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iPhone Marketing Report.doc

  2. 2. TABLE OF CONTENTS PAGE Introduction………………………………………………………………………………………..………… 3 A. Purpose (Sach) B. Scope (Dave/Amy) C. Organization of Report (Amy) Political Environment (George)…………………………………………………………………..………… 4 Legal Environment (Amy)………………………………………………………………………..………… 5 Economic Environment (Dave)………………………………………………………….………..………… 8 Technological Environment (Sach).…………………………………………….………..………..………… 9 Socio-Cultural Environment (Amy)……………..……………………………………………………..…… 10 Cannibalization and Creative Destruction Issues (Amy)…………………………………………………… 12 Geography, Climate and Natural Resources Environment (Meng)……………………….………..………… 15 Infrastructure Environment (George)…………………………..…………………….…..………..………… 17 Competitive Environment (Meng)..………..…………………..…………………….…..………..………… 18 Porter’s Five Forces Effecting Industry (George)…………………………………………………………… 20 Global Marketing Mix…...……………………………………..…………………….…..………..………… 23 A. Product Strategy (Meng) B. Pricing Strategy (Amy) C. Promotion Strategy (Dave) D. Distribution Strategy (Sach) Conclusions and Recommendations (Amy[ph: 1-4];George[ph: 5])….………………..………..………… 32 Appendix………………………………………………………………………………………..………… 33 MRKT 620-102 Team B – Apple’s iPhone Page 2 of 36 Monday, April 23, 2007
  3. 3. INTRODUCTION A. Purpose The report is designed to comprehensively document the efforts to market Apple’s iPhone. It will analyze the international marketing environments, Political, Legal, Economic, Technological, Socio-Cultural, Geographical, Infrastructure, and Competitive. The global market mix will also be examined with regards to Product, Pricing, Promotion, and Distribution Strategies. B. Scope This report covers comprehensive research necessary for successful product launch of the Apples’ iPhone. In order to simplify the process, the report identifies two major markets to which to focus, that of the United States and the European Union consisting of France, the UK and Germany. Briefly the idea of entering the Chinese market was reviewed, however there were negative factors affecting this decision. Some of those negative issues were: the Chinese consumer preferences with cell phones; Apple has not launched iTunes in China and has no plans to; there are no Apple Stores in China; and the iPhone has a closed architecture limiting Chinese consumer expectation of using 3rd party software on their devices. There are many similarities between the US market and the EU market; however, there are also considerable differences. The differences as well as the marketing approach to these differences is discussed with a view to the economy, consumer preferences, legal ramifications and concerns, along with recommendations for the various elements of the marketing mix. C. Organization of Report Organization of the Report was broken down into sections according the various environments that effect global marketing strategies. The first four sections, often referred to as PEST – Political (and Legal), Economic, Socio- Cultural and Technological, provide a framework to evaluate the opportunities or threats that Apple may face and can loosely be said to be outside their totally control. Normally a PEST analysis is an in depth study of these areas and should be done prior to entry and per country or region as a marketing/business strategy tool. They are covered here in the context of how they impact global marketing planning of Apple’s iPhone and not as they impact the company and strategic planning of other products, the business and product development cycle or research. The Political environment, reviewed in the next section, discusses the concerns for the two target markets we will be focusing on, the US and the EU (France, Germany, UK). The Legal environment reviewed in section two focuses on IP and piracy issues along with current and future legal concerns facing Apple and the iPhone. In section three the Economic environment is covered regarding these target markets. The Socio-Cultural environment, in section four, reviews the iPod sub-culture and its effect on the iPhone strategy along with social concerns. Section five presents the Technological environment and its impacts on the iPhone market. Section six discusses the issues of creative destruction and cannibalization and how these issues affect Apple with its new iPhone product as well as other manufacturers. The seventh section reviews the Geography, Climate and Natural Resources environment. Infrastructure environment in section six discusses the various infrastructure issues with the product. The eighth section, Global Marketing reviews: Product Strategies, Pricing Strategies, Promotion Strategies and Distribution Strategies. Finally, the report ends with a discussion of the conclusions and recommendations. MRKT 620-102 Team B – Apple’s iPhone Page 3 of 36 Monday, April 23, 2007
  4. 4. POLITICAL ENVIRONMENT The political environment in the European Union differs greatly regarding mobile phones compared to the United States. The iPhone introduction in Europe is subject to many factors as Europe relies heavily on mobile phone coverage more than the United States. In other words, land line phone use has always been the primary telephone system, and mobile coverage is viewed as a secondary coverage. In Europe, many residents do not even have a land line phone system, and the mobile phone is the primary (and only) phone number. Thus, the political environment is more possessive of the cellular standards. Keep in mind there are different political systems in different countries that must agree on the same cellular standard. The cellular standard must be transparent to a country that is a monarchy as well as a socialist country. The EU has made it clear that the political aim of the government’s role in cellular standards is to entertain more competition that share the same standards. The telecommunications industry for the most part became completely deregulated in 1998. The European Telecommunications Standards Institute (ETSI) has influence much of the standards in Europe. ETSI developed the third generation (3G) phone standards. ETSI’s members consist of manufacturers, operators and regulators based in Europe that developed a single standard for next generation cell phones. This has contributed to the success of the GSM standard in Europe allowing roaming all over the continent. One issue that Apple must confront is the apparent “de facto” protectionism of Nokia and Ericsson. These two companies are extremely important to their economy, as Nokia has been mentioned as one of Europe’s most important companies. The future is pretty safe for those two telecommunications giants, and Apple will be at a disadvantage if it must wrestle with them. There is an argument that with cellular standard conforming to European standards, US companies such as Motorola and Apple may be at a disadvantage in keeping up with Europe’s cellular manufacturers. One can argue that this can be supported by the 2.5G release of the iPhone Europe as opposed to the 3G standard. Apple can argue the European standards are exclusionary and discriminatory as Apple has invested large amounts of money into R&D standards. At present, mobile devices based on current US technology are now locked out of the EU market since the W-CDMA standard has been converted into a requirement.1 The development of the iPhone under two different standards is a burden for Apple. The EU arguably also protects its two telecommunication giants, Nokia and Ericsson. Apple is not alone in this fight, as Korean manufacturers such as LG and Samsung face these burdens. Apple also shares this dilemma with Motorola on US soil. However, these competitors are established companies that have introduced product since the early adopter phase of mobile technology. Apple is a late entry in mobile phones. The development of the iPhone must balance the development of the iPhone to conform to US standards, EU standards, and still maintain its uniqueness that the Apple brand has always maintained. 1 Wallis-Brown, Von Hellens, et al. “The secret of the global success of Nokia Mobile Phones and Ericsson Mobile Communications.” IEEE. April 2000. MRKT 620-102 Team B – Apple’s iPhone Page 4 of 36 Monday, April 23, 2007
  5. 5. LEGAL ENVIRONMENT The success of multinational corporations marketing plans depend on many factors, one of which plays out in the legal environment of the countries for which they do business. This section discusses the impacts and considerations Apple will need to address in regard to the legal ramifications it faces in its international strategy and marketing plan. It is important to note that legal concerns in one country can quickly lead to similar legal concerns in another country. Apple has already seen an example of this with a pending law suit in the United States that sparked another law suit in the EU states on the same issue. Interestingly, Apple’s iPhone experienced an immediate legal battle before it even got off the ground. That legal battle was over a trademark infringement in the US with Cisco’s over the “iPhone” name, a trademark name which Cisco owned. The iPhone trademark was originally registered with the company Infogear in 1996. Cisco acquired Infogear in early part of 2006 and introduced a new family of iPhones during 2006. Apple was not unaware of this conflict and even acknowledged the Cisco’s trademark issue by approaching Cisco for the rights to use the trademark name. It should be noted that in light of these issues, Apple quickly made sure to register the trademark name in the UK, Singapore, Australia, Canada, New Zealand, Hong Kong and the European Union. In January of 2007, Cisco filed suit after Apple’s highly publicized unveiling earlier that month; but by February Apple and Cisco reached an undisclosed agreement and the trademark infringement lawsuit was dropped2. However, this case shows the importance of trademark issues and the need to solidify product trademarks, copyrights and patents ahead of time to protect a corporation’s IP rights or keep a corporation from being sued from using someone else’s. Also important to consider that this case would have played out completely different had it been brought before the legal jurisdiction of a foreign country (see section “Legal Differences - between countries and how they impact the international marketing plan of Apple’s iPhone” for further details). Copyright laws vary by country which means that Apple will have to tackle each independently and use an adaptive approach to its global marketing plans. Intellectual Property (IP) Issues Apple will have a hard time monopolizing its interface and preventing others from copying it. An example of this issue is already at work in the US before the iPhone has been schedule for market release (June 2007). Merely based upon the marketing material provided in its January preview, competitors are integrating the slick iPhone interface icons into their products (see example in Appendix A)3. They may indeed have a case in which Apple cannot prevent its interface features from being commandeered by other products4. Regardless of its outcome in the US however, this issue of IP rights on the iPhone interface has broader ramifications in the global market. For example, the Chinese manufacturer Meizu has already made a copycat (see