia 9300
- Apple iPhone
- Motorola Q
- Sony Ericsson
W950i
- RIM Pearl
- Palm Treo
- Nokia 9300
- Nokia
(several models)
- Motorola
(several models)
Medium
- LG Prada
- Apple iPhone
High
- Apple iPhone
Exhibit II (D) 3e: Samsung’s strategic alliances
Partner
Qualcomm
Kent State University
KDDI, Japan
VDL France
Bayanat Al-Oulacxlv
Googlecxlvi
Time
July 2004
Oct 2004
Jan 2005
Feb 2005
Jan 2007
Jan 2007
Yahoocxlvii
Jan 2007
Key Agenda
Technology cooperation in MDDI (Mobile Display Data Interface)
Joint development of display technologies
Supply of CDMA2000 1xEV-DO network equipment in East Japan
Cooperation in commercialization of terrestrial DMB
Contract to deploy the largest WiMAX network in the region
Access to Google’s products and services for Samsung mobile handset users, including Google
search, maps and email.
Access to Yahoo’s products and services for Samsung mobile handset users, including Yahoo!
Go 2.0, one Search, email, messenger and personal information management services
Exhibit II (D) 3f – Part A: iPhone and PRADA Phone comparison
iPhonecxlviii
Availability
Price
Features
U.S. - Jun. 2007
Europe - late 2007
Asia – 2008
$499 to $599 with 2 year contract.
- Visual Voicemail
- SMS with full QWERTY soft keyboard
PRADA Phonecxlix
U.S. - no data
Europe - late Feb. 2007
Asia - late Mar. 2007
$775
- Capacitive Touch Screen
- Music Player
- Music Player (iPod)
- Video Player (iPod)
- OS/X Operating System
- Email
- Web Browser
- Advance Sensors
- 2M Pixel Camera
- Quad Band GSM
- EDGE
- Bluetooth
- WiFi
115 x 61 x 11.6mm
Technologies
Size
- Music Multitasking (Messaging)
- Video Player
- Macromedia Flash UI
- Document Viewer
- 2M Pixel Camera
- Micro SD External Memory
- Tri Band GSM
- EDGE
- Bluetooth
98.8 × 54 × 12 mm
Exhibit II (D) 5a: Willingness to Pay analysis – Handset manufacturers
%weight
Apple
Apple
Samsung
Samsung
Sony
Sony
LG
LG
Palm
Palm
RIM
RIM
Nokia
Nokia
Motorola
Motorola
Brand
20%
18
3.6
10
2
12
2.4
8
1.6
15
3
20
4
10
2
14
2.8
Support /
Warranties
2%
15
0.3
10
0.2
12
0.24
4
0.08
8
0.16
14
0.28
8
0.16
6
0.12
Features
18%
18
3.24
12
2.16
10
1.8
6
1.08
14
2.52
16
2.88
8
1.44
9
1.62
User
Experience
13%
20
2.6
12
1.56
12
1.56
13
1.69
16
2.08
18
2.34
9
1.17
9
1.17
Complementary
Products
(Accessories )
6%
15
0.9
10
0.6
12
0.72
10
0.6
14
0.84
15
0.9
12
0.72
12
0.72
Dimensions
4%
10
0.4
5
0.2
10
0.4
3
0.12
7
0.28
7
0.28
5
0.2
8
0.32
Price
5%
5
0.25
6
0.3
8
0.4
3
0.15
4
0.2
6
0.3
10
0.5
8
0.4
Availability of
Service
providers
10%
5
0.5
15
1.5
5
0.5
5
0.5
15
1.5
18
1.8
17
1.7
15
1.5
Product portfolio
3%
0.54
0
0
0
0
0
0
0
0
0
0
0
0
0
Status
6%
20
1.2
10
0.6
12
0.72
20
1.2
8
0.48
9
0.54
15
0.9
14
0.84
Complementary
Services
13%
18
2.34
12
1.56
15
1.95
5
0.65
12
1.56
15
1.95
10
1.3
15
1.95
Scaled Value
15.87
10.68
10.69
7.67
12.62
15.27
10.09
11.44
Note: To get the scaled value %weight is multiplied by the assigned dollar value (determined on a scale of
$1 to $20)from the customer survey
Scaled Value ($1-$20 scale)
Scaling factor
Absolute value : V
Reference Product
Palm
12.62
50
$631.00
Treo 750
Price (w/ Two year plan)
Rebate/Discount
End Price: P
Buyer's Surplus: V-P
COGS ($000)
G&A
Sales & Marketing
SG&A ($000)
399
100
$299.00
$332.00
1,058,083
43,481
205,138
248,619
RIM
15.27
50
763.5
BlackBerry
8800
Series
349
50
$299.00
$464.50
925,215
311,420
Nokia
10.09
50
504.5
Nokia
9300
Apple
15.87
50
793.5
Apple
iPhone
Samsung
10.68
50
534
Samsung
BlackJack
299
0
$299.00
$205.50
605880
97680
291720
389400
599
0
$599.00
$194.50
299
100
$199.00
$335.00
Sony Ericsson
10.69
50
534.5
Sony Ericsson
Walkman
W950i
699
0
$699.00
-$164.50
Motorola
11.44
50
572
Motorola Q
Black
329
100
229
$343.00
30,152
4,504
R&D($000)
Other expenses($000)
Total Expenses($000)
# Units (000)
Average price/unit ($)
Adjustment factor
Cost: C
Tot Econ Contribution: V-C
135,959
1,442,661
4,749
303.78
15%
$349.35
$281.65
157,629
49,951
1,444,215
4,043
357.21
15%
$410.80
$352.70
434280
47520
1,477,080
28500
51.82737
15%
$59.60
$444.90
4,106
25
38,787
217,400
0.178413063
15%
$0.21
$571.79
0
Exhibit II (D) 5b: Willingness to pay graph
WTP Analysis - Handsets
$800.00
$700.00
$600.00
$500.00
Absolute value : V
$400.00
End Price: P
$300.00
Cost: C
Cost: C
End Price: P
$200.00
$100.00
Absolute value : V
$0.00
Palm
RIM
Nokia
Apple
Samsung
Sony
Ericsson
Motorola
Firm
Exhibit II (D) 5a: Willingness to Pay analysis – Wireless Service Providers
Cingular
Verizon
Verizon
Sprint Nextel
Sprint
Netel
T-Mobile
T-Mobile
% weight
Cingular
2%
18
0.36
17
0.34
14
0.28
15
0.3
18%
17
3.06
14
2.52
14
2.52
19
3.42
12%
20
2.4
17
2.04
17
2.04
12
1.44
15
2.4
14
2.24
14
2.24
18
2.88
15%
15
2.25
15
2.25
17
2.55
18
2.7
6%
18
1.08
10
0.6
10
0.6
16
0.96
5%
12
0.6
10
0.5
10
0.5
12
0.6
11%
18
1.98
18
1.98
15
1.65
12
1.32
7%
15
1.05
18
1.26
18
1.26
16
1.12
6%
14
0.84
10
0.6
8
0.48
16
0.96
2%
15
0.3
1
0.02
1
0.02
8
Brand
Technology (CDMA/GSM)
Number of subscribers
Plans and Rates
16%
Weekend minutes and Night-time
minutes
Availability of phones
Contract
Network Coverage
Data Speed
International Coverage
Free Interaction between landline and
mobile phone
Scaled Value
16.32
Cingular
Scaled Value ($1-$20 scale)
Scaling factor
Absolute value : V
$6.32
70
$1,142
Verizon
14.35
70
1,005
14.35
Sprint
Nextel
14.14
70
990
T-Mobile
15.86
70
1,110
14.14
0.16
15.86
Wireless Service
Reference Product
$60
$960.00
$182.40
$18,037
$18,037
49.10
$367.35
15%
$422.46
$719.94
Price
End Price: P
Buyer's Surplus: V-P
COGS ($000)
Total Expenses($000)
# subscribers (00,000)
Average price/subscriber ($)
Adjustment factor
Cost: C
Tot Econ Contribution: V-C
Wireless
Service
Wireless
Service
960
$960.00
$44.50
21,824
21,824
43.80
498.26
15%
$573.00
$431.50
Wireless
Service
960
$960.00
$29.80
10085
10,085
16.20
622.53
15%
$715.91
$273.89
960
$960.00
$150.20
43039
43,039
77.40
556.06
15%
$639.47
$470.73
Average Spending Per Person Per Month=$40
Average Contract Duration
= 2 years
Total Spending By Consumer
=$960
WTP Analysis - Service Providers
1,200
1,000
Absolute value : V
800
End Price: P
600
Cost: C
Cost: C
400
End Price: P
200
Absolute value : V
0
Cingular
Verizon
Sprint Nextel
T-Mobile
Firm
Exhibit II (D) 5c – Part A: Survey for Smartphones
How does Apple iPhone Compare with other Smartphones
Exit this survey >>
1. Survey - How Apple iPhone Compares With Other Smartphones
1. If you are selecting a smartphone, in what order would you rate these features? (Rating 1:
Most important, 10: Least important)
1
Brand
Support /
2
3
4
5
6
7
8
9
10
11
N/A
Warranties
Features
User
Experience
Complementary
Products
(Accessories )
Dimensions
Price
Availability at
Service
providers
Product
portfolio
Status
Complementary
Services
(include
iTunes, Maps,
Email, Music
downloads)
2. While selecting a smartphone, which brand would you choose?
Apple iPhone
Samsung Blackjack
Sony Ericsson Walkman model
LG Prada
Palm Treo 750
RIM Blackberry 8800
Nokia 9300
Motorola Q
Other (please specify)
3. Will you be willing to switch service providers (For example, from Verizon to Cingular) if a
particular phone of your choice is available with only one service provider?
Yes
No
Maybe
4. How important is the user experience (in terms of ease of use, need to learn new technology
in terms of using stylus, keyboard etc, navigating from one feature to another)?
Very
important
Somewhat
important
important
Dont care
5. How would you rate the following smartphones in terms of user experience? (1 implies '"best
user experience''' and 8 implies "worst user experience".)
1
Apple
iPhone
Samsung
2
3
4
5
6
7
8
N/A
Blackjack
Sony
Ericsson
W950i
LG Prada
Palm Treo
750
RIM
Blackberry
8800
Nokia
9300
Motorola
Q
6. Do you buy a smartphone for status or functionality?
Status
Functionality
Other (please specify)
7. Which phone conveys the status best? (1 implies "Best conveys status"; 8 implies "Least
conveys status")
1
Apple
2
3
4
5
6
7
8
Other (please
specify)
iPhone
Samsung
Blackjack
Sony
Ericsson
W950i
LG Prada
Palm Treo
750
RIM
Blackberry
8800
Nokia
9300
Motorola
Q
8. In your opinion which of these phones provide the best value for price and which of these
phones are you likely to buy ?
Apple iPhone ($599)
Samsung Blackjack ($50)
Sony Ericsson W950i ($50)
LG Prada ($750)
Palm Treo 750 ($299)
RIM Blackberry 8800 ($299)
Nokia 9300 ($299)
Motorola Q ($200)
Other (please specify)
9. How would you rate the following phones in terms of complementary services
(Complementary services include iTunes, Maps, Email, Music download)? (1 implies "Best
complementary services available". 8 implies "Least complementary services available")
1
2
3
4
5
6
7
8
Apple iPhone
Samsung
Blackjack
Sony Ericsson
W950i
LG Prada
Palm Treo 750
RIM Blackberry
8800
Nokia 9300
Motorola Q
10. What is the make of phone you own currently? Do you own a smartphone? Please list any
other considerations you would take while making a decision to buy smartphone?
Done >>
Exhibit II (D) 5c – Part A: Survey for Wireless Service Providers
Wireless Service Provider Survey
Exit this survey >>
1. Untitled Page
1. Which service provider are you likely to go with? (CDMA includes all flavors of technology like
EVDO etc; GSM includes all flavors of technology like UMTS/ EDGE)
CDMA
GSM
2. Which service provider do you prefer?
Cingular
(at&t)
Sprint-Nextel
Verizon
T-Mobile
3. While selecting a service provider which of these factors are most important to you? (1 Most
Important; 10 Least Important)
1
Brand
Technology
(CDMA/GSM)
Number of
subscribers
Plans and
Rates
Weekend
minutes and
Night-time
minutes
Availability of
phones
Contract
Network
Coverage
Data Speed
International
Coverage
Free
Interaction
between
landline and
mobile
phone
2
3
4
5
6
7
8
9
10
N/A
4. While selecting a service provider, which of these factors motivate you to go with a service
provider? (Enter 1 next to the choice if the factor is most important; 10 if it is least important;
and 0 if it doesn't matter)
0
1
2
3
4
5
6
7
8
9
10
Better
network
coverage at
home
(and/or
work)
Friends are
with the
same
provider. So
free IN
network
calling is
available.
Attractive
rates and
plans
Better
Phones
Better data
speeds
International
Coverage
5. If a phone of your choice is not available with your service provider, will you be willing to
change service providers?
