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Apple: 8 Easy Steps to Beat

Microsoft (and Google)Paris, September 2010


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.2September 2010 Apple Study v2

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Introduction

Step #1: Believe in the simple

Step #2: Design a full experience

Step #3: Lock customers in

Step #4: Sell at a premium

Step #5: Cross-sell your product lineStep #6: Balance control vs. freedom

Step #7: Think different

Step #8: Assess risks and competition

Conclusion: happily ever after Apple?

Appendixes: Glossary

Table of contents


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.4September 2010 Apple Study v2Source: Bloomberg

Why and how did Apple beatGoogle & Microsoft?

MicrosoftGoogle

Apple

In 6 years, Apples market cap outweighedboth the new and old tech champions


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September 2010 Apple Study v2

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.5

Step #1: Believe in the simple

Apple: the arrogance of simplicity


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What is Apples design process?

Apple envisions use cases to make decisionsabout function and technologies.

Drops 20 % of non-required functionalities toperfectly design 80 % of key user needs.

Vision

Focus

Attention to details leads to excellence in userexperience. Global

When you first start off trying to solve a problem, the first solutions you come up with

are very complex, and most people stop there. But if you keep going, [

] you can oftentimes arrive at some very elegant and simple solutions. Steve Jobs1

1 Q&A: Jobs on iPod's Cultural Impact, Newsweek, 10/16/2010


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Case study: iMac (1998)Simplicity & choices

Simplicity

All-in-one computerSetup & go

Choices

No floppy diskNo extension stack


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Case study: why does making choicesimplies constraint?

It became an intense and almost religious argument about the purity of the system'sdesign versus the user's freedom to configure the system he liked.

Christopher Espinosa (Apple employee #8) speaking about the Macintosh project, 1984

YouTube now supports HD video. Steve Jobs1No sign of upcoming blu-ray

support on Apple computers.

Other companies tried to do everything on thedevice itself and made it so complicated that itwas useless. Steve Jobs2

Music can only be managedthrough iTunes.

App Store approval processas a quality insurance.

We created an approval process [to] avoidapplications that degrade the core experience ofthe iPhone.Apple Answers the FCCs Questions

1 Email on 04/14/20102 Q&A: Jobs on iPod's Cultural Impact, Newsweek, 10/16/2010


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Step #2: Design a full experience

UX: User experience

Apple adopts a comprehensiveapproach


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Apple re-legitimize vertical integration

1 Source: Piper Jaffray2 UX: User Experience

Apple goes againstthe outsourcing

trend.

Contrary to industrialvertical integration,Apple integrates to

control itscustomers global

experience.

Customer-centric

App Store contributed to only1 % in profit!1

Pure financial managementwould have required it to beoutsourced as soon as possible.

Apple adopts aholistic approach to

its business.

ProductsUX2

FinancialMarketing

Business design

Apple advertisement aredesigned internally.

Mobile carriers are only allowedto show their logo at the end.

Apple focuses on avery lean product

line.

Risk management ontechnological choicesand consistency at all

layers

Focus

Weve reviewed the road map ofnew products and axed morethan 70 percent of them, keepingthe 30 percent that were gems.

Steve Jobs upon his returning toApple in 1997


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Apples vertical integration offers threecompetitive advantages

Our competitors, Dell and Compaq, are distribution companies [].They dont create anything.

Steve Jobs, Time, Oct 1999

Apple acts as anabstraction layer.

Technical complexityhidden behind slick

and intuitive UI:seamless experience.

Simplicity

Thanks to hardwareand software tight

integration, Applesproducts offers great

quality.

Quality

Apple does notdepend on its

suppliers technicalbreakthroughs.

It can innovate on

hardware andsoftware at its ownpace.

Innovation


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Case study: the digital music revolution(2001-2004)

Agreements with the music industryDistributionDRM1

iTunes softwareAvailable on Mac & PCReliable software

Chose high-speed FireWireinstead of USB1Game-changing click wheelApples design guidelines applied

Apple provides a comprehensive music experience1 Digital Rights Management (DRM): technologies used by content owners to control usage of music, movies


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Case study: Apples vertical integrationin hardware for consumer electronics

Apple controls every step: it ensures that almost every hardware and

software parts are customized to perfectly fit its needs.


