Apple Inc in Consumer Electronics

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    APPLE INC IN CONSUMER ELECTRONICS (WORLD)

    December 2011

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    © Euromonitor International PASSPORT 2CONSUMER ELECTRONICS: APPLE INC

    DisclaimerMuch of the information in thisbriefing is of a statistical nature and,while every attempt has been madeto ensure accuracy and reliability,Euromonitor International cannot beheld responsible for omissions orerrors.

    Figures in tables and analyses arecalculated from unrounded data andmay not sum. Analyses found in thebriefings may not totally reflect thecompanies’ opinions, reader

    discretion is advised.

    This prof i le of Apple Incexamines the company’sope ra ti ons i n consumerelect ronics and re ta i l ing, wi th afocus on fo rwa rd l ook inganalys is of i t s prospects incomp uters and por tableconsum er e lect ronics . A br ief

    overview of Apple Inc’s contentre ta i l ing and operat ionalspeci f ics i s provided tosupplement th e core analys is .

    ScopeSCOPE OF THE REPORT

    Apple Inc

    Consumerelectronics

    Portable computers

    Portable media players

    Smartphones

    Retailing

    Electronics and appliancespecialist retailers

    Internet retailing

    This profile of Apple Inc focuses on its operations in consumer electronics as

    well as its product distribution lines, and examines future opportunities andchallenges for the company globally.

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    STRATEGIC EVALUATION

    COMPETITIVE POSITIONING

    MARKET ASSESSMENT

    CATEGORY OPPORTUNITIES

    BRAND STRATEGY

    OPERATIONS

    RECOMMENDATIONS

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    © Euromonitor International PASSPORT 4CONSUMER ELECTRONICS: APPLE INC

    Apple`s performance in 2010 improved

    significantly with sales increasing by 52%, toUS$65,225 million. The main factor of theincrease in growth was the continued success ofthe iPhone.2010 followed a more moderate performance in2009, when the company was transitioning fromsales of desktops, laptops and media players tofocusing on the iPhone and iPad as its core

    products. Asia Pacific emerged as the fastest growth areafor Apple with sales rising by 160%. However,growth was from a low base as the region wastraditionally dominated by Japanese, Korean, andTaiwanese brands like Sony, Samsung and Acer.In actual terms, Europe contributed most togrowth, with sales rising by 58%. Japan grewfaster at 75%. The Americas remained the mostimportant market for Apple, with US$24.5 billion(excluding retail). The iPhone continued to be

    Apple’s strongest performer in FY2009; in actualvalue terms, it accounted for over 50% of Apple’snet sales growth, with sales rising by 93%.

    Apple Inc Headquarters Cupertino, CARegional Involvement Worldwide

    Category Involvement Smartphones, computers,portable media players

    World smartphoneshare (2010) 16.1%

    Key company factsSTRATEGIC EVALUATION

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    Apple Inc Net Sales vs Net Profit2006-2010

    Net sales Net profit

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    © Euromonitor International PASSPORT 5CONSUMER ELECTRONICS: APPLE INC

    Yearly Performance by Product Line

    US$ million 2010 2009 2010 on 2009% growth

    iPad 4.948 n/a n/m

    iPhone 25,179 13,033 93

    Mac (total) 17,479 13,859 26

    Music (iTunes) 4,948 4,036 23Peripherals 1,814 1,475 13

    Software 2,573 2,411 7

    iPod 8,274 8,091 2Source: Apple Inc

    The success of the iPhone 4 and iPad 2 modelswas instrumental in driving revenues and growingprofitability in 2011. Aside from revenue from hardware sales bothproducts serve as important content deliverydevices through which third party providers sellcontent and applications from which Apple Incderives an increasing revenue stream.In Q2 2011, Apple Inc introduced its iCloud cloudstorage service, which allows users to store andaccess media via the internet on the company’sdevices. The move follows similar productlaunches from companies like Amazon Inc.