Yes
No
Maybe
6. Will you be willing to break a service contract to get the phone of your choice?
Yes
No
Maybe
7. How would you rate the following service providers in terms of complementary services
(Complementary services include iTunes, Maps, Email, Music download)? (1 implies "Best
complementary services available". 8 implies "Least complementary services available")
1
2
3
4
N/A
Cingular (at&t)
Verizon
T-Mobile
Sprint Nextel
8. Will you be willing to switch service provider if data speeds on smartphones are better with
other service providers?
Yes
No
Maybe
9. What service plan are you likely to choose?
$29.99
$39.99
$49.99
$59.99
$69.99
10. How important is the feature "Ability to receive free calls from landline" to you? (Similar to
at&t unity plan)
Very
Important
Somewhat
Important
Neutral
Not Important
Exhibit III (D) 1b: Apple’s 2006 revenues
Total Macintosh net sales
iPod
Other music related products and services
Peripherals and other hardware
Software, service, and other sales
Total net sales
7,375
7,676
1,885
1,100
1,279
19,315
38%
40%
10%
6%
7%
100%
Exhibit III (D) 1d-1: Apple’s and Cingular’s synergies as partners
Factors
Type of Synergies
Classification
Modular
Recommended Strategy
Non-equity alliance
Reason
Apple’s core business is in electronic hardware, and Cingular’s core
business is providing phone services
Because of the modular synergy, the intangible resources do not match
with the tangible resource
Relative Value of
Intangible to Tangibles
Resources
Extent of Redundant
Resources
Degrees of Uncertainty
Low
Non-equity alliance
Low
Non-equity alliance
Since it is a modular synergy, there is very low redundancy of resources
Moderate
Non-equity alliance
Forces of Competition
Low
Non-equity alliance
Apple is known to create superior technology compared to its competitors.
However, it is uncertain if Apple can sell 10M units by 2008, or whether
users will switch to Cingular just to use iPhone
Because Apple was determined to be in the commanding seat, Apple chose
the service provider. As demanding as service providers are in the U.S.
over handset development, Apple was determined to ignore the providers’
demands. Therefore, the competition for iPhone was relatively low
Exhibit III (D) 1d-2: Apple’s and Cisco’s synergies as partners
Factors
Type of Synergies
Classification
Modular
Recommended Strategy
Non-equity alliance
Reason
Apple’s core business is in electronic hardware, and Cisco’s core business
is providing network infrastructure, router hardware, security, enterprise
software, consumer voice over IP communications to name a few.
Because of the modular synergy, the intangible resources do not match
with the tangible resource.
Relative Value of
Intangible to Tangibles
Resources
Extent of Redundant
Resources
Degrees of Uncertainty
Low
Non-equity alliance
Low
Non-equity alliance
Since it is a modular synergy, there is very low redundancy of resources.
Moderate
Non-equity alliance
Apple is known to create superior user experience in its products.
However, it is uncertain if Apple and Cisco can work together in bringing
the user experience to corporate world with its offering on security and
enterprise software integrated in iPhone. This will require software
interaction between Apple and Cisco and Apple does not like depending on
outsiders to deliver the software experience. Since Cisco’s software will be
Forces of Competition
Moderate
in the backend, we have assumed that the disruption to user experience will
be minimal.
Apple was forced into this agreement by Cisco as part of the trademark
settlement dispute. However, other makers such as RIM could partner with
other networking firms to enhance their enterprise software or security
offering in smartphone.
Equity alliance
Exhibit II (D) 1: Global sales of mobile service providers
Graph: U.S. sales of mobile phone service in the U.S., 2005
Source: Mintel/CTIA
The U.S. sales of mobile phone services in the U.S., 2003 and 2005 are given belowcl
Supplier
2003 Sales
($billion)
%
2005 Sales
($billion)
Cingular (a)
29.0
33.1 30.6
27.0 5.7
-6.1
Verizon
20.3
23.2 28.1
24.8 38.3
1.6
Sprint Nextel (b)
21.1
24.1 27.6
24.3 30.9
0.2
T-Mobile
7.2
8.2
12.3
10.8 70.5
2.6
Alltel (c)
4.5
5.1
5.9
5.2
0.1
Subtotal
82.1
93.7 104.6
92.1 27.4
-1.6
Other
5.5
6.3
7.9
1.6
Total
87.6
100.0 113.5
8.9
%
Change 2003-05 (%)
32.0
62.0
100.0 29.6
2003-05
(% point change)
-
(a) Cingular and AT&T Wireless completed merger as of October 2004.
(b) Sprint and Nextel completed merger as of August 2005.
(c) Alltel acquired Western Wireless and certain markets from Cingular in 2005.
Exhibit III (D) 3b – Part A: iPhone’s values
Patented technologies
There are over 200 patents filed for iPhone. Some of these patents demonstrate immediate value to end users:
Multi-Touch – Without seeing a demonstration of the iPhone, most people would think of the iPhone touch screen just like any other touch
screen technology out there today. However, Apple has patented iPhone’s touch screen technology, because it is uniquely different. Besides
being able to tap on the screen, the user can slide his finger from top to bottom, and it would scroll the listing of songs or contacts. It is like
flipping through a rolodex. Also, the user can use 2 fingers in a pinching motion to cause an image on the screen to zoom in or out.
Proximity sensor – When the phone gets close to an object such as your ear, it turns off the display and turns off the touch screen. This will
save energy, and avoid any unintentional touching of the screen by your face.
Ambient light sensor – This automatically adjusts the screen lighting based on ambient lighting conditions.
Accelerometer – This senses if the users is holding the iPhone in portrait or landscape position, and it automatically rotates the display.
Visual Voicemail – This allows random access to a user’s voicemail just like email. The user would see a list of voicemails in his/her
mailbox, and could select the specific voicemail to listen to without starting from the first voicemail.
Email Access
This feature isn’t new since RIM and Cingular already offer push email to mobile phones. However, their services are not free. In
contrast, the iPhone will support free push IMAP email in collaboration with Yahoo\. This will immediately allow millions of current Yahoo
mail users to have access to free push emails. This is no longer limited to corporate users.
Full Web Browser
Because of the limited screen size on mobile phones, today’s mobile phone web browsers will cram the web content in a way that is
hard or sometimes impossible to read. The iPhone is able to display a full web page content like a zoomed out page. The user can see the whole
page, and the text would be of course too small to read. The user can then zoom in and out to various sections to read the details by double
tapping the section of the screen or pinching the section of the screen.
Exhibit II (G) – Part A: Comparison of handset manufacturers
Key Aspects
Priorities
Apple
Creating
ultimate
user
experience
Nokia
Focusing on
volume
advantage
Achievement
of objectives
Successful
so far with
its existing
products
Market leader
in handsets
due to its
strategy
Beliefs about
industry and
resources
and
capabilities
Enter an
existing
industry
with
disruptive
technology
and value
to
consumers
Creative
people and
expertise
in
enhancing
user
experience.
Numerous
patents
Untapped
opportunities
in emerging
markets
Well
developed
logistics and
control over
manufacturing
processes to
cater to
demand
Management
style
Risk-takers
Risk-averse
Motorola
Bringing
the best
engineering
products to
market and
promoting
it through
hip
advertising
Very
successful
in the
mobile
segment
(#2
worldwide)
but facing
challenges
on-and-off
Focused
primarily
on gaining
market
share in the
mobile
segment
through
significant
investments
in R&D
LG
Changing
consumer
perception
on brand
Samsung
Focus on
high end,
high margin
handsets
Sony-Ericsson
Focus on
delivering
products across
price spectrums
and establish in
emerging markets
RIM
“Integrated
hardware,
software and
services for
seamless
access to time
sensitive
information”
Palm
“Developing
market
defining
products
available on
multiple
industry
platforms”
Successful
execution
through
their
partnership
with Prada
Develop
partnerships
with startups and
universities.
Handsets across
price spectrum;
infrastructure
investment in
India
Very
successful,
has the largest
smart phone
market share
in North
America, is
expending
internationally
Moderately
successful in
the smart
phone
sectortrailing
behind RIM
Provide
stylish
mobile
phones for
today’s
fashionable
users.
Mobile platform
seen as the rapid
way of large scale
telecommunication
deployment
reducing the
digital divide
between the
developed, the
developing, and
the underdeveloped
economies of the
world
Wants to
leverage its
ISV
relationships
to enhance
connectivity
with the
blackberry
network, but
believes that a
tight
integration
between
hardware and
software is
critical and
that RIM has
the requisite
resources and
capabilities to
achieve that.
Belief that
the hardware
devices can
be
differentiated
through
software and
applications
Risk averse
Risk
averse, as
indicated
by its
hedged bet
Continues to
believe in
technological
innovation in
all its
business
segments
with the
belief that
with
increasing
global
competition,
only the top
one or two
firms with
the
capabilities
to identify,
establish and
lead new
markets shall
be assured
survival
Process
improvement
driven
Risk averse
Risk aversehas been
expanding
product lines
and
Risk-averse:
hedging bets
with dual-OS
(Windows,
Palm OS)
Recent
moves in
response to
Apple’s
strategic
move
Unknown –
may
potentially
acquire Palm
to enhance
capabilities.
Can the
competitor
address the
challenge
posed by
Apple
Yes – with a
few years in
R&D
Unknown –
recent
rumors
regarding a
potential
acquisition
of the
ailing Palm
business to
beef up its
smartphone
business
Yes – with
a few years
in R&D.
Needs to
build
capabilities
in software
design and
engineering
on OSSymbian
as well as
Windows
ME
New
fashion
phone for
consumers
– LG Prada
phone
Yes – with
a few years
in R&D to
match up
features in
Apple
iPhone
Exhibit II (D) 1a – Part B: AT&T’s corporate structure
Introduced
Samsung
f700
touchscreen
phone
Introduced Sony
Ericsson W950I
Yes – User
experience
of touch
screen in
designed
however
need to work
with partners
for content
delivery such
as visual
voice mails
Yes- By Sony’s
excellence in
producing high
resolution handset
camera lenses and
walkman style
integrated music
players
businesses in
other
geographies
in a cautious
manner.
Increase
availability of
RIM through
network
operators
alliance
strategy
Yes – with a
few years in
R&D
Unknown –
strategic
move
unknown
due to mixed
messages
sent to
market.
Looking for
options
(possibly to
get
acquired).
Hires Apple
engineer to
design
similar touch
screen
products.
Exhibit IV (A) – Industry Lifecycle and Apple’s evolution
Competing over time: Traditional Industry Life Cycle
Periods of:
Disequilibrium
Discontinuity
Growth
Equilibrium
Shakeout
Industry
Disruption
Period of
Disequilibrium/
Discontinuity
Maturity Decline
t0
Wide Variation
in Capabilities &
Resources
Wide Variation in
Value & Cost
Drivers
Heterogeneity in
Competitive
Positions
Development of
Dynamic
Capabilities
Development of
Sustaining
Strategies
Emergence of
Dominant
Competitors &
Convergence on
Dominant Designs
Strategic
responses =
f(type of industry
shock or nature of
discontinuity)
Capstone Course
Tammy Madsen, SCU
Source: Class powerpoint slides, “chris619eresw07.ppt”, Madsen, T; Slide 2, Date accessed: March 10 th 2007
Exhibit II (C) 7: Demographic Trends
a) Usage and significance of cell phones (Source: Mintel/Greenfield Online)
b)Reasons for choosing a mobile phone (Source: Mintel/Greenfield Online)
It was free or inexpensive with my
phone plan
Reasons for choosing a mobile phone, by age, June 2006
Reason
60
I like how it looks
50
I trust the brand that makes the phone
40
30
I wanted the features, such as a
camera or MP3 player, that were on the
phone
20
10
Friends or family recommended this
phone
0
18-24
25-34
35-44
45-54
Age group
55-64
65+
Quality or size of the screen
Other
c) Ownership of mobile handset brands (Source: Mintel/Simmons NCS)
d) Reasons to change mobile phone service (Source: Mintel/Greenfield Online)
Reason
Reasons to change mobile phone service
None of the above, I’m happy with my service
45
None of the above, I’m not entirely happy but
don’t want to pay another activation fee and
buy another phone
40
35
30
Better hardware (phone) choices
25
20
15
Better reception quality, even if it means
paying slightly more each month
10
5
More minutes for the same price, even with
weak reception
0
%
%
%
All
Male
Female
Other
Gender
e) Usage of mobile features by gender (Source: Mintel/Greenfield -Mobile Phones and Phone Service – US-Aug2006)
Use of mobile phone features, by gender, June 2006
90
80
70
60
All %
%
50
Male %
40
Female %
30
20
10
Play games
with others
Play MP3s
Download
information
Surf the
Internet
Download
games
Play singleplayer games
Download
ringtones
Take pictures
Text
messaging
Store
telephone
0
Currenty use
f) Usage of mobile features by gender – Would like to use (Source: Mintel/Greenfield -Mobile Phones and Phone Service – US-Aug2006)
Use of mobile phone features by gender, (Would like to use), June 2006
30
25
20
Male %
Female %
10
5
Would like to use
Voicemail
Text
messaging
Download
wallpaper
Play games
that came
Download
games
Watch video
clips
Surf the
Internet
Store
information
Check and
send email
0
Download
information
%
All %
15
Exhibit 2 D: Market Shares
a) Worldwide Handset Manufacturer Market Shares (Yr. 2006 – By number of phones sold)
Others, 19.40%
Nokia, 34.10%
LG, 6.30%
Sony Ericsson,
7.30%
Samsung, 11.60%
Motorola, 21.30%
Sources: http://www.newsfactor.com/story.xhtml?story_id=123003YHSYYX
http://www.edn.com/article/CA6409988.html?partner=enews
http://www.mobiletechnews.com/info/2007/01/25/132924.html
Exhibit V: Decision Tree
Exhibit II (D) 4 – Part A: VRIO Analysis for handset manufacturers
a) VRIO Analysis for Nokia
Legend: V: Valuable; R: Rare; I: Hard to Imitate; O: Organized to leverage
Reasoning behind “Hard to Imitate”?