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Step #3: Lock customers in

iTunes goal is to lock the consumer in


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iTunes revenues are insignificant

Hardware

Software

82% 18%63%

37%iTunes Store

Other software

Revenue Distribution in 2009

Source: Apple annual reports

The iTunes Store represented only 11 % of Apples revenues in 2009.

$4.1 bn

$6.6 bn

$30 bn


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Case study: App Store revenuesare a drop in the bucket

$6.8 bn Revenues generated by iPhone (hardware) salesin 2009

(22 % of Apples revenues)

$400 m Revenues generated by App Store sales since its creation

< 1 % App Store contribution to gross profit since its creation

Source: Keynote WWDC 2010, Piper Jaffray

Apple authorizes and sometimes promotes apps competitorsto its iTunes Store during keynotes.


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Yet iTunes goalis to lock the consumer in

1 Deutsche Bank.2 There are no DRM on iTunes Music since 2009.3 Source: Clayton Morris

iTunes-devices relationship is locked Consumers lock themselves in

$100spent per device on av.1

150 miTunes accounts linked with creditcard (painless buying experience)3

One-way sync(Palm controversy)

FairPlayDRM software invented by Apple,protecting videos, eBooks, apps2

Great customer loyalty (user retention/walled garden)


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Step #4: Sell at a premium

Apples revenues come from highmargin hardware products


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Case study: Apples profit comes frommargins in hardware (iPad)

$2301

1 Source: iSuppli

$130 (Industry standards)

$499

Margin:40 %

Costs of materials andmanufacturing

$200

$70 Cost of sales


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Big picture: hardware drivesApples gross margin


Biggest gross margin growth in the industry

23%

28% 29%

33%

40%

2001 2003 2005 2007 2009

iPod iPhone iPadiPhone 3G

vs.


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Step #5: Cross-sell your product line

Apple brand appeal drives its productline


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Who is the iCustomer?

The iCustomerneeds allApple products to maximize his user experience.

1 Prices for entry-level models.Source: Apple, Morgan Stanley, Gartner.

+Product lifecycle: each new product implements appealing new features, strongly inducing theloyal iCustomerto buy new products (iPhone 3GS to iPhone 4)

Product line covers all markets, all price ranges, all needs with an accurate segmentation.

Market leader 100m iPhones sold by 2011 (est.) 8 % market share


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Halo effect1 + seamless experience with mobile devices requires a Mac

Case study: iPod and iPhonedrive Mac sales

1 Halo effect: e.g. a product (the iPod) has positive effects on our perception of something else (the Apple brand)Source: Apple annual reports, Oppenheimer

0

10

20

30

40

50

60

0

2

4

6

8

10

12

14

2002 2004 2006 2008 2010E

iPod (right axis)

Mac (left axis)

iPhone (right axis)

iPod andiPhonesales, m

Macsales, m

40 % of Apple revenues comes from Mac sales (desktop and laptop).


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Integration reinforced by retail strategy

0

50

100

150

200

250

300

0%

5%

10%

15%

20%

25%

2002 2003 2004 2005 2006 2007 2008 2009

% revenue from Apples retail stores

Number of Apple stores

Contribution to revenue starting to plateau (but profitability sacrificed to enhance buyingexperience) but still Apple Stores are a place where the company can:showcase a 100 % Apple environment (to appeal the iCustomer)have a trained sales force selling its products.


We want to make the best buying experience in the world []. Its impossible to get

knowledge at the point of sale. We cant thrive in that environment. Steve Jobs, D2

Apple Stores fosters the brand appeal and consequently, the halo effect.


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iCustomers will drive Apples sales

Apples main focus is the consumer market where every person votes for themselvesSteve Jobs, D8

However, thanks to its thriving success in B2C, Apple will be able to raise itsmarket share in B2B


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How did Apple cross the chasm?

Source: Apple, Electronista

iPhone and iPod sales have enabled the Apple brand to cross the chasm.

Killer products

Brand leverage

Immediatemainstream

adoption+

Example: Amazon Kindle sold 3 m units in its first year. Apples iPad did the same in 80 days.


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Step #6: Balance control vs. freedom

Apple needs an ecosystem


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Case study: how Apple failed in the 80s

1982: Steve Jobs forces Bill Gates to develop productivity software only for theMac

1985: Apple allows Microsoft to use Mac technologies in Windows in exchange ofa Word and Excel upgrade for Macintosh

1988-1995: 7-year legal battle lost by Apple

1995: Launch of Windows 95 has definitively dwarfed Apples share in the PCmarket

We werent so good at partnering with people []. If Apple could have a little more ofthat in its DNA, it would have served it extremely well. Steve Jobs, D5, 2007


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Lessons learned!