    Financial assessmentSTRATEGIC EVALUATION

    Quarterly Performance

    US$ million Q1 2011 Q1 2010 % Y-o-YGrowth FY 2010 FY 20092010 on 2009

    % growth

    Net sales 28,571 15,700 82 65,225 42,905 52

    Operating profit 9,379 4,234 122 14,013 8,235 70

    Operating margin 32.8% 27% +5.8pp 21.5% 19.2% +2.3ppSource: Apple Inc

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    © Euromonitor International PASSPORT 6CONSUMER ELECTRONICS: APPLE INC

    STRENGTHS

    OPPORTUNITIES

    WEAKNESSES

    THREATS

    Apple is present inconsumer electronicswith a strong ecosystemof products and servicesin addition to the Appleretail operations, AppleStores iOS App Store

    and iTunes Store.

    Cross-industry presenceSleek, easy-to-useproducts and a vastecosystem of content andapplications have made

    Apple a desirable brandin portable electronicsand computers with

    exceptional brand loyalty.

    Strong brand image Apple Inc has left itselfunder-exposed to keygrowth markets such asBrazil, India, and Chinalargely due to the highprice point of its coreproduct ranges.

    Developing markets Apple Inc has beenreliant on the iPhoneand iPad to driverevenues, but whilesuccessful so far thisstrategy carries asignificant risk of lost

    market share as growthshifts to new markets.

    Narrow product portfolio

    As integration of contenton in-home and portabledevices increases inimportance, thecompany needs astronger presence in in-home electronics, than

    Apple TV.

    In-home entertainment

    To capitalise onopportunities indeveloping markets andlate adopters indeveloped ones, Appleneeds to develop lowprice ranges in computersand smartphones.

    Economy range

    Apple Inc started out asa computermanufacturer whichresulted in a verynarrow IP portfolio intelecommunicationsbringing aboutnumerous law suits.

    Lack of IP intelecommunications

    In the increasinglycrowded smartphoneand tablet markets,

    Apple Inc’s maincompetitors are quicklycutting prices andaccelerating priceerosion.

    Hardware price erosion

    SWOT: Apple IncSTRATEGIC EVALUATION

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    © Euromonitor International PASSPORT 7CONSUMER ELECTRONICS: APPLE INC

    In order to continue growing Apple will need to increase itspresence in emerging markets,which in turn makes it lessdependent on the US market.It is taking steps in the rightdirection, with Asia Pacific salesrising by 160% in FY2010.

    Although impressive, the growthis from a low base and theregion still only accounts for15% of sales.Sales of the iPhone were themain component of the stronggrowth, but having exhausteddemand from early adoptersand wealthier consumers, AppleInc needs to create anaffordable smartphone to gainaccess to a vast base ofconsumers who use pre-paidmobile service.

    Expanded price range

    A key component of creating aunified experience acrossdifferent types of devices iscloud computing. Apple Inc isvery well positioned with all thenecessary ground work in place:wide install-base of iOS incomputers and portable

    consumer electronics, strongservices portfolio and a widedistribution network.The iCloud service is a follow-on to Apple Inc’s previous cloudservices iTools and MobileMe,and allows users to store anddownload data to their devices. A crucial missing component isin-home entertainment as at thetime of writing the service wasnot available on internet-enabled televisions.

    Cloud-based services

    In the developed world, AppleInc must work to develop apresence in in-home consumerelectronics. This is particularlyimportant as consumers want aplatform that allows them toeasily access their content on avariety of in-home electronics,

    computers, and portabledevices. While Apple Inc hasbeen successful in bothcomputers and smartphones ithas not been able to makesignificant inroads into in-homeelectronics. This makes itvulnerable to competition from

    Google Inc whose Android 4.0platform will likely be installedon internet-enabled TVs andset-top-boxes in addition totablets and smartphones.

    In-home electronics

    Key strategic objectives and challengesSTRATEGIC EVALUATION

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    STRATEGIC EVALUATION

    COMPETITIVE POSITIONING

    MARKET ASSESSMENT

    CATEGORY OPPORTUNITIES

    BRAND STRATEGY

    OPERATIONS

    RECOMMENDATIONS

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    © Euromonitor International PASSPORT 9CONSUMER ELECTRONICS: APPLE INC

    Apple Inc’s line of iPod music players was instrumental in bringing it out of obscurity that it found itself in in

    the late 1990s and early 2000s. Hoping to build on the success of the media players Apple Inc released theiPhone in 2007, which was a significant departure from the smartphones of the time. The key differencewas that the iPhone was media and consumer centric, while smartphones running on BlackBerry, Windowsand Palm OS were mainly tailored for productivity-related tasks and the corporate customer.This departure proved to be a successful gamble and the iPhone along with the iOS App Store emerged askey revenue growth drivers as demand for computers and media players stagnated since 2008. Demand forthe iPhone has increased with every refresh cycle, and in 2010 Apple Inc released the iPad which hasenjoyed a virtual monopoly through most of 2010 and into 2011 when Samsung Corp and Motorola Mobility

    Inc among others released competing products.