Yes
Competitive
Implications
Sustained
No
Yes
Temporary
Yes
Yes
Yes
Sustained
Yes
Yes
No
Yes
Temporary
Broad range of
products across
multiple mobile
handset segments
Style
Yes
Yes
Yes
Yes
Sustained
Yes
No
-
-
Parity
High quality
products
Headquarters
Location
Yes
No
-
-
Parity
Nokia is very good at coming out with new features on phones and being first to market. In the event it misses any
innovation, it is very quick to bring out the phones with similar innovation (as the market leader) and coming up with
better designs.
Nokia gives tailored network solutions and has the flexibility to provide network solutions according to the various
price points at which potential customers are willing to pay. Similarly it also has phones that can are priced for
emerging markets as well as phones for luxury segment. Anyone trying to imitate this strategy will need to implement
techniques to not compromise quality across the various product lines and yet not lose focus on luxury and high end
customers.
Nokia is known worldwide. Although Nokia comes up with wide variety of phones and network solutions, it can
contain its costs due to worldwide geographic presence and it can leverage economies of scale due to volume
advantage. Other companies can expand their geographic presence. Mass production of handsets leads to network
externalities and lowered handset costs.
Nokia phones are available at low-end (free phones) and on high end (with 700 diamonds in Vertu model). Nokia has
segmented its mobile business unit to 5 segments – each with emphasis on a particular customer segment, so that they
can stay focused to customer needs. Other companies will have to develop a similar organization and develop such a
culture.
Nokia has reputation to make fashionable phones. However, sometimes competitors such as Motorola can come up
with better and more stylish products like RAZR.
Most of the handset companies provide high quality products especially on the high end.
Yes
Yes
No
Yes
Temporary
Resource
Capability
Brand
/
V
R
I
O
Yes
Yes
Yes
Product features
Yes
Yes
Tailored network
solutions and
devices
Yes
Geographical
presence
Nokia has spent years in building brand (“Connecting People”) and majority of its marketing dollars are spent on
building brand awareness. The Nokia brand is known for quality, design, durable and efficient phones.
Nokia’s headquarters is located in Finland and is constantly driven by innovative technology from other players. Nokia
is automatically in the game of producing competitive products.
b) VRIO Analysis for Motorola
Resource / Capability
V
R
I
O
Brand
Yes
Yes
Yes
Yes
Competitive
Implications
Sustained
Product innovations
Yes
No
No
Yes
Parity
Complementary services
Yes
No
No
Yes
Parity
Commitment to high quality
Yes
No
No
Yes
Parity
Reasoning behind “Hard to Imitate”?
Motorola has come a long way from the perception of a “stodgy engineering company” to one of the hippest,
most innovative phone providers. Ranked only behind Nokia in brand value, it has improved its brand position
worldwide through hip marketing campaigns and very successful product introductions (e.g. RAZR & SLVR)
While Motorola is working hard on introducing several new products (e.g. 8 in Q4 FY’06), the race is on with
all the top mobile manufacturers who are also introducing new products at an increasingly rapid pace
Motorola collaborated with Apple to introduce a few phones with iTunes capability. But this position is now
threatened with Apple’s iPhone introduction and other mobile manufacturers following suit
The iRadio service is currently unique but can be easily imitated by other mobile manufacturers
Although Motorola was the original pioneer of the Six Sigma quality system, this and other quality processes
standards
Consistent cost reduction
through supplier management
& outsourcing of design /
manufacturing activities
A strong developer network
have become the de-facto standard across other mobile manufacturers as well
Motorola has achieved significant cost reduction through various procurement process improvements and use of
Electronics Manufacturing Suppliers (EMS) & Original Design Manufacturers (ODM). But this practice is quite
prevalent amongst other mobile manufacturers as well
Yes
No
No
Yes
Parity
Yes
Yes
No
Yes
Temporary
Recent acquisition of Good
Technology
Yes
No
No
Yes
Parity
Acquisition of Symbol
Technologies
Yes
Yes
Yes
Yes
Sustained
WMNetServ Managed
Services
Yes
Yes
No
Yes
Temporary
Social partnering
Technology patents
Complementary businesses
Yes
Yes
Yes
No
Yes
No
No
Yes
No
Yes
Yes
Yes
Parity
Sustained
Parity
Motorola started a new developer network, Motodev, in 2005 to attract more developers to leverage their
industry standard Linux platform to develop applications. But at this point, this isn’t a defensible enough
position as they haven’t built the required network effects yet
Motorola’s acquisition of Good will provide it incremental opportunity but its relatively small subscriber base
(500,000 vs. RIM’s 6.5M) doesn’t appear significant enough to dislodge other integrated mobile service
providers such RIM
With this acquisition, Motorola is trying to position itself for the convergence of mobile, WiFi, WiMax, RFID
and related technologies. Symbol has over 900 patents, is a leader in its field and will provide a significant legup to Motorola. However, it will likely take a few years for the full benefits of this acquisition to be achieved
This is a joint venture with Wipro Technologies to deliver managed services to both public and private network
customers to reduce Opex and increase Time-to-Market by providing Total Outsourcing, Out-tasking, BuiltOperate-Run/Transfer & Hosting Services. However, other mobile providers could easily enter into similar
relationships with other outsourcing companies
All large mobile manufacturers are involved in a variety of social causes
Several patents across multiple design and technology areas provide Motorola a unique market position
Motorola provides optimized content distribution services through WiFi hot spots and kiosks but some other
mobile manufacturers already provide similar services too
c) VRIO Analysis for Palm
Reasoning behind “Hard to Imitate”?
Resource / Capability
V
R
I
O
Technology focus
Yes
Yes
No
Yes
Competitive
Implications
Temporary
Innovative products
Multiple sales channels –service
providers, distributors, direct (webstore)
Outsourced design and manufacturing
Yes
Yes
Yes
No
Yes
-
Yes
Yes
Sustained
Parity
Yes
Yes
No
Yes
Temporary
Technology leadership
Choice of industry standard platforms
Yes
Yes
Yes
No
No
-
Yes
Yes
Sustained
Parity
Brand reputation
Worldwide distribution-100 international
distributors
Serving multiple segments - consumer,
prosumer, corporate
Yes
Yes
Yes
No
Yes
-
Yes
Yes
Sustained
Parity
Helps make R&D and manufacturing costs variable, but existence of multiple R&D and
manufacturing services providers makes this imitable
RIM has been able to obtain technology leadership as well, with its BlackBerry line of products
Many of Palm’s competitors provide abilities to use multiple industry platforms. E.g. mobile
operating systems like Symbian, Windows ME, Palm OS
Palm is one of the pioneers of the smartphone industry and its brand reputation is high
Most of Palm’s competitors have worldwide distribution capability.
Yes
No
-
Yes
Parity
Most of the players in the smartphone industry serve multiple end user segments
V
R
I
O
Competitive
Reasoning behind “Hard to Imitate”?
Palm has had sharp focus on one or two product lines- first PDAs, now PDAs and Smartphones. This,
however, has been successfully imitated by RIM
Palm has been known for product innovation
Many of Palm’s competitors use multiple sales channels
d) VRIO Analysis for RIM
Resource / Capability
Breadth of technology
Yes
Yes
Yes
Yes
Implications
Sustained
Innovative products
Strategic alliances
ISV relationships (500 strong)
In house R&D (1000 strong)
Technology leadership
Carrier relationships (110)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
No
Yes
No
Yes
Yes
-
Yes
Yes
Yes
Yes
Yes
Yes
Sustained
Temporary
Sustained
Parity
Sustained
Parity
Vertical integration- into S/W, enterprise
solutions, services
Licensing programs w/ OS providers
Yes
Yes
Yes
Yes
Sustained
Yes
Yes
Yes
Yes
Sustained
Brand reputation
Serving multiple segments - consumer,
prosumer, corporate
Yes
Yes
Yes
No
Yes
-
Yes
Yes
Sustained
Parity
Multiple product service offerings- Blackberry devices, business solutions-software and services ,
Blackberry connect embedded solutions for other handset manufacturers, Smart Card readers
High credibility in innovative products due to Blackberry
The alliances are not permanent and other competitors can imitate these
S/W packages from ISVs serve as valuable complements and enhance the value of Blackberry devices
In house R&D provides finer control over design. However, many players follow this route.
Technology leadership earned through continuous enhancements to Blackberry devices
These are valuable. However, these are normally not exclusive and carriers maintain these
relationships with multiple handset manufacturers
Gives RIM control over complementary products and services, thereby enhancing the value of its core
offering namely the blackberry.
Ensures that blackberry technology works with multiple operating systems, thereby increasing the
choice and therefore, value, to customers
One of the pioneers in mobile internet connectivity services
Useful, but most other players do likewise.
e) VRIO Analysis for Samsung
Reasoning behind “Hard to Imitate”?
Resource / Capability
V
R
I
O
Complementary businesses
Yes
No
No
Yes
Competitive
Implications
Temporary
Brand reputation
Technology innovation
Strategic partnerships
PhD’s in the workforce
Social partnering
Technology Patents
Use of technology in supply chain
management
Global Product Design Team
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
Yes
No
Yes
Yes
Yes
No
No
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Sustained
Parity
Sustained
Temporary
Parity
Sustained
Temporary
Yes
Yes
No
Yes
Temporary
Resource / Capabilities
V
R
I
O
Reasoning behind “Hard to Imitate”?
Fashionable Designs
Yes
Yes
No
Competitive
Implications
Temporary
Brand image
Yes
Yes
Yes
Yes
Sustained
Aiming at high end market
3G with Cingular
Complementary product offerings
Yes
Yes
Yes
Yes
Yes
No
No
No
-
-
Temporary
Temporary
Parity
LG has been actively improving its brand image when it change its name from Goldstar to LG. In some
Asian and European countries, LG is considered to be a luxurious brand.
Marketing to high-end consumers is relatively easy.
Although 3G technology may be limited today, the trend of the industry is to go to 3G technologies.
Even though LG offer complementary products, this is not rare. A host of competitors also offer similar
complementary products.
The semiconductor business is a very well placed complement, but with firms like Sony and Apple, this is
temporary
Samsung is a leading brand in consumer electronics
Majority of firms in the market space are technology innovation driven
Partnerships and investments in strategic start-ups and university research projects by Samsung
Samsung prides itself in employing PhDs in engineering, but it can be quickly imitated by competitors
All big players currently are involved in social causes, which is regarded as critical by some of their clients
High number of patents give exclusive access to related technologies
Heavy investment in SCM streamlines suppliers, reduces operational costs and helps develop better quality
products
Local design teams help align global designs to meet local market needs in terms of product design
f) VRIO Analysis for LG
Although fashionable designs are rare, but it can be easily imitated by it's competitors.
Partnership with Prada
Yes
Yes
Yes
Yes
Sustained
Award winning design center
Yes
Yes
No
-
Temporary
The partnership with Prada to create the Prada phone puts LG in a very unique position of the luxury
market. Although competitors can partner with other fashion designers, it is still very difficult to imitate the
uniqueness of the Prada phone.
Although LG has been focusing on fashionable designs to suite the high-end users, LG fail to create any
casual ambiguity or patents that would give them sustainable competitive advantages.
g) VRIO Analysis for Apple
Resource / Capability
V
R
I
O
Breadth of technologies
Yes
Yes
Yes
Yes
Competitive
Implications
Sustained
Innovative products
Yes
Yes
Yes
Yes
Sustained
High quality sales and aftersales support service
Direct contact with targeted
customers thru' online &
retail stores
Yes
Yes
No
Yes
Temporary
Yes
Yes
Yes
Yes
Sustained
Being 2nd or 3rd to market
learning from other
companies mistakes
Broad product lines
Brand reputation
Geographies are limited
Yes
No
-
-
Parity
Yes
Yes
No
No
Yes
-
Yes
-
Yes
-
Parity
Sustained
Disadvantage
Focused
Complementary services
(iTunes, iPod, Macintosh,
Mac OS, iPhone and
Cingular tie-up)
Increased focus on digital
lifestyle (vs. computers)
Steve Jobs
Yes
Yes
No
Yes
Temporary
Yes
No
-
-
Parity
Yes
Yes
Yes
Yes
Sustained
Vertical integration of
hardware and software
Yes
Yes
Yes
Yes
Sustained
R
I
O
Competitive
Implications
Reasoning behind “Hard to Imitate”?