Apple:understood their marketstructuregave them what they wantedmost (DRM for music,price control for publishers)

Crucial to iPhones success:AT&T first allowed Apple,which had no experiencein this market, to make the phonethey wantedSet a standard for others

Contrary to the Mac, Apple has attracteddevelopers on iOSGround breakingrevenue sharing56 % of US mobile devon iPhone(90 % are single-platform)1

Apple keeps partnering with its #1competitor because its the best atcertain services (native apps on iOS):

SearchMapsYouTube

Copyright owners Carriers

GoogleDevelopers

1 Source: Millenial Media

Apple understood it needed to partnerwith other players.


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September 2010 Apple Study v2..

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Mobile application paradigms:Native Apps vs. Web Apps

Apples model put the emphasis on native apps (iPhone SDK), but alsopromotes HTML5 (iAd, WebKit). Flash represents the past.

SaaS: Software as a service (see Wikipedia)


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Case study: What is Apples vision aboutmobile applications?

Long-term vision: promoting open standards will prevent other players fromexcludingApple, as Microsoft did with its Office proprietary formats.

For Apple HTML5 is a complement to the curated App Store model,

providing developers with liberty and an open architecture.

Near future


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Step #7: Think different

From Wikipedia: Cloud computingis Internet-based computing, whereby shared resources, software, and informationare provided to computers and other devices on demand, like the electricity grid.

Apple uses the cloud to foster anew computing paradigm.


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What was Apples vision of computing ?

Personal computer= only digital hub

Applications and UX= glue

Devices = mediaconsumption/creation


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iPad embodies the transitionto post-PC era

New inputtechnologies +

Progress inUI

We are scratching the surface on the kind of apps we can build for it. [] One can

create a lot of content on a tablet. Steve Jobs, D8

Personal computersare trucks: most

people do not needsuch an extensive

interface.

Other devices,including tablets, willbe mainstream, justas cars are great for

everyday life.

People will turn to a more intimate anddirect relationship with content


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To make it happen Apple is investingin cloud

Without cloud computing, Applewould lose ground before its

competitors.

Mobile resources areconstraints (end of Mooreslaw1, battery life), while cloudcomputing enables speech

recognition, unlimited storageCompetitors are already

differentiating: Google Voice,

Microsoft Office Online

Differentiation

Without cloud computing, Applewould fail to secure reliable

infrastructure.

It would be dependent oncompetitors (notably Google

and Amazon)Entry barriers are increasing

(experience maintainingsecurity and scalability)

Independence

1 Moores Law: see Wikipedia.

Th i f t


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Three upcoming featuresto build an Apple cloud

Apple makes MobileMefree for all Apple users

Devices will be syncedwirelessly

MobileMe

The cloud is the newglue that links all Apple

devices

Unified storage (iDisk)Streaming vs.downloadingWould greatly improvethe iPad

New glue

Were working on it, Steve Jobs, D8, June 2010

1 Quattro Wireless is a mobile advertising agency bought by Apple in January 2010.

Streaming as a newparadigm formedia

consumption

Streamlined UX: nomore downloading/buyingMedia & entertainmentas a serviceMonetisation: viaQuattro Wireless1

Streaming

Apple bought Lala (an onlinemusic store) in 2009,presumably to build up acloud-based iTunes.com


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Fostering a new Apple environment

Decentralisation

Glue = iTunes.comand MobileMe

Variety of devices


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Step #8: Assess risks and competition

Apples notion of control is thecompanys greatest risk


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Overview of Apple, Microsoft and Google

Source: Google Finance, IPO

Will iOS A d id b th i l f


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Will iOS vs Android be the revival ofMacintosh vs. Windows?

Focus on one strategiclayer

(Windows, Search)

They create competitionto let others innovate in

all remaining layers(hardware, web)

Microsoft & Google: dominate and divide

Tight control on allaspects of UX

The firm cannot support

all development cost andmust focus on a few

products.

Apple: control and decide

Microsoft Office (at the beginning only availablefor the Macintosh platform) was instrumental infostering its sales.

1985: Bill Gates begs Apple to consider licensingthe Macintosh: Apple must make Macintosh astandard.

