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MH0078

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1264124317
FEBRUARY 2, 2023
FRANK T. ROTHAERMEL
DAVID R. KING

Apple Inc.

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CEO Tim Cook stood in his office on the top floor of Apple’s $5 billion headquarters on 1 Apple Park Way in
Cupertino, California, the most expensive office building on the planet. After an early morning workout in the facil-
ity’s gym and a quick shower and massage, he gazed out of his all-glass walls, seeing the first sun rays emerge on the
horizon. Tim Cook immensely enjoyed the panoramic view that the spaceship-like office building afforded.

With sales in 2022 of $400 billion and $100 billion in profits, Apple was the first tech company to reach a market
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valuation of $3 trillion (Exhibit 1). By designing category-defining products and embedding them in a service ecosys-
tem, the Cupertino-based company has enjoyed sustained success while many other tech companies have floun-
dered. Since Tim Cook was appointed CEO in 2011, Apple’s shares have appreciated by more than 900%, while the
tech-heavy Nasdaq-100 index achieved some 400% appreciation (Exhibit 2).

Yet, as Tim Cook opened a can of Mountain Dew zero while reviewing Apple’s 2022 annual report, he worried
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about how long the company would sustain its superior performance. Apple’s CEO is well aware that no competitive
advantage can last indefinitely. Many of Apple’s challenges are tied to the iPhone, one of the most iconic product
innovations of the 21st century.

The Covid-19 pandemic resulted in supply chain bottlenecks that still reverberate today. Labor unrests in China
at Apple’s largest supplier, Foxconn, brought the issue back to center stage. Because of China’s stringent zero-Covid
policy, Foxconn could not meet the new iPhone 14 deadline for the 2022 holiday season. Apple’s presence in China
also results in other issues, including ceding control of company data centers to state-owned enterprises and accusa-
No

tions of company suppliers using forced Uighur labor.

Apple’s supply chain problems are compounded by the fact that the iPhone has been responsible for most of
Apple’s revenues (Exhibits 3a and 3b). Moreover, Apple’s sales are not geographically diverse (Exhibits 4a and 4b).
The U.S. makes up almost one-half of all sales, while China accounts for nearly 20% and Europe for about 25%.

While Cook was able to more than double Apple’s services business from less than 10% in 2015 to over 20% by
2022, the segment needs to grow faster to soften the blow if the hardware business declines. Services are also more
Do

profitable than consumer electronics (Exhibit 5). Apple’s App store, an essential component of the company’s ser-
vices, has been subject to intense legal and regulatory scrutiny. Apple generally takes a 30% cut of all in-app pur-
chases and subscriptions. At the same time, Apple TV+, its streaming service, is battling it out in the streaming wars
with Netflix, Amazon, Disney (Disney+, Hulu, ESPN+), Discovery Time Warner, NBC Universal (Peacock), CBS
(Paramount+), and others.

Professors Frank T. Rothaermel and David R. King prepared this case based on public sources; it is not intended to be used for any kind of endorsement, source
of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and omissions, are entirely the authors’. Copyright © 2023 by
Rothaermel and King. All rights reserved.
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What irks Cook the most is the criticism that he managed Apple well for profitability and stock market returns,

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but that under his leadership, the company has yet to launch any significant product breakthroughs since it intro-
duced the iPhone in 2007. To make matters worse, lead designer Jony Ive—a long-time confident of Apple’s co-
founder, the late Steve Jobs, left Apple in 2019.

Brief History

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In 1976, Steve Jobs and Steve Wozniak founded Apple Computer, Inc. to commercialize the personal (home)
computer, a revolutionary idea at the time. In 1978, they launched the Apple II with 4K bytes of RAM and sold it
for $666.66. In 1980, Apple had a successful initial public offering (IPO), making it a publicly traded company
(Exhibit 6).

In 1981, IBM (“Big Blue”) entered the personal computer market and quickly became the dominant player. IBM

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set the industry standard with an open architecture using off-the-shelf components. In the meantime, Microsoft, with
its DOS operating system (later renamed Windows), and Intel, with its microprocessors (x86 architecture), set the
industry standard (“Wintel,” the portmanteau of Windows and Intel). The open architecture combined with the
Wintel standard induced various computer hardware makers to enter the industry.

In 1984, Apple introduced the Macintosh, which offered advanced capabilities with an intuitive graphical user
interface (GUI). Apple launched the Macintosh with a dramatic television commercial during the 1984 Super Bowl.1
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The underdog Apple was taking on BigBlue (IBM). Today, many view Apple being as dominant as IBM was in the
1980s.

In 1984, competition in the computer hardware industry was cutthroat. Given Apple’s closed operating system,
not many software products were available. Instead, because the Wintel standard was open, software developers
flocked around it and provided critical software products such as spreadsheets, word processors, and presentation
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software. In the meantime, Apple struggled with a high-cost structure and a lack of software for its hardware.

Consequently, in 1985, Steve Jobs was forced out after a power struggle with CEO John Sculley, who had joined
Apple two years earlier from Pepsi.2 Things turned from bad to worse for Apple. By 1996, the once-hot startup
reported a mere $69 million in first-quarter revenue and laid off 30% of the company’s workforce.3 Product quality
and reputation hit an all-time low. In 1997, Apple was near bankruptcy.
No

STEVE JOBS RETURNS

After being fired from Apple, Steve Jobs pursued other opportunities in the high-tech space with NeXT, a devel-
oper and manufacturer of computer workstations, and Pixar, a computer animation studio. In 1986, Jobs purchased
Pixar for $5 million and invested another $5 million of his own money to remake the company into the computer-
animated movie studio as we know it today. In 2006, Disney purchased Pixar for $7.4 billion. Jobs captured a
73,900% return on his investment.