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    Apple Inc: Global Retail Sales by Category 2008-2010

    Smartphones

    Portable Media Players

    Peripherals

    Tablets

    Netbooks

    Laptops

    Desktops

    Changing the product mix paves way to current successCOMPETITIVE POSITIONING

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    © Euromonitor International PASSPORT 10CONSUMER ELECTRONICS: APPLE INC

    Apple Inc: Retail Laptop Sales byVolume Distribution 2010

    North America Western Europe Japan ROW

    Demand for Mac computers is mostly confined to thedeveloped markets, with nearly half of 2010 laptopvolume sales accounted for by North America. Although the brand is widely known, its computers arenot price competitive, which makes penetrating mass

    markets in developing countries very difficult. A similar pattern has been observed in the sales of theiPad with 74% of iPad volume sales accounted for byNorth America. The iPad distribution picture in 2010 isheavily skewed by the fact that the iPad was launchedmuch earlier in the US, with a global roll-out lastingthrough 2010.

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    % v

    o l u m e s h a r e

    Computers: Top 5 Global Companies by

    Category Volume Share 2010

    Apple Inc Lenovo Group Ltd Acer Inc Dell IncHewlett-Packard Development Co LP

    Apple Inc remained far behind it main

    competitors in computers, in desktops andlaptops, and had a negligible presence innetbooks in 2010. Although Mac computershave gained popularity they remain pricedhigher than most of the Windows-basedcompetition with a narrower software portfolioand therefore remains a niche brand.The situation is reversed in tablets, where AppleInc operated as a virtual monopoly through mostof 2010 as competing products did not enter themarket until late 2010 and early 2011.

    Apple Inc has limited penetration within desktops and laptopsCOMPETITIVE POSITIONING

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    © Euromonitor International PASSPORT 11CONSUMER ELECTRONICS: APPLE INC

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    iPhone: Global Volume Sales 2007-2010

    Aside from being an important source of revenuefor Apple Inc in 2001-2010, the iPod line provided afoundation for the iPhone. Unlike the competition in2007, the iPhone was largely centered aroundmedia consumption in a smartphone and built toclosely resemble the user experience of the iPodline, building on the content distribution Apple Incestablished with the iTunes store, expanding it toapplications in the iOS App Store. The contentdistribution became an integral part of Apple’secosystem of devices and services, a major sellingpoint for its devices.

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    Media Players: Global Retail Sales by Top

    Brands 2010

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    Apple Inc

    Following its launch in 2001 the iPod quickly

    emerged as the biggest selling portable mediaplayer globally. However, the brand is havingdifficulties gaining mass acceptance in keydeveloping markets like China and Russiaparticularly with the iPod Touch line of portablemultimedia players which have to compete withlower-priced brands and Apple Inc’s iPhone, aproduct that is functionally equivalent to the iPod

    Touch with the telephony added. The iPod brand isalso less popular in markets where content piracyis more prevalent as the iTunes store is much lessof a competitive advantage in those markets.

    Apple Inc dominates within portable consumer electronicsCOMPETITIVE POSITIONING

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    © Euromonitor International PASSPORT 12CONSUMER ELECTRONICS: APPLE INC

    iTunes and iOS App StoreThe two retailing brands are at the heart of thecompany’s content distribution operations.iTunes distributes music, films, shows and othermultimedia content, while the App Store retails

    downloadable applications for the company’srange of iPod Touch, iPhone and iPad.Both services are an integral part of thecompany’s offering drawing in content providersand application developers to provide third partycontent for iOS devices.

    Retailing forms a major part of Apple`s overall operation as the company’s content distribution platforms

    (iTunes and iOS App Store) are its key competitive advantages. Although its retailing operations, especially Apple Stores, saw increasing sales in 2010, its share of the company’s turnover declined as hardwaresales, especially the iPhone and iPad, grew significantly faster.

