The Consumer Products Industry

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Executive Summary
Apple Apple is making a comeback The iPod is a runaway success

Can Apple Capitalize & Overcome Their Own Demons?

Apples Background
"So we went to Atari and said, 'Hey, we've got this amazing thing, even built with some of your parts, and what do you think about funding us? Or we'll give it to you. We just want to do it. Pay our salary, we'll come work for you.' And they said, 'No.' So then we went to Hewlett-Packard, and they said, 'Hey, we don't need you. You haven't got through college yet.'" --Apple Computer Inc. founder Steve Jobs on attempts to get Atari and H-P
interested in his and Steve Wozniak's personal computer.

Apples Background
1976 The Beginning 1985 -1997 The Missteps 1997 - Present The Rebound

Steve Wozniak creates Apple I Steve Jobs sees potential and insists they sell it together -- Apple is born Apple I is sold without monitor or keyboard (mini mac concept not new)

The GUI wars and the decision not to license the Mac OS Leadership issues Supplier issues Left in the dust because of incompatibility Failed products (Performa, Lisa, Newton)

Steve Jobs the CEO, take 2 A succession of hits iMac iBook iPod iPod Mini Revolutionizes the Music Industry with iTunes

Apples History of Innovation

Newton PDA PowerMac G3 & Powerbook G3 PowerMac G4 Cube iTunes Mac & PC

Mac First Apple Computer Apple III

PowerMac

70s
Apple Disk II

80s
Mac II

90s
New iMac Performas Powerbooks iMac & iBook

2000 - 2005

5 consecutive quarters of profits. Turnaround is in full swing

Source: www.apple-history.com

The iPods Success Factors

PC and MAC Compatible Design Accessories

iTunes Music Store

Auto Integration

Apples Demand Factors - Income

Income
As income of consumers fall, it puts downward pressure on Demand Curve for Apples premium products.

Income

Apples products are normal goods When income rises, demand for their products increases

As Income of consumers rises, demand for Apples premium products increases. Quantity

Apples Demand Factors Prices of Related Goods

Prices of Related Goods

Price

Substitutes Computers made by other manufacturers Complements Software Peripherals Internet service

Apple faces negative pressure on their demand curve when competitors reduce prices

Apple must continue to innovate in computers and addons to counter pricing pressure

Quantity

Apples Demand Factors Taste

Apple faces negative pressure on their demand curve when competitors introduce products that attract consumers away from Apple products Apple must continue to make the coolest and most stylish products to keep and attract customers

Taste

Industry leader in design and quality Brand image Cool factor Must have gadgets

Price

Quantity

Apples Demand Factors Expectations

Apple faces negative pressure on their demand curve when consumers decide to not purchase current products because they expect better products in the future Apple must keep new innovations secret to avoid reductions in demand for current products

Expectations

Consumers expect the coolest products from Apple Consumers expect to pay premiums for these products

Price

Quantity

Apples Demand Factors Number of Buyers

Apple faces negative pressure on their demand curve when competitors are better able to attract customers (buyers)

Number of Buyers

Apple historically has catered to a niche market It now wishes to attract the mass consumer market

Price
Apple must continue to offer products that will attract new buyers to the Apple brand

Quantity

Apples Production & Cost Issues

Defects in: Design or Manufacturing

Quality

= = =

Decreased Sales & Decreased Profits Negative effects on Operating Results and Financial Condition Lots of headaches and potential negative effects on Operating Results and Financial Condition

Inventory

High or Low Levels of product components

Third Parties

High reliability on third parties to manufacture and transport products

Apples Market Power

Top Global Brand
(Brandchannel.com)

98 U.S. and 4 International Retail Locations

21 Online stores around the world

Over 17 Strategic Partnerships Innovative Product Design

Stiff Competition
Computers Digital Music Players Music Download Services

Strategies and Goals

Continue to Innovate Expand Distribution Network Keep Costs Low and Quality High Invest in New Product Areas and R&D Apple is committed to bringing the best personal computing and music experience to students, educators, creative professionals, businesses and consumers around the world through its innovative hardware, software, peripherals and Internet offerings.
Apple Inc., 04 Annual Report