Appendix B for a side-by-side comparison) iPhone product with similar features and interface5. Some would argue, and they would be correct, that it is not features alone that will be selling the iPhone; but that of the image that Apple products project with its consumers. However, given the consumer preferences, marketing conditions, and the readily availability of a copycat product, China would not be considered a primary location for a launch of the iPhone product after the US6. At present, it is inconclusive to say whether the Meizu’s M8 mimic of iPhone’s interface by its competition is a large global threat in other than the Asian market. Apple could very well play into the unstoppable progression of the market and tout that ‘imitation is the highest form of flattery but it is still imitation’ at copycat product manufacturers. In the end, Apple might very well be the winner in that it will only add to their superior product image. In addressing IP rights, it must additionally be mentioned that there is an advocacy group for global intellectual property rights, the international TRIPs (Trade-Related Aspects of Intellectual Property Rights) agreement, which outlines standards for protection of IP. A patent, trademark or other intellectual property once registered is expected to meet certain guidelines that of that country. For example, in the US an individual can hold a patent without manufacture for the duration of the patent. In other countries, in exchange for this monopoly it is expect that the 2 http://news.com.com/Apple,+Cisco+settle+iPhone+trademark+lawsuit/2100-1041_3-6161233.html 3 http://rychlicki.net/en/2007/04/01/174/ 4 http://www.macnn.com/articles/07/04/11/lawyer.challenges.apple/ 5 http://www.engadget.com/2007/01/29/meizus-m8-apple-lawyers-start-your-engines/ 6 http://homepage.mac.com/dwbmbeijing/iblog/SiHu/C520534961/E20070117133202/index.html MRKT 620-102 Team B – Apple’s iPhone Page 5 of 36 Monday, April 23, 2007
  6. 6. holder must produce a product, usually within five years of the patent award, or the patent will revert to public domain. It is these types of IP issues that Apple’s iPhone must be aware of to avoid costly legal battles should Apple market the iPhone in countries where they do not hold the trademark or patent. Since M8 is scheduled for release in early 2008, it would be prudent that Apple be aware of any legal conflicts it may have marketing the iPhone in China. Although Apple may decide to target the Chinese market in the future, it could face hefty legal battles and costs if they are not careful in establishing, if possible, their products patent before hand. Piracy and Counterfeiting Issues Until recent changes in the Chinese law, China was seen as one of the largest contributors to piracy and product counterfeiting. Apparently, even with changes within the legal structure of the country, it is hard to prevent copycat products from being developed like Meizu’s M8 phone.4 It is not just the iPhone itself that can be a target for counterfeiting, components that make up the iPhone may be a targeted as well, such as batteries. Apple has decided to address this issue in the US the same way it has addressed many of its products in the past, via authorized dealers; in this case that ‘dealer’ is Cingular. However Cingular as a broad band provider will only hold the exclusive rights from mid-2007 to end of the year. Additionally, Cingular does not support GMS networks nor operates outside the US, thus it is expected that Apple will be forming exclusive provider rights to others come 2008 in the US, Europe and other regions/countries that are tentative launch sites. Regardless of measures taken by Apple (counterfeit prevention site for Apple: www.apple.com/legal/contacts.html), with the benefits of the symbol of ‘ownership prestige’ that Apple wishes to project for devices (like the iPod), there will also be a continual market for counterfeit or copycat products. In many cases it may not even be possible for the common consumer to afford to pay for legitimate Apple products given the tariffs7. This can also add to Apple’s image which is brought out by India Editor of Jam magazine “The fact that iPods are unaffordable makes them iconic.”4 There is little that Apple can do presently with counterfeit issues in international countries and in some cases it makes little economic sense to pursue costly legal options with uncertain outcomes. Many issues regarding piracy and counterfeiting can only be settled by adopting a grey market scheme where legitimate products are sold under cost values by grey market supply chains. Legal Differences - between countries and how they impact the international marketing plan of Apple’s iPhone Legal differences such as prior use (whoever can establish first use is considered the rightful owner) or registration (in trademarks and patents), differ from country to country and need to be addressed before market entry. Additionally, the cultural differences regarding how intellectual property is viewed may vary. For example, if IP is seen as ‘adding to innovation and provides for individual rewards’ or ‘should be the benefit of all and shared’ changes the decisions on how markets and competitors may react to patents, trademarks and IP. When deciding upon market entry it is important to address these types of legal issues with corporate attorneys or consultants whom have prior experience in international IP laws rather then rely on past experiences or assumptions of how laws may apply. Additionally, marketing laws also have a huge impact on a corporation’s plans to promote, develop and distribute a product. Marketing laws that effect labeling, pricing, channels of distribution and even advertising must all be considered prior to developing a marketing plan or entry. Even once all these items are addressed, there must be continuous understanding of laws that might prohibit certain types of sales promotions or special offers. Cultural differences in how products are advertised also play a key role in understanding the legalities of doing business in a foreign country. An example of this is China, who heavily censors advertising and bans any advertising that might unfavorably reflect upon government or China. Law violations in one country can also lead to further legal battles in other countries. In 2003, an unhappy US iTunes user filed an anti-trust case against Apple because he stated it forced the consumer to purchase an iPod to use iTunes. Apple filed a motion to dismiss the case and was denied by the US courts. Subsequently, in early 2005 a consumer group in France filed a similar suit along with several other Nordic countries. Apple, even if successful in it’s US battle given the number of business hosting downloadable audio content, may face different circumstances in European countries who have limited hosting possibilities. Some headline news excerpts and links are provided: “Some European countries claiming Apple’s DRM policies violate contract & copyright laws; Claim Apple’s FairPlay DRM locks consumers into owning iPods because not compatible with rival music/players; Norway began campaign in June 2006 to persuade Apple to change DRM policies; France, Germany, Netherlands joined; all claim Apple’s DRM policies violate their laws; Sweden, Denmark, Finland expressed support for Norway’s campaign, but 7 http://www.wired.com/gadgets/mac/news/2006/08/71639 MRKT 620-102 Team B – Apple’s iPhone Page 6 of 36 Monday, April 23, 2007
  7. 7. not officially claiming Apple violates their laws; Norway threatened legal action unless Apple changes policies to allow compatibility with competing players/music by Sept. 2007”8 US Laws Applying to US Companies Operating Outside US Apple Inc. (aka Apple) is a US publicly traded corporation subject to the laws of the United States. Thus, in evaluating its role in marketing the iPhone product, it is necessary to understand the implications of US laws on US companies that operate outside of the US. Several laws prohibit the taken of bribes, trading with countries that constitute a threat to national security and participating in commercial ventures that negatively affect the US economy are just a few. Apple must comply with the objective theory of jurisdiction when dealing with consumers or companies outside the US. The ‘objective theory of jurisdiction’ means that Apple must comply with US laws even when doing business outside the US territory. Therefore, not only does Apple have to contend with issues regarding various countries for which it intends to market the iPhone, in this case the EU, but also the laws outlining its business practices with other companies and governments of foreign countries. These issues involving the anti-trust case in several European countries will need to be settled not only for iPods but also iPhones which rely heavily on the backend technology of the iPod for it use as a music player as well as a phone -- one of its largest selling features. As of April 2007, the European Commission has opened an anti-trust probe into the iTunes case.9 Apple will have several EU cases as time continues to battle regarding its decision to limit iTunes to iPods only.10 Another case that is involving iTunes and European Commission regulations that of breaking the EU competition laws -- charging different prices for the same product, such as iTunes downloads. Apple also must comply with European laws regarding competition and pricing and continues to find itself in hot water over territorial restrictions. In response to investigations of Apple violating EU Law, “A spokesman for the European Commission -- the EU's executive body and top competition regulator -- expressed concern Monday that Apple might be infringing the law by imposing "territorial restrictions" on music downloads…European consumers are only able to download music from the iTunes site in their country of residence and prices differ from country to country within the 27-nation European Union.”11 Anti-trust issues will continue to plague Apple, not only in the US, but also in the EU, with Apple have to face both battles on two different fronts. It is noted that the outcome of these possible future litigations could have a large impact on the image of Apple’s products and the iPhones acceptance in the EU market. 8 http://www.theregister.co.uk/2007/01/23/itunes_slagged_again/ www.cptwg.org/Assets/Presentations%202007/Washington%20Update%20CPTWG%20presentation %203-8-07.pps http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9006985&source=rss_news10 http://www.theregister.co.uk/2007/01/03/apple_itunes_lawsuit/ 9 http://www.nowpublic.com/apple_itunes_facing_allegations_from_eu_law 10 http://www.engadget.com/2006/08/04/french-ipod-law-now-um-law-apple-takes-stand-against-scandis/ 11 http://news.yahoo.com/s/afp/20070403/ts_afp/euusmusicitcompanycompetitionapple_070403094048 MRKT 620-102 Team B – Apple’s iPhone Page 7 of 36 Monday, April 23, 2007