    Apple Stores Apple currently operates a global network of almost 293 retail outlets. Apple outlets are located in flagship locations, like New York`s 5th Avenue and Tokyo`s Ginza Street orhigh-profile shopping malls, like London`s Westfield.The outlet network is dominated by the US, where 207 of the outlets are located; thus the vast majority ofits retail revenue is derived from the US market.While important in increasing brand visibility, Apple Store sales are lagging behind its online retailing.

    Online services is key to Apple’s success COMPETITIVE POSITIONING

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    Apple Inc: Retailing by Segment 2007-2010

    Internet retailing Store-based retailing

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    STRATEGIC EVALUATION

    COMPETITIVE POSITIONING

    MARKET ASSESSMENT

    CATEGORY OPPORTUNITIESBRAND STRATEGY

    OPERATIONS

    RECOMMENDATIONS

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    © Euromonitor International PASSPORT 14CONSUMER ELECTRONICS: APPLE INC

    By 2013, tablets will overtakelaptops as the dominant form-factor

    in portable computers. Growth willbe primarily driven by: growth inavailability and accessibility of datanetworks, expansion of consumer-orientated cloud computing servicesand rapid price erosion of hardware.

    Apple Inc has started to build on itscontent retail brands to branch out

    into cloud computing with thelaunch of its iCloud virtual mediastorage service in 2011, but is likelyto face an increasing number ofcompetitors in this lucrative market.

    Increased reliance on cloud computing will likely make more powerful laptop computers less necessary and

    the category will likely stagnate. Network data coverage is expected to continue expanding rapidly, meaningthat the global population as a whole will be increasingly reliant on the internet as a primary means ofobtaining information, creating demand for a low-cost device to access this content. The devices will likelybe highly dependent on cloud services for data storage and processing, so the expansion of cloud serviceswill facilitate volume growth and price erosion by decreasing the need for high-performance internalcomponents in tablets.

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    Tablets Laptops

    Tablet volume sales to overtake laptopsMARKET ASSESSMENT

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    © Euromonitor International PASSPORT 15CONSUMER ELECTRONICS: APPLE INC

    MARKET ASSESSMENT

    The switchover from feature phones to smartphones will continue fuelling growth in the latter market acrossthe world, as global smartphone volume sales are predicted to grow by 42% in 2011 and 33% in 2012, toreach 540 million units sold in the latter year. Asia Pacific will be the most important driving force in the global market, as North American and WesternEuropean markets approach saturation. The biggest growth drivers in the region will be China, India,Indonesia and Philippines. These populous markets have experienced rapid economic development andhave developed a demand propensity for feature phones over the review period. A similar picture will takeshape in Latin America and Middle East and Africa, where countries like Brazil, Argentina and Nigeria areexpected to drive smartphone growth. Despite the recent growth, large portions of the population in these

    developing markets remain poor and will likely be looking for economy-priced smartphones with basicfeature sets, as they have done with feature phones.

    Growth shifting to developing markets in smartphones

    Size of bubble represents 2010 volume size. Range shown: 4.5-86 million units

    Asia Pacific

    Australasia

    Latin AmericaMiddle East and Africa

    North America

    Western Europe

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    © Euromonitor International PASSPORT 16CONSUMER ELECTRONICS: APPLE INC

    Despite dynamic growth in electronics andappliance internet retailing, store-basedspecialist retailers will remain the maindistribution channel for consumerelectronics globally. This is due in large partto the likely slow growth of consumerelectronics internet retailing in developingmarkets compared to the growth ofconsumer electronics in those markets.Problems with infrastructure and concernsabout criminality are likely to continuefueling distrust toward internet retailing indeveloping markets despite rapid growth inoverall consumer electronics sales.

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    Revenue by Market as a Percentage of Total Global Sales2010/2015

    2010 2015

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    STRATEGIC EVALUATION

    COMPETITIVE POSITIONING

    MARKET ASSESSMENT

    CATEGORY OPPORTUNITIESBRAND STRATEGY

    OPERATIONS

    RECOMMENDATIONS

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    © Euromonitor International PASSPORT 18CONSUMER ELECTRONICS: APPLE INC

    0%10%20%30%40%50%60%70%80%90%

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    China India Russia Brazil US

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    Monthly Contract Pay As You Go Phone Only