Apple has presence in computer hardware, software, portable music, complementary service tie-ups. Apple TV
and Apple iPhone. They can leverage technologies across various platforms (such as using OS X on iPhone).
Other competitors have product line extensions or solutions that revolve around a product line. So the
technologies are a sustained competitive advantage for Apple.
Although Apple is not first to market a technology, Apple takes existing products and creatively modifies it to
make it user-friendly.
Apple has its own employees at certain third party retail stores also to help with customer queries. Other
customers can easily imitate this strategy.
Apple has setup its own retail stores and websites to reach out to customers. Other competitors like Nokia,
Motorola, RIM, PALM etc will need to enter into retail space and have relationships with customers. While other
competitors maintain relationship through wireless service providers, Apple will maintain relationship with
customers through both wireless service providers and through direct customer relationship using its retail
outlets.
Both Apple and Nokia learn from others mistakes and take the 2nd to market approach. In doing so, they may lose
some market share but they don’t incur huge potential loses if a product fails.
Most competitors have offerings in low end and high end market segments.
Apple is known for its brand and people are willing to buy products just because it’s an “Apple” product.
Apple has presence only in USA, UK, Japan, Europe. Asia which is leading/emerging in wireless handsets has a
great potential for higher sales.
Apple is known to offer complementary services such as hardware, software, portable music player and iTunes,
Phone with integrated services. Most other competitors provide one technology and rely on partners to complete
product portfolio. However some firms are coming up with music offering (such as streaming music that can be
downloaded directly onto cell phone) and this new model might provide complementary services to other
competitors thereby eroding the competitive advantage that Apple currently has.
Most companies are now focused on digital lifestyle.
Steve Jobs has the creativity and business aptitude for negotiating and coming up with the right complementary
products.
Apple has a tightly integrated culture so it can leverage its hardware and software capabilities and its creative
work force to come up with user experience products.
h) VRIO Analysis for Sony Ericsson
Resource / Capability
V
Reasoning behind “Hard to Imitate”?
1
2
Technology focus
Brand reputation
Strategic alliance
Yes
Yes
Yes
No
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Temporary
Sustained
Sustained
Product innovation
Yes
No
No
Yes
Temporary
Patents
Yes
Yes
Yes
Yes
Sustained
Ericsson Annual Report 2005, Page 17, Accessed on Feb 11th 2007
Ericsson Annual Report 2005, Page 08, Accessed on Feb 11th 2007
Majority of firms in the market space are technology innovation driven
Sony has a leading brand reputation in consumer electronics
Sony Ericsson is uniquely partnered in terms of Ericsson’s expertise in wireless network infrastructure and
Sony’s expertise in consumer electronics
Sony’s walkman style handsets with high quality camera lens 1 and further innovation based on that, leads to a
favorable advantage
Patents in GSM and WCDMA technologies2 cannot be imitated and are leveraged
Exhibit II (D) 4 – Part B: VRIO Analysis for wireless service providers
a) VRIO Analysis for Cingular
Legend: V: Valuable; R: Rare; I: Hard to Imitate; O: Organized to leverage
Resource / Capability
V
R
I
O
Brand Name
Yes
Yes
Yes
Yes
Competitive
Implications
Sustained
Global Presence
Tie up with enterprises
Yes
Yes
No
Yes
No
Yes
Parity
Temporary
Large subscriber base (free
minutes between subscribers)
Integrated voice, wireless, wired
services
Yes
Yes
No
Yes
Temporary
Yes
Yes
Yes
Yes
Sustained
Rollover Minutes
Yes
Yes
No
-
TCA
Technology
Yes
No
-
-
Parity
Reasoning behind “Hard to Imitate”?
Cingular has developed a brand name synonymous with extended network coverage and fewest dropped
calls. The Cingular brand name was built by putting in years of planning and this definitely gives Cingular
a sustained advantage.
T-Mobile, Verizon and Cingular all have international presence.
As long as these tie up’s with enterprises is not exclusive, other mobile operators can enter the enterprises
with attractive rates and plans for employees.
Subscribers could move across networks thereby reducing the subscriber base of Cingular.
Most of the service providers are in wireless business. For them to invest in end-to-end solutions of being
in both wired and wireless domain will require either merging into other companies or investing in capital
intensive equipment to get into wired business; so they will have to invest in building equity alliances with
other providers of wired solutions.
Although Cingular is the only service provider to offer rollover minutes, the offer can be easily imitated by
competitors if they choose to.
Most of the wireless providers invest in latest technology to stay competitive in market place.
b) VRIO Analysis for Sprint-Nextel
Resource / Capability
V
R
I
O
Brand Name
Tie up with enterprises
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Competitive
Implications
Sustained
Temporary
Large subscriber base (free
minutes between subscribers)
Integrated voice, wireless,
wired services
Technology
Walkie Talkie Technology
Yes
No
-
-
Parity
Yes
Yes
Yes
Yes
Sustained
Yes
Yes
No
Yes
No
Yes
Parity
Sustained
Reasoning behind “Hard to Imitate”?
As long as these tie up’s with enterprises is not exclusive, other mobile operators can enter the enterprises with
just as attractive rates and plans as Sprint.
Gaining market share and thereby increasing subscribers is valuable since IN network calling is generally free.
However, all competitors are trying to increase their subscriber base.
Not all competitors have wired and wireless service offering and entering into wired business can be costly.
All wireless service providers are investing heavily in technology.
Walkie Talkie technology can be useful especially in enterprises where corporate users may want to leverage
walkie talkie technology instead of making calls. Not all competitors provide this feature.
c) VRIO Analysis for T-Mobile
Resource / Capability
V
R
I
O
Brand
Quality: Superior
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Competitive
Implications
Sustained
Temporary
Delivery
Offer end to end business
Yes
Yes
No
Yes
Yes
Yes
Parity
Sustained
Reasoning behind “Hard to Imitate”?
T-Mobile brand is known for providing exceptional GSM service.
T-Mobile offers superior quality of service. Other service providers can offer this service through a little capital
investment and phasing out their out equipment with new equipment.
Significant capital investment and license procurement are needed for firms to enter into broadband and mobile
solutions – both broadband
and mobile communications
Deutsche Telekom
Laboratories
T-Venture
Security
Geographical presence and
parental ties
GSM Network
communications. Some firms are in one of these fields while other firms are in both the fields.
Yes
Yes
No
Yes
Temporary
Yes
Yes
Yes
Yes
Sustained
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Temporary
Sustained
Yes
No
Deutsche Telekom Laboratories performs central research and development. Other service providers can have
similar R&D in-house to identify market opportunities.
This group finances and supports innovative start-ups in the telecommunications and IT sectors. Other companies
may have to change their organization mentality to come up with such venture group within their organization.
T-Mobile looks to offer security as a bundled solution in all its offerings.
DT has presence in multiple countries and is governed by one group. So it can use its parental ties to expand
services and offerings in one market to other markets.
Parity
d) VRIO Analysis for Verizon
Resource / Capability
V
R
I
O
Brand image
V-Cast
Yes
Yes
Yes
Yes
Yes
No
Yes
VZ Navigator & Chaperon
Wide area of coverage
Yes
Yes
No
Yes
Yes
Yes
Competitive
Implications
Sustained
Temporary
Parity
Sustained
Reasoning behind “Hard to Imitate”?
Verizon is known to provide quality coverage at just about everywhere.
Online video and music streaming is limited due to data transfer speed. Verizon is able to use its 3G technology to
provide V-Cast. However, this resource can easily duplicated by competitors.
Since all mobile handsets are required to have GPS locator for 911, VZ Navigator and Chaperon is not that rare.
Although it is not impossible to imitate wide area of coverage, it is very difficult. There are limited wireless
spectrum allocated from FCC. The only way to increase coverage area is to acquired licenses from existing
wireless service provider. Because of the limited spectrum availability, the licenses can be very expensive.
Exhibit II (D) 6 – Part A: Comparative Financial Analysis for Handset Manufacturers
Apple
Motorola
Data in $mill
unless
otherwise
stated
Financial Year
ends Sept 2006
Financial Year
ends Dec 2006
Samsung
Financial Year
ends Dec 2006
Sony
Financial Year
ends March
2006
Results available
only till 3Q FY 06
ie Sept 06 and last
10K is as of 2005
10Ks for 2003
contained blank
pages for
consolidated
balance sheet and
income statement
Financial Year
ends Dec 2005
Financial Year
ends Dec 2005
Exchange
Rate(1US$=1SEK)
Exchange
Rate(1US$=1Euro)
Ericsson
Nokia
LG
RIM
Palm
Ratio Category
Liquidity Ratios
Financial Year
ends Dec 2005
Financial Year
ends Mar 2006
Financial Year
ends May 2006
NO
CONSOLIDATED
BALANCE
SHEET DATA
AVAILABLE
FROM 2003 AND
BEFORE
Exchange
Rate(1US$=1KRW)
2002
2003
2004
2005
0.1144
0.1381
0.1514
0.1257
1.0483
1.2557
1.3644
1.1844
0.00084
0.00084
0.00098
0.001
2002
5,388
1,658
2003
5,887
2,357
2004
7,055
2,651
2005
10,300
3,487
No consolidated
financial
statements
available for LG
for FY 02
Ratio/Financial
Current Ratio
Apple
Current Assets
Current Liabilities
2006
14,509
6,471
INDUSTRY
STANDARD
2.44
Motorola
Samsung
Sony
Ericsson
Nokia
LG
RIM
Palm
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
3.250
17,134
9,810
1.747
N/A
N/A
25,092
19,237
1.304
16,245
7,278
2.232
18,434
8,818
2.090
N/A
N/A
737
59
478,179
232,998
2.052
2.498
17,856
9,381
1.903
N/A
N/A
26,285
N/A
17,919
7,423
2.414
25,218
10,397
2.425
16,794
20,302
0.827
428
149
2.872
371,023
237,346
1.563
2.661
21,115
10,603
1.991
31,580
25,772
1.225
32,340
28,675
1.128
20,725
10,498
1.974
26,617
10,882
2.446
19,200
20,362
0.943
1,355,405
208,875
6.489
402,502
259,804
1.549
2.954
28,022
12,592
2.225
32,970
24,588
1.341
33,225
26,256
1.265
19,880
10,302
1.930
22,446
11,453
1.960
20,831
21,252
0.980
1,544,248
630,814
2.448
552,812
321,752
1.718
2.242
30,975
15,425
2.008
32,218
27,352
1.178
1,256,579
278,680
4.509
949,999
497,072
1.911