Maintain Digital Music Lead

Appeal to Mass Market Leverage Designs of Hardware and Software

+ Economic
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Environment

Apple Revenues
1997 Sales (millions) Macintosh Net Sales iPod Other Music Products Other Services & Products Total Units (thousands) Macintosh Net Sales iPod Avg Sales Price Macintosh Net Sales iPod Gross Margin 1998 1999 2000 2001 2002 2003 2004 4,923 1,306 278 1,772 8,279 $ 5,671 $ 4,862 $ 5,082 $ 6,885 $ 4,403 $ 4,534 $ 4,491 $ 143 345 4 36 1,410 1,079 1,052 1,098 960 1,061 1,335 $ 7,081 $ 5,941 $ 6,134 $ 7,983 $ 5,363 $ 5,742 $ 6,207 $

2,874 -

2,763 -

3,448 -

4,558 -

3,087 -

3,101 381

3,012 939

3,290 4,416

$ 1,973 $ 1,760 $ 1,474 $ 1,511 $ 1,426 $ 1,462 $ 1,491 $ 1,496 n/a n/a n/a n/a n/a $ 375 $ 367 $ 296 19% 25% 28% 27% 23% 28% 28% 27%

Source: Apple, Inc.

Apple Revenues
$9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Other Music Products Other Services & Products Macintosh Net Sales iPod

1997 1998 1999 2000 2001 2002 2003 2004

Source: Apple, Inc.

Apple Revenues
$12,000 $10,000

Apple Revenues (millions)

$8,000

$6,000

$4,000

$2,000

$0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: Apple, Inc.

Apple vs. GDP

$12,000 $14,000 $10,000 $12,000

Apple Revenues (millions)

GDP Consumer Products

$10,000

$8,000 $8,000 $6,000 $6,000 $4,000 $4,000

Durable Goods

$2,000

$2,000

$0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$0

Source: Dept. of Commerce & Apple, Inc.

GDP (billions)

Computers & Peripherals

Apple vs. Consumer Products

$12,000 $9,000 $8,000 $10,000 $7,000

Apple Revenues (millions)

GDP Consumer Products

Consumer Products (billions)

$8,000

$6,000

Durable Goods
Computers & Peripherals

$5,000 $6,000 $4,000

$4,000

$3,000

$2,000 $2,000 $1,000

$0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$0

Source: Dept. of Commerce & Apple, Inc.

Apple vs. Durable Goods

$12,000 $1,200 $10,000 $1,000

Apple Revenues (millions)

GDP Consumer Products

Durable Goods (billions)

$8,000

$800

Durable Goods
Computers & Peripherals

$6,000

$600

$4,000

$400

$2,000

$200

$0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$0

Source: Dept. of Commerce & Apple, Inc.

Apple vs. Computer & Peripherals

$12,000 $120 $10,000 $100

Computers & Peripherals (billions)

Apple Revenues (millions)

GDP Consumer Products Durable Goods

Computers & Peripherals

$8,000

$80

$6,000

$60

$4,000

$40

$2,000

$20

$0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$0

Source: Dept. of Commerce & Apple, Inc.

Apples Focus on R&D

R&D $ (millions) Apple Dell HP IBM $489 $464 $3,506 $5,673 % of Net Sales 6.0% 1.1% 5.0% 5.9%

It took us three years to build the NeXT computer. If we'd given customers what they said they wanted, we'd have built a computer they'd have been happy with a year after we spoke to them - not something they'd want now. Steve Jobs

Forecasts & Projections

Forecasts & Projections

Computer

Media

The Computer Hardware Industry

&

Recommendations for Apple

Continue making must have products Leverage the power of the iPod Stay ahead of the competition Partner with companies that complement the Apple brand Expand retail footprint Keep costs low and quality high Increase market share in the education, business and government sectors