  8. 8. ECONOMICAL ENVIRONMENT When conducting our research we have narrowed down the major markets or market groups where we will introduce iPhone. These markets are: South Africa, Europe and China. Factors such as total population, new units sold per year, market maturity and income levels. On the global scale in 2004 there were 1,752 million cell phone users globally12. Economic Environment Europe European Union is the world largest economy. It is responsible for 30.3% of World GDP. As of 2006 there are 492 million European13. The average GDP wroth rate in 2006 was 2.8%. An average inflation was 2.2%. In 2003 the EU has widen its membership to additional 10 new member states having now total count of 27 states. In January 2007 the EU was joined by two additional states: Bulgaria Romania with now the total count of 29 member states14. The EU has a very developed mobile phone market. 63% of the population currently uses mobile phones. According to www.itfacts.biz 27% Europeans buy a new phone every year15. Taking in count the population this makes 132.84 million new devices sol per year. Economic Environment Latin American The population of Latin America is 548.5 million in 20 different nations. GDP per capita for 2006 was 3.8%16. Brazil is the largest country in population and also the largest market. In Latin America 46% of the population uses mobile phones. There were 115 million units sold in Latin America in 2004. The predicted sales for 2010 are 126 million.17 The expected mobile phone usage for 2010 is 65.5%.18 GDP growth phones very units sold in (in millions) buying new percentage population population in percent GDP/per users (in millions) 2004 (in of users # of cell million) phone capita year to EU 492 132.84 $29,526 2.80% 314.6 63.94% 42.23% China 1,314 120 $7,593 9.90% 334.8 25.48% 35.84% Latin America 548.5 115 $6,667 5.30% 254 46.31% 45.28% China China is the largest single economy in the world with the population of 1,314 million. It is also the fastest growing economy with 9.90% GDP growth in 2006. In 2006 China sold 120 million mobile units.19 The total cell phone usage is 334.8 million. Calculated, 25% of the population currently uses mobile phones. Cross Comparison: Although comparing these geographical areas, the population differs significantly the units sold in 2004 are relatively similar: European Union 132.84 million, China 120 million, and Latin America 115 million units. The maturity of the market is also important to be considered. China’s 9.9% GDP growth together with only 25% creates good future market growth outlook. Comparing these to the US market, all three geographic areas still have good potential growth. 93.2% American own cell phones. 145 million phones sold in the US in 2006.20 12 http://www.infoplease.com/ipa/A0933605.html 13 http://en.wikipedia.org/wiki/Economy_of_the_European_Union 14 http://en.wikipedia.org/wiki/Enlargement_of_the_European_Union 15 http://www.itfacts.biz/index.php?id=P6492 16 http://en.wikipedia.org/wiki/Latin_America 17 http://www.itfacts.biz/index.php?id=P6820 18 http://www.itfacts.biz/index.php?id=P8111 19 http://www.chinadaily.com.cn/china/2007-02/04/content_800710.htm 20 http://www.itfacts.biz/index.php?id=P8111 MRKT 620-102 Team B – Apple’s iPhone Page 8 of 36 Monday, April 23, 2007
  9. 9. TECHNOLOGICAL ENVIRONMENT Technological Environment “The technological environment refers to new technologies, which create new product and market opportunities. Technological developments are the most manageable uncontrollable force faced by marketers. Organizations need to be aware of new technologies in order to turn these advances into opportunities and a competitive edge. Technology has a tremendous effect on life-styles, consumption patterns, and the economy. Advances in technology can start new industries, radically alter or destroy existing industries, and stimulate entirely separate markets. The rapid rate at which technology changes has forced organizations to quickly adapt in terms of how they develop, price, distribute, and promote their products.”21 The four P’s of marketing are directly affected the moment a new design is created. New technology is an ever- growing competitive industry based on consumer demand. Consumers want to do everything faster and easier, thus causing companies to combine their technologies into one product. The idea of multi-media device is not new, mobile phones have been able to make calls and access the internet for a some years now. With the latest craze of listening to music outside of the car and Discman’s becoming a history channel special, digital music; MP3 has skyrocketed. With many PDA’s supporting a Window’s based OS, consumers were able to buy a memory card, load music, insert that into their phone, and listen via Windows Media Player. The iPhone is different because it allows music to be stored directly onto either a 4 or 8GB hard drive (Apple Website). The iPhone uses a new multi-touch display and new software so everything can be controlled by touch. It capabilities of listening to music and watching videos are amazing compared to standard software on PDA’s and other multi-media phones currently available. The phone capabilities are the same, you just simply touch a name and press call on the display, there are no buttons to press. The internet allows you scroll web pages while downloading, just like a computer. However, in the international market, if Apple were to enter into Europe, they would be faced with a challenge of accommodating their technology. Europe’s largest mobile phone service provider, Vodaphone, uses 3G/UMTS technology, which the iPhone does not support. iPhone currently operates on GSM, however rumors have been spread about the possibility of Apple developing two versions of their phone22. If a contract between Vodaphone and Apple was generated and the two versions of the iPhone were available for both markets, the launch of the iPhone would be astounding. 21 http://telecollege.dcccd.edu/mrkt2370/Chapters/ch2/2env.html 22 http://mindthegeek.blogspot.com/2007/03/apple-looking-for-eu-operators-to-carry.html MRKT 620-102 Team B – Apple’s iPhone Page 9 of 36 Monday, April 23, 2007
  10. 10. SOCIO-CULTURAL ENVIRONMENT One of the primary aspects in examining a socio-cultural environment is to attempt to analyze how to gain wide acceptance of a product and approach the market using this information. The tendency to use self-reference criteria when evaluating a marketing strategy can lead to poor, or complete, marketing failure of a product. Apple has already experienced huge success in their international strategy to market the iPod. However, in marketing the iPhone they must be careful not be complacent on past iPod successes in approaching this highly competitive industry, where pricing alone can road block your marketing efforts23. For example, in a EU launch of their product Apple would have to consider the consumer preference in EU in shying away from most contracts with cellular providers, especially any longer than 12 months. In the US, Apple has given exclusive rights to the iPhone product to Cingular who requires a 2-year contract for which US consumers are used to when choosing a cellular carrier. With this in mind Apple needs to structure its marketing approach tailored to each market. The Apple “iProduct” Culture The culture surrounding the iPod has been amazing and truly disruptive. The iPod family of products has lead to a generation of new terms such as ‘podcast’ along with numerous iPod accessories. Auto manufacturers are even including features in automobiles where iPods are integrated into the audio system. Corporations have made huge profits on just manufacturing accessories for the iPod. Yet, Apple was not the first to market an mp3 player; but their product design along with cleaver marketing, has created an iconic culture. It is this mass brand recognition that Apple can use to leverage its new iPhone product24. The fact that individuals will want the iPhone merely because it is an Apple product cannot be ignored and is the salient point of successful marketing. Importance of cultural acceptance for the iPhone An important aspect in dealing with any product is to examine its acceptance in main stream culture and by the social institutions that make up that culture (family, media, government, etc). The iPhone product is targeted to various demographics in both business and personal sectors. Certain aspects of the purchasing power of these sectors will impact how much and to what extent the iPhone will become main stream compared to its iPod cousin. This is very important and it should be noted that the inexpensive nature of the iPod family of devices along with other inexpensive cellular phones will provide a cultural threat of ‘substitutes’ to the acceptance of the iPhone. Another aspect of product acceptance is the features of a product. The touch screen interface lacks the tactile feedback that many are used to when using hi-tech products. However, like many other technologies in the past that have been viewed as ‘disruptive’, the iPhone’s cultural acceptance is difficult to measure in this area. Humans are highly adaptive to innovation and learn and respond to cultural changes through socialization (acculturation) quickly. The Internet’s wide acceptance is a perfect example of how quickly technological innovations are accepted when they are embraced by youth. The iPhone is designed to compete outside of the arena of mere ‘cell phones’ and is designed to compete with PDAs and smart phones such as the Blackberry by RIM. True, a high degree of cultural acceptance will rely on the ‘feel’ of the device; however the bottom line for cultural acceptance will be its reliability, especially at the hefty price tag Apple is demanding. This should come as no surprise since Apple fell flat in mass acceptance of its first personal device (PDA), the Apple Newton. Poor product performance outweighed the huge marketing hype and Apple removed the Newton from the market after a few short years of production. In evaluating the cultural acceptance, Apple itself researched those attending an Expo in Paris at the end of 2006. From the information they gathered, approximately 74% of those asked indicated that they a high likelihood of purchasing the iPhone once it became available. However, cost is a major consider and of the “74 percent who would be highly likely to purchase an iPhone said that, on average, they would pay $285 for such a product. This is consistent with our thinking that Apple must price an iPhone in the $300 range to gain significant traction with the product."25 Thus price is clearly a deciding factor for most, not only in the US but also in EU. With this in mind, Apple would need to reconsider its pricing strategy before and after launch. 23 http://blogs.msdn.com/acid49/archive/2007/01/10/apple-s-iphone-will-chinese-people-buy-it.aspx 24 http://www.maclife.com/article/news_roundup_google_tops_apple_in_global_brand_cred_new_analysis_on_iphone_margins_and_more 25 http://www.appleinsider.com/articles/06/09/22/74_percent_of_european_apple_faithful_seek_iphone.html MRKT 620-102 Team B – Apple’s iPhone Page 10 of 36 Monday, April 23, 2007