Apple’s purchase of NeXT in late 1996 opened the way for Job’s return to Apple.4 Steve Jobs was named interim
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CEO in the fall of 1997. While Jobs called himself “iCEO,” the interim title was dropped officially in 2000. Apple
survived this challenging period based on a $150 million cash injection from Microsoft in 1997. Microsoft intended
to keep Apple and its operating system viable to alleviate monopoly antitrust concerns.5 However, it gave Steve Jobs
time to develop products that would shape the future of technology and orchestrate one of the greatest comebacks
in modern-day corporate history.

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 t
Jobs swiftly refocused the company he had helped start and discontinued several products, such as printers,

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cameras, and personal digital assistants. Instead, the he focused Apple on only two computer models (one laptop
and one desktop) in each market segment (the professional market and the consumer market) instead of dozens of
non-differentiated products. As part of the restructuring efforts, Apple outsourced manufacturing to Taiwan and
streamlined the distribution system by ending relationships with smaller outlets. Tim Cook, who left IBM to work
for Apple in 1998, spearheaded this effort. Apple also launched a user-friendly website (in 1997) to sell directly to
customers.

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In 1998, Apple started to be profitable after losing money every year since 1993. Even so, the outlook for the
company was grim. Jobs believed that with less than a 5% market share, Apple could not win in the personal com-
puter industry, where desktops and laptops had become commoditized gray boxes. Microsoft, Intel, and Dell were
the star performers in that world.

Yet, at the same time, Steve Jobs firmly believed that Apple could create major innovation breakthroughs that

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would reshape future industries. Jobs’ attitude toward innovation as key to a successful strategy was revealed in an
interview with UCLA professor Richard Rumelt shortly after Jobs returned to Apple in 1998:

I was interested in what Steve Jobs might say about the future of Apple. His survival strategy for Apple, for
all its skill and drama, was not going to propel Apple into the future. At that moment in time, Apple had
less than four percent of the personal-computer market. The de facto standard was Windows-Intel [later
“Wintel”] and there seemed to be no way for Apple to do more than just hang on to a tiny niche. I said,
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“Steve, this turnaround at Apple has been impressive. But everything we know about the PC business says
that Apple cannot really push beyond a small niche position. The network effects are just too strong to
upset the Wintel standard. So, what are you going to do in the longer term? What is your strategy?” [Steve
Jobs] did not attack my argument. He didn’t agree with it either. He just smiled and said, “I’m going to wait
for the next big thing.”6
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Jobs also realized the necessity of making Apple’s operating system more accessible for software providers. He
switched from a closed to an open-source, UNIX-based operating system, Mac OS X. This proved to be a more stable
operating environment and permitted the company to issue annual upgrades in response to customer feedback. In
2005, Apple completed this transition by switching from PowerPC to Intel processors. As a result, Apple computers
could run the Mac OS X and Microsoft’s Windows operating system, with its dominant Office suite, a discounted
bundle of productivity software (Word, Excel, PowerPoint, Outlook, etc.).
No

Beyond changing the operating system, Jobs’ most visible change was leveraging industrial design to produce
more aesthetically pleasing computers. Jobs revitalized Apple’s image by fusing technology and art to drive innova-
tion. He appointed Jonathan “Jony” Ive, a British designer and head of Apple’s in-house Industrial Design group
(IDg).

Jony Ive worked for Apple since its “dark days” in 1992. Ive’s design philosophy is to make technology as
intuitive as possible. The goal is that people do not realize they are using cutting-edge technology but can focus on
their primary tasks such as writing, reading, communicating, creating, or consuming media. As such, Apple prod-
Do

ucts tend to have thin, light, and minimalistic designs. For instance, over time, Apple removed their iPhone’s
ports, such as headphone jacks, bezels, and buttons. Steve Jobs and Jony Ive helped Apple reclaim its status as a
global tech icon, launching category-defining products and services such as the iPod, iTunes, iPhone, and iPad
(Exhibit 6).

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 t
APPLE’S ECOSYSTEM: INTEGRATING HARDWARE, SOFTWARE, AND SERVICES

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Apple combines innovation in products, services, and business models to create an ecosystem. A business ecosys-
tem is a network of different products and services that interact with each other to create and exchange value. The
Apple ecosystem comprises mobile devices (iPhone, iPad, Apple Watch, and MacBook) combined with services
such as the AppStore, iCloud, and ApplePay. The Apple ecosystem revolves around its proprietary iOS operating

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system for mobile devices, which anchors a family of Apple products with its accompanying codependent services.
Apple’s system-wide integration of products and services results in a superior experience. For instance, the iPhone
allows customers to use Apple Pay, which almost all merchants accept in the U.S.

From near bankruptcy in 1997, Apple’s revitalization took off in 2001 when it introduced the iPod, a portable
digital music player, the same year it opened its first retail stores (Exhibit 6). The company’s retail stores earn the
highest sales per square foot of any retail outlets, including luxury stores such as jeweler Tiffany & Co. and Louis

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Vuitton (LVMH), purveyor of fine handbags, and other luxury goods. In 2003, Apple soared even higher when it
launched the digital iTunes store and the Cupertino tech company didn’t stop there.

In 2007, the California tech company revolutionized the smartphone market by introducing the iPhone. Just three
years later, Apple recreated the tablet segment by introducing the iPad. Further, for each of its iPod, iPhone, and
iPad lines of businesses, Apple followed up with incremental product innovations that extended each product cate-
gory—for instance, launching the iPhone 14 (in 2022); see Exhibit 6.
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Given the price escalation (from $499 [$720 inflation-adjusted] for the original iPhone to $1,499 for the iPhone
14 Pro) combined with incremental improvements, consumers are holding onto their phones for longer. Yet, while
Apple sells fewer units, the price increases of newer models more than make up for it, leading to rising revenues
(Exhibit 1 and 3a).
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Tim Cook, CEO

After his second medical leave in two years following a liver transplant in 2009, Steve Jobs put Tim Cook in
charge.7 Tim Cook was appointed CEO on August 24, 2011. A few weeks later, on October 5, 2011, Steve Jobs lost
his battle with cancer.