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
5,388
45
1,658
3.223
17,134
2,869
9,810
1.454
N/A
N/A
5,887
56
2,357
2.474
17,856
2,099
9,381
1.680
N/A
N/A
7,055
101
2,651
2.623
21,115
2,546
10,603
1.751
31,580
5,729
10,300
165
3,487
2.907
28,022
2,422
12,592
2.033
32,970
5,789
14,509
270
6,471
2.200
30,975
3,162
15,425
1.803
-
Quick Ratio
1.80
Apple
Motorola
Samsung
Sony
Ericsson
Nokia
LG
RIM
Palm
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
Ratio
N/A
25,092
5,063
19,237
1.041
16,245
1,535
7,278
2.021
18,434
1,339
8,818
1.939
N/A
N/A
N/A
737
37
59
11.864
478,179
55,004
232,998
1.816
N/A
26,285
5,214
N/A
17,919
1,514
7,423
2.210
25,218
1,468
10,397
2.284
16,794
5,858
20,302
0.539
428
31
149
2.664
371,023
22,748
237,346
1.467
25,772
1.003
32,340
6,409
28,675
0.904
20,725
2,120
10,498
1.772
26,617
1,781
10,882
2.282
19,200
6,870
20,362
0.606
1,355,405
42
208,875
6.489
402,502
14,030
259,804
1.495
24,588
1.105
33,225
5,900
26,256
1.041
19,880
2,414
10,302
1.695
22,446
1,976
11,453
1.787
20,831
7,248
21,252
0.639
1,544,248
92
630,814
2.448
552,812
35,544
321,752
1.608
32,218
6,878
27,352
0.926
1,256,579
134
278,680
4.509
949,999
58,010
497,072
1.794
Asset Turnover Ratio
Inventory
Turnover
4.80
Apple
Motorola
Samsung
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
COGS
Average Inventory
4,139
15,741
21,972
N/A
4,499
56
80.339
15,652
2,484
6.301
24,660
N/A
6,022
101
59.624
19,698
2,323
8.481
52,273
N/A
9,889
165
59.933
23,833
2,484
9.595
54,542
5,759
13,717
270
50.804
30,152
2,792
10.799
-
Sony
Ericsson
Nokia
LG
RIM
Palm
Ratio
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
39,395
6,303
6.250
1,440
19,161
N/A
N/A
209
1,139,674
-
N/A
N/A
10,896
1,684
6.472
21,755
1,536
14.166
36,319
6,835
5.314
187
34
5.500
1,035,569
38,876
26.638
48,637
N/A
10,729
1,890
5.676
24,803
1,688
14.696
50,756
6,853
7.407
323
37
8.849
953,734
18,389
51.864
9.471
46,730
6,155
7.593
10,354
2,087
4.960
26,304
1,761
14.940
48,039
7,129
6.738
635
67
9.478
1,192,882
24,787
48.125
48,637
6,389
7.613
925
113
8.186
1,473,198
46,777
31.494
2,203
6,298
0.350
19,913
31,152
0.639
N/A
N/A
43,548
61,547
0.708
24,768
23,923
1.035
2,592
6,815
0.380
18,871
32,046
0.589
N/A
N/A
N/A
69,755
16,833
25,186
0.668
4,088
11,516
0.355
17,591
30,922
0.569
32,185
68,119
0.472
64,325
87,410
0.736
15,849
28,189
0.562
4,088
11,516
0.355
19,129
35,802
0.534
32,432
73,506
0.441
61,728
88,777
0.695
12,985
26,250
0.495
7,221
17,205
0.420
21,451
38,593
0.556
62,965
90,665
0.694
-
Financial Leverage Ratios
Debt Ratio
Apple
Motorola
Samsung
Sony
Ericsson
Total Debt
Total Assets
Ratio
Total Debt
Total Assets
Ratio
Total Debt
Total Assets
Ratio
Total Debt
Total Assets
Ratio
Total Debt
Total Assets
Ratio
Nokia
LG
RIM
Palm
Total Debt
Total Assets
Ratio
Total Debt
Total Assets
Ratio
Total Debt
Total Assets
Ratio
Total Debt
Total Assets
Ratio
9,302
24,454
0.380
N/A
N/A
71
948
0.075
298,248
989,096
0.302
10,809
30,036
0.360
30,470
42,173
0.722
154
861
0.179
320,840
576,626
0.556
11,284
30,384
0.371
31,055
45,440
0.683
215
1,936
0.111
296,404
787,938
0.376
11,771
26,410
0.446
32,136
50,359
0.638
637
2,620
0.243
369,009
950,032
0.388
313
2,312
0.135
503,617
1,487,522
0.339
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
2,203
4,095
0.538
19,913
11,239
1.772
N/A
N/A
43,548
17,823
2.443
24,768
8,421
2.941
9,302
14,971
0.621
N/A
N/A
71
876
2,592
4,223
0.614
18,871
12,689
1.487
N/A
N/A
N/A
69,755
16,833
8,352
2.015
10,809
19,021
0.568
30,470
11,703
2.604
154
706
4,088
7,428
0.550
17,591
13,331
1.320
32,185
35,933
0.896
64,325
22,865
2.813
15,849
12,339
1.284
11,284
19,646
0.574
31,055
14,385
2.159
215
1,721
4,088
7,428
0.550
19,129
16,673
1.147
32,432
41,073
0.790
61,728
26,826
2.301
12,985
13,265
0.979
11,771
14,639
0.804
32,136
18,223
1.763
637
1,983
7,221
9,984
0.723
21,451
17,142
1.251
62,965
27,383
2.299
313
1,998
Debt-ToEquity Ratio
0.33
Apple
Motorola
Samsung
Sony
Ericsson
Nokia
LG
RIM
Palm
Ratio
Total Debt
Total Equity
Ratio
0.081
298,248
690,848
0.432
0.218
320,840
255,786
1.254
0.125
296,404
491,534
0.603
0.321
369,009
581,023
0.635
0.157
503,617
983,905
0.512
5,742
4,139
0.279
23,422
15,741
0.328
33,260
21,972
0.339
53,073
39,395
0.258
16,676
1,440
0.914
31,466
19,161
0.391
N/A
N/A
294
209
0.289
1,004,388
1,096,952
-0.092
6,207
4,499
0.275
23,155
15,652
0.324
36,409
24,660
0.323
62,280
N/A
16,260
10,896
0.330
37,085
21,755
0.413
48,845
36,319
0.256
306
187
0.389
837,637
1,035,569
-0.236
8,279
6,022
0.273
29,663
19,698
0.336
80,911
52,273
0.354
66,187
48,637
0.265
19,981
10,729
0.463
40,074
24,803
0.381
68,794
50,756
0.262
594
323
0.456
949,654
953,734
-0.004
13,931
9,889
0.290
35,262
23,833
0.324
79,594
54,542
0.315
61,355
46,730
0.238
19,084
10,354
0.457
40,496
26,304
0.350
62,046
48,039
0.226
1,350
635
0.530
1,270,410
1,192,882
0.061
19,315
13,717
0.290
42,879
30,152
0.297
57,203
48,637
0.150
2,065
925
0.552
1,578,509
1,473,198
0.067
65
6,298
69
6,815
266
8,050
1,328
11,516
1,989
17,205
Profitability Ratios
Gross Profit
Margin
Apple
Motorola
Samsung
Sony
Ericsson
Nokia
LG
RIM
Palm
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
34.20%
1.50%
ROA
Apple
Net Income
Total Assets
Motorola
Samsung
Sony
Ericsson
Nokia
LG
RIM
Palm
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
0.010
-2,485
31,152
-0.080
8,021
N/A
115
61,547
0.002
-2,175
23,923
-0.091
3,544
24,454
0.145
N/A
N/A
-28
948
-0.030
-82,168
989,096
-0.083
0.010
893
32,046
0.028
6,939
N/A
963
69,755
0.014
-1,498
25,186
-0.059
4,449
30,036
0.148
52
42,173
0.001
-148
861
-0.172
-442,852
576,626
-0.768
0.033
1,532
30,922
0.050
10,651
68,119
0.156
851
87,410
0.010
2,700
28,189
0.096
4,355
30,384
0.143
641
45,440
0.014
51
1,936
0.026
-10,215
787,938
-0.013
0.115
4,578
35,802
0.128
7,542
73,506
0.103
1,531
88,777
0.017
3,075
26,250
0.117
4,283
26,410
0.162
602
50,359
0.012
213
2,620
0.081
66,387
950,032
0.070
0.116
3,661
38,593
0.095
1,057
90,665
0.012
382
2,312
0.165
336,170
1,487,522
0.226
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Net Income
65
4,095
0.016
-2,485
11,239
-0.221
8,021
N/A
115
69
4,223
0.016
893
12,689
0.070
6,939
N/A
963
266
5,076
0.052
1,532
13,331
0.115
10,651
35,933
0.296
851
1,328
7,428
0.179
4,578
16,673
0.275
7,542
41,073
0.184
1,531
1,989
9,984
0.199
3,661
17,142
0.214
1,057
5.50%
ROE
Apple
Motorola
Samsung
Sony
17,823
0.006
-2,175
8,421
-0.258
3,544
14,971
0.237
N/A
N/A
-28
876
-0.032
-82,168
690,848
-0.119
69,755
0.014
-1,498
8,352
-0.179
4,449
19,021
0.234
52
11,703
0.004
-148
706
-0.210
-442,852
255,786
-1.731
22,865
0.037
2,700
12,339
0.219
4,355
19,646
0.222
641
14,385
0.045
51
1,721
0.030
-10,215
491,534
-0.021
26,826
0.057
3,075
13,265
0.232
4,283
14,639
0.293
602
18,223
0.033
213
1,983
0.107
66,387
581,023
0.114
27,383
0.039
382
1,998
0.191
336,170
983,905
0.342
Apple
% growth
5,742
-
6,207
8.10%
8,279
33.38%
13,931
68.27%
19,315
38.65%
Motorola
% growth
23,422
-
23,155
-1.14%
29,663
28.11%
35,262
18.88%
42,879
21.60%
Samsung
% growth
33,260
-
36,409
9.47%
80,911
122.23%
79,594
-1.63%
-
Sony
% growth
53,073
-
62,280
17.35%
66,187
6.27%
61,355
-7.30%
57,203
-6.77%
Ericsson
% growth
16,676
-
16,260
-2.50%
19,981
22.88%
19,084
-4.49%
-
Nokia
31,466
37,085
40,074
40,496
-
Ericsson
Nokia
LG
RIM
Palm
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Growth Rates
Sales
Cost of Sales
% growth
-
17.86%
8.06%
1.05%
-
LG
% growth
N/A
-
48,845
-
68,794
40.84%
62,046
-9.81%
-
RIM
% growth
294
-
306
4.08%
594
94.12%
1,350
127.27%
2,065
52.96%
Palm
% growth
1,004,388
-
837,637
-16.60%
949,654
13.37%
1,270,410
33.78%
1,578,509
24.25%
Apple
% growth
4,139
-
4,499
8.70%
6,022
33.85%
9,889
64.21%
13,717
38.71%
Motorola
% growth
15,741
-
15,652
-0.57%
19,698
25.85%
23,833
20.99%
30,152
26.51%
Samsung
% growth
21,972
-
24,660
12.23%
52,273
111.97%
54,542
4.34%
-
Sony
% growth
39,395
-
N/A
-
48,637
-
46,730
-3.92%
48,637
4.08%
Ericsson
% growth
1,440
-
10,896
656.92%
10,729
-1.54%
10,354
-3.50%
-
Nokia
% growth
19,161
-
21,755
13.54%
24,803
14.01%
26,304
6.05%
-
LG
% growth
N/A
-
36,319
-
50,756
39.75%
48,039
-5.35%
-
RIM
% growth
209
-
187
-10.53%
323
72.73%
635
96.59%
925
45.67%
1,139,674
1,035,569
953,734
1,192,882
1,473,198
Palm
Net Income
% growth
-
-9.13%
-7.90%
25.07%
23.50%
Apple
% growth
65
-
69
6.15%
266
285.51%
1,328
399.25%
1,989
49.77%
Motorola
-2,485
1,532
4,578
3,661
% growth
-
893
135.94%
71.56%
198.83%
-20.03%
Samsung
% growth
8,021
-
6,939
-13.49%
10,651
53.49%
7,542
-29.19%
-
Sony
% growth
115
-
963
737.39%
851
-11.63%
1,531
79.91%
1,057
-30.96%
Ericsson
% growth
-2,175
-
-1,498
-31.15%
2,700
-280.32%
3,075
13.86%
-
Nokia
% growth
3,544
-
4,449
25.52%
4,355
-2.11%
4,283
-1.66%
-
LG
% growth
N/A
-
52
-
641
1138.96%
602
-6.19%
-
RIM
-28
-148
428.57%
51
213
382
-134.46%
317.65%
79.34%
-10,215
336,170
406.38%
712
19,315
3.69%
33.08%
% growth
-
Palm
-82,168
% growth
-
-442,852
438.96%
-97.69%
66,387
749.90%
446
5,742
7.77%
-
471
6,207
7.59%
5.61%
491
8,279
5.93%
4.25%
535
13,931
3.84%
8.96%
R&D/Sales
Apple
R&D spending
Sales
R&D/Sales
R&D growth
Motorola
R&D spending
Sales
R&D/Sales
R&D growth
2774
23,422
11.84%
-
2979
23,155
12.87%
7.39%
3316
29,663
11.18%
11.31%
3600
35,262
10.21%
8.56%
4106
42,879
9.58%
14.06%
R&D spending
Sales
R&D/Sales
R&D growth
2774
33,260
8.34%
-
2979
36,409
8.18%
7.39%
3316
80,911
4.10%
11.31%
3600
79,594
4.52%
8.56%
4106
14.06%
R&D spending
Sales
R&D/Sales
R&D growth
2774
53,073
5.23%
-
2979
62,280
4.78%
7.39%
3316
66,187
5.01%
11.31%
3600
61,355
5.87%
8.56%
4106
57,203
7.18%
14.06%
R&D spending
R&D/Sales
R&D growth
33455
23%
-
28553
24.30%
-14.65%
23421
17.70%
-17.97%
24454
16.10%
4.41%
-
R&D spending
Sales
R&D/Sales
R&D growth
3199
31,466
10.17%
-
4757
37,085
12.83%
48.67%
5152
40,074
12.86%
8.31%
4530
40,496
11.19%
-12.07%
-
R&D spending
Sales
R&D/Sales
R&D growth
N/A
-
48,845
-
1793
68,794
2.61%
-
2055
62,046
3.31%
14.61%
-
R&D spending
Sales
131
294
160
306
271
594
714
1,350
1140
2,065
Samsung
Sony
Ericsson
Nokia
LG
RIM
R&D/Sales
R&D growth
44.56%
52.29%
22.14%
45.62%
69.38%
52.89%
163.47%
55.21%
59.66%
91539
1,004,388
9.11%
-
70175
837,637
8.38%
-23.34%
69367
949,654
7.30%
-1.15%
89804
1,270,410
7.07%
29.46%
135959
1,578,509
8.61%
51.40%
Palm
R&D spending
Sales
R&D/Sales
R&D growth
Exhibit II (D) 6 – Part B: Comparative Financial Analysis for Wireless Service Providers
AT&T
Inventory line item missing from its annual reports
T-Mobile
Ratio Category
Liquidity Ratios
2002
2003
2004
2005
2006
1.0483
1.2557
1.3644
1.1844
1.3203
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
Current Assets
Current Liabilities
Ratio
2002
2,731
2,787
0.980
3,070
11,534
0.266
4,650
2,756
1.687
14,177
11,050
1.283
14,089
14,683
0.960
2003
3,300
3,210
1.028
3,251
10,859
0.299
3,688
2,817
1.309
24,682
13,123
1.881
14,023
14,300
0.981
2004
5,570
7,983
0.698
4,102
13,928
0.295
5,207
2,609
1.996
22,720
13,314
1.706
9,962
20,355
0.489
2005
6,049
10,008
0.604
4,768
7,782
0.613
19,742
29,560
0.668
14,654
25,418
0.577
2006
21,060
29,163
0.722
25,553
40,482
0.631
