Introduction
A dilemma is the state of uncertainty when having to choose between two or more options. Both options are seemingly equally (un)attractive. Ultimately, the uncertainty between the options in which choosing for the one you must forego the other accounts for the emergence of the dilemma.
In this either-or situation in which all companies find themselves in from time to time, a company will have to consider which of the options suits them best. In this case, we will examine the dilemma the technology company Apple, has recently been faced with. Steve Jobs, Ronald Wayne, and Steve Wozniak founded Apple in April 1976; a year later in June 1977, it was incorporated, without Wayne however. Since then, they have designed and manufactured many innovative and groundbreaking technological software and hardware products, the most popular being the Macintosh personal computers, the iPod, and the iPhone.
The revolutionary iPhone, combining the world’s most popular music player, a palmtop computer, and phone into one hand-held gadget, was a thoroughly extraordinary device. Preceded by months of rumors, speculation, and fake leaked-pictures, at last the start of 2007 saw Apple announcing the iPhone for release at the end of June. Of course, this device had required a lot of research and development; bountiful financial backing was of course necessary to fund the project. The mobile phone network company known as AT&T Mobility is estimated to have funded US$150 million over a time period of 30 months.
In return for this substantial investment, AT&T Mobility was to receive exclusive carrier rights for the iPhone in the US. There is a SIM lock on iPhones sold in America, in theory obliging all US users to be contracted with AT&T. Obviously, the number of mobile phone contracts at AT&T would rocket because of the immense hype surrounding the iPhone. Of course, this would be necessary to cover their initial investment in Apple; however, the investment is not in proportion with the revenues from the contracts sold, so Apple demanded an initial amount of US$240 per contract.
Furthermore, each contract at AT&T was a two-year commitment, which is, of course, a relatively long time compared to a pay-as-you-talk or one-year commitment. Identify the dilemma Within a brief interval after the launch of the iPhone, it was made possible to unlock the iPhone, voiding the SIM-lock and making the iPhone compatible with other network carriers. So instead of activating the iPhone with AT&T immediately, the SIM lock could be removed and the contract with AT&T avoided.
Internet forums and message boards aided in spreading the hackers’ breakthrough to the public. At once, the iPhone and AT&T lost its edge. With the iPhone being made compatible with any network provider, AT&T was no longer the obligatory carrier if one were to want an iPhone. Immediately, a black market for the sale of iPhones emerged, to both inland and overseas consumers. Of course, the fact itself that iPhones are being unlocked does not directly create problems for Apple; after all, the company will still get their revenues from the sales of the hardware, i.e. the iPhones themselves. However, Apple indirectly pays a large amount to AT&T for using a network that is not even used by the unlocked-iPhone users: they forego selling iPhones freely without SIM-locks or exclusive network providers, as an indirect interest or return of the goodwill from when AT&T invested large sums of money in Apple. Moreover, they miss out on the kickback percentage, which the other carriers obviously don’t pay. Hence, a dilemma emerges. Does Apple turn a blind eye to the unlocking of the iPhones?
Or does Apple tighten security surrounding locked software and honor the exclusivity contracts with AT&T? Not an easy answerable query. Short term profits will be unchanged if Apple decides not to do anything about the SIM locked iPhones. Eventually, however, pressure from AT&T will make sure the contract is adhered to, and this path may have various negative repercussions if it is dragged on for too long. The criticizing media, for example, could sully Apple Inc’s good reputation; Apple’s lack of competence surrounding secure software, or Apple’s negligence of their partnering company.
When the tightened security is finally implemented, many consumers will already have an iPhone, and no longer need a contract with AT&T to obtain the iPhone. However, trying to retain the exclusivity of the current network would mean tightening the SIM-lock security. This would take time and labor, both costing money but hopefully ensuring a profitable long run cause. There is sufficient evidence that more can indeed be done to stop people from unlocking their phones (SECAU – security research center, Edith Cowan University).
Of course, however, Apple must always consider that there will always be people trying to find ways to hack the software, and in a large number of cases, succeeding. Apple has already made it clear that when tampering with one’s iPhone, the warranty will be voided; this measure can be fine-tuned also, as many do not take heed of it. Ultimately, the dilemma is this: must Apple forgo sales in order to honor their agreements with AT&T, or should they turn a blind eye to unlocking iPhones? The root cause Apple’s iPhone has been a popular smartphone since it launched in 2007. Its interactive touch screen, its 2. inches width, the wireless internet access, GPS features and the famous Mac OS X system the iPhone operates on, and not to forget the integrated music player widely acclaimed as the most popular music player of late makes the phone a hot gadget desired by many. Apple currently has a contract with mobile phone service provider AT&T, saying that the iPhone will exclusively be sold through this carrier with a two-year contract in the US. Apple also made the iPhone available through other carriers in Europe and Asia, which include O2, Orange, and T-mobile. Apple and AT&T report their number of iPhones once in a while.