1996: If we had licensed earlier, we would bethe Microsoft of today (Apple executive VP IanW. Diery)

The same year, Apple reports $740 m loss.

Diff i b i d l


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Differences in business modelsexplain why Google and Apple compete

1 BusinessWeek Online, Oct. 12, 20042 Google I/O 2010

Attacks

Freelyadaptedfroma

commentb

yDominiquedeVitoonaffordance.info

Car dealerApple sells greatproducts.

Differentiation: strives on selectingthe best technologies available

(Googles when theyre the best).

Ive always wanted to own the []technology in everything I do

Steve Jobs1

Road TollMonetises web streams via ads.

Volume: an Internet that is moreopen increases the traffic, whichincreases Googles revenues.

[We dont want a] future with oneman, one company, one carrier

Vic Gundotra, Google VP, Engineering2

GoogleApple

W t i


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Worst-case scenario:How could Android kill iOS?

Apples vertical integration prevents partnerships: why would Apple letothers compete with one of its layer?

Swype, an alternative inputmethod replacing the Androidkeyboard

Technological value

Android benefits fromopen innovation.

Apples walledgarden prevents

others from innovatingin input method,

hardware

Android supports a

variety of devices.

Only Apple productscan use iOS.

User base

Ford, GM announced a line ofAndroid cars

Complementary goods

Android Marketfosters developers

freedom.

App Store approvalprocess is not

flexible.

Developers opinion: Android bestin the long term1

1Appcelerator study


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What are Apples main short-term risks?

Brand image

1 BusinessWeek2Apples Mistake by Paul Graham3 Integrated Development Environment

Apples strategy is alimited number of high

quality products.

If a products had to berecalled, it would

dramatically impact thebrand.

Product

Heating issue in Apple III released in1980, due to Steve Jobs insistence thatthe computer should have no fans.

iPhone 4 antenna controversy

Apples nightmare began

with Jobs departure andended with his return.

Its capacity to focus maybe significantly impeded

without him

Steve Jobs

Apple desperately needs a great day-to-day manager, visionary, leader andpolitician. The only person whosqualified to run this company wascrucified 2,000 years ago.Michael Murphy, San FranciscoChronicle, September 11, 1997

Apples strategy of strict

product control can comeacross as evil.

Developer lock-in: Xcode(only IDE3), Objective-C

(only language)

We have created for the first time in allhistory, a garden of pure ideology, whereeach worker may bloom secure from thepests of contradictory and confusingtruths.

Steve Jobs speaking about the AppStore?No. Dictator representing IBM in Apples

famous 1984 ads. 2


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Conclusion: happily ever after Apple?

Step #9: you cant afford to make theslightest mistake?


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1. Glossary2. Acknowledgements3. Contact

Appendix


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Digital Rights Management (DRM): technologies used by content owners tocontrol usage of contents DX (D5, D8): The Wall Street Journals D: All Things Digital conference

Halo effect: a product (the iPod) has positive effects on our perception of somethingelse (the Apple brand)

Moores law: The number of transistors that can be placed inexpensively on anintegrated circuit has doubled approximately every two years. (see Wikipedia)

IDE: integrated development environment (see Wikipedia) iOS: iPhone OS (operating system) SaaS: Software as a Service (see Wikipedia) Software Development Kit (SDK): set of development tools that allows for the

creation of applications (from Wikipedia)

UI: user interface UX: user experience Vendor lock-in: makes a customer dependent on a vendor for products and

services, unable to use another vendor without substantial switching costs (seeWikipedia)

WWDC: Apple WorldWide Developers Conference

Glossary


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Mr. Gilles Douns (MacPlus) Mr. Christophe Laporte (Mac Gnration) Dr. Christian Chabrerie (Founder and CEO ofMobiNear, professor at cole Centrale

Paris)

To our faberNovel redactors: Clment Ravouna Johan Ismal Charles-Axel Dein

To our faberNovel contributors: Sabrina Distinguin Estelle Specque Matthieu Lecomte Romain Perrier

Acknowledgements


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17, rue du faubourg du Temple 75010 ParisTl. : +33 1 42 72 20 04Fax. : +33 1 42 72 20 03

www.fabernovel.com

Stphane DistinguinFounder & CEO

[email protected]

Cyril VartVP Strategy & Development

[email protected]

Baptiste BenezetSenior Project [email protected]

For all press inquiries, please contactNawal Hamitouche

[email protected]

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