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
2,731
126
2,787
0.935
3,070
331
11,534
0.237
4,650
245
2,756
3,300
273
3,210
0.943
3,251
432
10,859
0.260
3,688
223
2,817
5,570
690
7,983
0.611
4,102
666
13,928
0.247
5,207
322
2,609
6,049
536
10,008
0.551
4,768
901
7,782
0.497
-
-
Exchange
Rate(1US$=1Euro)
Ratio/Financial
Current Ratio
Cingular
Verizon
Sprint Nextel
T-Mobile
AT&T
INDUSTRY
STANDARD
1.13
1
Quick Ratio
Cingular
Verizon
Sprint Nextel
T-Mobile
AT&T
Asset Turnover
Ratio
Ratio
Current Assets
Inventory
Current Liabilities
Ratio
Current Assets
Inventory
Current Liabilities
1.598
14,177
1,631
11,050
1.135
14,683
14,683
1.230
24,682
1,798
13,123
1.744
14,300
14,300
1.872
22,720
1,933
13,314
1.561
20,355
20,355
19,742
1,299
29,560
0.624
25,418
25,418
21,060
1,491
29,163
0.671
40,482
40,482
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
COGS
Average Inventory
Ratio
12,382
15,985
7,204
253
46,625
34,383
-
13,323
200
66.782
18,405
382
48.244
8,316
382
21.798
39,431
1,715
22.997
34214
-
18,037
482
37.460
21,824
549
39.752
10,085
549
18.370
43,039
1,866
23.068
34,832
-
32,609
613
53.196
24,921
784
31.807
37,737
1,616
23.348
37,596
-
45,887
1,395
32.895
52,767
-
Total Debt
Total Assets
Ratio
Total Debt
Total Assets
Ratio
Total Debt
Total Assets
Ratio
Total Debt
16,014
24,122
0.664
21,324
63,188
0.337
17,623
21,484
0.820
77,139
16,538
25,530
0.648
22,329
64,833
0.344
14,673
20,510
0.715
82,703
37,093
82,238
0.451
23,842
67,825
0.352
13,228
22,744
0.582
71,508
33,978
79,319
0.428
28,091
76,334
0.368
94,597
106,271
Ratio
18
Inventory Turnover
Cingular
Verizon
Sprint Nextel
T-Mobile
AT&T
Financial
Leverage Ratios
Debt Ratio
Cingular
Verizon
Sprint Nextel
T-Mobile
AT&T
Total Assets
Ratio
Total Debt
Total Assets
Ratio
131,898
0.585
61,858
95,057
0.651
145,760
0.567
61,985
100,233
0.618
147,104
0.486
69,761
110,265
0.633
152,157
0.622
65,524
145,632
0.450
171,850
0.618
114,612
270,634
0.423
0.74
Debt-To-Equity Ratio
Cingular
Verizon
Sprint Nextel
T-Mobile
AT&T
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
Total Debt
Total Equity
Ratio
16,014
7,541
2.124
21,324
20,289
1.051
17,623
2,846
6.192
77,139
37,127
2.078
61,858
33,199
1.863
16,538
8,333
1.985
22,329
20,963
1.065
14,673
5,738
2.557
82,703
42,456
1.948
61,985
38,248
1.621
37,093
44,536
0.833
23,842
22,408
1.064
13,228
9,408
1.406
71,508
51,767
1.381
69,761
40,504
1.722
33,978
44,978
0.755
28,091
26,593
1.056
94,597
57,561
1.643
65,524
54,690
1.198
106,271
65,579
1.620
114,612
115,540
0.992
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
Sales
COGS
Ratio
14,903
12,382
0.169
19,473
15,985
0.179
8,186
7,204
0.120
56,282
46,625
0.172
42,821
34,383
0.197
15,483
13,323
0.140
22,489
18,405
0.182
9,892
8,316
0.159
70,116
39431.4914
0.438
40,498
34214
0.155
19,565
18,037
0.078
27,662
21,824
0.211
11,925
10,085
0.154
78,252
43,039
0.450
40,733
34,832
0.145
34,433
32,609
0.053
32,301
24,921
0.228
70,595
37,737
0.465
43,764
37,596
0.141
80,996
45,887
0.433
63,055
52,767
0.163
50.10%
Gross Profit Margin
Cingular
Verizon
Sprint Nextel
T-Mobile
AT&T
ROA
Cingular
Verizon
Sprint Nextel
T-Mobile
AT&T
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
Net Income
Total Assets
Ratio
1,207
24,122
0.050
2,584
63,188
0.041
1,360
21,484
0.063
-25,477
131,898
-0.193
5,653
95,057
0.059
977
25,530
0.038
3,083
64,833
0.048
1,511
20,510
0.074
2,038
145,760
0.014
8,505
100,233
0.085
201
82,238
0.002
4,698
67,825
0.069
3,000
22,744
0.132
2,175
147,104
0.015
5,887
110,265
0.053
333
79,319
0.004
6,152
76,334
0.081
6,620
152,157
0.044
4,786
145,632
0.033
4,179
171,850
0.024
7,356
270,634
0.027
10.10%
ROE
Cingular
Verizon
Sprint Nextel
T-Mobile
AT&T
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
Net Income
Shareholder Equity
Ratio
1,207
7,541
0.160
2,584
20,289
0.127
1,360
2,846
0.478
-25,477
37,127
-0.686
5,653
33,199
0.170
977
8,333
0.117
3,083
20,963
0.147
1,511
5,738
0.263
2,038
42,456
0.048
8,505
38,248
0.222
201
44,536
0.005
4,698
22,408
0.210
3,000
9,408
0.319
2,175
51,767
0.042
5,887
40,504
0.145
333
44,978
0.007
6,152
26,593
0.231
6,620
57,561
0.115
4,786
54,690
0.088
4,179
65,579
0.064
7,356
115,540
0.064
14,903
-
15,483
3.89%
19,565
26.36%
34,433
75.99%
-
Growth Rates
Sales
-0.50%
Cingular
% growth
Cost of Sales
Net Income
Verizon
% growth
19,473
-
22,489
15.49%
27,662
23.00%
32,301
16.77%
-
Sprint Nextel
% growth
8,186
-
9,892
20.84%
11,925
20.55%
-
-
T-Mobile
% growth
56,282
-
70,116
24.58%
78,252
11.60%
70,595
-9.79%
80,996
14.73%
AT&T
% growth
42,821
-
40,498
-5.42%
40,733
0.58%
43,764
7.44%
63,055
44.08%
Cingular
% growth
12,382
-
13,323
7.60%
18,037
35.38%
32,609
80.79%
-
Verizon
% growth
15,985
-
18,405
15.14%
21,824
18.58%
24,921
14.19%
-
Sprint Nextel
% growth
7,204
-
8,316
15.44%
10,085
21.27%
-
-
T-Mobile
% growth
46,625
-
39,431
-15.43%
43,039
9.15%
37,737
-12.32%
45,887
21.60%
AT&T
% growth
34,383
-
34,214
-0.49%
34,832
1.81%
37,596
7.94%
52,767
40.35%
Cingular
% growth
1,207
-
977
-19.06%
201
-79.43%
333
65.67%
-
Verizon
% growth
2,584
-
3,083
19.31%
4,698
52.38%
6,152
30.95%
-
Sprint Nextel
% growth
1,360
-
1,511
11.10%
3,000
98.54%
-
-
-25,477
2,038
2,175
6,620
4,179
T-Mobile
% growth
-
108.00%
6.72%
204.37%
36.87%
AT&T
% growth
5,653
-
8,505
50.45%
5,887
-30.78%
4,786
-18.70%
7,356
53.70%
ARPU
$52.14
$51.67
$49.68
$49.65
-
ARPU
$48.35
$48.85
$50.22
$49.49
-
$8,186.00
$8.67
$78.68
$9,892.00
$10.60
$77.77
$11,925.00
$16.20
$61.34
-
-
Cingular
2.80%
2.70%
2.70%
2.20%
-
Verizon
1.50%
1.82%
1.50%
1.26%
-
Sprint Nextel
2.10%
1.60%
1.60%
-
-
-
-
-
-
-
2.80%
2.70%
2.70%
2.20%
1.80%
Subscribers
21.9
21.4
49.1
54.1
-
Subscribers
32.5
37.5
43.8
51.3
-
Subscribers
8.7
10.6
16.2
-
-
SPECIAL RATIO
ARPU
Cingular
Verizon
Sprint Nextel
Sales
Subscribers
ARPU
Subscriber churn rate
T-Mobile
AT&T
Subscribers Growth
Cingular
Verizon
Sprint Nextel
Exhibit III (E) 3: Apple’s valuation using Scenario Analysis
Scenario
Stock Price
Equity Value
(in Billion)
Range – Stock
price
Realistic goal
of 1% market
share
$102.30
96.93
$810.83 $63.79
iTunes reduced
content
33.31
39.32
Range – Equity
Value (in
Billion)
$688.56– 64.71
93.36 – 656.41
89.46 – 559.62
65.61 – 309.37
66.29-269.84
0.72-206.1
12.10 – 183.61
530.79 – 58.63
454.74 – 60.47
34.31 – 153.58
40.15 – 139.75
6.13-78.6
16.62- 77.14
462.62 – 1.63
397.80-12.86
24.51-273.73
31.97-240.07
23.96-250.93
32.75-221.04
214.7-14.83
190.79 – 23.89
5.34 – 59.12
15.96 – 60.87
Parameter modified and range
WACC
Base case: 15.48%
Range – 7%-21%
Terminal Year Sales Growth:
Base case: 5%
Range 2-14%
This years sales growth
Base case: 54%
Range: 20-70%
Terminal Years ROE:
Range – 5-70%
COGS:
Range
Reduces from 71 to 30%
Reduces from 71-70%
SG&A:
Range
Reduces from 40 to 15%
Reduces from 15 to 10%
R&D/Sales
Range
Reduces from 15-10%
Reduces from 10-5%
WACC
Base case: 15.48%
Range – 7%-21%
Terminal Year Sales Growth:
Base case: 5%
Range 2-14%
This years sales growth
Base case: 54%
Range: 20-70%
COGS:
Range
Reduces from 71 to 30%
Reduces from 71-70%
SG&A:
Range
No iPhone
Commoditize
iPhone
34.56
101.91
40.36
96.60
0.77 – 20.79
12.15 – 28.86
335.4 – 11.5
291.57 – 21.10
28.37 – 203.77
35.19 – 181.66
29.36 – 133.97
36.02 – 123.37
156.92 – 22.09
142.54 – 29.95
s
13.16 – 47.93
0.07 – 22.97
11.56 – 30.68
1186.87 –
27.61
1002.56 –
34.56
79.31 – 719.39
77.73 – 612.22
11.72 – 144.28
21.29 – 131.98
527.62 – 58.51
452.09 – 60.36
62.14 – 143.59
63.39 – 131.41
Reduces from 30 to 15%
Reduces from 15 to 10%
R&D/Sales
Range
Reduces from 20 to 5%
Reduces from 10-5%
WACC
Base case: 15.48%
Range – 7%-21%
Terminal Year Sales Growth:
Base case: 5%
Range 2-14%
This years sales growth
Base case: 54%
Range: 20-70%
COGS:
Range
Reduces from 71 to 30%
Reduces from 71-70%
SG&A:
Range
Reduces from 35 to 15%
Reduces from 15 to 10%
R&D/Sales
Range
Reduces from 15-10%
Reduces from 10-5%
WACC
Base case: 15.48%
Range – 7%-21%
Terminal Year Sales Growth:
Base case: 5%
Range 2-14%
This years sales growth
Base case: 54%
Range: 20-70%
COGS:
Range
Reduces from 71 to 30%
Reduces from 71-70%
SG&A:
Range
Reduces from 40 to 15%
Reduces from 15 to 10%
Exceptional
Success
317.34
276.49
33.69 – 88.4
39.64 – 85.32
3936.38 –
90.03
3298.45 –
86.48
238.58 –
2469.35
210.72 –
2073.48
5.66 – 127.02
16.23 – 117.57
1938.57 –
207.14
1179.38 –
184.48
176.48 –
455.53
158.87 –
391.73
121.11 –
279.49
112.64 –
244.90
R&D/Sales
Range
Reduces from 15-10%
Reduces from 10-5%
WACC
Base case: 15.48%
Range – 7%-21%
Terminal Year Sales Growth:
Base case: 5%
Range 2-14%
This years sales growth
Base case: 54%
Range: 20-70%
COGS:
Range
Reduces from 71 to 30%
Reduces from 71-70%
SG&A:
Range
Reduces from 40 to 15%
Reduces from 15 to 10%
R&D/Sales
Range
Reduces from 15-10%
Reduces from 10-5%
Exhibit II (E) 1a: Smartphone – Operating System Adoption Landscape
Company
OS X Tiger
Mobile Operating System
Windows ME
Palm
OS
Blackberry
Symbian
Linux
Samsung
Nokia
Sony Ericsson
LG
Palm
Motorola
RIM
Apple
Reference Product
Samsung Blackjack
Nokia 9300
Sony Ericsson W950i
LG Prada KE850
Palm Treo 750
Motorola MOTO Q q9
RIM Blackberry 8800
Apple iPhone
http://samsung.com/Products/MobilePhones/ATTCingular/SGH_I607ZKACIN.asp
http://www.nokiausa.com/phones/9300/0,7747,feat:1,00.html
http://www.sonyericsson.com/spg.jsp?cc=us&lc=en&ver=4000&template=pip3&zone=pp&pid=10391
http://www.lge.com/about/press_release/detail/PRO%7CNEWS%5EPRE%7CMENU_20328_PRE%7CMENU.jhtml
http://www.palm.com/us/products/smartphones/treo750/pdf/treo750_datasheet.pdf
http://www.motorola.com/mot/doc/6/6659_MotDoc.pdf
http://rim.com/products/handhelds/index.shtml
http://www.apple.com/iphone/
Exhibit II (E) 1b: Smartphone Industry Map
Apple
High
RIM
OS-HW integration
Nokia
- Motorola
- Sony Ericsson
Medium
- Samsung
- Palm
LG
Low
Low
Mid
High
Relative Strength & Multiplicity of features and applications
Exhibit III (C) 1: Apple’s Organizational Structure
Steve Jobs
CEO
Peter Oppenheimer
Senior Vice President and Chief Financial Officer
Timothy Cook
Chief Operating Officer
Donald Rosenberg
Senior Vice President and General Counsel
Tony Fadell
Senior Vice President, iPod Division
Philip Schiller
Senior Vice President, Worldwide Product Marketing
Jonathan Ive
Senior Vice President, Industrial Design
Bertrand Serlet
Senior Vice President, Software Engineering
Ron Johnson
Senior Vice President, Retail
Sina Tamaddon
Senior Vice President, Application
Exhibit III (D) 1e: Apple’s Business Portfolio Analysis using the BCG matrix
Relative Market Share
High
Low
High
iPod
iTunes
iPhone
Market
Growth
Rate
iTunes
Mac
Low
Exhibit III (D) 1e: Cingular’s Business Portfolio Analysis using the BCG matrix
Relative Market Share
High
Low
High
Cingular
Data
Market
Growth
Rate
Cingular
Voice
Low
Exhibit III (D) 3c – Part A: Value Chain Analysis for Apple
Infrastructure
o Casual work environment to
promote new ideas
o Highly secretive
organizational environment
o Say ‘no’ to thousands of new
ideas-Strict project selection
criteria
o Locate Apple Stores at hightraffic locations.