From the offset, there has always been a significant gap between the number of iPhones sold and the number of iPhones activated to the AT&T network. The gap started with 24,000 iPhones in a few days and had grown to 1,7 million units in 2008; it has rapidly grown since. More than one million of those missing iPhones are thought to have been purchased with the purpose of unlocking them. The coveted item the iPhone is has led to a readiness to pay more for a phone that can run on other service networks. This means not only within the US but also abroad, the iPhone could be used freely.
Countries where the iPhone has not yet been introduced or where iPhone stocks are depleted, or where there isn’t the right technology to unlock the phones, a large margin of profit could be made on the black market. Clever exploiters have made a substantial operation of the iPhone trafficking, endowing the iPhones where they could get a high price for them. Mark Abramsky of RBC Capital Markets estimated that in 2007 30 percent of all iPhones sold were unlocked, adding that unlocking is occurring commonly. There is no significant way in stopping people from unlocking phones.
A few protocols have been put into effect, but it has hardly made people think twice; the number of unregistered iPhones was still on the rise. Apple attempted to prevent their phones from getting unlocked by limiting the number of iPhones that can be sold by one person to two. This was said to prevent unauthorized resale to countries, where networks other than AT&T have to be used and unlocking is required to use the phone. Another step that was taken by Apple was changing the so-called ‘bootloader’ of the iPhone, a program that loads the operating system into the memory.
This creates problems for unlocking the phone. Until those actions were taken, it was very easy to unlock the iPhone. Nowadays, people face a more challenging job unlocking the phones but there are definitely ways to still get it done, and new ways of unlocking are continuously being developed. The conclusion that can be drawn from the above is that the AT&T network was too exclusive. This made it unattractive to use for consumers and drove people into finding a way around it. Firstly, for most consumers, and affordable iPhone meant having a two-year contract with an expensive network.
Two years is not only a long time to have the same contract, but it leaves no room for change for other, cheaper, better technology, or overall better phone-deals. Secondly, consumers who were prepared to pay the price for the iPhone itself either wanted to use a different network because of personal preferences or saw opportunities to make a quick buck. Especially at the end of 2007, when the dollar was low on the stock exchange, many Europeans saw this as a good time to visit America; in this way, Europeans were able to easily buy an iPhone for back home.
This was another, arguably somewhat minor, a stroke of bad luck for AT&T. Obviously, Apple could no longer sit around and wait; they could not miss out on potential revenues. The unlocking was becoming easier and conventional, so the dilemma between stimulating sales of the iPhone, and the importance of signing people on for contracts was only getting bigger. With confrontational figures being published surrounding sales and contracts, “the jig was up”, read one particular website; this was the main consensus on the message boards and forums.
The rumors and speculation around the unlocking of iPhones were becoming fact instead of far-off fiction; the news was spreading at an exponential rate, due to people talking and the unmatched accessibility and extraordinary communication-powers we all know the world wide web offers. So, the desire for an iPhone abroad or on different networks has called for people to divert from the ordinary path. Cheaper networks make it attractive to use their own, the seemingly endless number of service pack costs, activation costs, early cancellation fees have been a reason to not activate one’s iPhone, and look for another solution.
The two-year bind was also an overly ambitious venture on AT&T’s part; customer retention by other means than a contract may on hindsight been more effective. Consumers are known to bend rules if it suits them better, and this is what has happened. This is ultimately the root cause; people will always want to pay less if it is possible. The network was unattractive for people who did not want to have to change to it and go through all the trouble, but also for people abroad – those who cannot even use the network.
Furthermore, the iPhones in the USA were substantially cheaper than in Europe, so buying an unlocked phone in America for less, and using one’s own network was a good solution. Chart and stretch the dilemma This dilemma is based on the conflicting interest between the component of clients/customers/suppliers and the component of shareholders. The clients/customers/suppliers’ interest is satisfaction, while all that the shareholders strive for is a high shareholder return, and the best financial performance achievable. Apple needs to satisfy the clients, but also the shareholders i.e. the companies who bought the rights to sell the iPhone which was initially AT&T. Apple satisfied AT&T by allowing them to be the exclusive carrier and paying an adequate amount of money in return for usage of its service. The consumers, however, have to be kept satisfied by Apple by providing them the iPhones they want. E. g they have to be easy in use, the contract needs to be reasonable, etc. Clearly, those two different interests of the two different parties conflict with each other. Apple has to satisfy the shareholders and consumers at the same time. Y 10(0,10)(10,10) Satisfying shareholder AT&T 5(5,5) (0,0)Satisfying consumers iPhones(10,0) 0 X 0510 The y-axis shows the degree to which shareholders are being satisfied by Apple. Apple would satisfy them by appointing AT&T the exclusive network service provider for the iPhones. The X-axis, on the other hand, shows the degree to which the consumers of the iPhones are being satisfied. (0,10) Pursue guaranteed exclusivity of one carrier and please shareholder. By giving AT&T the exclusive rights to be the iPhone’s one and only service provider, AT&T will benefits every time an iPhone is sold.
Apple gets paid for letting them be the carrier, it gets a generous kickback percentage on a fixed basis. This kickback percentage can be seen as a rebate. Apple finds customers for AT&T contracts and earns for that reason a commission back. This relationship between both companies will be steady and beneficial, causing a supplemental income stream for both AT&T and Apple. When applying the y-axis, and thus satisfying AT&T, Apple will continue to earn a huge kickback percentage on every contract sold. The percentage is fixed, so this is a very attractive deal for Apple.