A native of Alabama, Tim Cook holds a BS in industrial engineering from Auburn University and an MBA from
No

Duke University. Since 2007, Cook has served as Apple’s Chief Operating Officer (COO). He directed the outsourc-
ing for most of Apple’s production in a business where obsolescence can decrease the value of unsold goods by 2%
a week.8

Tim Cook is a highly disciplined operations executive, focused on playing it safe. As such, he has a different lead-
ership philosophy than Jobs.9 Tim Cook reversed several of Steve Jobs’ policies when he became CEO. For instance,
Cook committed to stock buybacks and paying dividends annually (since 2012), things Jobs abhorred. Fast-growing
tech companies generally do not buy back stocks and pay dividends because they prefer to reinvest their profits into
new products and services.10 Cook also instituted a policy where Apple would match employee charitable donations
Do

up to $10,000 a year.

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 t
Moreover, CEO Cook changed what some people termed the “dictatorial” top-down strategy approach favored

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by Jobs, who was convinced that he knew best—to introduce some bottom-up features into Apple’s strategy process.
While Jobs made decisions single-handedly, Cook is much more consensus-oriented. CEO Cook also implemented
a zero-tolerance policy towards discriminatory or demeaning behavior for Apple employees, leading to controver-
sial firings of long-time executives, including, in 2022, Tony Blevins, a 22-year Apple veteran and vice president of
procurement.11 Blevins was responsible for negotiating supplier contracts for Apple components and assembly. He
has been credited with the large profit margin Apple captures by outsourcing the assembly of iPhones and other

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products.

In 2022, Tim Cook had been Apple’s CEO for over eleven years. From a financial standpoint, he has seen success
with Apple’s superior performance along several dimensions, such as revenues, net income, and shareholder value
appreciation (Exhibits 1-6). Under Cook’s tenure as CEO, however, Apple has not managed to introduce an innova-
tion even remotely close to the success of the iPhone, albeit the Apple Watch (introduced in 2015) is considered a
success in the wearable devices category.

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Apple is under pressure to create the “next big thing.” As such, Apple’s R&D spending has been escalating in
recent years, becoming one of the largest corporate spenders in the U.S. As Tim Cook reviews the 2022 annual
report and reflects on how little the company got out of the $26 billion it spent on R&D (Exhibit 7), the words of his
friend and Apple founder, Steve Jobs, ring in his ear:

Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac,
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IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have,
how you’re led, and how much you get it.12

PEAK IPHONE: WHAT’S NEXT?

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Since its launch in 2007, Apple has sold 2.2 billion iPhones globally, making it the most successful consumer
electronics product ever. The iPhone anchors customers in Apple’s ecosystem because the iPhone is much more
valuable when used in conjunction with the App Store and other services such as Apple Pay and iCloud. In 2022, 1.2
billion iPhone users are locked into the Apple ecosystem.

BEATS BY DR. DRE AND APPLE MUSIC

No

In 2014, Apple acquired Beats Electronics for $3 billion and maintained it as a separate brand.13 Andre Young—
also known as Dr. Dre—co-founded Beats Electronics with Jimmy Iovine, a record and film producer who is also an
entrepreneur. Founded in 2008, Beats Electronics is best known for its premium consumer headphones, Beats by Dr.
Dre, which Dr. Dre claims allow listeners to hear all the music.

During rampant piracy (Napster, a peer-to-peer file-sharing application, peaked in 2001), Apple saved the music
industry by unbundling albums and offering legal downloads for 99 cents per song. After disrupting the music indus-
try with the launch of iTunes (in 2003), Apple itself was disrupted by leaders in the music streaming industry, such
Do

as Spotify. In the second wave of disruption, music and video delivery has shifted from ownership of digital files via
downloads to streaming on demand. Consequently, purchasing music downloads has declined rapidly while sub-
scription services have taken off.

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To address the disruptive threat of content streaming, Apple created iTunes Radio in 2013, its first music stream-

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ing initiative. However, iTunes Radio did not gain traction until Apple bought Beats Music. This acquisition turned
Apple into a powerful player again—this time in the music streaming space. In 2015, just a year after the Beats acqui-
sition, Apple launched its new streaming service, Apple Music. The strategic intent is to make Apple Music a cul-
tural platform that is a one-stop shop for pop culture. In 2022, Apple Music had over 100 million paid subscribers,
up from zero when Apple launched the service in the wake of the Beats acquisition. Spotify, the leader in music
streaming, has about 200 million paid subscribers.

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APPLE WATCH
As the phone emerged as people’s most important computing device, the idea of an Apple Watch was champi-
oned by Jony Ive. The original Series 1 Apple Watch was launched in 2015 and cost $350 ($440 inflation-adjusted).
The Apple Watch worked only with an iPhone nearby via Bluetooth. With the Apple Watch, the company was also

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attempting to break into luxury fashion accessories, with the 18-carat gold version priced at $17,000.14

Over time, the Apple Watch morphed into a fitness and health tracker that commanded over 50% market share
in 2020. By 2022, it had fallen to about 30% because of increased competition. In 2022, Apple offers multiple watch
models ranging from $249 (Apple Watch SE) to $799 (Apple Watch Ultra).