o Apple Online Store
Human Resources
o Creative Industrial Design
Engineers
o Strong software
development team
o Knowledgeable
salespersons at Apple
Stores.
o Apple Sales Consultant
Program.
o
Technology
o Breath of technologiesPatents
o Human Engineering
o Able to Vertical Integrate
without the other team
knowing what product is
being worked on.
Online information about
pre=launch products
o iTunes Stores
o Mac OS X
o Online support
o User discussions
After-sales
Service
Procurement
o Negotiation Power
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
o Third party manufacturing
vendors
o Low cost final assembly sites
o
o Create user awareness
o Brand identity
o Apple Store
o Focused on simplicity
o
o Apple Care Plan
o Genius Bar
Exhibit III (D) 3c – Part B: Value Chain Analysis for Cingular
o Largest network in US
Infrastructure
o
Human Resources
o
Technology
o
o Gain license to latest
technologies as 3G and GSM
Procurement
o
o Media Net
o Integrated voice wireless and
wired services
o Cingular Video
o Online support
o
After-sales
Service
o Own a wide spectrum of
licenses.
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
o Access to newest handset in
the market.
o Exclusive HBO programs
o
o Extensive distribution outlets
o Brand identity
o Rollover minutes
o Family Talk plan
o Customer Support
o Pay-as-you-go
o Large subscriber base
Exhibit III (E) 3 – Assumptions for DCF valuation
Ratio Analysiscli:
Key:
Value & Cost Drivers – Red
Value Drivers – Blue
Cost Drivers – Green
COGS/Sales Ratio
Defines how much of every sales dollar is spent on providing the product or delivering a service
Apple can charge a price premium over its competitors at least in the short run before competitors can come up with similar products
that have easy to use user interface.
Manufacturing efficiencies will be realized as Apple starts to capture market share and the need to manufacture more phones arises.
Apple is traditionally known to keep its prices constant even though there is enough competition. It may introduce lower end products at
a later stage (similar to iPod shuffle in iPod market) but at this point we assume that Apple will not reduce its cell phone prices.
Lowers COGS/Sales ratio over time due to the above factors.
PALM has COGS/Sales ratio as 68%(Decreased from 83% to 68%) while RIMM has COGS/Sales ratio as 44.8% (Declines from 60%).
Since Apple doesn’t have a history in iPhone Cogs/Sales ratio, we anticipate that the industry trend will continue and COGS/Sales ratio
will decline
Gross profit margin in industry is 33.7%clii So over time we expect the COGS/Sales ratio to drop to (1-Gross Profit Margin) = 66.3%
R&D/Sales Ratio:
Expect this ratio to be high in the initial few years during iPhone’s initial introduction and 1st and 2nd versions of the product. Later this
ratio will decrease as the product becomes mature and enters the mainstream market.
SG&A/Sales Ratio:
SG&A/Sales ratio will increase as commissions paid to sales force in the initial launch of the iPhone will be a huge part of SG&A. Since
iPhone will be introduced only in the month of June and majority of sales will continue to take place till September 2008, we have
assumed that the SG&A/Sales percentage will increase in the initial couple of years as iPhone goes from Early Adopter market towards
mainstream market. After that point(Crossing the Chasm), the SG&A/Sales ratio will reduce. For RIMM and PALM, the ratios are 14%
and 16%. For Apple, the previous years SG&A is 13%. So we have assumed that the SG&A/Sales ratio in the terminal year will be
around 13%
Dep&Amort/Avge PP&E and Intang.
Apple uses straight line depreciation for its property and plant. Apple capitalizes costs it incurred to develop or acquire internal-use
software and uses straight line amortization over the useful life of assets which is usually 3-5 years.
Net Property Plan and equipment for 2006 is $1281 millioncliii
Interest Expense/Avge Debt
Apple has no debt currently and so this ratio will continue to be zero.
Non-Operating Income/Sales
Interest income affected by US interest rates
Interest income has been doubling for the last two years cliv
Apple did not pay any dividends and it anticipates that it will retain its earnings for use in operations. (Apple Inc., Form 10-k, Page 46)
Company writes down any devices that are excess in inventory but no clear number has been given
(Page 79 Form 10k) Apple did not incur any impairment charges
From 10-k, “Note 6—Restructuring Charges “During 2004, the Company recorded total restructuring charges of approximately $23.0
million, including approximately $14.0 million in severance costs, $5.5 million in asset impairments, and $3.5 million for lease
cancellations. The lease cancellations relate to vacating a leased sales facility from a European workforce reduction during 2004. Of the
$23.0 million charges, $21.3 million had been utilized by the end of 2006, with the remainder consisting of $1.7 million for lease
cancellations. These actions have resulted in the termination of 452 positions”
Effective Tax Rate
The 10-k doesn’t reveal anything to the effect that Apple is proactively working on reducing its tax rate. Since we have projected that
the revenues will continue to go up, we expect that the effective tax rate may slightly increase
Minority Interest/After Tax Income
This will continue to be zero since Apple owns 100% of its subsidiaries
Other Income/Sales
Other income will remain at zero
Ext. Items & Disc. Ops./Sales
Extraordinary Items will remain zero
Pref. Dividends/Avge Pref. Stock
Apple does not give out any preferred dividends
Ending Operating Cash/Sales
Typically firms need 3% of sales. Apple seems to have historically maintained this ratio in the range of 59%-81% although the trend
seems to be decreasing.
In view of the decreasing trend, we have taken this ratio as 30% in the terminal year.
Ending Receivables/Sales
The company has historically maintained low levels of Ending Receivables/Sales ratio. We expect that this ratio may slightly increase in the initial years as Apple
moves towards the digital lifestyle products such as iPhone and sell through new channels such as Cingular. Later this ratio may reduce. Apple has relatively low
receivables compared to its competitors and we expect that its policy on receivables might not shift drastically
Ending Inventories/COGS:
This ratio has historically been in the range of 0.3 to 1.7 and the trend has been increasing ratio. We anticipate that as Apple gets into consumer lifestyle products
and as products become obsolete, it will begin to accumulate inventories.
.
Ending Other Current Assets/Sales
This ratio has been fluctuating a bit for last couple of years and there is no clear trend. The 10k also does not state anything
extraordinary about this line. So left the ratios as is.
Ending Accounts Payable/COGS
Apple will have significant power over its suppliers. So this ratio may increase in the initial years and then converge towards industry
standard as rivals tend to copy similar products and supplier power may increase..
Ending Other Current Liabs/Sales
10k doesn’t talk much about this. Need to discus how this ratio will be affected
Ending Net PP&E/Sales:
From 10k page 59, “Expansion of the Retail segment has required and will continue to require a substantial investment in fixed assets
and related infrastructure, operating lease commitments, personnel, and other operating expenses. Capital expenditures associated
with the Retail segment were $200 million in 2006, bringing the total capital expenditures since inception of the Retail segment to
approximately $729 million. As of September 30, 2006, the Retail segment had approximately 5,787 employees and had outstanding
operating lease commitments associated with retail store space and related facilities of approximately $887 million. The Company
would incur substantial costs if it were to close its retail stores. Such costs could adversely affect the Company’s results of operations
and financial condition”.
Increased pp&e initially and then flatten out since in the next few years there will be expansion into retail segment.
Ending Intangibles/Sales
The trend has been increasing in the past yrs due to increased spending in R&D and Apple trying to come up with innovative products
for consumer digital lifestyle involves generating patents and thereby increases the intangibles.
Ending Other Assets/Sales
Increased this ratio initially since pre-opening expenses for retail stores need to be accounted for.
Deferred Taxes/Sales
Since asset base will grow in next few yrs, the ratio will increase and then reduce
Calculating cost of equity:
Beta
Valueline: 1.05
Yahoo: 2.4
Ameritrade: 1.4
Median: 1.4
Cost of equity, based on CAPM, is defined as:
Cost of Equity = Risk-Free Rate + (Beta x Equity Premium)
where:
Risk-free Rate = 30-yr Treasury Bill rateclv = 5.44%
Beta = 1.4
Equity Premium = Market Premium obtained from the Ibbotson’s dataclvi = 7.17%
Therefore, Cost of Equity = 5.44% + 1.4*7.17% = 15.48%
Scenario II: Without the strategic move
No iPhone
Sales growth: Sales growth will continue to decline as phones and MP3 players continue to be integrated. Also, players like OmniPhone are
coming up with music services aimed at cell phone usersclvii. So iPod sales will continue to decline.
COGS/Sales ratio has been kept constant. All other ratios have been kept constant except.Net PP&Sales and Ending other assets/sales since
Apple will continue to expand its retail outlets.
