iPhone Business Plan

The iPhone Software Development Kit:

A Critical Element for Both Recreational and Business Wireless Communications Convergence

Presented to Apple Executive Committee Scott Leslie 530-448-6430 P.O. Box 2466 Truckee, CA 96160

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Table Of Contents STATEMENT OF PURPOSE

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EXECUTIVE SUMMARY

3

CONCEPT HISTORY AND BACKGROUND

3

DESCRIPTION OF PRODUCT IDEA HISTORY SUMMARY OF EXPERIENCE

4 5 6

GOALS AND OBJECTIVES

6

MARKETING PLAN

7

CONSUMERS AND DEMAND COMPETITION GEOGRAPHIC MARKET PRICING POLICY

7 8 9 9

LEGAL REQUIREMENTS

10

FORM OF OWNERSHIP

10

FINANCIAL PLAN

10

INITIAL CAPITALIZATION PROJECTED INCOME STATEMENT

10 11

ORGANIZATION, MANAGEMENT, AND STAFFING PLAN

13

SPECIAL CONSIDERATIONS

13

SOURCES

14







Statement of Purpose This report sets out to provide both qualitative and quantitative proof that illustrates just how profitable it would be for Apple to combine its already revolutionary iPhone hardware interface with an open source software development kit that would allow third party developers to create applications that suit b oth their professional and personal needs. A software development kit of this nature would allow the iPhone to become the ultimate mobile computing solution, ideally aimed at businesses worldwide.

Executive Summary The iPhone is a revolutionary piece of hardware. Matching simplicity with power, it is the epitome of what Apple does well and will certainly appeal to the company’s longtime faithful customer base. However, Apple must be carefu l that it does not waste an incredible chance to effectively access the wireless smartphone industry with the iPhone. Currently, there is no hardware interface superior to the iPhone, and Apple must ensure that its accompanying software flows along the same vein. So, it is imperative that Apple capture a substantial portion of the rapidly expanding smartphone industry if it is to truly bring wireless communication convergence to the world. While Apple has currently made deals with several movie studios, it must also ensure that the iPhone serves as a practical solution for businesses. While it is important that the iPhone provide entertainment, it must also be a functional fun ctional business tool, and an open source software development kit will assure that developers will have the freedom to make sure that the iPhone realizes its full potential. If Apple does do es appeal to businesses in this way, it is a very realistic assumption that the company could capture at least a 30% market share and increase its net profits by many times.

Concept History and Background Since its initial release, Apple’s iPhone has garnered an incredible amount of excitement throughout the world amongst both computer enthusiasts and technophobes alike. The iPhone, Apple’s first foray into the extremely competitive wireless telephone market, has captured attention with its revolutionary user interface. With on e face composed entirely of a touch screen, the iPhone is able to provide p rovide its user with both a convenient and familiar “qwerty” keyboard, or a widescreen cinema display, all at the touch of a finger. Furthermore, Steve Jobs recently announced during Apple’s 2008







However, while Apple continues to offer consumers new and innovative products that provide an experience ever closer to mobile communications convergence, the computer manufacturer must keep in mind that entertainment is only a portion of the information that consumers process each day. While the iPhone has been marketed as a “smartphone,” it does not include many of the functional business applications used by both the Microsoft Mobile and Symbian operating systems, and therefore does not always justify its $400+ price tag for many consumers. This, primarily, can be h eld to blame for Apple’s current weak demand dilemma (it has been estimated using AT&T’s year-end report that 18% of the four million iPhones Steve Jobs claimed to have sold at the 2008 keynote are still sitting on shelves at AT&T stores as ending inventory).i In order to fully appeal to the vast v ast public, Apple must provide a way for iPhone users to not only enjoy their favorite movies and music, but also access and manipulate documents in order to be useful in the professional realm. In order for Apple to penetrate the smartphone market, it must combine its incredible distinctive competency, the iPhon e’s tactile and streamline user interface, with practical and functional applications.