WEARABLES
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The iPhone launch and subsequent Beats acquisition initiated Apple’s innovations in wireless headphones.
Apple’s wearables segment, including headphones, AirPods, and Apple Watch, grew to over $30 billion (in 2020),
overtaking Mac computer sales.15 In 2022, sales of wearables were over $40 billion (Exhibit 3a). Apple’s AirPods
were the most popular headphones in the U.S., and Beats were number two.16
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THE M-CHIP SERIES

One area where Apple’s innovation efforts bore fruit is the internal development of one of the most advanced
chip-design operations.17 For the past 15 years, Intel chips powered Apple’s Mac computers. While iPhones were in
high demand, sales of Macs were falling. To turn around this situation, Apple designed the M1 chip to optimize
performance and efficiency for its Mac computers.
No

The M-chip series is a system-on-chip that contains a central processing unit (CPU) and a graphical user interface
(GPU) for Mac computers and selected iPad tablets. When introduced in 2020, the M1 chip was the world’s fastest
CPU while consuming low power, which is critical to extending the battery use time of laptops. The Apple M2 chip
was announced in 2022. The new M-Chip series recharged Mac computer sales. Having its chip design in-house also
insulated Apple from the supply chain disruptions that led to chip shortages across many industries, from computers
and phones to automobiles.

APPLE PAY AND APPLE PAY LATER

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Apple Pay, the company’s mobile payment service, launched in 2014. Some 80% of all transactions in the U.S. are
electronic (credit cards, etc.), and 22% of total transactions use a mobile payment service. Of these, some 90% of
mobile payments in the U.S. are made using Apple Pay, and roughly 50% of smartphones support Apple Pay. World-
wide, Apple Pay has over half a billion users.

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 t
Adoption of mobile payments is higher for younger users, with over 70% of Generation Z using Apple Pay at least

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once a week.18 In 2022, Apple entered the “buy now, pay later” market with Apple Pay Later, allowing users to make
four equal installments for purchases over six weeks.19

APPLE TV+

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In 2019, Apple launched its Apple TV+ subscription video streaming service that offered original movies and
series for $4.99 per month (since 2022, $6.99 per month).20 Although the new streaming service initially had limited
content, the library has expanded and improved over time.21 Apple does not report its number of subscribers, and
while it has fewer than the leading video streamers, it has higher subscriber retention. 22 Average review scores for
Apple’s streaming content are higher than for other streaming services because Apple TV+ focuses on differentiated
content with an estimated annual spending of $3 billion.23 In 2022, Apple was the first streaming service to win a
“Best Picture” Oscar for CODA.24

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HOMEPOD

While Apple pioneered the use of digital assistants with Siri appearing in iOS 5 and the iPhone 4s (in 2011),
Apple has watched mainly as Amazon’s Echo (Alexa) and Google (OK Google) took the lead in digital home assis-
tants. Microsoft has also placed its digital assistant (Cortana) on an in-home device called Project Evo.25 In response,
Apple offered a Siri Speaker called HomePod in 2017. However, Apple discontinued it in 2021 because it had over-
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heating issues.26 Released in 2020, the HomePod mini cost $99 and came in five colors. In 2023, Apple plans to
release an improved full-size HomePod.27

AUGMENTED REALITY
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Augmented reality (AR) combines the physical world and computer-generated content. Pokémon Go was the first
commercially successful AR application. Projections are that AR will be close to $500 billion by 2030.28 Apple has
formed a team that combines its strengths in hardware and software with external expertise (i.e., acquisitions) to
develop next-generation AR products.29

Meta (Oculus) and Microsoft (Hololens) already have products that work with a smartphone or computer as
virtual or mixed reality, respectively. Apple’s initial prototype attempts to blend virtual reality (VR) and augmented
No

reality (AR) with a headset like Oculus. Additionally, Apple already integrates AR tools into iPhone and iPad soft-
ware.30 Meanwhile, Google has put its initial Google Glass initiative on hold as it continues to develop and refine the
concept.31

ICAR

Since 2015, there have been various reports of Apple working on an electric car project under the code name
“Titan” 32 and car software under the code name “Stark.”33 Available since 2015 as CarPlay, it improved access to
Do

Apple apps across dozens of car models. Meanwhile, Apple has struggled to progress in manufacturing an Apple
Car. In 2016 dozens of employees were let go, and a new executive came on board to oversee the effort.34 Apple
struggles to find an appropriate partner to manufacture all-electric and autonomous vehicles. In 2022, Apple
announced that the “Apple Car” won’t arrive until 2026, at the earliest.

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 t
Multiple companies are working on electric and autonomous vehicles, including Tesla and Alphabet’s Waymo,

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and established car companies with GM, Kia, and Volkswagen leading in this effort. Additionally, government regu-
lations, questions of liability for crashes, and questions of customer acceptance have delayed progress on self-driving
cars. Another challenge is that a lack of a common charging standard has limited the creation of a network of charg-
ing stations.35

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Competition
While Apple’s exceptional performance, brand loyalty, and innovation capabilities would be the envy of many
CEOs, technology industries continue to evolve, and traditional lines between industries blur. Given the continued
convergence in the tech industry, several companies pose potent threats to Apple.

ALPHABET

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Alphabet had revenues of $260 billion with a net income of $79 billion; its market capitalization stood at $2 tril-
lion (in 2021).

In 2008, Google released its open-source Android operating system, which was adopted widely in smartphones
and other products.36 Samsung released its first smartphone using Android in 2009, with its flagship Galaxy line of
phones imitating the look and feel of an iPhone. Although Alphabet’s Google holds a 72% market share globally in
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mobile operating systems software with Android (vs. 27% for Apple’s iOS), Apple continues to extract 66% of profits
from the global smartphone market.37

In 2011, Google announced Chromebook, a line of laptop computers running Google’s Chrome operating sys-
tem. The Chrome OS is designed to provide the user with the minimal amount of hardware and installed applica-
tions needed. The user runs applications from the cloud and uses Google’s Chrome browser to access these
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applications. Several manufacturers, such as Samsung, Acer, and HP, offer Chromebooks. By 2016, Chromebooks
outsold Macs for the first time,38 and Chrome OS gained some 60% market share in the key U.S. K-12 market.39 Dur-
ing the pandemic, computer sales increased, but the boost to Chromebook sales was temporary, and they dropped
60% from 2021.40

In 2016, Google introduced its Pixel line of phones by using the same approach as Apple by tightly integrating
hardware and software. Although well-reviewed by tech experts, in 2022, Google Pixel phones had just a 2% of the
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U.S. smartphone market.41

Also, in 2016, Google introduced Google Home to compete with the Amazon Echo, and its sales are growing
faster than Amazon’s; however, Google has not figured out a way to make money from Google Home.42 In 2022,
Google Home was a distant second behind Amazon.