  11. 11. Cultural values and consumer behavior (Hofstede’s dimensions) Cultural values and consumer behavior has been the subject of much research. This research has lead to a classification of certain ‘indices’ which relate to cultural consumer behavior patterns when determining the best way to approach a global marketing plan. Cultural values affect how consumers respond to marketing ads as well as products. The iPhone seems to hold broad acceptance in varying degrees of these indices. The Individual/Collectivism Index which references to a cultural preference for either group or individual promotion can support and justify the iPhone marketing regardless of which preference is made by the culture. In Europe there are various levels of this index. For example, the US, Great Britain, and France score on the high side of Individualistic side, but Germany is slightly higher than mid-range. However, considering the iconic nature of Apple’s iPod product line gives reason to believe that group acceptance has already taken place and is a conduit for the iPhone into cultures that integrate into strong cohesive groups, thus Germany’s mid-preference range does not appear to be an issue. The Power Distance Index refers to the inequality between inferiors and their superiors; although Great Britain, Germany and the US score relatively low on the Power Distance Index, France scores relative high. Already the iPod is seen by many cultures as a product of prestige and affluence26. Therefore, its acceptance as a statement of power and prestige would mean targeting the iPhone to a business market in France rather than a general consumer market. As with Individual/Collectivism, cultures scoring high in Uncertainty Avoidance would be adverse to the iPhone, however again the iPod has paved the market in overcoming this adversity with its widespread use. Consumer behavior is complex and any product wishing to be a success on a global scale must consider factors such as icons, symbols, colors, and imagery, and what these mean to their target consumers in each country. Countries have their own ‘accepted’ and distinct symbolism which may or may not be shared with other countries or even similar regions. It is known that consumers respond to imagery, icons and symbols for which they are familiar with within their cultural reference criteria. The iPhone relies heavily on aesthetics and symbol recognition. As part of any cultural research before product launch, Apple will have to make use of extensive local knowledge and customs so as not to inadvertently offend a cultural sensitivity or contort an icons meaning and be seen as malfeasant. Thus a degree of adaptation may have to be considered in markets where specific imagery and icons are considered unacceptable. Imitation of the US culture Just because a culture ‘borrows’ from the American cultural concepts technologies or ideas, does not mean they will accept the same marketing techniques as those used in the US. Similarities may or may not exist and inferences made because of them fall short of cultural values, rituals, beliefs and thoughts. A primary example of this is the European market where the limited supplies and high costs must be factored when deciding upon a marketing campaign that may or may not be affective in the first place. Since many may not be able to afford the iPhone, a marketing strategy targeted at specific consumers such as business professionals, rather than a wide spectrum as in the States, would have to be considered, especially in those with higher Power Distance Indexes like France. Also a consideration that should be made by Apple would be the evolution of the iPhone product similar to the iPod’s. Possibly a smaller, less expensive iPhone may be more readily accepted by a broader audience globally in the general consumer market, not just in the US but also for the EU regions. Just like the wider acceptance and purchase of the nano and shuffle over the iPod, more consumers in other cultures would be likely purchase a product that they can afford. This is evident by the comment of Frank Yu and Neema Moraveji, “The iPod is very popular in China among the rich and middle class segments, which in terms of numbers is larger than some European countries. However, Apple's real success here seems to be their low and affordable Shuffle product. …Of course the deal breaker for mass acceptance continues to be the price point ($499 for a 4GB model, $599 for 8GB) for the relatively expensive iPhone. I mean, thats the cost of a cheap new laptop here.”27 Apple has the ability to capitalize on the appeal of ‘western’ technology with the iPhone. Already consumers in many countries have accepted and widely use cellular technologies, therefore the use of an iPhone would be readily accepted as well. However as stated previously, it would be a grave mistake for Apple to market the iPhone based upon self-reference criteria and its domestic appeal. Apple will also need to consider factors such as carrier’s reputation before signing exclusive deals, if even at all, with operators like it has done in the US with Cingular. Currently the top carrier has been Vodaphone which supports another wireless technology, WCDMA and 3G rather 26 http://www.wired.com/gadgets/mac/news/2006/08/71639 27 http://blogs.msdn.com/acid49/archive/2007/01/10/apple-s-iphone-will-chinese-people-buy-it.aspx MRKT 620-102 Team B – Apple’s iPhone Page 11 of 36 Monday, April 23, 2007
  12. 12. than GSM, which is already built into the iPhone for Cingular since that is their broadband. It would not be an issue for Apple to integrate another chip set to support 3G or WCDMA to allow for these ventures. CANNIBALIZATION AND CREATIVE DESTRUCTION ISSUES Apple’s product strategy of the iPhone has numerous implications on its existing market and product lines. There is debate on whether or not this ‘next generation iPod’, as some are calling the iPhone, will cannibalize Apple’s existing product lines, more specifically the iPod. Discussed are the topics of cannibalization and creative destruction, both of which force difficult decisions by many corporations as they market their products and develop new technologies. Cannibalization – iPhone vs. iPod A full screen is a feasture consumers have been asking for with the iPod. They have also been requesting a full color and fully-designed interface along with wi-fi and Bluetooth along with built in speakers. All of which are found in Apple’s iPhone. Some even ask why this new product has to have a phone incorporated at all. The question is ‘Why not produce a ‘phone-less’ iPod which will allow for a possible price point of $299 instead of $499?’ The answer to that question is the converse of the iPhone cannibalizing the iPod. If such a new generation iPod existed it would surely cannibalize the iPhone28. However, its features are obviously something consumers have been asking for and are eager to purchase. That is why Apple has strategically decided to offer both, but only to offer these ‘6th gen’ iPods about 6-12 months after its initial iPhone offering29. However, ‘What about Apple’s existing iPod line of products, will iPhone cannibalize the iPod?’ Gartner Inc (leading provider of research and analysis to the global IT industry) believes it will and is advising industry to expect it, “A new advisory from Gartner warned that the iPhone could eat into existing iPod sales, as some buyers will want a converged device rather than the dedicated devices currently available.”30 Their report highlighted that Apple has positioned the iPhone as three devices in one: a widescreen iPod (which consumers have been waiting for); a smartphone (a security concern addressed for many using cellular today); and an internet communicator (also a feature consumers have been asking for). However some argue that sans (without) the phone, iPod loyalists are waiting for widescreen touchscreen video iPods, not the smartphone. This point is adequately argued by HardDrive Life, “What do the current iPods cost? The Nano sells at $149, $199 and $249 for its 2, 4 and 8 GB sizes respectively. The video Ipod models start at $249 and $349 for 30 and 80 GB models. The iPhone will cost $499 or $599 for 4 GB or 8 GB models…Parents will have to get the message that THIS IS NOT AN IPOD. It’s a feature-rich smart phone, or a step further, a portable PC (running OS X). This is not like their son or daughter’s RAZR or Sidekick they want to ditch. It’s a whole other level of phone, once reserved for journalists and business-types…I just don’t see any parent (or practical-thinking teen, for that matter) getting an iPhone for its iPod features when the music/video only devices do such a superior job already.”31 Other analysts agree with this blogger, Barry Ritholtz discusses his take on Street Insight’s views of the iPhone cannibalizing the iPod’s sales, “I do not see the iPhone as cannibalizing Apple's iPod sales. First, the iPhone creates an entry point into a huge market for mobile phones. Second, it creates an even higher end iPod model for Apple to sell, between the existing iPod models and the new iPhone…As drool worthy as it is, I am not sure if I will be getting an iPhone. However, we can assume that the same touchscreen device will available - without a phone built in - as a high end touchscreen iPod. That would be a must have for me and a lot of other Apple fans, and I would expect to pay a healthy premium for it.”32 In addition, according to Innoblog, “Some analysts already have argued that Apple actually set an artificially high price tag to minimize cannibalization of its profitable iPod line.”33 However it should also be recognized that if the iPhone price is too high it will limit iPhone sales and work against Apple’s supposed strategy that Innoblog is proposing. 28 http://www.tuaw.com/2007/01/10/will-the-iphone-cannibalize-ipod-sales-or-vice-versa/ 29 http://arstechnica.com/journals/apple.ars/2007/03/05/rumor-6th-gen-ipod-video-taking-a-back-seat-to-the-iphone 30 http://www.itnews.com.au/newsstory.aspx?CIaNID=44596 31 http://www.netscape.com/viewstory/2007/01/10/iphone-watch-day-1-why-apples-iphone-will-not-cannibalize- ipod-sales/?url=http%3A%2F%2Fharddrivelife.com%2F2007%2F01%2F10%2Fiphonewatchday1%2F&frame=true 32 http://ce.seekingalpha.com/article/24338 33 http://www.innosight.com/blog/index.php?/archives/79-A-Disruptive-Assessment-of-the-iPhone.html MRKT 620-102 Team B – Apple’s iPhone Page 12 of 36 Monday, April 23, 2007
