Apple Inc: Economic Analysis

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Apple Inc: Economic Analysis

Firm Overview

It all began in the garage of a modest house located in the hills of Silicon Valley that marked the beginning of a technology giant known as Apple Inc. Now a public corporation headquartered in Cupertino, California, Apple is a dominant household name that commands a significant market share in mobile devices, personal computers, services, software, and electronic accessories market. Apple's leading products and services include smartphones (iPhone), watch (Apple Watch), music platform (iTunes), tablets (IPad), virtual storage (ICloud), and the personal computer (Macintosh) (Gurdus, 2017). Apple's renowned product is the iPhone that revolutionized the smartphone industry which will also be the product of focus for this analysis.

Market Structure

The market structure of the smartphone industry is oligopolistic. This conclusion is based on the characteristics of an oligopolistic market such as a small number of interdependent firms, a four-firm concentration ratio of above 40%, high barriers to entry, and the existence of non-price competition. The industry displays all of these characteristics. First, it fits the criteria of a small number of interdependent firms. The current firms in the market with substantial market share are Samsung (20.9%), Huawei (15.8%), Apple (12.1%), Xiaomi (9.3%), and Oppo (8.6%) ("Smartphone Rankings Shaken…," 2018). Second, the four-firm concentration is 58.1% which surpasses 40%. Third, due to the intense competition within the market, barriers to entry exist which makes it difficult for new firms to enter the market easily. The sources of these barriers in are economies of scale, product differentiation, capital requirements, the cost of customer conversion, and high research and development costs. Fourth, the existence of non-price competition which is evident as competing in the smartphone industry is more than price but also the specifications the device offers such as battery life, camera capabilities, and storage capacity. Based on these reasons, I conclude that the smartphone industry is an oligopoly.

Market Power

Operating in an oligopoly market, Apple has a degree of market power. The sources of Apple’s market power are its superior brand position, consumer loyalty, and most importantly product differentiation. Apple positions itself as a lifestyle brand, defined as a brand that “embodies the interests, attitudes, and opinions of a group or culture” (Swystun, 2016). With this position Apple is able to attract consumers who prefer a simplistic modern design with high functionality and convenience. As a result of this, Apple consumers are typically perceived as wealthy, creative, and trendy. This leads to the formulation of Apple’s second source, a loyal consumer base. Apple’s loyal consumer base is attributable to two factors, the Apple “ecosystem” and product differentiation. The Apple “ecosystem” is a seamless integration of all of Apple’s products that create a unified and uncomplicated experience for users (Markman, 2018). The ecosystem provides Apple opportunities to leverage relationships with existing consumers (Dudovskiy, 2018). The second factor and also the third source of Apple’s market power is product differentiation. The iPhone X offers consumers “super retina” display, “true depth” camera, face identification, and Animoji ("Future is here: iPhone X," 2017). These unique features illustrate Apples ability to differentiate itself apart from its competitor.

Competitors

Smartphone popularity and relevance is driven by the demand for convenient connectivity to the social world. Consumers want portable connection and seek an ‘all in one’ device to capture and save candid moments, organize tumultuous everyday responsibilities, and provide effortless communication. Currently, in the market, Apple has four competitors who are Samsung, Huawei, Xiaomi, and Oppo. Samsung is preeminently Apple’s top competitor followed by Huawei. Samsung’s popularity can be attributed to their brand image, their product differentiation, and their broader consumer target. Huawei’s recent success is associated with the substitution effect occurring in China. China is Apple’s second-biggest market, and with its economy in decline, consumers are becoming price sensitive, depicting an elastic demand. Due to the premium pricing of Apple, quantity demanded has decreased in China, giving rise to Huawei sales (Gibbs, 2018).

Consumer Target

Apple’s target group is mainly middle to upper-class households with disposable income between the ages of 14 to 55 years old (Alami, 2013). IPhone’s attract teenagers with its variety of applications; it appeals to the adults with its Apple “ecosystem” and engages the older generation with its user-friendly design. All of these functions allow Apple differentiate from competitors while building brand loyalty, prestige, and market power. It is a widely recognized fact that Apples is a prestigious brand that claims a premium price marketed towards affluent consumers. As a result of focusing on such a narrow segment Apple loses patronage from customers with elastic demand. To combat this to a degree, Apple employs special pricing practices to capture these sales. Apple utilizes third-degree price discrimination with their education discount and during the introduction of new models. Identified educators and students are offered a $150 deduction on select MacBooks and IPads (Gartenberg, 2018). This promotion targets students and educators who are price sensitive. In offering these discounts, Apple can increase sales with a discount incentive but maintain premium pricing for consumers outside of the predetermined segment. Apple also employs this price strategy when new products are launched. For example, during the release of iPhone X, the iPhone 8’s was discounted by $100, and the iPhone 7’s were lowered by $200 (Looper, 2018). This tactic allows Apple to capture inelastic consumers, who value the product at its release price, but then win the remaining market when the price is discounted by renewing the demand for an older discounted model.

Non-price Competition/Promotions

The smartphone industry is consistently evolving, and the demand for bigger and better has become routine. In the pursuit of better, price is no longer the only channel of comparison for consumers as they seek a device with superior functions. For firms, this is where their product differentiation is fundamental for non-price competition, an approach to build brand loyalty. Apple builds brand loyalty by providing a storefront for customer support, quality products, the Apple ecosystem, and exceptional product features. This array of advertising reduces customer price sensitivities, which will generate an increase in quantity demanded.  Apples' most recent promotion is the “Switch to iPhone” ads. Each fifteen-second long ad highlights the difference between an iPhone and “your phone.” One ad suggests that unlike “your phone” the iPhone is made with zero waste and a second ad suggest that unlike “your phone” the iPhone X’s dual camera can create professional portraits. These promotions illustrate the superiority of iPhones based on features and erode the premium consumers are willing to pay for a different firms output. Promotions appeal to price-sensitive consumers and thus will increase quantity demanded.

Factor Market

    Inputs utilized in producing the Apple iPhone include raw materials, manufacturing costs, and research and development. Raw materials include, but not limited to, modems, battery, processor, ram, display, camera, and storage components. Components of an iPhone are not made by but from different companies that are then dispatched to China plants for assembly. The most famous manufacturing plant is Foxconn’s plant in Zhengzhou, the world’s largest iPhone factory (Barboza, 2016). These plants provide Apple with low-cost labor, inexpensive logistical costs as Apple’s entire supply chain is located in China, and non-existent overhead costs (Barboza, 2016). Apple is recognized for their innovation, a result of their considerable research and development spending. I would consider the raw materials and research and development specialized. Reason for this classification for raw material is because the components are purchased from suppliers and thus not readily available to Apple. The logic for research and development’s classification is due to the enormous amount of labor needed to provide results that may be constructive or counterproductive.

Vertical Integration

Apple has presented a vertical integration. “[Apple] is essentially four companies in one, controlling all the major critical parts of the chain used to make and sell products. Apple is a hardware company, a software company, a service company, and retail company,” (Sraders, 2018). While Apple controls the designs of its product, it does not manufacture the components nor assemble the product. By adopting a vertical integration strategy, Apple can decrease production cost as they can eradicate any markups that occur in transactions with suppliers (Sraders, 2018). The low variable costs combined with fixed costs that get stretched over a large volume of production results in Apple achieving economies of scale, a significant competitive advantage that deters competitors. In essence as production increase, the average cost per unit decreases.