Google captures some 90% of all search queries worldwide. To maintain this dominant position, Google pays
Apple an estimated $20 billion per year for Google’s search engine to be the default on all Apple phones. The
Do

Google payment amounts to more than 25% of Apple’s service revenues. The Google-Apple agreement is under
intense scrutiny as the U.S. Department of Justice sued Google (in 2020) for alleged anti-competitive conduct.

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 t
[Link]

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What began as a fledgling online startup has become one of the world’s most valuable technology companies,
reaching a market valuation of close to $2 trillion and sales of $470 billion with a net income of $25 billion (in
2021).

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[Link] is a business invention and a strategy-execution machine. Indeed, Amazon is the single largest
spender on research and development ($60 billion in 2021, or 13% of revenues). These large outlays fund Amazon’s
diversification into new products, services, and geographies. Amazon is active in many businesses, including ecom-
merce, cloud computing, digital content (video, music, and books), advertising, groceries, and logistics.

Amazon Web Services (AWS) was created in 2006. AWS is a cloud-based computing service that includes soft-
ware applications, data storage, content delivery, payment and billing systems, and other business applications. With

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over $62 billion in revenues, AWS is also the world’s largest cloud-computing provider, ahead of Microsoft’s Azure
and Google Cloud. Apple’s iCloud service is based on AWS and Azure.43

While Amazon’s Fire Phone launched in 2014 flopped, other Amazon products and services overlap with Apple’s
offerings. The Kindle Fire tablet product runs Google’s Android software and is a direct competitor to the iPad.
Although a lower-cost solution, Amazon’s tablet market share has consistently lagged behind offerings by Apple and
Samsung. Amazon has over 80% market share in ebooks, competing with Apple Books.
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Amazon’s Echo and its digital assistant Alexa compete directly with Apple’s Siri to be the home’s central, voice-
control digital assistant. The Echo creates customer lock-in with an Amazon Prime subscription and is equipped
with multiple apps called “skills.”44 However, in 2022, Amazon laid off 10,000 employees, most coming from its
Alexa division, with losses of $5 billion annually in recent years.45
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MICROSOFT

Microsoft had revenues of $200 billion with a net income of $83 billion; its market capitalization stood at over $2
trillion (in 2022), making it one of the most valuable tech companies globally. Microsoft dominated the technology
market with its Windows operating system in the 1990s and early 2000s. CEO Satya Nadella, appointed in 2014,
refocused the company on a “mobile first, cloud first strategy” to make significant inroads with Azure, Microsoft’s
cloud-computing service.
No

To catch up with the iPhone, Microsoft’s then-CEO Steve Ballmer initiated the $7.5 billion acquisition of Nokia,
the Finnish phone maker and a leader in the initial phase of cell phones. Just a year later, Satya Nadella decided to
exit the smartphone market and shut down the unit. By 2016, Microsoft had written off a total of $11 billion to shut
down its entire mobile phone unit, including the Nokia acquisition. In the process, it laid off over 27,000 employ-
ees.46 Microsoft’s Surface tablet has found modest success, especially as a productivity tool. By 2022, users of Micro-
soft Surface tablets are mainly in the U.S., and its market share is below 5%.

Microsoft also updated its Windows 8 operating system and skipped version 9 to launch Windows 10 in 2015. By
Do

2022, among all types of personal computers (desktops, laptops, and notebooks), Microsoft’s Windows operating
system is the dominant OS (60% market share), with Apple (macOS) a distant second (23%).

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SAMSUNG

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In 2012, Samsung Electronics became the global smartphone market leader due mainly to its highly successful
Galaxy devices that run on Google’s Android operating system. The phone is comparable in design and technical
features to the iPhone and poses the biggest competitive threat to Apple. In 2017, following its recall of the Galaxy
Note 7, Samsung regained its status as the largest smartphone company, with a worldwide market share of 26% com-
pared to Apple’s 17%.47 In 2017, Samsung released Samsung’s digital assistant Bixby.48 In 2022, Samsung offers a

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variety of Galaxy smartphones at higher and lower prices than Apple’s iPhone, including foldable phones.

One of the main drivers of Samsung’s rise has been its pricing structure. Its premium products are priced simi-
larly to Apple’s in the United States. Still, the company also heavily discounts the prices of other phone models,
sometimes to less than a quarter of the suggested retail price. Additionally, Samsung manufactures its smartphones,
including the components, giving it a cost advantage. Even Apple uses Samsung to manufacture parts for its iPhone

yo
product line. Over the years, the intense competition between Apple and Samsung has led to many legal battles,
mostly over patent infringement.

CHINESE COMPETITORS

In China, Apple faces both competitive and geopolitical risks. In particular, Apple faces intense native competi-
tion and problems at its manufacturing plants. It has exposure to government regulations, notably since the U.S.
op
enacted a chip ban on China in 2022. At the same time, the Chinese market has accounted for 20–25% of Apple’s
total sales annually since 2015.