  13. 13. With the foreknowledge that iPod fans may not have to wait long for their 6th Gen iPods, there may be justification in their observations to ‘wait and see’. According to various forums like the AppleInsider, Apple plans to launch new iPods with WiFi towards the end of the year, just in time for the holidays; although, this has yet to be confirmed by any legitimate sources from Apple Inc. Some feel that Apple will not be releasing any 6th Gen iPod until iPhone sales start to stagnate, which would possibly be a huge mistake given that the Zune WiFi player that Microsoft has marketed could capitalize on the lack of Apple’s initiative to make a marketing move. “Creative destruction occurs when a new generation of technology moves into the mainstream, competes with, and eventually overshadows and replaces its predecessor technology.” --Austrian Economist Joseph Schumpeter Creative Destruction (Innovation and Disruptive Technologies) The music industry has seen records replaced with 8-tracks, 8-tracks replaced with cassettes, cassettes replaced with CDs and finally the CD replaced with digital music files such as mp3s. As the world started to replace CD format with mp3s, Sony was the leader in providing first the cassette walk-man and then the mp3 player. However, all of this changed abruptly with what was considered a disruptive technology, that of the Apple iPod. The Apple iPod was not all that different in its primary functionality, however it was entirely different in its features. The way the consumer enjoys music has drastically changed over the past 5 years as cleaver innovators jumped on the iPod bandwagon and developed ‘iPod accessories’ ranging from iPod integration into automobiles to under the kitchen counter iPod players. This innovative approach to providing consumers with mobile music players has drastically impacted the market with Apple iPods establishing not only dominance but also a sub-culture with cult-like followings. As of April 9 2007, 100 million iPods have been sold in the 5 ½ years since its first sale in November 2001. In comparison to the product it replaced, the Sony walkman, who only seen 50 million sales in a span of 10 years, indeed the iPod has had incredible success. The idea beyond creative destruction or creative disruption is to continually develop, alter and destroy preconceived ideas, established products and processes in the effort to change and grow with the market. The market is constantly changing, especially in technology sectors, and the need to change with it is a necessary component of survival. This is clearly demonstrated in the example of the iPod. However as Apple decides to launch yet another potentially ‘disruptive’ technology, the iPhone, the question is will the iPhone displace current cell phone leaders like Nokia, Motorola or Blackberry like it did with the Walkman and Sony? We have addressed the possibility that the iPhone may displace the iPod and Apple becoming a victim of its own creative destruction, however it is likely that the marketing in December of the 6th generation iPod that will eliminate this risk. The iPhone is targeted to compete with not just the cell phone market, but also the PDA market. Its superior design and integrated features make it unique in its appeal not just to the cult-like iPod fans, but also those who seek to eliminate the need to carry numerous devices. An added issue in comparison to the existing cell phone market is the iPhone’s “stunningly clear, large iPhone screen and its unique sensor-based interface will provide a truly distinctive user experience.”34 However some argue that Apple’s choice of exclusive carrier Cingular may negatively impact iPhone’s ability to be truly disruptive. “Apple decided to be an arms-length provider to Cingular, America’s leading mobile operator. This approach minimizes Apple’s risks and allows it to get to market quickly, but it also provides fewer degrees of freedom for Apple to offer a truly breakthrough offering. Cingular is far from a perfect operator. Consumers accustomed to a seamless experience with Apple products might find themselves disappointed with the bumps and bruises that come from interacting with Cingular.”16 Another key aspect to consider is that Apple is once again facing a well developed sustaining technology (but in this instance there are numerous incumbents) as a late entrant into the cellular market; not utilizing improved 3G technology; and setting a higher price tag in comparison to its competition, could undermine long term demand which will be the deciding factors as to its success or failure. Regardless of its long term success, the Apple’s iPhone has truly delivered a genuinely disruptive user interface. The iPhone’s ability to intuitively zoom without the need for the users to use specific buttons, the device’s 34 http://www.innosight.com/blog/index.php?/archives/79-A-Disruptive-Assessment-of-the-iPhone.html MRKT 620-102 Team B – Apple’s iPhone Page 13 of 36 Monday, April 23, 2007
  14. 14. accelerometer - which detects the orientation of the device to rotate the viewing area accordingly, and the “most revolutionary user interface” feature - the multi-touch screen which allows a user to “glide through albums with Cover Flow, flip through photos and email them with a touch, or zoom in and out on a section of a web page — all by simply using iPhone’s multi-touch display”35 makes this product a disruptive technology regardless of its long term sales. (see youtube.com video demonstration of disruptive features: http://www.youtube.com/watch? v=YgW7or1TuFk) 35 http://www.apple.com/iphone/technology/ MRKT 620-102 Team B – Apple’s iPhone Page 14 of 36 Monday, April 23, 2007
  15. 15. GEOGRAPHY, CLIMATE, AND NATURAL RESOURCES ENVIRONMENT European Union Geography36 In 1993, an organization known as the European Community was recharged and reorganized to form the European Union. The European Union has twenty-five member countries - Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. Europe is traditionally reckoned as one of seven continents. Geographically, however, it is the northwestern peninsula of the larger landmass known as Eurasia (or Africa-Eurasia): Asia occupies the eastern bulk of this continuous landmass and all share a common continental shelf. Europe's eastern frontier is delineated by the Ural Mountains in Russia. The south-east boundary with Asia is not universally defined. Most commonly the Ural or, alternatively, the Emba River serves as possible boundaries. The boundary continues to the Caspian Sea, the crest of the Caucasus Mountains or, alternatively, the Kura River in the Caucasus, and on to the Black Sea; the Bosporus, the Sea of Marmara, and the Dardanelles conclude the Asian boundary. However, numerous geographers consider Azerbaijan's and Armenia's southern border with Iran and Turkey's southern and eastern border with Syria, Iraq and Iran as the boundary between Asia and Europe because of political and cultural reasons. The Mediterranean Sea to the south separates Europe from Africa. The western boundary is the Atlantic Ocean; Iceland, though nearer to Greenland (North America) than mainland Europe, is generally included in Europe. There is ongoing debate on where the geographical centre of Europe is. Land relief in Europe shows great variation within relatively small areas. The southern regions are mountainous, while moving north the terrain descends from the high Alps, Pyrenees and Carpathians, through hilly uplands, into broad, low northern plains, which are vast in the east. An arc of uplands also exists along the northwestern seaboard, beginning in the western British Isles and continuing along the mountainous, fjord-cut spine of Norway. This description is simplified. Sub-regions such as Iberia and Italy contain their own complex features, as does mainland Europe itself, where the relief contains many plateaus, river valleys and basins that complicate the general trend. Iceland and the British Isles are special cases. The former is a land unto itself in the northern ocean which is counted as part of Europe, while the latter are upland areas that were once joined to the mainland until rising sea levels cut them off. The few generalizations that can be made about the relief of Europe make it less than surprising that the continent's many separate regions provided homes for many separate nations throughout history. Demographics37 Since the Renaissance, Europe has had a dominating influence in culture, economics and social movements in the world. European demographics are important not only historically, but also in understanding current international relations and population issues. Some current and past issues in European demographics have included religious emigration, race relations, economic immigration, a declining birth rate and an aging population. In some countries, such as the Republic of Ireland and Poland, access to abortion is currently limited; in the past, such restrictions and also restrictions on artificial birth control were commonplace throughout Europe. Furthermore, three European countries (The Netherlands, Belgium and Switzerland) have allowed a limited form of voluntary euthanasia for some terminally ill people. In 2005, the population of Europe was estimated to be 728 million according to the United Nations, which is slightly more than one-ninth of the world's population. A century ago, Europe had nearly a quarter of the world's population. The population of Europe has grown in the past century, but in other areas of the world (in particular 36 http://geography.about.com/library/faq/blqzeu.htm http://en.wikipedia.org/wiki/Geography_of_Europe 37 http://en.wikipedia.org/wiki/Europe#Demographics MRKT 620-102 Team B – Apple’s iPhone Page 15 of 36 Monday, April 23, 2007
  16. 16. Africa and Asia) the population has grown far more quickly.[9] According to UN population projection (medium variant), Europe's share will fall to 7% in 2050, numbering 653 million. United States Geography38 North America is the third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km) (if Eurasia is excluded), and the northern of the two continents of the Western Hemisphere. It is bounded by the Pacific Ocean on the west, the Atlantic Ocean on the east, the Caribbean Sea, Atlantic and Pacific oceans, and South America on the south, and the Arctic Ocean on the north. Canada covers most of the northern half of North America (much of which is sparsely populated). Alaska, the largest state of the U.S.A., occupies the northwestern part of the continent. The first inhabitants of North America are believed to have come from Asia at least 20,000 years ago, some of whom are believed to have come over the Bering land bridge. Europeans, such as Christopher Columbus and many others made discoveries in North America. As human settlement in North America has evolved, now "Most people live in towns and cities with larger cities along the east and west coasts." North America consists of all the mainland and related offshore islands lying north of the Isthmus of Panama (which joins with South America). "Anglo-America" can describe Canada and the USA together. "Middle America" is used in reference to the region of Mexico, the republics of Central America, and the Caribbean. Its natural features include the Rocky Mountains, the Appalachian Mountains (the largest mountains in the east), the Great Lakes, and the Mississippi, Missouri, Rio Grande, and St Lawrence rivers. Climate is mainly determined, to a large extent, by the latitude, ranging from arctic cold in the north to tropical heat in the south. The western half of North America tends to have wilder and wetter climate than other areas with equivalent latitude, although there are steppes (known as "prairies") and deserts in the "American Southwest" (Arizona, Colorado, California, Nevada, New Mexico, Utah, Oklahoma, Texas), along with neighboring parts of Mexico. Surface and Climate39 The Rocky Mountains stretches from north to south, in contrast to South American cordilleras lean on, west, elevated plateaus, which helps to develop large-sized rivers; less high and send to the east more expanded ramifications. The mountain systems do not allow indefinite connection with the cordillera system with exceptions. They lie in chains parallel to the nearest coasts in North America. These are named the Appalachians or Alleghenies. The Great Plains is the broad expanse of prairie and steppe which lies east of the Rocky Mountains in the United States and Canada. The narrow plains in the Mexican coast and the savannas of the Mississippi are analogous to, respectively, the Patagonian steppes and the pampas of the Piranha, Paraguay, and Rio de la Plata. Thus the Appalachians and the mountain chains of Brazil are regarded as creating similar interruptions to the plains community. North America extends to within 10° of latitude of both the equator and the North Pole. It embraces every climatic zone, from tropical rain forest and savanna on the lowlands of Central America to areas of permanent ice cap in central Greenland. Sub arctic and tundra climates prevail in north Canada and north Alaska, and desert and semiarid conditions are found in interior regions cut off by high mountains from rain-bearing westerly winds. However, most of the continent has temperate climates very favorable to settlement and agriculture. Prairies, or vast grasslands cover a huge amount in mountain ranges. 38 http://en.wikipedia.org/wiki/Geography_of_North_America 39 http://en.wikipedia.org/wiki/Geography_of_North_America MRKT 620-102 Team B – Apple’s iPhone Page 16 of 36 Monday, April 23, 2007
