Tribunale Bologna 24.07.2007, n.7770 - ISSN 2239-7752 Direttore responsabile: Antonio Zama Apple’s Business Model in the Context of Internationalization 24 Agosto 2019 Claudiu Chiriac, Gheorghe Hurduzeu, Andreea-Alexandra Chiriac Abstract The main purpose of this paper is to create an X-ray of Apple’s controversial business model in the contex t of internationalization. Fortune states that Apple’s annual revenue in FY 2017 was of $215 B. The Cuperti no based company managed to jump from 492nd place in FY 2006 to 9th place in FY 2017 on the Fortune Global 500 list. According to Forbes, in 2017 Apple had a market value of $752 B being ranked as numbe r one. This is a stunning performance for a company that has as main products mobile phones, laptops and more recently watches and intelligent home assistants. In a business environment where user’s retention is directly proportional to the number of the iDevices they have, the main threat for Apple products comes from its very own products. After presenting different types of business models discussed in the literature re garding Apple’s business model, the focus will be on navigating through Apple tech-chain and discussing whether the topic of self-cannibalization is relevant for Apple’s products. Another insight will be also how the store expansion or internationalization improved Apple’s business model. The findings are creating the premises for a better understanding and anticipation of Apple’s expansion strategy by a reader which is not familiar with their ecosystem. Table of contents 1. Introduction 2. Literature review 3. Reshaping existing business models 4. Research Methods 5. Findings 6. Conclusions JEL Classification: F20, M20 1. Introduction The main purpose of this paper is to create an X-ray of Apple’s business model. It is intriguing how a c ompany that sells mobile phones and laptops manages to annually boost its revenue. This is a consequence of the internationalization, of fact that Apple scores high sales in the first two wor ld’s economies – US and China. In fact, according to Gartner, in 2015, Apple sold more iDevices in China (71.2M) than the US (70.3M). There was no surprise when Apple decided to invest $500M in R&D cente rs in China, at the end of 2017 (Dunn, 2017). Apple entered the tech industry by producing desktop computers mainly for productivity and enter tainment. Apple I was a great piece of technology that created the room for the next iconic product but the company’s extraordinary growth since 2001 has come from a series of innovative products from the iPod to the iPhone and the iPad that, have made connected digital device s ubiquitous in our everyday lives. (Lazonick et al., 2013) When it comes to internationalization, there are two big époques in the recent history of Cupertino based c ompany – ante-iPhone and post-iPhone. If back in 2001 Apple had only 8 stores within the United States a nd in 2007 the number of worldwide stores reached approximately 200, only three years after the launch of the iPhone – in 2010 – the number of worldwide stores almost doubled. With a mainstream product to sell and the idea that “there’s no b etter place to discover, explore and learn about our products than in retail. It’s the retail experience where you walk in and you instantly realize this store is not here for the purpose of selling. It’s here for the purpose of serving” (Cook, 2013) Apple has perfected a true worship strategy among world wide users and carriers through scarcity. A conclusive example would be the long queues formed at each iPhone launch. Apple is requesting special treatment even from carriers. The so-called Apple corners are present in each carrier store and are imposed and standardized by Apple. Apple is also very keen on bloatware strategy - banning the modification of the proprietary softwa re included in their products in order to prevent the pre-installation of carrier’s applications (e.g. Cost Control, Top-up). Even so, according to Dediu (2013), the number of visitors to Apple Stores increased from 25 million/quarter in 2007 to 120 million/quarter in 2012. Just to extrapolate this means that only in 2012 half of Europe’s population visited Apple Stores. That’s a perfect example to stress Apple’s ability to extract extraordinary margins due to an ability to maint ain high price points by providing a ‘unique’ retail experience (Montgomeriea & Samuel, 2013). 2. Literature review Introduced by King Gillette, razor and blades is a business model whose central idea was to give away free razors samples and to make a real profit from the high margin on the blades, which is similar to what Apple does with its software and hardware products (Anderson, 2009). While it may seem a good example, this model has certain flaws. The main weakness of the model is that the protection is granted only by the patent. The risk is that competitors would find convenient to produce auxiliary products for the patented one . This was the case of Gillette when the patent expired. In the case of Apple, this strategy applies to mostly to its software. An example is the patent battle between Apple and Samsung at the launching of the first Samsung Galaxy P hone. The embedded software had similar touch gestures to the ones found on iPhone iOS. According to Cuofano (2017), Apple uses a reversed razor and blade model because it makes the real pro fit on its physical products while offering free or low-priced digital products. According to Reuters (2017), the newest iPhone – iPhone X costs $357.50 to produce and Apple sells it with a $999 price tag. That’s a 64.21 percent gross margin due to the fact that Apple successfully managed to combine the low-c ost manufacture and assembly model of many electronics companies with a luxury brand marketing and pri cing strategy (Montgomeriea & Samuel, 2013). On the other hand, according to Market Watch, in 2017 Apple invested in R&D the equivalent of Albania’ s GDP ($11B). This translates into the further development of the proprietary operating system and hardwa re improvements. There is also the so-called fishbone business model used hand in hand with iPod Classic according to whic h Apple partnered with key stakeholders in the music industry in order to create the environment for the dir ect sale of the overpriced iPod (King, 2012). Currently, this applies to Apple Music platform, the only wa y of using this service is buying a $99/year subscription. Even Steve Jobs indirectly underlined that more complex strategies are better than one, declaring that his “ model for business is the Beatles. They were four guys that kept each other’s negative tendencies in check; they balanced each other…And the total was greater than the sum of the parts. Great things in business are never done by one person, they are done by a team of people” (Isaacson, 2011). 3. Reshaping existing business models While it can be confusing to talk about various business models implemented by the same company and the way they are applied and interlinked in different situations, paraphrasing Steve Jobs it is safe to say that business is never done by one model, it is done by a mix of them. All the aforementioned business models were and are used in the different combinations. One may think of the iPhone as an expensive piece of technology that costs three times less to produce than the marketed va lue but the newer models incorporate another business model – making redundant the existing software/ha rdware. After buying Beats Company, Apple Inc. decided to remove the 3.5 jack connector in favor of a proprietar y one. As consequence, all iPhone 7 models and newer no longer have an audio jack so users can use only t he proprietary wired lighting headphones or Bluetooth wireless headphones. The same goes with the softwa re. Usually, Apple drops software support for devices older than 4 years. This was the case of the iPad 3, Apple reporting in 2016 that no updates will be further available for this device, although it had the same hardwa re as the iPad 4 (except the lightning connector). A recent tweet revealed that Apple purposely is slowing down old devices without notifying users, just to sp eed up the upgrade to a newer iDevice. Figure 1 the tech-chain of Apple is correlated with net sales, net income and number of worldwide stores. I t is called in this manner considering the fact that each and every new product was meant to fill a gap in t he industry caused by the previous one. Source: Data for Apple tech-chain was adapted from Apple (2015). Data for Apple financial statements we re collected from Apple Investor (2015). Data for number of stores were collected from Apple Storefronts (2017) After the Sony Walkman revolution, everyone wanted a more compact device that could store a huge quanti ty of music, without using tapes. The Cupertino company introduced the iPod – a media player that could download and store a huge quantity of songs. This astonishing device was introduced together with a more complex business model. After buying this de vice, the only way to copy songs from/to device was through iTunes software. Practically the users were locked to Apple’s proprietary content. When the first-generation iPhone was launched back in 2007, the same strategy continued to lure the users.