Description of Product The ideal companion to the iPhone’s revolutionary hardware interface would be a software application set that would utilize the integrative features of the iPhone that make it as comfortable and familiar as a home computer. Already, the iPhone has been applauded for its user-friendly operating system based on Mac OS X, a system that has made Apple computers increasingly popular for the last few years due to both its aesthetic qualities and its ability to perform advanced operations using a very simple interface. The most widely touted iPhone application running within this operating system has been Safari, Apple’s native web browser that has been converted to the iPhone in order to create an internet experience that is more computer-like than any other mobile browser yet developed. As Dan Frakes of Macworld Magazine notes, “If you've ever browsed the Web on a PDA or a mobile phone, Safari on the iPhone will be a joy to use.”ii A significant issue that arises, however, is that while bro wsing the web and watching movies are very popular consumer activities, the iPhone stands little chance competing within the smartphone market if it does not develop applications that transcend vehicles of entertainment. In order to compete against the most popular operating systems used by smartphones (Nokia’s Symbian System and Microsoft’s Windows Mobile), Apple must develop applications that integrate two of its applicable distinctive competencies: its ability to create user-friendly, yet powerful software and its already popular hardware interface. The ideal product that would allow Apple to reach its goal of attaining a 1% smartphone market share by the end of 2008 would be the release of an iPhone software development kit (SDK) that would allow third party developers a chance to write applications that would effectively work with the most popular document formats of the







has adequately addressed iPhone security issues, all iPhone users could be at risk from malicious applications. Furthermore, for reasons of Apple’s own marketing strategies, the manufacturer’s current progress of working out iPhone security issues and the exact nature of the forthcoming SDK have remained highly classified. So, given the assumption that the vast majority of iPhone bugs will be solved by the end of o f February 2008, I have created the theoretical framework for an SDK that would allow third party developers the chance to create the necessary applications that will enable Apple to acquire and maintain smartphone market share in the long lon g run. While security is indeed very critical, it is crucial that Apple release either an open source SDK (an SDK S DK that would allow program writers full freedom over the applications they write by providing them with the full source co de that was used to create the operating system) or at least a pseudo-open source SDK that would allow program writers to write applications but not let them see the entire source code (currently utilized by Google’s Google’s Android Platform). However, as a late entrant in in the smartphone market, an open source SDK would be the most appropriate and powerful tool to allow writers to quickly create truly effective applications. Therefore, I insist (given that the aforementioned assumptions are valid) that Apple release an open source SDK that will allow it to effectively contend with the various competitors in the smartphone market.

Idea History The idea of developing such an SDK came from the observation that there are many parallels between the smartphone market of 2008 and the personal computer Roughly Drafted Magazine notes, smartphones market of 1984. As Daniel Eran Dilger of Roughly are now at a decisive d ecisive crossroads, much like the climate of personal co mputers in 1984. As Dilger notes: Palm OS is the new n ew CP/M, a bit past its prime as a holdover from the last decade. Windows Mobile is the new DOS, struggling to clone and conquer yesterday's standard. Apple's OS X is the new Mac, an intelligent rethinking of how things should work. Linux is the new Amiga, a tinker fantasy that will ultimately go nowhere until it finds a driver. Symbian is the new Unix: the commercial standard currently powering the majority of mobiles.iii • •

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While it is virtually impossible that the current market is exactly the same, it is still important to pay close attention to the relevant similarities. similarities. In the late 1980s 1980 s and through the 1990s, as the personal computer market matured, the competitive forces of the industry eventually created an environment that could support only two operating systems: systems: Mac and Dos. While many believe that this historical perspective is good news for Apple as the company is now, in 2008, an extremely profitable computer







through the iPod phenomenon that Apple has been able to regain its strength in the last few years (a point reinforced by the fact that the company changed its name from “Apple Computers” to “Apple” in 2007). So, as Apple is now again a strong organization thanks to the iPod, it is important that it does not fail to heed the lessons learned in its youth. If Apple desires to provide a product pro duct that truly achieves mobile communication convergence, it must be b e sure to target the market sector that originally fed the Microsoft giant, the professional realm, rather than focus all efforts appealing to internet surfers and movie renters. While a sophisticated entertainment vehicle is indeed alluring, the iPhone must also become a device integral in both the professional and recreational lives of its users in order to achieve true convergence.