  17. 17. INFRASTRUCTURE ENVIRONMENT The mobile phone infrastructure appears to be a major obstacle in launching the iPhone in Europe. It appears that the first generation iPhone will be 2.5G compliant. That may satisfy American consumers, but it will not suffice in Europe. The 3G infrastructure lacks 3G radio, open architecture, and a removable battery. Having a closed platform has always been in line with Apple’s philosophy. 2.5G EDGE date is the prevailing standard in the USA. The 200 kbps is unacceptable by European standards. Apple marketing must overcome this by attracting customers to the iPhone in a manner that they will not want to wait for the 3G version which will possibly be available in January 2008.40 -One possibility, however risky is putting off the launch of the 2.5G version until a 3G version is ready. That may allow time for competitors to garner potential iPhone customers -The other possibility it to postpone the 3G version of the iPhone later, but Apple may risk losing the EU market altogether. -Skip a 3G version and press onward for the 3.5G standard featured by HDSPA with a stealthy 1.7 Mbps Neither alternative addresses the removable battery, which is a demand of European phone consumers. The closed platform is an idiosyncrasy that even Europeans are used to with the iPod. The serious infrastructure hurdle that remains is the choice of a standard Option Standard Implications Option 1 Launch in 2.5G Gain early adopters. Dissapoint tech-savvy Europeans. Make launch date of June 2007 Option 2 Launch in 3G Gain acceptability by Europeans. Offer the same 3G standards that are in place. Post pone launch Option 3 Launch in 3.5G Postpone iPone launch even longer. Gain cutting edge 3.5G standard featured by HDSPA with 1.7 Mbps transfer rates. 40 Ziegler, Chris. “3G iPhone on track for early ’08.” Endgadget. February 23, 2007. MRKT 620-102 Team B – Apple’s iPhone Page 17 of 36 Monday, April 23, 2007
  18. 18. COMPETITIVE ENVIRONMENT Apple will release their first handset, the iPhone, in June 2007. In order to predict its performance in the market, we have to first understand the competitive environment it is surrounded and then compare the iPhone’s function in terms of Apple’s strategies to beat other competitors. Today, the handset vendors keep developing and adding new functions into their products. Ten years ago, nobody can imagine that a cell phone can be a camera, a media player or even a mini computer. But today, all those functions are becoming a standard in terms of cell phones. Although it is Apple’s first “phone” product, the iPhone lives up the hype, and presents a significant challenge to certain handset vendors. One of the key areas Apple impacts the competitive environment is in user interface (UI). Apple builds a phone that is easy and genuinely pleasurable to use. Why hasn’t anyone designed a bar phone with a slide lock/unlock switch found on every iPod (other than the shuffle) since its launch? Palm and RIM do include a dedicated slider/button for silencing the phone, and Nokia has a wonderful mini-menu for invoking frequently used features. Unfortunately, Nokia then puts the menu in the absolute worst possible location: under the on/off switch (press quickly, the menu pops up - press and hold, and the phone turns off), where no one could possibly discover it. Moreover, SEND and END keys are the equivalent of a steering wheel on a car, but Sony Ericsson and Nokia don’t label their SEND and END keys anymore – on Sony Ericsson phones, they actually double as menu selection buttons. Even an unlabeled button might work if it gets specially lit up when appropriate (like when the phone is ringing) so users aren’t left to guess which button to press to accept the call. Apple will also likely take credit for innovations that have appeared on existing products. For example, the iPhone’s tabbed phone application looks a lot like a Palm Treo 680, and Palm has offered threaded SMS for years. Palm even offers visual voicemail, but the iPhone’s implementation is more like unified messaging than just VCR-style controls. With a 480 x 320 touch-screen (no number pads) and either 4 or 8 GB of flash storage, it is simply a widescreen video iPod. Sony Ericsson also offers a 4 GB, touch-screen music phone, the W950, which it sells in Europe and Asia. But Sony Ericsson doesn’t take this innovative UI and apply it throughout the product, as Apple has done. (The W950i still has a number pad.) The touch-everything UI is never seen before. Despite some people preferred hard buttons with tactile feedback when dialing the phone, the iPhone still takes UI innovation beyond telephony and into media, as well. Another feature that may makes Apple a winner on the competitive cell phone market is that it provides a complete music solution. Even if Apple does not announce a phone, just the threat of Apple’s entry could spur innovation in terms of the music value proposition. There are plenty of phones that play music, but very few true music-phones. Most make you work to synchronize it from your PC, most have terrible user interfaces, and even the dedicated media control keys (on the phones that actually have them) only work when you're in "music" mode, making background listening a chore. Sony Ericsson's Walkman line gets closest to the ideal, and has been rewarded with record sales. So there's definitely a market for a converged music phone done right. Apple also doesn’t release half products; an iPod comes with everything you need to listen to music. This is not the case in the cell phone industry, where even phones promoted as flagship music devices, like Samsung’s SYNC at Cingular, lack the basics like headphones or enough memory to do anything useful. Verizon Wireless sells a $30 Music Essentials Kit for its musicphones that provides headphones, a data synchronization cable and PC synchronization software. Quick note to Verizon Wireless: if they are essentials, they should be included. Yet even the Essentials Kit isn’t complete – a microSD memory card is still another extra. Battery life is another area ripe for fresh approaches. This isn’t like the iPod where Apple essentially cornered the market on new storage technologies (first with the 1.8” hard disk drive, more recently with large amounts of flash memory); there isn’t any commercially available battery technology that Nokia, Motorola etc. don’t know about. But even Samsung’s defeatist approach with the BlackJack – it includes two batteries and a nifty dual charger – is MRKT 620-102 Team B – Apple’s iPhone Page 18 of 36 Monday, April 23, 2007
  19. 19. better than ignoring the problem altogether. Even a converged phone must always be a phone; if the battery runs down while playing songs or videos, it is no longer a phone. Apple could include a second, just-for-voice battery, or achieve the same effect in software. For example, a program that reminds you that your music has been paused. If you continue playing music, you will have less than an hour of talk time left. At some level, the iPhone has been billed as less a smart phone than a super-smart iPod with phone functionality. It comes from a place of being more of an entertainment device with phone functionality added on. From iMac to iPod, Apple is known for building gorgeous hardware with incredible attention to detail. Therefore, conventional wisdom suggests that an Apple phone could have a significant impact on phone design. Conventional wisdom is wrong: handset vendors actually have very little to worry about in this respect. Yes, Apple makes beautiful devices – compared to Dell. But cell phone manufacturers are no slouches in this department. If you are a designer at Nokia, you aren’t worried about a super-thin bar phone from Apple, you’re looking at Motorola’s MOTOFONE and wondering when consumers are going to get tired of the RAZR. Apple’s “nano” blew people away with how thin it is, but nobody is going to build something dramatically thinner than Samsung’s Ultra line anytime soon. With “thin” now an expected characteristic of any phone on the market, handset vendors are already trying to stand out by using colors, materials and finishes (CMF). Motorola, LG and Nokia already use advanced CMF on their premium lines. Apple does have experience in this area, too, but doing CMF well on a phone is not trivial. Not only do some metal cases interact badly with internal antennas, even certain paint colors interfere with cell phone reception. The iPhone runs on a full version of OS X and it is locked down. Apple always has a unique operating system in their products. The creativities and the uniqueness is the trademark of Apple. Moreover, because the iPhone is only carried by Cingular, the unique operating system will maintain the iPhone’s user experience and protects Cingular against a Skype client. But on the other hand, users will not be able to add any new application on the phone. Another thing we will have to take into considerations is the pricing and distribution of the iPhone. It’s not too difficult to imagine what an Apple phone might look like. It’s considerably harder to pick the right business model getting a phone to market. U.S. carriers use different wireless network technologies, and it is very complicated to support more than one U.S. carrier. Just to supply the top three carriers, vendors need to support different combinations of core technologies. For example, Cingular’s network/runtime environment is GSM/Java, Verizon Wireless is CDMA/BREW and Sprint is CDMA/Java. The combinations get much, much more complicated when you throw in carrier-specific user interfaces, messaging clients, email clients, Web browsers, a GPS, PTT and DRM. Many consumers have definite carrier preferences. For the iPhone, Cingular is the only carrier. If you are a Verizon Wireless customer because of coverage reasons or because that is the preferred vendor for your company, you can't buy the iPhone at all. Besides, unlike iPods or PCs, many consumers are locked into contracts with their phones, and can't buy a new model right away. On the other hand, the iPhone could change the competitive landscape among mobile phone operators. For example, Verizon Wireless is current having the position of the “best network” in the market. But after the release of iPhone, if people want the coolest phone in the world, they have to go with Cingular. It pulls the rug out from under Verizon. The market dynamics have shifted rapidly over the last 18 months. Phones that should sell for $400 unlocked are being subsidized down to $49 with a contract. The Samsung SYNC has quad-band EDGE and HSDPA, a QVGA screen, a 2 MP camera, removable memory, an MP3 player with dedicated media control keys and is packed into a thin clamshell case. Cingular is selling it for $49. Even once you factor in the cost of headphones and memory, that's going to be tough to beat. MRKT 620-102 Team B – Apple’s iPhone Page 19 of 36 Monday, April 23, 2007
