Apple Inc. Microeconomic Analysis: Market, Demand & Strategy

Introduction

Apple Inc. is one of the world's principal producers of a broad mix of electronics goods and gadgets, along with their related software applications, across a wide range of international industry segments. The company operates on an oligopolistic model and sells products whose demand is relatively inelastic. This paper applies a microeconomic framework to discuss the relevant factors shaping Apple's performance and offers recommendations based on these insights.

Similar to the trajectory described by Moore's Law, the number of people and devices connected to the internet is growing at an exponential rate. In 2016, it was estimated that 3.4 billion people were connected to the internet, accounting for approximately 46% of the world's population (Number of Internet Users, 2016). Furthermore, Cisco estimated that about 50 billion devices would be connected by 2020, based on an earlier analysis that counted 8.7 billion connected devices in 2012 (Danova, 2017). Apple Inc. is one of the forerunners that has innovated at nearly every turn, providing well-designed products that enable consumers to remain connected via computer, tablet, watch, smartphone, and more.

The purpose of this analysis is to examine Apple Inc. from a microeconomics perspective and discuss how factors such as supply and demand conditions, price elasticity of demand, cost of production, market entry barriers, market share, and market structure explain the company's performance. The paper begins with a historical overview of Apple and concludes with data-derived recommendations suggesting how Apple could manage its future business operations to stay competitive in the computer market and industry.

History of Apple Inc.

Apple was founded in April 1976 by Steve Wozniak, then 26 years old, and Steve Jobs, then 21, both college dropouts. Their partnership began several years earlier when Wozniak, a talented, self-taught electronics engineer, began building boxes that allowed him to make long-distance phone calls for free. The pair sold several hundred such boxes out of their garage (Apple Computer, 2017). Later that year, Wozniak was working on the first Apple computer for a hobbyist club, and eventually local retailers began ordering their computers.

Jobs hired local computer enthusiasts to assemble the computers and design software to fulfill those orders (Apple Computer, 2017). Wanting to build a larger company capable of competing in the industry, Jobs consulted with Mike Markkula, who invested in the company as Chairman. Within one year, annual sales reached $1 million, and Apple became one of the fastest-growing companies in the United States, with products carried by over 100 dealers. By the end of 1980, Apple went public, selling 4.6 million shares at $22 each in a matter of minutes and offering 2.6 million more shares, which quickly sold out by May of the following year. By the end of 1982, Apple became the first company to reach $1 billion in annual sales (The Human Relations in Management Business Essay, 2017). Although Apple's path took many twists and turns throughout its history, it emerged as one of the dominant players in the industry.

The company designs, develops, and sells consumer electronics, computer software, and online services. Growth accelerated significantly after Steve Jobs implemented a strategy known as the "digital hub," which shifted Apple's focus away from the personal computer platform alone and expanded it to include various peripheral devices such as MP3 players and watches. The company's hardware products include the iPhone smartphone, the iPad tablet computer, the Mac personal computer, the iPod portable media player, the Apple Watch, and the Apple TV digital media player. Apple's consumer software includes the macOS and iOS operating systems, the iTunes media player, the Safari web browser, and the iLife and iWork creativity and productivity suites. Its online services include the iTunes Store, the iOS App Store, the Mac App Store, Apple Music, and iCloud (Apple Inc., 2017). The evolution of Apple's product mix is quite complex, though its major product lines illustrate the breadth of innovation achieved over the decades.

Supply and Demand for the iPhone

Apple has enjoyed sustained growth in demand for the iPhone over the ten years between 2007 and 2016. In 2007, Apple recorded sales of 270,000 iPhones; by 2016, sales had increased to over 74 million units. In the first quarter of 2017 alone, iPhone sales reached 78 million units. This increase in iPhone sales contributed to growth in global smartphone demand more broadly (Statista, 2017). Although Apple worked to pioneer the market, other entrants subsequently joined the industry, fueled competition, and built a large and dynamic array of brands and product offerings. Despite increased competition, strong demand from Apple's loyal customer base — coupled with consistent innovation — significantly aided the company's ability to grow net profits year over year.

The theory of supply and demand illustrates the relationship between the quantity demanded and the quantity supplied in a market (Mankiw, 2007). Apple operates in a global market, and the iPhone 7 represents one of the major product launches analyzed here. Since its release, demand for the iPhone 7 has outstripped supply. The law of supply and demand holds that supply must equal demand for a market to reach equilibrium. In the case of the iPhone 7, Apple was unable to immediately meet demand at its retail and online stores around the world.

Similar trends affected demand for the iPhone 6, though not to quite the same extent as the newer model. Much of the growth in demand has been fueled by emerging markets, particularly China. As illustrated in supply and demand diagrams for the iPhone, Point A represents the market equilibrium. When demand exceeds supply, a shortage results. When the official market runs short of iPhones, black-market prices rise to create a new, higher equilibrium price. When the iPhone 5 was sold in China, the black market sold the same product at unreasonably high prices — a signal that price elasticity of demand for the iPhone leans toward the inelastic side, a point supported by additional evidence discussed below.

Price Elasticity of Demand

Apple's price elasticity of demand closely resembles that of an essential good — or at least it does so far more than a typical normal good. On the one hand, one might expect a large number of perceived substitutes given the numerous brands of electronic goods available. In the personal computer industry, companies such as IBM, Dell, HP, and Toshiba compete with Apple, while in the smartphone market Apple competes with Samsung and HTC. Yet iPhone demand remains relatively inelastic by comparison. Apple maintains this market position largely through its ability to innovate, maintain high switching costs, and sustain high levels of customer loyalty — all of which allow the company to be more price-inelastic than the typical consumer good.

Thinking about the market in terms of technology adoption stages — early adopters, innovators, the early majority, late adopters, and so on — Apple is able to capture each segment at its respective price point. The formal calculation for price elasticity of demand is simply the percentage change in quantity demanded divided by the percentage change in price. When the demand market is segmented, however, it becomes clear that not all customers exhibit the same degree of elasticity, and Apple fully exploits this variation. The company takes advantage of differential price elasticity to launch products at multiple price points.

A specific example illustrates this strategy well. When the iPhone 7 was released, Apple introduced both the iPhone 7 and the iPhone 7 Plus, further differentiating by storage capacity. The price of the iPhone 7 Plus 32 GB was $859, while the 256 GB version was $1,149.99. By offering products at different price points based on model and storage capacity, Apple is able to capture consumers with varying elasticities. The company supplies higher-priced products to markets where demand is inelastic and lower-priced products where demand is more elastic. This market strategy has assisted Apple in growing net profits consistently over time.