Summary of Experience Apple’s resume indicates that it is clearly poised to capture a vast majority of the smartphone market. With an already stellar reputation captured by its sales of over 100 million iPods in only five and a half years, consumers look to Apple as a capable and dependable electronics manufacture. Furthermore, as Steve Jobs has noted in his 2008 keynote address, the iPhone runs on a converted version of the operating system supporting Apple computers, meaning that it has a very solid foundation to create functional applications in a much shorter amount of time than if it were creating a new operating system from scratch. Furthermore, while relatively unknown, Apple and Microsoft have actually had a longstanding relationship in software development for the Macintosh platform. In an article out of Wired magazine, Leander Kahney outlines the two companies’ relationship, explaining that Microsoft’s past support for Apple has been critical for Apple’s survival, and that “Office is so important to the Mac, without it the platform would have withered away.”v So, while die-hard Apple enthusiasts often curse the name “Microsoft,” it is clear that a very dependable alliance does indeed exist. This is one of the most crucial factors in the iPhone’s destiny to become a successful smartphone. This alliance between the two companies will enable developers access to the crucial Microsoft Office formats, affording application writers the opportunity to allow the iPhone to transcend the perception of “crafty gadgetry” and earn respect throughout the industry as a truly powerful and vital v ital business utility.

Goals and Objectives









already accomplished 40% of its end of 2008 goal by selling 4,000,000 out of the 10,000,000 unit target. Furthermore, according to market research firm Gartner, the iPhone has actually captured 20% of smartphone sales during the third quarter of 2007, a market share surpassed only by long established Research in Motion (RIM) BlackBerry, a powerhouse that still maintains a commanding 39% share.vi These results indicate that iPhone has already surpassed quarterly sales of Arstechnica.com/news Motorola, Nokia, and Palm, an incredible feat in itself, and now has a whole year to sell only 150% of what it sold in just six months. Furthermore, if Apple is able to keep demand for the iPhone high through the use of an aggressive pricing strategy and the creation of new applications, Apple will be able to maintain its unprecedented growth through the decade. Given these staggering numbers, I project that with a SDK that would allow developers a chance to tailor the iPhone to suit the needs of the business realm, the iPhone could very likely capture a 30% market share by the end of 2010. While there are indeed many obstacles and uncertainties that Apple will need to face and overcome by this time (the possibility of a recessed economy, consumer price sensitivity, a widely unpopular contract with AT&T lasting until 2009), I forecast that a sophisticated application set, combined with an effective pricing strategy, will allow Apple to take a commanding lead in the smartphone market. mark et.

Marketing Plan Consumers and Demand Because the iPhone is actually much more than a typical smartphone, functioning as both a video and music player, it can be difficult to project consumer demand as it is a product that spans several different markets. To solve this problem, however, my forecast







workforce will undoubtedly move to lighter and more compact smartphones once these devices become capable of performing the necessary computer-like operations. Another way that smart phones are being practically integrated in Japan and elsewhere is through an inventive new system of online banking called contactless payment. In Japan, there are currently payment chips embedded into internet-capable smartphones that not only permit users to transfer money between various ban k accounts, but also actually allow them to use their smartphones as debit and credit card substitutes. This system has tremendous advantage over traditional plastic cards as users of this service can simultaneous check their various balances while making purchases. So, using this system, it is virtually impossible to overdraw an account without realizing it. Arthur D. Little, a management consulting co nsulting firm, now projects that cumulative payments using this system will grow from an infantile $3.4 billion in 2 003 to over $37 billion by the end of 2008.ix It is clear just from these two examples that the existence of a smartphone that is powerful, user-friendly, and flexible enough to run a wide range of applications would create immense demand in both the consumer and business realms. An open source SDK would allow flexibility of the iPhone platform to support various functional applications, creating greater demand for iPhones in nearly every industry as technology is further adopted by businesses to bring about higher levels of efficiency.

Competition The smartphone market is incredibly competitive, and Apple’s remarkably powerful initial market entry will undoubtedly cause it to be the target of various competitive attacks. Furthermore, the manufacturer’s peer group is also vast and many have already begun making moves to counter Apple’s competitive strategy. Apple’s competitive peer group consists of a broad range of companies including most notably: RIM BlackBerry’s Smartphones, Pearl and Curve, Hewlett Packard’s iPAQ Messenger and Pocket PC series, Motorola’ MOTO Q series, and Nokia E, N, and an d Tablet series. Because most of the previously mentioned competitors have been in the industry for a longer period of time than Apple, they are largely run on open platforms, often catering to large businesses by allowing them to run their own, internally created programs







anything.”x This ad can be taken as both a negative critique of the weakness inherent in Apple’s closed operating platform, as well as a jab at the fact that an estimated 20% of the more tech-savvy iPhone users have illegally “hacked” their phones so that they can be used with any carrier, an issue that severally impacts Apple’s revenue streams. Generally, however, this advertisement is a perfect example of the inevitable competitive attacks Apple will continue to face in the wake of its unprecedented market entry. Furthermore, as the proposed SDK allows developers to write more and more applications for the iPod, these programs pro grams will also undoubtedly be attacked using similar competitive campaigns. In all, because of the iPho ne’s incredible hardware interface, combined with the superior Mac OS X applications that will be written using the SDK, contenders will likely continue to wage a more vicious competitive war as time goes on.