  20. 20. A WiFi-only VoIP41 “phone” would get Apple around the GSM vs. CDMA and global frequency selection problems, but would not be a direct competitor to cellphones. An Apple WiFi voice device would initially be considered a competitor to the two WiFi VoIP products already on the market: Nokia’s 770 and Sony’s mylo. Neither are complete products today – the 770 is the wrong form factor for voice, and the mylo’s features are half- baked. Apple’s entry would legitimize the category, which hardly exists today, but wouldn’t be an effective strategic move to counter music-phones. There is one more thing to be considering of the iPhone. Apple pulls no punches in terms of voice quality and reception. It does not have a track record in this regard. But other venders already build up their reputations The iPhone may only have limited initial impact because of the fragmented nature of the market and carrier- controlled distribution. But it’s innovation of the UI and the music-phone concept should give the veteran handset venders the challenge and good competition. As David Chamberlain, principal analyst for wireless issues at market research firm In-Stat said, “Right now, there are 10,000 engineers in Asia working on new things because [of the iPhone]." PORTER’S FIVE FORCES EFFECTING INDUSTRY An examination of Porter’s 5 forces for the iPhone’s introduction in the European Union reveals several compelling factors. Each of the factors affects the success of any product or marketing campaign. What is unique about Apple is that it had been successful in other product lines when confronted with what appears to be shortcomings in Porter’s 5 forces. Many of the forces intertwine and compliment each other. For example, touch screen technology presents itself in Threat of New Entrants and Supply issues. Competitive Rivalry A starting point of analyzing the iPhone’s grip on the industry is to look at its competitive rivalry. When entry to an industry is easy then competitive rivalry will likely to be high. This is the case for most of the mobile phone market. If it is easy for customers to choose among substitute products then rivalry will be high. Competitive rivalry will be high if: -It is costly to leave the industry in term of barrier to exit; hence they fight to just stay in. -There is little differentiation between the products sold and the customers. -Competitors are approximately the same size. -Competitors have similar strategies. The first point would not apply to the iPhone. Since Apple has not entered the mobile phone market, there is no barrier for them to exit. Once the iPhone is launched and the product is in the adoption phase, perhaps there would be barriers to exit. There are several companies that are making products that have some of the features of the iPhone, but none that have the niche market capabilities that the Apple hopes to capture. If Apples product and marketing are copied, there may be little differentiation in the market. If the digital music player industry were analyzed, one may observe that while there is little real differentiation between the Apple iPod and other digital music player, Apple still has at least differentiated itself from the rest of the manufactures. While all digital music players play music, Apple has managed to differentiate itself by its software, marketing, and the “look” of the iPod versus other digital music players. Congruently, while all mobile phones make phone calls, and some others play digital music and offer multimedia features, it is essential for Apple to differentiate itself just like it did with the iPod. Apple’s competitors vary depending on the industry. Regarding the mobile phone market, it must differentiate itself from its major competitor in the European Union, Nokia. Nokia makes many products from tires to monitors to phones; however in the scope of the iPhone, Apple has a greater multimedia presence. Nokia has a large foothold in 41 Voice over Internet Protocol (VoIP), is a technology that allows you to make voice calls using a broadband Internet connection instead of a regular (or analog) phone line. http://www.currentanalysis.com/r/2007/s/applephone-1-1.htm http://www.currentanalysis.com/r/2007/s/applephone-2-1.htm MRKT 620-102 Team B – Apple’s iPhone Page 20 of 36 Monday, April 23, 2007
  21. 21. the world’s mobile phone market. Apple will have a distinct competitive rivalry as it has developed a reputation for marching to the beat of its own drum, even if it is in a parallel channel with a competitor. Power of suppliers Suppliers will be essential for the success of Apple’s iPhone. Raw materials are needed to produce the finished product of the organization. This means that do have power. This power comes from: -If they are the only one who supply that particular part or material. -If it is costly for the organization to move from one supplier to another, known as switching costs. -If there is no substitute for their product. Apple has very unique specifications and is very distinct in sourcing its parts. One of the parts that can not be presently differentiated is the touch screen. German company Balda will outfit the iPhone with its advance touchscreen. With the Chinese technology, Balda now makes glass-surfaced screens that are far more sensitive, thinner, and harder to scratch or smudge than the plastic displays that now dominate. The screens offer sharper resolution, and unlike conventional touch screens can sense several human digits simultaneously. Apple has already patented software that would allow a user to place thumb and forefinger on the display, then spread them apart to magnify an image. This is somewhat of a gamble, as Balda was in some financial troubles recently. This makes Apple vulnerable for the first rule of the Power of suppliers. Balda is the only one who can supply the part. This is the Achilles heal of the iPhone because there is no substitute currently for the touch screen which must satisfy the following requirements. Balda's screen is specified because: - The surface is more scratch-resistant, glassier, and harder than existing screens - The screen resists smudging which is necessary to combat the oils in the human finger - The phone housing and display is a single unit, allowing for extra-thin design capable of recognizing several fingers at once Power of buyers Buyers or customers can exert great influence and control over an industry in certain circumstances. This happens when: -There is little differentiation over the product and where substitutions can be found easily. -Customers are sensitive to price. -Switching to another product is not costly. It is arguable whether the M8 or any other multimedia phone will be easily substituted for the iPhone. In the case of the digital music player, there are many alternative devices, but none quite like the iPod. Many customers are price conscious when it comes to mobile phones. Some people only want a phone for free or a very low cost. The $499 to $599 will deter many customers who may opt for a Treo or similar phone. Apple will not initially target that group. Also, it is the carriers that implement a price tag to the customer ultimately. The phone cost the same to Cingular customers, but may have different prices for customers based on loyalty or service packages. The power of the buyer will exert the greatest pressure on the iPhone. There currently is a demand for high-end electronics for early adopters. The Apple brand has established a loyal following of customers. Also, the iPod is utilized by young school age juveniles so its brand loyalty is being established at a young age. Threat of substitutes Are there alternative products that customers can be purchased over iPhone that offer the same benefit for the same or less price? The threat of substitute is high when: -Price of substitute product falls. -It is easy for consumers to switch from one substitute product to another. -Buyers are willing to substitute. There is only one iPod, and Apple has felt mediocre pressure to lower prices. There likely will only be one iPhone with little chance of a substitute. The M8 may offer a competitive alternative, particularly in the Asian market. Nokia, LG, and Samsung may offer alternative phone solutions. Generally, the price to the consumer will be dominated by the phone companies. LG, Siemens and Samsung in particular are in good positions to capitalize on MRKT 620-102 Team B – Apple’s iPhone Page 21 of 36 Monday, April 23, 2007
  22. 22. early on sales of touch phones and establish themselves. However, similar to digital music players, there are Apple iPods, and then there is everything else. Threat of new entrant The threat of a new competitor entering the industry is high when it is easy for an organization to enter the industry. A company needs to address several issues: -How loyal customers are to existing products -How quickly can entrants achieve economies of scale -Would they have access to suppliers -Would government legislation prevent them or encourage them to enter the industry? There are many powerhouses in the mobile phone market. Some companies are working on phones that will have many of the same capabilities as the iPhone. Whenever Apple launches a product, people notice. Apple’s launch of the iPhone must have the same magnitude to create a lasting impression in the minds of a potential customer. That may be the only way to thwart new entrants, because phone with the same capabilities will arrive on the market. The Samsung F700 has a slide out QWERTY keyboard, something the iPhone does not. Other features on competitors’ phones may erode iPhones sales. But Samsung does not market as successfully as Apple. Hence, much of the success and maintenance of the market relies on successful marketing. Given the past history of the iTunes in the EU and issues with the Digital Right Management software, government regulations may spur other competitors to gain market share. MRKT 620-102 Team B – Apple’s iPhone Page 22 of 36 Monday, April 23, 2007
