Monopolistic Tendencies of Apple inc.12
Managerial Economics
Student
Patten University
Abstract
This paper will explore the financial economics of a business, its product line, market structures, and long term market prospects. We will explore the product in detail, future outlook of the supply curve, available substitutes and their future outlook. A detailed analysis of whether the products are elastic or in elastic and their time frame. We will also explore the technology that may update or replace the existing product. The author will also provide their opinion of the profitability and necessary changes for increased profits in the future.
Keywords: Apple, Microsoft, iPhone, profit, market structure, elasticity
Managerial Economics
Monopolistic Tendencies of Apple Inc.
After three tumultuous decades, Apple recently surpassed Microsoft to become the largest technology firm in the world. Since his return 13 years ago, Steve Jobs has steered Apple through profound changes to create completely new product lines, such as: iPod, iTunes, iPhone, Apple TV and MacBook Pro. The most recent releases include the Apple watch. The product line consist of the iPod which is a device that stores and plays music, movies, TV shows, audio and videos. ITunes is a media management software created by Apple that allows the user to manage and play audio and video files on the computers, iPhones, iPads and iPod touch. IPhone is Apples version of the smartphone which includes a camera, phone, tablet PC, iPod and includes internet browsing and networking capabilities. Other products include the Apple TV, which is a digital player and a micro console that can receive digital data and stream it to a television. Macbook Pro is Apple’s line of portable computers. Apple watch is a watch that incorporates fitness tracking and health-oriented capabilities as well as integration with iOS and other Apple products and services such as playing tunes, checking messages, making payments, alarms, and tells time.
Apple’s iPhone
We will explore Apple’s iPhone. The iPhone is Apple’s version of a smartphone that combines a phone, camera, music, and internet device in one product. The first version was introduced in 2007 and continues to dominate the market today. Apple has released upgraded versions of the original product approximately every one to two years. The latest versions are the iPhone 6 and 6s. The models vary in size and features. One of the most popular features is Siri, the personal assistant built into the iPhone. Siri uses natural language processing to interpret spoken commands. When you talk to Siri, your voice is uploaded to a server, processed, and sent back to the phone where action is taken. The process only takes a few seconds. Siri can send emails, text messages, set alarms, appointments, reminders, and search for restaurants or make voice calls.
Apple iPhone Demand
The iPhone is in high demand because it combines 4 devices in one and offers a plethora of uses. When Apple released its initial version of the iPhone the demand was high due to the fact that it was a relatively new technology concept. The release of the iPhone was basically a disruptive technology for the cellular phone industry and because of this disruptive technology, Apple was able to create a niche in the market for its products, especially the iPhone. The innovative technology, the sleek design, functionality and the iPhone being considered as a luxury item and status symbol has increased the demand for ownership. The laws of supply and demand state that if the product is in high demand and a current supply will create less products and higher prices, Low demand for an item and current supply equates to more products and lower prices. The demand for iPhone was high due to the aesthetics and superior operating system. The supply was low and even though Apple introduced its products on the upper end of the price scale it, the new disruptive technology created an enormous demand. The demand was so great that as Apple released upgraded models, it took pre-orders for sales of the iPhones. So iPhones are expensive because of high manufacturing cost, a low supply and a high demand. Over the years the demand for iPhone may have periodically slacked off as evidenced by some periods of decreased financial earnings and profits but it has remained relatively strong throughout the years and continues to possess a steady market share. According to the Boston Consulting Group’s growth-share matrix, Apples growth coupled with a steady market share is elevating them into star status. The company’s ability to dominate the marketplace and reinvent entire industries has strategically positioned Apple and relatively insulated them from the competition. Even though there are other smartphones available, the Apple bubble in the market has yet to be penetrated. Apple iPhone models compete amongst themselves due to the fact that each upgrade possesses newer technology and features. Apple iPhone competitors
include Samsung Galaxy S, the HTC One, or the ZTE. Other competitors include Sony, Nokia and new entrants into the market like Xioami, Gionee and OnePlus. The competition has been designed with some of the most advanced hardware and software, larger screens with better resolution, lifelike pictures with up to 20 megapixels. The competitors have also released their products at nearly half the price of the iPhone. Even with the reduced price of the other smartphones, Apple is still able to monopolize the market due to the fact that it has a superior operating system and sleeker design.
Exhibit A. (unit sales of Apple iPhone worldwide from 2007 to 2015 in million)
Exhibit C. iPhone supply and Demand
iPhone Market Structure
Market structure refers to the competitive environment in which the buyer and the sellers operate. In the initial stages and launch of the iPhone, Apple was a monopoly. A monopoly is a situation in which a single group or company owns all or nearly all of the market for a given product or service. Apple holds a monopoly on the iPhone, its software, and controls the media and applications that are installed on it (Witty,B.2013). For the first few years Apple was the leading technology and dominated the market in sales. Apple’s monopolistic tendencies were evidenced by the fact that few retailers were able to sell their products. None of the retailers had control over the prices and were restricted from offering discounts on Apple products. In the initial stages, Apple sought to monopolize the market and partnered exclusively with AT&T as the only cellular service provider for its iPhone. This led to a lawsuit accusing Apple and AT&T creating a monopoly that blocked competitors and reduced consumer choices. Apple eventually won the lawsuit after ten years. As time progressed, other companies developed their technology to decrease the technology gap between iPhone and themselves. At this time the smartphone market is an oligopoly. Other company’s entrance into the smartphone market such as Samsung, Nokia, Blackberry, HTC, Sony, LG, Google and Motorola have created an oligopoly. An oligopoly occurs when there are a few sellers of homogenous or differentiated products. (Salvatore, D.2012). In the case of the smartphone industry, the number of sellers are small, each of them holding a sizeable percentage of the market share, with Apple and Samsung being the dominant players. As of 201, Apple continues to dominate the industry with 49.3 % of the market share of iPhone users. [Exhibit B] In an oligopoly the barriers for entry into the market are high due to patents, control over materials, high customer switching costs and strong customer loyalty for existing brands.
