Marketing case

Chapter Case Study TH E SMART(EST) PHON E1 In 2007, Apple introduced the iPhone, a purchase comparable to buying three devices in one: an iPod, a wireless phone, and a wireless computer device. On the first day the iPhone was available, consumers lined up in the streets in hopes of getting the opportunity to purchase it. Time magazine then named the iPhone the “Invention of the Year.”2 And today, more than 30 million iPhones have been sold, giving Apple a 100 percent year-over-year rise in sales.3 Its total share in the U.S. smartphone market of 25 percent runs second to Blackberry’s 41 percent share.4 However, worldwide, Nokia’s Symbian owns almost half the smartphone market, followed by Blackberry with 20 percent and the iPhone with 15 percent.5

APPLE I NC. Apple manufactures and sells computer, music, and phone hardware, along with related software. Since its incorporation in 19776 under the name Apple Com- puter Incorporated, Apple has introduced products that challenge conventional approaches in the electronics industry. It pioneered modular design with the Apple II, engineered initial graphical interfaces with the Macintosh, and offered the PowerBook as the first laptop to include a built-in track pad.7

In 2001, Apple changed how consumers listen to music when it entered the portable music player market. Since then, it has sold more than 225 million iPods, making it the market leader with a 74 percent market share in the MP3 arena.8 According to most consumers and technology experts, the success of the iPod

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resulted from its incredible ease of use. By combining a music store, software, and portable player into one simple system, Apple eliminated the problems consumers faced with other music players and thus created value by simplifying the digital music experience. Although Apple dominated the dedicated MP3 player market, more and more phone manufacturers were adding music playback to their handsets. Primary phone manufacturers, such as Nokia and Motorola, already had existing relation- ships with cellular carriers, so they achieved a distinct advantage in the U.S. mar- ket, where cellular carriers dominate the distribution market for handsets.

TH E SMARTPHON E MARKET Apple partnered with AT&T to be the exclusive service provider for the iPhone. The first iPhone entered at $599, and then dropped to $399 shortly after. Since the initial launch, Apple offered newer models, including the 3G and 3GS (16GB or 32GB), priced at $99, $199, or $299, respectively, assuming the customer signs a two-year wireless phone contract. The iPhone’s newest features include video capabilities and access to the App store and iTunes store. The iPhone initiated the growth of the smartphone product life cycle by encouraging many new competitors to enter the market. Now consumers wonder how they ever went anywhere without instant access to their e-mail, music, GPS, web, games, and various selected applications. In turn, 2010 has been called “the year of the mobile computer,” as the smartphone market moves into the mass- market stage.9 This market has grown considerably as well through new entrants, including Google’s Droid, which is selling at a quicker pace than the iPhone.10 The Droid runs on Google’s Android operating system, with integration with Gmail, Google Calendar, and Google Voice, but it currently offers “only” 10,000 applica- tions, compared with the more than 100,000 apps available for the iPhone.11

Still, only 21 percent of U.S. wireless subscribers use a smartphone, even as makers add more and more capabilities and prices continue to drop. By the end of 2011, forecasters predict there will be more smartphones than feature cell phones.12 What makes these devices so powerful is their integration with the customer’s surroundings—able to scan prices at a store or look up the nearest coffee shop in an instant.

TH E I PHON E When Apple entered the market, it was the first to integrate wireless, music, and phone features onto one device, so it needed to market the iPhone’s capabilities carefully, including the touchscreen, the GPS maps, e-mail capabilities, and excel- lent user interface. To improve the purchasing process, Apple relied on simplification to make the ordeal as painless as possible. Customers who disliked shopping for phones could buy online and register through iTunes or visit an AT&T or an Apple store. Either retail location could help customers with service issues. For the iPhone’s application store, any programmer may build an app and sell it via downloads. In turn, the number of apps has grown so great that users rely completely on their preferred downloads and find themselves lost without the access their iPhone offers. New competitors in the market would have to build off this network, which currently is one of Apple’s primary competitive advan- tages. Each month, approximately $200 million worth of applications sell through Apple’s app store; the Android has sold only about $5 million per month.13

Although the iPhone is no longer a new product, each year the device will receive improvements, designed to encourage customers to upgrade to a newer version. In the meantime, new applications are constantly launching, supported only on the iPhone. Will the Android network be able to catch up to this vast net- work of applications?

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Questions 1. At what stage in the product life cycle is the iPhone? What about other

smartphones? 2. Given the diffusion of innovation theory, which is the largest and second

largest group currently purchasing smartphones? Justify your answer. 3. Will Apple’s iPhone maintain its competitive edge, or will Google’s Android

become the market leader? 4. What would happen to the smartphone market if Android applications were

available on the iPhone and vice versa.

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