Geographic Market Because iPhones have only recently debuted outside of the United States, it is likely that the applications written using the SDK will be tailored to suit the needs of various domestic businesses. However, iPhones were introduced in Europe in late 2007 and are projected to be offered in Japan in the near future, making it likely that the iPhone will eventually become a global product. Because each country has very specific needs and issues, especially pertaining to communications, it will be necessary to tailor the iPhone to suit the tastes and regulations of each respective region. One very interesting, and perhaps the most technically difficult, region that Apple wishes to enter is Japan. Because of these qualities, I will use Japan as an example ex ample of how Apple will have to tailor the iPhone operating system and applications to meet each country’s various needs. First off, all of Japan’s mobile phones run on 3G networks, a format that supports much higher speeds than that of the U.S. and Europe. In order to be







the SDK to third party developers for free. However, a pricing strategy that is closely linked to the SDK is the amount Apple will charge for the various applications created from the kit. Similar to the way video game system and the T-Mobile Sidekick manufactures have done, it would be best to take a cut from the applications that are written for the iPhone. Currently, Apple uses a price lining strategy for its iPod games at a flat rate of $4.99 per p er application. In this way, Apple is able to simplify the process of buying games for consumers. However, as more and more sophisticated applications are released for the iPhone, Apple will have to price these programs more carefully, as a mobile version of Microsoft Word would clearly constitute a higher price than a calendar plug-in. Thankfully, as with many aspects of the iPhone, Apple clearly has an advantage advan tage in pricing due to its twenty-five year experience releasing software and will likely use a pricing mechanism similar to that of its computer applications since it h as continually marketed the iPhone as a mobile computer.

Legal Requirements Although the legal requirements for releasing an open source SDK would be minimal, Apple must be careful in a few areas. First off, while Apple will not have to secure copywrites on its third party developed software, it will need to be very careful to secure its own internally developed intellectual property as the competitive climate of the market will surely entice contenders to take whatever advantage they can to oust Apple. The best way to go about securing Apple’s own intellectual property would be to follow the same model that Apple has for the past twenty five years developing its own computer software. Although an aspect that is not closely related to the SDK, Apple will also need to be cognizant of the fact that as it expands iPhone iPh one distribution to other countries, many of these countries have more stringent antitrust agencies, and do not favor Apple’s current practice of forcing consumers to sign two-year contracts with o ne company (ie. AT&T). Already, both France and Germany have outlawed Apple’s practices of tying with only one phone company.







(crude but still useful) benchmark, Apple would be able to easily match or exceed this figure as it holds over nine billion dollars in cash on its balance sheet for 2007 . ASSETS Cash & Cash Equivalents Short Term Investments

2006 6,392,000 3,718,000

2007 9,352,000 6,034,000

% Assets 1.50%

Projected Income Statement As shown in the table below, the iPhone’s various revenue streams would make it an extremely profitable segment of Apple’s product portfolio.

2007 iPhone Sales (six months) iPhone Sales Revenues (Initial Purchases) Sales at Original Price ($599)

2007 Qty Sold

Total Revenues

864,000

$517,536,000

Sales at New Price ($399)

2,886,000

$1,151,514,000

Total

3,750,000

$1,669,050,000

Estimated Ending Inventory Percent Ending Inventory Provision for Cracked Phones (20%) Actual Phones Activated Estimated Phones Activated at Apple Stores

670,000 18% 750,000 2,000,000 900,000

Activation Fee Revenue

$157,500,000

Apple Monthly Revenues Provided by AT&T

$180,000,000

Total Estimated Revenues Realized

$855,036,000

In 2007, it has been realized that although Steve Jobs claimed that he had sold 4,000,000 iPhones, AT&T has only activated 2,000,000 phones. So, assuming 20% have been “cracked” for use with other carriers and 670,000 iPhones remain as ending inventory, it is still clear just how profitable the iPhones are. Apple collects revenues in three streams, as shown: initial sales, an activation fee that, and a $15 monthly mon thly payment from AT&T per subscriber. It is clear then, that even as Apple has not receiving the ideal amount of revenue due to unsubscribed phones, it still is collecting high revenues.