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http://money.cnn.com/magazines/business2/business2_archive/2005/04/01/8256057/index.htm, Kaihla, P, April 1st 2005, Page 1, Accessed on Feb 22nd 2007
lxxi
Apple Investor Relations FAQ accessed Mar. 3, 2007 from http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-faq#corpinfo9
lxxii
Kaihla, P. ,April 1, 2005 ”The Secrecy of Success” - CNN Money.com from http://money.cnn.com/magazines/business2/business2_archive/2005/04/01/8256057/index.htm
lxxiii
DigiBarn Computer Museum website refer to Apple Value Statement accessed on Mar. 3, 2007 from http://www.digibarn.com/collections/business-docs/apple-values/index.html
lxxiv
Apple Computer 2006, Yoffie, D,B, Slind, M; Harvard Business School, Page 6, 9-706-496
lxxv
Apple Computer 2006, Yoffie, D,B, Slind, M; Harvard Business School, Page 7, 9-706-496
lxxvi
Apple Inc., 10-K for fiscal year ending Sep. 30, 2006
lxxvii
IDC Press Release, (Jan. 17, 2007) “HP Gain Continue As Dell Struggles And Slow Commercial Demand Limits Growth in the United States, According To IDC” accessed on Mar. 8,
2007 from http://www.idc.com/getdoc.jsp?containerId=prUS20525907
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Apple Inc., 10-K from fiscal year ending Sep. 30, 2006
lxxix
Marsal, K. (May 24, 2006) “iPod: how big can it get?” accessed Mar. 8, 2007 from http://www.appleinsider.com/article.php?id=1770
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IDC Press Release (Oct. 13, 2005) “IDC Forecast and Analysis Finds MP3 All Over The Place” accessed on Mar. 8, 2007 from
http://www.idc.com/getdoc.jsp?containerId=prUS00256605
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IDC Press Release (Jan 25, 2007) “Record-Setting Fourth Quarter Shipments Propel Worldwide Mobile Phones Past One Billion Unit Mark, Says IDC” accessed on Mar. 8, 2007 from
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lxxxii
Apple Computer 2006, Yoffie, D,B, Slind, M; Harvard Business School, Page 14, 9-706-496
lxxxiii
DigiBarn Computer Museum website refer to Apple Value Statement accessed on Mar. 3, 2007 from http://www.digibarn.com/collections/business-docs/apple-values/index.html
lxxxiv
Apple Inc., 10-K for fiscal year ending Sep. 30, 2006
lxxxv
iSuppli In The News, (Jan. 18, 2007) “Apple iPhone to Generate 50 Percent Margin, According to iSuppli’s Preliminary Analysis” access on Jan. 19, 2007 from
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Steve Jobs, (Jan. 10, 2007) “Macworld 2007 San Francisco Keynote Address” accessed on Mar. 5, 2007 from http://www.apple.com/quicktime/qtv/mwsf07/
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Lundholm, R.J, Sloan, R.G. 2006. Equity Valuation and Analysis, Second Edition, CDROM supplied with book,. NY, USA: McGraw-Hill Companies, Inc.
lxxxviii
Investopedia, “Cost Of Equity” accessed on Mar. 13, 2007 from http://investment.investopedia.com/terms/c/costofequity.asp
lxxxix
30-year Treasury Bill Rate, http://www.federalreserve.gov/releases/h15/update/ , 21st Feb 2007
xc
Market Premium obtained from the Ibbotson’s data, Obtained Ibbotson’s data from Professor Atulya Sarin’s Business Valuation class, Fall 2006.
xci
We took the beta from three sources and took its median. Beta from Yahoo was 2.4, Ameritrade was 1.4 and Valueline was 1.05
xcii
Apple Inc., Form 10k, 2006, Page 107
xciii
Note: Another realistic scenario is if Apple is forced to open up its iTunes to outsiders as is currently being discussed by European Commission. Since this information came in after the
cut off date, we have ignored this scenario in our financial analysis.
xciv
EU Starts Talks Over Apple's iTunes Dominance >AAPL, WSJ, Dow Jones Newswires,
http://online.wsj.com/article/BT-CO-20070312-705083.html?mod=djempersonal, Accessed March 12, 2007
xcv
2005 Annual Report AT&T Inc.
xcvi
AT&T Press Room, http://www.att.com/gen/pressroom?pid=5097&cdvn=news&newsarticleid=23318, Date Accessed 02/15/2007
xcvii
AT&T Mobility LLC filed this Form 10-K on 02/24/06, http://phx.corporateir.net/phoenix.zhtml?c=125269&p=IROLsecToc&TOC=aHR0cDovL2NjYm4uMTBrd2l6YXJkLmNvbS94bWwvY29udGVudHMueG1sP2lwYWdlPTM5OTA5MTImcmVwbz10ZW5r
xcviii
From Form-10k Sprint-Nextel Corp S, Filed March 07 2006 (Period December 31 st 2005) Annual Report
xcix
http://en.wikipedia.org/wiki/T-Mobile, March 1st 2007
lxvii
lxviii
c
ci
Deutsche Telekom: Annual Report 2006, Date accessed: March 1st 2007, http://www.download-telekom.de/dt/StaticPage/25/32/98/dtag_fy06_en.pdf_253298.pdf, page 46
Verizon Communication Inc., 10K for Fiscal Year ending 12/31/05
cii
Cingular Wireless LLC, 10K for Fiscal Year ending 12/31/05
http://getitnow.vzwshop.com/index.aspx?id=vcast, Verizon V-Cast website, Accessed on 12/15/07
civ
Verizon Communication Inc., 10K for Fiscal Year ending 12/31/05
cv
Cingular Wireless LLC, 10K for Fiscal Year 12/31/05
cvi
Cingular Wireless, Annual Report 2005, Page 40, Accessed on March 3, 2007
cvii
Cingular Wireless, Annual Report 2005, Page 40, Accessed on March 3, 2007
cviii
Cingular Wireless, Annual Report 2005, Page 40, Accessed on March 3, 2007
cix
http://www.cingular.com/learn/3g/?_requestid=118308, Cingular-Powered by 3G, Accessed on March 3, 2007
cx
Although it is known the Apple approached Verizon first who refused to give control of handset to Apple. Article: How Steve Jobs played hardball in iPhone birth,
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Accessed Feb 22nd 2007
cxi
Standard and Poor’s, INDUSTRY SURVEYS, Telecommunications: Wireless, September 28, 2006, Kenneth Leon, CPA, Telecommunications Group Head Karen Kawaguchi Financial
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cxii
Executive Bios from AT&T Investor Relations website accessed on Feb. 28, 2007 from http://www.att.com/gen/investor-relations?pid=7811
cxiii
Cingular Meet Us website accessed on Feb. 21, 2007 from http://www.cingular.com/about/meet-us.jsp
cxiv
Cingular About Us website accessed on Mar. 8, 2007 from http://www.cingular.com/about/
cxv
Cingular Wireless LLC, 10-K for fiscal year ending December 31, 2005.
cxvi
http://online.wsj.com/article/SB117209959916915403-search.html?KEYWORDS=Nokia&COLLECTION=wsjie/6month, Mossberg, W,S; Feb 22nd 2007
cxvii
http://online.wsj.com/article/SB117305802256326527-search.html?KEYWORDS=Nokia&COLLECTION=wsjie/6month, Cheng, R; March 5th 2007
cxviii
http://www.forbes.com/2007/01/25/apple-microsoft-motorola-ent-sales-cx_kw_0125wharton.html, What's In A Name Change? Look At Apple, Accessed on March 9, 2007
cxix
http://online.wsj.com/article/SB116799340187968123-search.html?KEYWORDS=cingular+merger&COLLECTION=wsjie/6month, , Motorola Profit Warning Generates Unease Over
CEO Zander's Strategy, Silver, Bryan-Low, Sharma, Accessed on March 5, 2007
cxx
Cingular Wireless, Annual Report 2005, Page 40, Accessed on March 3, 2007
cxxi
http://online.wsj.com/article/SB117168001288511981-search.html?KEYWORDS=iPhone&COLLECTION=wsjie/6month, How Steve Jobs Played Hardball In iPhone Birth, Sharma,
Wingfield, Yuan, Accessed on March 9, 2007
cxxii
http://online.wsj.com/article/SB117209959916915403-search.html?KEYWORDS=Nokia&COLLECTION=wsjie/6month, Nokia's Marriage To Small Computers Still Has Its
Problems, Mossberg, Accessed on March 9, 2007
cxxiii
http://online.wsj.com/article/SB116881217136676580-search.html?KEYWORDS=Blackberry&COLLECTION=wsjie/6month, BlackBerry Pearl Goes White, Yuan, Accessed on
March 9, 2007
cxxiv
http://online.wsj.com/article/SB117201826016014277-search.html?KEYWORDS=8800&COLLECTION=wsjie/6month, Latest BlackBerry Is Flashy, Familiar, Boehret, Accessed on
March 9, 2007
cxxv
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Berman, Tam, Accessed on March 9, 2007
cxxvi
http://online.wsj.com/article/SB117345129683432186.html?mod=technology_main_whats_news, Palm Hires Former Apple Engineer, Cheng, Accessed on March 9, 2007
cxxvii
Apple Computer 2006, Yoffie, D,B, Slind, M; Harvard Business School, Page 14, 9-706-496
cxxviii
Cisco Suit May Snag Apple's iPhone Plans, By NICK WINGFIELD and DON CLARK, January 11, 2007; Page A3,
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cxxix
The Wall Street Journal, Apple, Cisco Reach Accord Over iPhone, by By NICK WINGFIELD February 22, 2007; Page B4,
http://online.wsj.com/article/SB117211001262715655-search.html?KEYWORDS=iPhone+cisco&COLLECTION=wsjie/6month
cxxx
http://www.idc.com/getdoc.jsp?containerId=pr2007_01_17_133455, IDC Press Release, Accessed on March 11, 2007
cxxxi
Guide to the wireless industry, Plunkett Research, Ltd, Retrieved on January 22nd, 2007
cxxxii
Guide to the wireless industry, Plunkett Research, Ltd, Retrieved on January 22nd, 2007
cxxxiii
Guide to the wireless industry, Plunkett Research, Ltd, Retrieved on January 22nd, 2007
ciii
cxxxiv
Gartner Research Report, ID Number G00137064, Cozza, Wood, Verne, Liang, Mitsuyama, Accessed on, 18 Jan 2006
http://www.ericsson.com/mobilityworld/sub/open/technologies/emp/index.html, About Ericsson’s Mobile Platforms, Accessed on March 7, 2007
cxxxvi
Mobile Phones and Phone Service – US- August 2006, The Consumer, Mintel Market Research, Accessed on March 7, 2007
cxxxvii
http://www.phoneyworld.com/newspage.aspx?n=1331, Samsung breaks new record: Worlds smallest handset announced, Accessed on March 7, 2007
cxxxviii
Guide to the wireless industry, Plunkett Research, Ltd, Accessed on Jan 22 nd 2007
cxxxix
Mobile Phones and Phone Service – US- August 2006, The Consumer, Mintel Market Research, Accessed on Jan 25 th 2007
cxl
http://www.samsungnetworks.co.kr/eng/, Customer and affiliated company, Accessed on March 7, 2007
cxli
Mobile Phones and Phone Service – US- August 2006, The Consumer, Mintel Market Research, Accessed on Jan 25th, 2007
cxlii
Cingular Annual Report 2005, Page 24, Accessed on March 7, 2007
cxliii
http://www.computerworld.com/mobiletopics/mobile/story/0,10801,96956,00.html, Cingular completes AT&T Wireless Acquisition, Gross, Accessed on March 7, 2007
cxliv
Cingular Annual Report 2005, Page 24, Accessed on March 7, 2007
cxlv
SAMSUNG Electronics and Bayanat Al-Oula Lead the Mobile WiMAX Revolution in the Middle East, Retrieved from
http://www.samsung.com/AboutSAMSUNG/ELECTRONICSGLOBAL/InvestorRelations/NewsPublicDisclosure/PressRelease/index.asp, on February 10th, 2007
cxlvi
SAMSUNG and Google Align to Create Rich Experience for Mobile Phone Users Worldwide, Retrieved from
http://www.samsung.com/AboutSAMSUNG/ELECTRONICSGLOBAL/InvestorRelations/NewsPublicDisclosure/PressRelease/index.asp, on February 10th, 2007
cxlvii
SAMSUNG and Yahoo! Form Strategic Partnership for Mobile Phones, Retrieved from
http://www.samsung.com/AboutSAMSUNG/ELECTRONICSGLOBAL/InvestorRelations/NewsPublicDisclosure/PressRelease/index.asp on February 10th, 2007c
cxlviii
Apple Press Release: Apple Reinvents the Phone with iPhone, Accessed Feb. 11, 2007 from http://www.apple.com/pr/library/2007/01/09iphone.html,
cxlix
LG Press Release: Mobile Innovation Meets Avant-Garde Design, Accessed on Feb. 11, 2007 from
http://www.lge.com/about/press_release/detail/PRO|NEWS%5EPRE|MENU_20328_PRE|MENU.jhtml
cl
Source Mintel report on “Mobile phone and phone service industry – US – August 2006”
cli
Lundholm, R.J, Sloan, R.G. 2006. Equity Valuation and Analysis, Second Edition, Chapter 8,. NY, USA: McGraw-Hill Companies, Inc., Retrieved on February 21st, 2007.
clii
Research in Motion Limited, Page 20, Retrieved from Hoover’s custom report builder, 2007, A D&B Company, Retrieved on February 21st, 2007,
cliii
Form 10-k, Apple Inc. Filed December 29th 2006 (Page 96), Retrieved on February 21st, 2007,
cliv
Form 10-k, Apple Inc. Filed December 29th 2006 (Page 97), Retrieved on February 21st, 2007,
clv
Selected Interest Rates, Retrieved from http://www.federalreserve.gov/releases/h15/update/, Retrieved on February 21st February 2007
clvi
Obtained Ibbotson’s data from Professor Atulya Sarin’s Business Valuation class, Fall 2006, Retrieved on February 21st February 2007
clvii
UK Omnifone To Unveil First Rival To Apple's iPhone,iTunes, Retrieved from http://online.wsj.com/article/BT-CO-20070211-704110.html?mod=djempersonal on January 26th 2007
cxxxv