In 2022, four Chinese firms—Honor, Vivo, Oppo, and Xiaomi—account for roughly 75% of the Chinese smart-
phone market, pushing Apple to fifth place. Xiaomi has become the primary competitor.49 The Chinese phone mak-
ers offer unique and innovative features. For instance, Xiaomi offers a phone with a triple-lens camera,50 and Oppo
tC

provides the fastest wireless recharging time (“flash charging”).51

Apple produces more than 90% of its products in China. Nearly all the iPhones (98%) are made in China, of
which Foxconn has a share of more than 70%. At its largest factory in Zhengzhou (Henan), Foxconn employs more
than 200,000 people. For almost three years, the factory had to operate for long stretches of time in a closed loop
where employees work and live at the facility in dormitories to prevent the spread of the coronavirus.
No

What’s Next?
Cook had received an advanced copy of Tipp Mickle’s book entitled “After Steve: How Apple Became a Trillion-
Dollar Company and Lost Its Soul,”52 in which the WSJ reporter develops the thesis, after speaking with more than
200 current and former Apple executives, including Ive, that Apple has lost its innovative spirit and has become a
soulless business empire that relies on market power to extract rents from partners such as app developers and cus-
tomers locked into the Apple ecosystem.
Do

Tim Cook raises an eyebrow as he reads the summary of the book while booting up his iMac Pro to prepare for
the investor call later that morning. He knows he will face tough questions regarding Apple’s ability to sustain its
competitive advantage. Investors will want to know about Apple’s strategy in China, the problem of peak iPhone, the
ongoing regulatory scrutiny by various government agencies, and the shift he initiated from Apple being a company
that invented category-defining products to a service company.

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Apple’s supply chain strategy, developed by Tim Cook when he was chief operating officer, has made the com-

os
pany dependent on China for production.53 This concentration of risk has contributed to disrupted iPhone 14 pro-
duction, as China’s strict zero-Covid policies resulted in worker riots at Foxconn’s iPhone factory in Zhengzhou, the
world’s largest electronics manufacturing facility.54 With frequent labor unrest, rising wages, and fewer young work-
ers in China, Apple must diversify its supply chain.

Apple has started manufacturing smartphones in India to decrease its dependence on China and to lower costs.55

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Yet, as of 2022, India’s contribution to Apple’s iPhone manufacturing is in the low single [Link] Apple
hopes to grow the Indian share to 25% by 2025. Yet, many observers are skeptical because of the country’s well-
known red tape and bureaucracy. In addition to India, Apple is considering locating iPhone production in Vietnam.
Industry experts believe that neither India nor Vietnam is in a position (in 2022) to produce the most advanced
iPhones in the quality, quantity, and price point Apple requires. Tim Cook knows that it will take years and billions
of dollars in investments to establish a supply chain in India or elsewhere that can rival China’s.

yo
Then, there is the issue of “peak iPhone.” Tim Cook has been cautious in creating new products, contributing to
stagnation.56 Historically, Apple invested less in R&D than competitors,57 but this has recently shifted, with over $26
billion spent on R&D in 2022, representing double-digit increases annually from 2017 (Exhibit 7). Recent spending
on R&D is at its highest percentage of Apple revenue since 2003. However, the associated “Tim Cook Doctrine” is
to eliminate third-party components58 and not necessarily create new products. Still, Apple is investing in multiple
new technologies, including self-driving cars and augmented reality (AR).59 With autonomous vehicles, Apple would
enter an industry with strong competitors, and AR may merely represent an accessory for an iPhone. Thus, “the next
op
big thing” remains elusive.

Apple’s iPhone sales are not geographically diverse (Exhibit 4), with a reliance on the U.S., Europe, and China.
Apple depends on China for $74 billion in revenue (2022). However, the share of Apple’s revenue has fallen from a
high in 2015 of 25% to under 20%.
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Apple is coming into regulatory scrutiny in both the U.S. and Europe. Consensus is building that the big tech
companies have too much market power which inhibits innovation and prevents startups from becoming successful.
The big tech companies also allegedly harm consumers by covering up all sorts of personal data and have become
powerful actors in business and politics. As a case in point, although Apple prevailed in court against Epic Games,
the maker of the popular online game Fortnite, the policy of collecting a 30% tax on any transaction conducted on
apps in the App Store and other Apple policies are likely to be challenged further.
No

Apple has also become an irritant to many law enforcement agencies in the U.S. Apple encrypts user data on
phones and the cloud, which prevents law enforcement from accessing it. Such was the case of the 2015 San Ber-
nardino shooting (16 deaths) or the terrorist attack on U.S. military personnel at a Naval Air Station in Pensacola,
Florida, in 2020. Critics note that Apple facilitates data transfers to government authorities elsewhere, including
China.

In his twelve years as CEO, Tim Cook wonders how much longer Apple will thrive as he dials into the conference
call…
Do

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Exhibit 1 Apple Financial Data (in $ millions, except earnings per share), 2018–2022

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Fiscal Year 2022 2021 2020 2019 2018
Cash and short-term investments 35,929 35,789 50,224 25,913 20,289
Receivables-total 28,184 26,278 16,120 22,926 23,186

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Inventories-total 4,946 6,580 4,061 4,106 3,956
Property, plant, and equipment-total (net) 42,117 39,440 36,766 37,378 41,304
Depreciation, depletion, and amortization (accumulated) 11,104 11,284 11,056 12,547 10,903
Assets-total 352,755 351,002 323,888 338,516 365,725
Accounts payable 64,115 54,763 42,296 46,236 55,888
Long-term debt

yo
98,958 109,106 98,667 91,807 93,735
Liabilities-total 302,083 287,912 258,549 248,028 258,578
Stockholders’ equity-total 50,672 63,090 65,339 90,488 107,147
Revenue (net) 394,328 365,817 274,515 260,174 265,595
Cost of sales 223,546 212,981 169,559 161,782 163,756
Selling, general, and administrative expense 25,094 21,973 19,916 18,245 16,075
op
Income taxes 19,300 14,527 9,680 10,481 13,372
Net income (loss) 99,803 94,680 57,411 55,256 59,531
Earnings per share (basic) excluding extraordinary items 6.15 5.67 3.31 2.99 3.00
Earnings per share (diluted) excluding extraordinary items 6.11 5.61 3.28 2.97 2.98

Source: Tabulation of publicly available data.