Exhibit B Smartphone brand marketshare
iPhone Elasticity and Inelasticity
The Price elasticity of demand measures how much the quantity demanded of a product changes when there is a change in the price of a product. A product is said to be elastic if the quantity demanded substantially responds to the changes in price. Apple iPhone is in high demand [Exhibit A].The price elasticity of the iPhone depends on where it is being sold. We will examine the price elasticity in the United States. Smartphones are generally a luxury in other markets but very affordable in the United States. The United States also has higher incomes than other countries. Since the price is considered expensive but affordable it deems the iPhone to be inelastic which means that increasing the price would merely affect the quantity demanded for the phones. As they release new models, and the price decreases for old models the price of the old models are elastic. As Apple continues to release new versions of iPhone the cycle will continue. The new versions will continue to be inelastic and old versions will be elastic. Even though there are many substitutes, which in usual cases the demand would be elastic. Since Apple still continues to dominate the market, even though there are many substitutes, the price is still inelastic. In the short run, the iPhone price has proven to be inelastic. The iPhone is still the highest priced and most desired phone in the market. In the long run, older models of the iPhone continue to be elastic in some ways since Apple has had to decrease the price to remain competitive and maintain profitability.
Apple Inc. capital intensive versus labor intensive
Capital intensive is defined as a business process or industry that requires large amounts of money and other financial resources to produce a good or service. A business is considered capital intensive based on the ratio of the capital required to the amount of labor required. Labor intensive s defined as an industry or process where a larger portion of total costs is due to labor as compared with the portion for costs incurred in purchase, maintenance, and depreciation of capital equipment. Apple iPhone costs Apple approximately $175 to $200 dollars to produce and generates approximately $650 in revenue. The estimate of the gross margin to be 65%.The iPhone is assembled in China where labor rates are significantly less than the United States. In the ABC report, the wage of workers on the line is $1.78 per hour. (Dediu,H.2012) It is also said that it takes 17 hours to build an iPhone which equates to about $30 in labor for each device. Apple has confirmed that they produce 3,000 units/devices per shift (10 hour day) and 6000 units per day (Dediu,H.2012) The electronic display of the iPhone, the digital signal processor, the microphone, the memory chip and the microprocessor are all technology and capital intensive, not labor intensive.
Long term Assessment of Apple, Inc.
Although many business analyst have predicted the demise of Apple due to the untimely death of Steve Jobs, the former President of Apple, whom was responsible for developing Apple’s innovative technology. Apple continues to remain strong force to be reckoned with. When Apple technology was marketed as an innovative pioneer it was able to amass a loyal following. Even though other competitors have encroached upon Apple’s lead in the market with the introduction of similar and newer technologies that have entered the market at cheaper prices. Apple continues to have loyal customers that continue to pay for the high priced technology. Even though many analyst think that Apple should have introduced a cheaper version of the iPhone into the market to compete with other cheaper priced androids and smartphones. Apples decision to maintain their high price for innovative technology has proven to be a good decision. IPhone continues to be the most profitable product in the Apple line. IPhone is responsible for over 70% Apples profit. The iPhone models continue to sell at approximately $600-$700 dollars in comparison to the average price of other smartphones costing roughly $200 - $300 dollars.
To avoid repeating historical mistakes, Apple needs to tread carefully on licensing, partnerships, and premium pricing factors that served as significant obstacles in the founding stages of the company. Based on Apple Inc.’s financial health, large cash reserves, high growth rates, and global brand recognition, it would appear the immediate marketing and competitive threats to the company are relatively minor. However a long-term horizon view of the company reveals emerging threats, potential loss of market share, and missed business opportunities.
The following is an overview of the marketing arenas Apple should consider focusing on mitigating competitive threats and increase its product and service market share. Reintroduce Mac Products to the Business Market. Most companies prefer to use traditional PC technology due to its broad compatibility with business software, customer familiarity, and Last Name to competitive pricing. Apple needs to focus on creating an opening for businesses that would be interested in switching to a more user-friendly and elite Mac, but currently worry about Apple Inc.’s premium pricing and the difficulty of conversion to a new system. Apple should move to reestablish its position in the educational arenas as well. It would serve them well to partner with schools and universities to offer the introduction to superior technologies to potential and emerging business leaders. Apple should also focus on developing the next innovative technology as well as updating its existing product line.
References
Savatore, D. (2012) Managerial Economics in a global economy. Seventh edition New York: Oxford university press
Scott, G. (2011), Is Brand Loyalty the Core of Apple’s Success?, Forbes, [online] Available from: http://www.forbes.com/sites/marketshare/2011/11/27/is-brand-loyalty-the-core-to-apples-success
Gartner (2013) Available from http://www.gartner.com/newsroom/id/2623415 accessed July 22,2016
Dediu, H. (12, February 22). How much does it cost to manufacture an iPhone? Retrieved July 21,16, from Asymco.com
Witty, B. (13, September 24). 9 Million Phones in Context. Retrieved July 21,16 from www.18smiles.org
Figures
Exhibit A. Unit Sales of Apple iPhone from 2007 to 2016,
In statista,n.d., Retrieved July 20, 2016, from http://statista.com
Exhibit B. Smartphone user market share, Reprinted from Fortune.com, February 11, 2016., Retrieved July 20, 2016, from http://Fortunedotcom.files/wordpress.com
Exhibit C. iPhone supply and demand. Reprinted from Economic Article sec 3,
October 26,2012., Retrieved July 20,2016 from
http://economicssec3.blogspot.com