  23. 23. GLOBAL MARKETING MIX A. Product Strategy42 Patent Right – For a high-tech company like Apple, it is important to maintain product exclusivity is crucial. Patent right allows high-tech companies to earn profits from their own exclusive products. iphone is not available in the market yet, but lots of mobile companies in many countries have gone on sale the similar cell phones which look like iphone. Therefore, legal issues investigation should be conducted more carefully to avoid unnecessary law suits or fines. To enter into EU market, professional consultants are required. The patent system in Europe consists of major administrative burden for applicants, holders and regulators are more protected in Europe than in U.S, with European products hold longer product exclusivity and patent extension periods Ex: While all of us blogged on and on about the union of the iPod and the cell phone into something we all loved to call the iPhone, Cisco has quietly been watching and waiting, not saying a word, even though they filed the trademark application for the name 10 years ago. Product Strategy Recommendations: Be different from others – iPhone– combines three products, is a revolutionary mobile phone, a widescreen iPod with touch controls, and a breakthrough Internet communications device with desktop-class email, web browsing, maps, and searching– into one small and lightweight handheld device. iPhone also introduces an entirely new user interface based on a large multi-touch display and pioneering new software, letting you control everything with just your fingers. So it ushers in an era of software power and sophistication never before seen in a mobile device, completely redefining what you can do on a mobile phone. Loyalty The iPhone is oriented more toward to the entertainment market than to the business market. This strategy fully expands Apple’s advantage in terms of the brand loyalty from their iMac and iPod users and the stylish shapes of their products. Apple focuses only on their strength which are designing and developing. For producing and manufacturing, it has contracted equipment manufactures to take care of it. B. Pricing Strategy According to an analysis report from iSuppli, Apple’s iPhone will generate close to a 50+% gross margin (GMP) in shear profit. This is according to their estimates of BoM (Bill of Materials) in which the following they have estimated as the following component breakdown: “iPhone 4GByte will carry a $229.85 hardware BoM and a manufacturing cost of $245.83 yielding a 50.7% gross profit margin on the $499.00 device. The 8GByte version will yield a 53.1% gross profit margin with a total manufacturing cost of $280.83 and a sales price of $599.00”43. These figures iSuppli states are preliminary but in line with nominal margins of Apple’s past product lines of 45%. iSuppli has extensive knowledge and has ‘teardown and dissected’ hundreds of products with a large degree of accuracy (see breakdown of these figures in Appendix C). “In terms of cost, the most expensive component will be either the four or eight gigabytes of flash memory, which provides the local storage for music and other data. At an estimated $35 for the 4-Gbyte version and $70 for the 8- 42 http://blog.tmcnet.com/blog/tom-keating/mobile-phones/the-iphone-arrives-via-cisco.asp http://mrsuan.blogspot.com/2007/01/apple-iphone.html http://magazine.sina.com/commercialage/000/2007-03-13/14377168.shtml 43 http://www.isuppli.com/marketwatch/default.asp?id=376 MRKT 620-102 Team B – Apple’s iPhone Page 23 of 36 Monday, April 23, 2007
  24. 24. Gbyte model, the cost outstrips even the flashiest element of the iPhone, the 320x480 touch screen, which is estimated to cost $33.50 for both models, and slightly less than $35 if a controller chip is added in.”44 It is our opinion that Apple should set up a revenue sharing structure with Cingular where it can leverage a lower priced unit with monthly revenue earnings being a percentage of Cingular contracts with consumers. Since the initial offering exclusively will be channeled through Cingular, Cingular benefits in that those wishing to obtain an iPhone will have to switch to Cingular in order to do so. Apple can leverage this by setting up pricing structuring with Cingular to offer rebates but also take a percentage of the monthly service fees the carrier collects due to the 2- year locked in contract. A rebate is a “small sacrifice to lock in a 2-year phone plan” that could cost between $70 and $100+ a month; thus can very well entice many consumers in purchasing an iPhone and switching Cingular ($1680 - $2400/contract gross). However, as stated earlier, it is pricing of the unit that plays a huge role and will significantly impact sales and wide-spread distribution of the product. The price is often the determining factor for consumers that are deciding to adopt new technologies when they are introduced. Since Apple has previously dropped its product pricing over time, many will simply ‘wait and see’ rather than leap into a contract that locks them in for 2-years to one device and one carrier. A pivotal point in iPhone’s success is the primarily pricing strategy used to target the consumer in both the US and EU. Pricing Strategy Recommendations: It would appear that Apple is planning on using a pricing policy in the US and in EU of skimming by charging a premium price for the iPhone. Skimming would normally be a good pricing strategy if the target market had only two income levels (poor and wealthy) and the consumer is price insensitive. Although this pricing strategy worked well for Apple in the past with their disruptive iPod, it will not work well with their disruptive iPhone for several reasons. First, the cell phone market is much more competitive with many more choices for the consumer than the mp3 player market was in 2001. Another significant factor is the differences in the EU market and the US market with cellular providers. One such difference is the length of the consumer/carrier contract period, if one is even chosen in EU. EU consumers will not enter into a long-term commitment with any provider and thus are used to low switching costs. To sell a high priced cell phone would imply a costly commitment that they are not willing to make and deviates from their social cultural norms. Another factor is EU consumers dictate control over their cellular devices by downloading 3rd party applications, which is not possible with Apple’s closed architecture. Apple has historically kept a closed architecture of their products and it is not expected at this time that they will change their corporate policy for the iPhone. Unlike in the US, the EU carrier’s have little power or ability to control the market thus they often constantly needing to address economic structures to cut costs in order to stay competitive. It is unlikely that they will be enticed to carry the iPhone at such high pricing or wish to setup a revenue sharing structure with Apple. Another concern for EU pricing strategy in staying competitive with pricing is to factor in the VAT (Value Added Tax 17.5% on electronic devices in the UK, 19.6% Fr, 19% Germany) which EU states need to pay for electronic products. A product that costs 2-3 times more than its competition will hit the consumer wallet much harder when it factors in an additional VAT. Considering that most US and EU consumers will not likely wish to shell out a hefty sum before a product has had a chance to be evaluated by the masses, a more competitive ‘penetration pricing’ policy is proposed to stimulate market interest and sales growth. By getting a lower margin and increasing the volume, rather than getting a higher margin but a lower volume, Apple can acquire and hold a share of market as a competitive maneuver. This is a pricing structure that would normally be used in a large middle-income market and would work very well in both the US and EU. Perceived value is still a factor and by providing a 20% margin rather than a 45% margin (after factoring in advertising costs of ~5%), the iPhone will still be able to retain an image of a superior device at an affordable price for most consumers. Little impact will be made into the well-established cell phone market if the target market cannot afford or is unwilling to pay for the device. Additionally, competitively pricing the iPhone units will allow for penetration into the EU market where most consumers would not be enticed by the iPhone considering its cost, and certainly not by any contract commitments. Gross Margin Variances and Revenue Sharing for each Region – US and EU 44 http://www.pcmag.com/article2/0,1895,2085350,00.asp MRKT 620-102 Team B – Apple’s iPhone Page 24 of 36 Monday, April 23, 2007
  25. 25. At a 20% gross margin (GM) for the US, the following cost per unit would be approximately $307.00 for the 4 GByte iPhone (vs. $499.00) and $351.00 for the 8 GByte (vs. $599.00) and is in line with competitive offerings. This is considered a practical approach to the pricing of competitive products such as a PDAs that normally costs between $150 and $300.00 or smart phone devices that extend from $0 to 175.00 with a contract in the US (pricing reflects rebates via carrier/consumer contracts). Revenue in the US would be made up by revenue sharing structure policies with carriers such as Cingular and would provide a continuous monthly revenue stream even after the iPhone product had been sold to the consumer. Apple and Cingular could entice greater consumer switching with a lower cost device while locking in a 2-year contract thus providing revenue generation long after the ‘novelty’ of the iPhone diminishes over time. This structure will not work in the EU for the various outlined reasons above. However, in examining the competitive pricing market, smart phones cost between £120 to £400 in the UK, PDAs in France start at €185.00 and increase to €372.86, therefore to offset the inability to setup a revenue sharing structure, a higher gross margin would be used. A 40% margin, which includes the VAT, yields € 358.36 and € 409.38 respectively for the devices in the France and Germany, however a gross margin of 30% might eliminate the competition in pricing with € 307.16 and € 350.90 and allow a significant profit percentage to vendors as an incentive to push iPhone sales. In the UK the gross margin can be slightly higher at 50%, yielding £291.12 and £349.59 respectively and still allow for a significant profit percentage from venders who will add their costs to the final sales price. Selling Price = Cost / (1 – GM) Base cost: US EUR UK $245.83 4 GByte iPhone (7% SALES TAX) (19% VAT) (17% VAT) $280.83 8 GByte iPhone Before Tax After Tax Before Vat After Vat Before Vat After Vat 4 GByte iPhone 20% GMP $307.29 $328.80 € 225.86 € 268.77 £153.34 £179.40 8 GByte iPhone 20% GMP $351.04 $375.61 € 258.01 € 307.03 £175.17 £204.95 4 GByte iPhone 30% GMP $351.19 $375.77 € 258.12 € 307.16 £175.24 £205.03 8 GByte iPhone 30% GMP $401.19 $429.27 € 294.87 € 350.90 £200.19 £234.22 4 GByte iPhone 40% GMP $409.72 $438.40 € 301.14 € 358.36 £204.45 £239.20 8 GByte iPhone 40% GMP $468.05 $500.81 € 344.02 € 409.38 £233.56 £273.26 4 GByte iPhone 50% GMP $491.66 $526.08 € 361.37 € 430.03 £245.34 £287.05 8 GByte iPhone 50% GMP $561.66 $600.98 € 412.82 € 491.26 £280.27 £327.91 4 GByte iPhone 50.7% GMP $498.64 $533.55 € 366.50 € 436.14 £248.82 £291.12 8 GByte iPhone 53.1% GMP $598.78 $640.70 € 440.11 € 523.73 £298.79 £349.59 1 USD = 0.735 EUR = 0.499 GBP *Exchange rates as of 4/19/0745 C. Promotion Strategy Promotional Strategy iPhone once introduced will be a superior device to all the other phones. Moreover, it is introducing a new paradigm of what the next direction in making smart phones will be. In the promotion strategy, target audience, marketing message, and marketing medium for our message should be well optimized in order to make the promotion of iPhone efficient. Target Audience Doe to the nature of the device it is expected that the buyer of iPhone somehow internet and technology savvy. Most likely will already have a computer with internet connection (in order to take advantage of some of the features of iPhone such as transferring MP3s from iTunes store) consequently these will be individuals between 15 and 35. They are most likely aware of Apples’ products. 45 http://www.gocurrency.com/ MRKT 620-102 Team B – Apple’s iPhone Page 25 of 36 Monday, April 23, 2007