    Growth in smartphones is shifting toward developing markets and late adopters in developed ones. Thismakes lower-cost smartphones instrumental for growth in 2012-2015. China, for example, will emerge as akey market, but in 2010 just less than 1% of Chinese households had a disposable income exceedingUS$65,000 (compared to almost 50% of US households), although this is set to increase by almost 70% by2014. It will still represent 5.7 million households, a market smaller than the Netherlands.Lowering device costs is key to capitalising on growth in developing markets where phones arepredominantly purchased as part of a pre-paid plan, or phone-only. Low-cost smartphones are becomingincreasingly important in developed markets like the US, where an increasing number of consumers haveswitched to pre-paid price plans faced with prolonged financial difficulties. Without moving into lower price-

    bands, Apple Inc will face an uphill battle for mainstream consumers in the biggest developing markets,where competing smartphone brands have a wide product portfolio including low-cost handsets tocapitalise on the decline in the popularity of the Symbian OS.

    Sharp dip in prices projected within smartphonesCATEGORY OPPORTUNITIES

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    © Euromonitor International PASSPORT 19CONSUMER ELECTRONICS: APPLE INC

    The iPad was a big part of Apple’s financial success in 2010 and 2011, but its power as a revenue sourceis fading fast as competitors enter the market and cut prices. In the long run, this price erosion will drive thetablets market, which will largely replace the netbook as a low-cost computer. In laptops, computermanufacturers will turn to ultrabooks: slim, low-voltage, clamshell computers that incorporate sometouchscreen capabilities. Apple Inc has an opportunity to build a touch-centric ultrabook, largely a more powerful version of the iPadwith an optional keyboard to differentiate from other tablets and maintain margins. The key competitor inthese hybrid products will be Microsoft Corp’s Windows 8 OS. Due out in 2012 it is a platform that is toutedto be equally well-suited for touchscreen and traditional clamshell portable computers.

    An Apple ultra-tablet?CATEGORY OPPORTUNITIES

    020406080

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    Average unit price Retail volume

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    © Euromonitor International PASSPORT 20CONSUMER ELECTRONICS: APPLE INC

    Apple Inc’s line of iPod portable media players played a crucial part in the company’s growth over 2000 -2010, but demand for portable media players is declining due primarily to competition from smartphones.Spending on health and wellness products has been growing dynamically in food and non-alcoholic drinkswith related products also reaping the benefits. Garmin Inc’s in-car navigation business has also faceddeclining demand with growing smartphone sales, but the company’s Forerunner line of watch -sized, GPS-enabled, personal fitness computers became increasingly popular in 2011.Demand for health and wellness-related products is on the rise in the US, where much of the attention isfocused on combatting obesity, but the trend is quickly proliferating to some of the largest developingmarkets. iPods remain very popular globally, and adding a line of rugged, fitness-orientated models withintegrated GPS and heart-rate monitors would be the best way to maintain margins and volume demand bydifferentiating from smartphones.

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    ROW US Brazil Russia Indonesia India China

    Harnessing the health and wellness potential in media playersCATEGORY OPPORTUNITIES

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    STRATEGIC EVALUATION

    COMPETITIVE POSITIONING

    MARKET ASSESSMENT

    CATEGORY OPPORTUNITIESBRAND STRATEGY

    OPERATIONS

    RECOMMENDATIONS

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    © Euromonitor International PASSPORT 22CONSUMER ELECTRONICS: APPLE INC

    Hardware Services Content ComputersPortable

    ConsumerElectronics

    A key to the success of Apple Inc has been its unified approach to the consumer experience creating anecosystem around its core products consisting of:

    Building the Apple nameBRAND STRATEGY

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    © Euromonitor International PASSPORT 23CONSUMER ELECTRONICS: APPLE INC

    Apple Inc designs its hardware in a polished minimalist look. While usually not a record setter in terms ofhardware performance, the company’s devices are slim, ergonomic, user -friendly and tend to command aprice premium over most competing products.

    • The company’s products are among the most user -friendly,emphasising simplicity in operation and a minimalist design,along with key performance features like battery life.Pros

    • Most criticism of the products stems from the sacrifice infunctionality for design. Notably the launch of the iPhone 4was accompanied by allegations that the phone’s antennamalfunctioned when the phone was held a certain way.