Estimate of Phones Activated at Apple Stores

76,225,050 $13,339,383,750

Activation Fee Revenues

$3,049,002,000

Software Revenues Cumulative iPhone Subscribers

169,389,000 $30,490,020,000

Apple Monthly Revenues Provided by AT&T Total Estimated Revenues Realized

$114,464,616,750

2010 Projections iPhone Sales Revenues (Initial Purchases) Industry Total Projected Apple Market Share

2010 Qty Sold

Total Revenues

1,301,520,000 30%

Projected Sales

390,456,000

Estimate of Phones Activated at Apple Stores

175,705,200 $30,748,410,000

Activation Fee Revenues

$7,028,208,000

Software Revenues Cumulative iPhone Subscribers Apple Monthly Revenues Provided by AT&T Total Estimated Revenues Realized

$117,136,800

390,456,000 $70,282,080,000 $108,175,834,800

Further projections show that as time goes on and Apple’s subscriber base and market share increase to 15% in 2009 and 30% in 2010, this lucrative revenue structure only becomes more and more profitable with total revenues surpassing $100 billion in 2010. This clearly will affect the income statement also. To f orecast, I will assume a $20 million increase in research and develop costs per year to maintain the platform, as well as a very conservative 20% increase in cost of goods sold per year. Also, I will assume that Apple will accomplish its goal of achieving 1% market share by the end of 2008 (1







Net Income

1,989,000

3,496,000 3,496,000

3,613,218

80,747,149

152,859,618

Assumptions: COGS G&A Int Income Other Effective Tax Rate

20% 4.60% 40% 60% 30%

It is clear just from these basic assumptions that if Apple is able to gain 30% market share in this rapidly exploding smartphone industry, the chances for higher profitability are enormous. In this forecast, Apple will have h ave increased its net income 7600%. Clearly, it is imperative that Apple do all that it can to capture at least 30% 30 % of this market.

Organization, Management, and Staffing Plan Because the release of the iPhone SDK will be largely based on independent third party developers, Apple will be at an advantage as it will be able to reap the benefits of not needing to manage these employees. However, there are many issues that Apple will need to face. One such issue is the infighting of developers. Most of the third party developers are hackers, self-employed as independent contractors. co ntractors. These hackers thrive







manufacturing business model to the iPhone, and make it the ultimate mobile computing system.

Sources i

Veverka, M (2008, January 28). In Search of the Los t iPhones. Barron's Barron's, Retrieved January 28, 2008, from http://online.barrons.com/arti http://online.barrons.com/article/SB120130794713218339. cle/SB120130794713218339.html?mod= html?mod=googlenews_barrons googlenews_barrons ii Frakes, D. (Sept 2007). Internet Features: many phones can access the Internet; few do it well. And n o phone has come close to approximating the experience you get on your computer. But that's the iPhone's lofty goal. Here's a look at the programs that aim to deliver that experience. (Meet the iPhone) (Product/service (Product/service evaluation). Macworld, 24, 9. p.64(2). Retrieved January 27, 2008, from Expanded Academic ASAP via Gale: http://find.galegroup.com. http://find.galegroup.com.hokhmah.stmary hokhmah.stmarys-ca.edu:2048/itx/sta s-ca.edu:2048/itx/start.do?prodId=EAIM rt.do?prodId=EAIM iii Dilger, D, E (2008). Inside the iPhone: Mac OS X, A RM, and iPod OS X. Retrieved January 27, 2008, from Roughly Drafted Magazine Web site: http://www.roughlydra http://www.roughlydrafted.com/RD/R fted.com/RD/RDM.Tech.Q1. DM.Tech.Q1.07/081A0C60-AD28-40EE-89E 07/081A0C60-AD28-40EE-89EEED54F1024FDBB.html iv Markoff, J (1998, October 15). COMPANY COMPANY REPORTS; Apple's First Annual Profit Since 1995. New York Times. v Kahney, L (2004, January 8). App le's Unlikely Guardian Angel. Wired Magazine . vi

Ars Technica, The Art of Cheng , J (2008, January 23). The truth about the iPhone's sales numbers. Ars Technology, Retrieved January 28, 2008, from http://arstechnica.com/news.a http://arstechnica.com/news.ars/post/20080123-thers/post/20080123-the-truthtruthabout-the-iphones-sales-numbers.html vii Graham, J, & Baig, E (2007). Q&A with Jobs: 'That's what happens in technology'. USA Today Online,

iPhone Business Plan

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