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No
Do

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Exhibit 2 Apple Stock Appreciation compared to Nasdaq-100 (normalized percentage change) since Tim Cook’s

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appointment as CEO (August 11, 2011) until December 9, 2022

Apple Inc Price % Change Nasdaq-100 Level % Change

1,500%

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1,000%
907%
Tim Cook
appointed CEO
August 11, 2011

yo
500%
394%

0%
2012 2014 2016 2018 2020 2022 December 9,
2022
op
Source: Depiction publicly available data.
tC
No
Do

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 t
Exhibit 3a Apple Sales by Category (in $), 2012–2022

os
iPhone Mac iPad Wearables* Services
$400

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$350

$300

$250

$200

yo
$150

$100

$50
op
$0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

* Wearables include segments Home and Accessories

Source: Depiction publicly available data.

tC
No
Do

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 t
Exhibit 3b Apple Sales by Category (in %), 2012–2022

os
iPhone Mac iPad Wearables* Services
70%

60%

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50%

40%

30%

yo
20%

10%

0%
op
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

* Wearables include segments Home and Accessories

Source: Depiction publicly available data.

tC
No
Do

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 t
Exhibit 4a Apple Sales by Region (in $), 2012–2022*

os
Americas Europe China Asia (other)
$400

rP
$350

$300

$250

$200

yo
$150

$100

$50

$0
op
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Note: The U.S. accounts for more than 90% of sales in the Americas.

Source: Depiction publicly available data.

tC
No
Do

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 t
Exhibit 4b Apple Sales by Region (in %), 2012–2022

os
Americas Europe China Asia (other)
50%

45%

rP
40%

35%

30%

25%

yo
20%

15%

10%

5%
op
0%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: Depiction publicly available data.

tC
No
Do

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Exhibit 5 Apple Revenue and Net Income (in $bn, left axis) and Profit Margin (in %, right axis), 2011–2022

os
Revenue Net Income Profit Margin
$450 30%

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$400
25%
$350

$300 20%

yo
$250
15%
$200

$150 10%

$100
op
5%
$50

$0 0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
tC

Source: Depiction publicly available data.

No
Do

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 t
Exhibit 6 Apple Stock Market Valuation (in $bn) and Key Events, 1976–2022

os
$3,500

$3,000 Market
Cap
$3,000 iPhone 14 Peak, $3T

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01/03/22

$2,500

$2,000 $2,000
Apple
M1 Chip

$1,500

yo
iPhone 10
$1,000 HomePod
Apple Watch
iPhone 5
Tim Cook,
CEO
$500 iPhone 6 iPhone 7
iPad
Apple Steve Jobs iTunes iPhone
founded IPO ousted Steve Jobs returns iPod Music
$0
op
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2022
Source: Depiction publicly available data.
tC
No
Do

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Exhibit 7 Apple Research and Development (R&D) Expenditures (in $bn), 2007–2022*

os
$30

rP
$25

$20

yo
$15

$10
iPhone
launched
op
$5

$0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
tC

* Trendline added.

Source: Depiction publicly available data.

No
Do

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Endnotes

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1 TechCrunch (2009, Sept. 29), “DoubleTwist remakes Apple’s classic 1984 ad with a new dictator: Steve Jobs.”
2 Sculley, J. and J.A. Byrne (1987), Odyssey: Pepsi to Apple (New York: Harper & Row).

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3 Markoff, J. (1997, Mar. 15), “Apple to trim jobs and its product line,” The New York Times.
4 NeXT Software Inc. (1996, Dec. 20), “Apple Computer Inc. agrees to acquire NeXT Software Inc.,” Press release, [Link]

5 Farzad, R. (2013, Dec. 9), “Microsoft’s Apple investment: The worst deal of them all?” Bloomberg Businessweek.
6 Rumelt, R.P. (2011), Good Strategy. Bad Strategy. The Difference and Why It Matters (New York, NY: Crown Business), 14.
7 Goldman, D. (2011, Jan. 18), “As Tim Cook takes over, Apple is poised to shatter sales record,” CNNMoney, [Link]
8 Simons, R. (2010), Seven Strategy Questions: A Simple Approach for Better Execution (Boston, MA: Harvard Business Review Press).

yo
9 Mickle, T. (2020, Aug. 8), “How Tim Cook made Apple his own,” The Wall Street Journal.
10 Love, J. (2016, Feb. 26), “Apple CEO Tim Cook commits to annual dividend raise,” Reuters.
11 Tilley, A. (2022, Dec. 9), “Former Apple executive says company blundered by firing him after TikTok video,” The Wall Street Journal.
12 Kirkpatrick, D. (1998, Nov. 9), “The second coming of Apple through a magical fusion of man—Steve Jobs—and company, Apple is
becoming itself again: The little anticompany that could,” Fortune.
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13 Wakabayashi, D. (2014, Jul. 8), “Tim Cook’s vision for ‘his’ Apple begins to emerge,” The Wall Street Journal.
14 Wakabayashi, D. (2015, Mar. 8), “Smartwatch pushes Apple into high-end fashion,” The Wall Street Journal.
15 Leswing, K. (2020, Jan. 28), “Apple’s fastest-growing business segment, which includes AirPods and Watch, is now bigger than Mac,”
CNBC, [Link]

16 Pierce, R.J. (2022, Feb. 10), “Apple is leading the American headphone market with AirPods, Beats,” Tech Times, [Link]
tC

17 Higgins, T. (2022, Dec. 8), “The chips that rebooted the Mac,” The Wall Street Journal.
18 Pierce, R.J. (2022, Feb. 10), “Apple is leading the American headphone market with AirPods, Beats,” Tech Times [Link]

19 Butler, P. (2022, Sept. 14), “iPhone’s buy now, pay later plan: How Apple Pay Later will work on iOS 16,” CNET, [Link]

20 Clark, T. (2022, Jul. 29), “After a rocky start, Apple’s streaming service is becoming harder and harder to ignore,” Insider, [Link]
ly/3Px6Xam.

