Apple recently announced its best results ever, with revenue of KRW 438 trillion and net profit of KRW 112 trillion in 2021,
representing year-on-year growth of 33% and 65%, respectively. What is interesting is the share of revenue by product category.
The iMac, once Apple’s flagship product, now accounts for less than 10% of revenue. By contrast, the iPhone and services segments together account for an overwhelming 73%.
Written by Brad Cho (CEO of The Innovation Lab)
Step 1
An Icon of Innovation That Ushered In the Personal Computer Era
Known as an icon of innovation, Apple attracted attention in the 1970s when it introduced the Apple I and II personal computers to the world. But that success did not last long. IBM entered the computer market in 1981. The joy of having developed the first personal computer was short-lived: the arrival of a formidable competitor and the failure of the Apple III led to Steve Jobs’s dismissal. Then, in 1995, Microsoft launched Windows 95, an operating system for IBM PCs, putting Apple in a critical predicament. Ultimately, to strengthen its competitiveness in the computer industry, Apple decided to adopt a new operating system and acquired NeXT, led by Steve Jobs.
After returning to Apple, Steve Jobs launched an intensive restructuring, eliminating numerous projects unrelated to the company’s strategy and streamlining its unwieldy product lineup. The computer range was also reduced to four products: consumer and professional models, each available as a laptop or desktop. At the same time, Apple took on a new challenge outside the overheated computer industry. Somewhat unexpectedly, it chose the music industry.
Step 2
Betting on Music, Not Computers
Apple focused on the growing popularity of MP3. Responding to the trend of storing and listening to music on computers rather than CDs, it launched iTunes, music playback and management software, in March 2000. To make this possible, Apple acquired SoundJam, a company specializing in music players, and brought its developers into a dedicated Apple team. This enabled Apple to launch iTunes in less than a year.
The next move naturally led to an MP3 player. As a computer manufacturer, Apple again drew on outside technology, using a high-capacity hard drive made by Toshiba and co-developing the first iPod with PortalPlayer, which had its own operating system. Launched in October 2001 at $399, the iPod was followed by a second-generation model six months later and began making a major impact on the market. Apple sold roughly 340,000 iPods in 2002 alone. Thanks to this, the company remained profitable in 2002 despite fierce competition in the computer industry.
Step 3
The Final Step in Building a Digital Music Platform
Apple had developed MP3 software, iTunes, and scored a hit with its own hardware, the iPod. The next step was to create the Music Store, a paid music download service where users could purchase music directly through iTunes.
At the time, record companies were suing Napster, which facilitated illegal peer-to-peer music downloads. Despite these efforts, P2P1) services continued to emerge, and total music industry revenue fell by about 8%. Although digital transformation was needed, the five major record labels—Sony, Universal, Warner, BMG, and EMI—failed to take a unified approach. Sony, for example, jointly pursued an online project called Press Play with Universal, while the other labels had co-founded Music Net with RealNetworks.
1) P2P
An abbreviation of Peer to Peer, referring broadly to methods in which client computers communicate directly without passing through a central server. As illegal sharing through P2P programs spread, offline content industries—especially the record industry—were hit hard.
Steve Jobs entered negotiations personally, leveraging both the record companies’ predicament amid rampant illegal downloading and the strength of the iPod, which had sold 500,000 units. In April 2003, Apple launched the Music Store with a catalogue of 200,000 songs. Within a year, it had captured 70% of the legal music download market and sold 85 million songs in its first year.
Building a digital music platform encompassing iTunes, the iPod, and the Music Store was highly significant for Apple. Four years after iTunes was introduced, the iPod and Music Store had grown to account for 19% of Apple’s revenue, while iMac revenue had fallen by 28%. Had Apple remained confined to the computer industry, the Steve Jobs legend we know today might never have existed. By recognizing that markets have no boundaries and correctly reading changes in the industry landscape, Apple was able to expand from computers into digital music and then smartphones.
Step 4
The Innovation That Changed Everything: The Birth of the iPhone
Apple’s next challenge was the iPhone, hailed as the pinnacle of innovation. Apple had in fact begun researching how to bring the iPod into the mobile phone market, which was larger than the music player market. In 2005, as the mobile phone industry continued to expand, Apple partnered with Motorola to launch the ROKR phone, which could run iTunes, but it received little response.
After its attempt to develop a mobile phone through an external partnership failed, Apple decided to create its own phone incorporating all the iPod’s functions. In January 2007, at Macworld in San Francisco, Steve Jobs unveiled the iPhone as “a revolutionary product that comes along every once in a while and changes everything.” What followed is familiar to us all. The iPod naturally ceded the music player role to the iPhone, while iTunes continued expanding across media until it was split into Music, Podcasts, and TV in 2019, which remain today.
It does not appear that Apple had the final step, the Music Store, in mind from the moment it first developed the iTunes player. But as Steve Jobs said, the dots can only be connected by looking back after the fact. Apple’s first step—paying attention to the popularization of MP3 and changes in how people consumed music—ultimately became the catalyst for businesses that now generate more than 90% of its total revenue. We should remember that taking the first step matters in any endeavor, and that long-term vision and medium-term focus are essential.
Written by Brad Cho, CEO of The Innovation Lab
While running The Innovation Lab, he has spent more than ten years leading corporate innovation workshops and coaching as a management consultant and innovation coach. He first introduced the concept of the Big Blur in a 2013 book and supports business model innovation, platform business transformation, and new-growth business development through a range of programs. His books include Platform Wars, All the Boundaries You Knew Are Disappearing, and Business Model Zen.
View the original article in Hana Financial Group’s magazine