    Cons

    Apple Inc’s hardwareBRAND STRATEGY

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    © Euromonitor International PASSPORT 24CONSUMER ELECTRONICS: APPLE INC

    The iOS mobile operating system is centered around media consumption and third party applications. Theplatform was a significant departure from smartphone platforms of 2007 when it was launched, as it focusedon user friendliness instead of native productivity applications and multitasking.

    • Apple Inc’s primary content offerings are at the core of itsdelivery platform. Films and music are primarily purchasedthrough iTunes, but an increasing number of on-demandmusic services have been made available on iOS devices via

    applications downloadable via the App Store.

    Services

    • A key competitive advantage for iOS is the wide selection ofsoftware. The company has a significant following in thedeveloper community with most applications being written foriOS first, with subsequent releases for Android and WindowsPhone 7.

    Content

    Apple Inc’s software BRAND STRATEGY

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    © Euromonitor International PASSPORT 26CONSUMER ELECTRONICS: APPLE INC

    All manufacturing operations outsourced to third parties

    Apple outsources the manufacturing of all its products. The majority of the manufacturing is conducted by asmall circle of large suppliers including: Samsung Corp, Hon Hai Precision Industry Co Ltd and QuantaComputer Inc. Amid litigation over patent infringement with Samsung Corp and the bad press Hon Hai Precision IndustryCo Ltd received over a string of worker suicides, it is increasingly likely that Apple Inc will broaden itssupplier base with possible candidates including LG Corp and Taiwan Semiconductor ManufacturingCompany.

    Final assembly conducted by Apple and selected outsourced partners Apple owns a manufacturing facility in Cork, Ireland, which is used primarily for the final assembly of Appleproducts such as iPods, iPhones, etc.Other outsourced assembly operations are located in the US, China, the Czech Republic and South Korea.

    Warehousing, distribution and other operations Apple owns one warehousing facility in California, USA, and outsources warehousing operations in the restof the world.

    Company headquarters are located in Cupertino, California, and there is also a data centre in Newark,California, with a second data centre expected to be opened in North Carolina over the next few years.

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    iOS: Focus on securityWhile the company’s success in the consumermarket has driven revenues since the launch of theiPhone, its sub-standard security credentials havelargely kept it out of securing major enterprise andgovernment contracts.BlackBerry-branded products are certified fortransmission of sensitive data by regulatoryagencies of most major governments and NGOslike NATO. Apple Inc largely ceded the enterpriseand government market to Research in Motion Ltd,as it focused on the consumer market, but rapid

    comodisation of smartphones will continuesqueezing hardware margins making enterprise-orientated products and services increasinglyattractive.

    Move into in-homeOn the consumer side of the market, the iOSecosystem is missing a key component: in-homecontent delivery. The company has released AppleTV, but without support for 1080p video and alimited content library the set-top box is far behindcompetitors like Boxee and Roku.The lack of a compelling in-home content deliverysystem leaves room for Google Inc’s Android 4.0 toenter the market and create a unified experiencewith a single platform running on smartphones, set-top boxes, internet-enabled TVs and tablets.

    Aside from diversifying its hardware line-up, Apple Inc needs to address two major shortfalls in its currentstrategy to stay competitive in the long run. While Apple Inc has been successful in the consumer market, itrisks becoming complacent in the current business model and leave room for competing platforms byleaving two key areas unaddressed:

    Filling the gapsRECOMMENDATIONS

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    Historic value data are given in US$ year-on-year exchange rates, unless otherwise stated.

    Forecast value data are given in real (constant), US$ terms using fixed 2009 exchange rates, unlessotherwise stated.Historic volume data are given in '000 units, unless otherwise stated.Profile coverage:

    Portable ComputersLaptops: Personal computers (PCs) meant for mobile use and must incorporate an external powersource, usually a rechargeable battery pack.

    Other Portable Computers: includes mobile internet-enabled devices that do not fit the definitions forlaptops and netbooks capable of multimedia playback and running software applications.

    Portable Consumer ElectronicsPortable Media Players: portable players that support digital audio, video playback, text and images.Portable Media Players includes: E-Book, Portable MP3 Players, Portable Multimedia Players, OtherPortable Media Players.Smartphones: a device capable of voice communication over a cellular network that fulfills all three of

    the below criteria:Has an identifiable operating system (e.g., Android, BlackBerry OS, iOS, Symbian, Windows).

    Allows installation of software applications.Has a screen size of

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