21 Alexander, J. (2020, Nov. 1), “Apple TV Plus one year later: Still on trial,” The Verge [Link]
No

22 Clark, T. (2022, Jul. 29), “After a rocky start, Apple’s streaming service is becoming harder and harder to ignore,” Insider, [Link]
ly/3Px6Xam.
23 Levy, A. (2022, Jul. 4), “Will Apple TV+ ever become profitable?” Motley Fool, [Link]

24 Richards, R. (2022, Aug. 2), “Hollywood vs. streaming,” World Finance, [Link]

25 Metz, C. (2016, Dec. 10), “Tech’s biggest showdown is unfolding in your living room,” Wired, [Link]
26 MacRumors (2022, Dec. 14), “Apple’s original Siri-based speaker, now discontinued,” [Link]

27 MacRumors (2022, Nov. 17), “HomePod Mini turns two as Apple looks to expand lineup next year,” [Link]
Do

28 Market Future Research (2022, Sept. 27), “Augmented reality (AR) market size to hit USD 461.25 billion at a CAGR of 41.50% CAGR by
2030,” [Link]

29 Gurman, M. (2020), “Inside Apple’s next big thing: Augmented reality,” Bloomberg, [Link]
30 Gurman, M. (2020), “Inside Apple’s next big thing: Augmented reality,” Bloomberg, [Link]

31 Lomas, N. (2015), “What Google sees in augmented reality,” TechCrunch, [Link]

Copyright © 2023 McGraw Hill Education. All rights reserved. No reproduction, distribution, or posting online without the prior written consent of 21
McGraw Hill Education.
This document is authorized for educator review use only by Vikas Kumar, Other (University not listed) until Sep 2025. Copying or posting is an infringement of copyright.
Permissions@[Link] or 617.783.7860
 t
32 Wakabayashi, D. and M. Ramsey (2015, Feb. 13), “Apple gears up to challenge Tesla in electric cars,” The Wall Street Journal.

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33 Ritchie, R. (2018, Jan. 17), “CarPlay: The present and future of Apple automotive,” iMore, [Link]

34 Wakabayashi, D. and B. Chen (2016, Sept. 9) “Apple is said to be rethinking strategy on self-driving cars,” The New York Times.
35 Hiller, J. (2022, Nov. 29), “Why America doesn’t have enough EV charging stations,” The Wall Street Journal.
36 Raphael, R. (2022, Aug. 23), “Android versions: A living history from 1.0 to 13,” Computerworld, [Link]

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37 Orr, A. (2022, Sept. 9), “Apple continuing command of global smartphone profits, and the lead is growing,” Apple Insider, [Link]
ly/3iSVZiX.
38 Hern, A. (2016, May 23) “Chromebooks outsell Macs for the first time,” The Guardian.
39 Kahn, J. (2017), “Apple’s iOS and macOS lose market share to Chrome OS in US K-12,” Mac9to5, [Link]
40 Canalys (2022, May 4), “PC and tablets see strong sales in Q1 2022, Chromebook sales plummet 60% globally,” [Link]

41 Khan, I. (2022, Oct. 7), “Here’s how Google could get you to actually buy a Pixel 7 Phone,” CNET, [Link]

yo
42 Levy, A. (2017, Mar. 16), “Google Home is catching up to Amazon’s echo,” Motley Fool, [Link]

43 Statt, N. (2019, Apr. 22), “Apple’s Cloud business is hugely dependent on Amazon,” The Verge, [Link]
44 Weinberger, M. (2017, Jan. 7), “Amazon’s Echo is building a coffin that’s custom-made for Google,” Insider, [Link]

45 Mattioli, D., S. Herrera, and J. Toonkel (2022, Nov. 10), “Amazon, in broad cost-cutting review, weighs changes at Alexa and other
unprofitable units,” The Wall Street Journal.
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46 Richeter, W. (2016, May 26), “After losing $11 billion on $9.4-billion Nokia Buy & axing 27,650 jobs, Microsoft dumps consumer
smartphones,” Wolf Street, [Link]

47 Reisinger, D. (2017, Apr. 11), “Samsung is back atop the smartphone market,” Fortune, [Link]

48 Dolcourt, J. (2017, May 26), “Samsung Galaxy S8 review: The most beautiful phone ever has one wildly annoying issue,” CNET, https://
[Link]/3hzfSey.
49 Byford, S. (2021, May 4), “Xiaomi Mi 11 review: undercutting Samsung,” The Verge, [Link]
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50 Mundy, J. (2022, May 2), “Xiaomi 12 vs iPhone 13: which compact flagship will rule 2022?” Techradar, [Link]

51 Dou, E. (2016, July 27), “In China, Apple’s local competition takes a bite out of its revenue,” The Wall Street Journal.

52 Mickle, S. (2022), How Apple Became a Trillion-Dollar Company and Lost its Soul (New York: William Morrow).
53 Cheng, T.-F. and L. Li (2019, Feb. 1), “Apple held hostage by its Chinese puzzle,” Nikkei Asia, [Link]
54 Reuters (2022, Nov. 23), “Unrest and production disruptions at Foxconn’s main iPhone plant in China,” [Link]
No

55 Roy, R. and N. Purnell, (2017, Jan. 26), “Apple nears deal to manufacture phones in India,” The Wall Street Journal.
56 Mickle, T. (2020, Aug. 8), “How Tim Cook made Apple his own,” The Wall Street Journal.
57 Savitz, E.J. (2020, Aug. 18), “Apple is spending ‘dramatically below peers’ on innovation,” Barron’s, [Link]
58 Kovach, S. (2019, Jul. 26), “Apple lost the 5G battle, but it paid Intel $1 billion to win the war,” CNBC, [Link]

59 Leswing, K. (2019, Aug. 3), “Apple is spending more than ever on R&D to fulfill the ‘Tim Cook doctrine’,” CNBC, [Link]
cx/3PuANMn.
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