Also, if the exclusivity of AT&T would be guaranteed, there will be no phones unlocked and therefore no money forgone by inactivated AT&T contracts. Another advantage would be that Apple opportunities in new markets abroad would develop or improve. After all, if the exclusivity of the service is guaranteed and no unlocking takes place anymore, more mobile service providers will be willing to pay for being the exclusive carrier of iPhones. So in short, the incentive for those carriers will be greater, and for Apple, this will result in a higher kickback percentage.
It should not be forgotten, that applying this strategy of satisfying AT&T will also bring some disadvantages. Sales will most likely be reduced if exclusivity will be guaranteed. Potential purchasers eager to buy the phone with the intention to unlock it will drop out. As a result, not only sales but also the revenues and profits will decrease. (10,0) Ignorance of the existence of unlocked phones /Availability Apple could look the other way when phones are sold with the intention to be unlocked.
This would mean that some customers will have an iPhone with an AT&T contract, and others will have an iPhone activated to another server than AT&T. However, unlocked iPhones generate 50 % less revenue, and 70-75% fewer profits. This is a big disadvantage as Apple obviously does not want to forgo any possible income. The advantage though is that sales will probably stay the same, or at least, they will not decrease as a result of people not being able to unlock them. The same amount of sales will provide them with the same amount of revenues earned from the hardware.
The kickback percentage that Apple would get with every new service contract with AT&T will, on the other hand, be forgone. Another disadvantage is that pursuing this strategy will make it difficult for Apple to expand in markets in countries abroad. If unlocked phones will continue to reach other countries, there is no way a local carrier would be willing to spend the amount of money required by Apple to be the exclusive carrier for that country when unlocked iPhones are also out there. It would know that potential revenues are forgone. (5,5)
The exclusivity of a service provider for a certain period of time. Apple could arrange a contract with AT&T, that after some time of being activated to the AT&T network, the phone could be unlocked and legally be connected to any other carrier to whom the customer would want to get a contract with. This way, Apple still ‘rewards’ AT&T for helping to develop the iPhone (although for a shorter period of time), and AT&T will still get their share of the iPhone hype. It will continue to be the exclusive carrier for that period of time, while after, say 1 year, the user is free to choose any carrier he wants.
The customer will like this, as they can see that the obligations to AT&T are limited and are only there for a relatively short period of time. People who previously would want to unlock the iPhone, would now maybe be willing to buy the iPhone and put up with AT&T knowing it is only for a little while. The iPhone will become more available, AT&T will profit from more revenues this way, and Apple will get more kickback as a result. The advantage is that this is a compromise, and both parties will benefit. People can be open about unlocking once the contract with AT&T is over, so no sneaky businesses have to take place any more.
Reconcile the dilemma This dilemma is based on a conflict between business processes and clients/customers/suppliers, which makes it a #3 dilemma: “We need to supply (global or standardized) products/services, which excel by our own internal criteria of excellence and effectiveness” vs “We need to supply products, which our clients and customers specifically want, value and appreciate. ” On the one hand, Apple wants to make its product to its own standards, and perfect it as far as they think possible and profitable. With the iPhone, they released a product that Apple was the ideal phone.
After the deal with AT&T, they were linked to only one provider in the USA, which made it even more exclusive, which drove prices up. The sales numbers were fantastic for Apple, which proved their strategy was effective, and AT&T got a good deal out of it as well. The only party that was not totally satisfied was the customers. They were looking for, and finding, new ways to avoid the monopoly of AT&T as a network provider for the iPhone. People would surely take one for free, but common opinion is that it is not the right combination of battery life, available memory, and everyday subtleties that justify people’s limited funds.
Customers knew that Apple and AT&T could keep prices high due to their monopoly position. That is why there have been people looking for ways around this mighty position. By cracking the iPhone’s system, they were now capable of connecting to networks other than AT&T. The iPhone as it is right now is a reaction to the market. Apple realizes the potential here and will leave its traditional business model in order to enter it. The ironic genius of this move lies in the fact that the market may actually react strongly to the iPhone, and if it does, Apple will have a strong position on the inside. To find an optimal reconciliation for this problem, which means trying to find an optimal solution for Apple to keep on making exclusive high-standard products for profitable prices, yet also making them available for a larger consumer base, is what we will do next. When we would take the middle road between the two extreme points in de chart, (10,0) and (0,10), we would come up with a mild compromise. At (5,5) there is a situation where maybe more phones can be sold to one person, or where more network providers would be partnering with Apple Inc. which would make the product a lot more accessible. So (5,5) is a place in the market where Apple gives in a bit, and the customers a bit. But still, both parties are not completely satisfied. That is still the goal of dilemma reconciliation. At the point of ultimate reconciliation, we would be at (10,10) of the chart, where both axis are at its maximum and both sides of the dilemma are optimally satisfied. In this case, it will be hard to find a win-win situation for both Apple Inc. and consumers. The most plausible and perhaps still more profitable situation is the following.
If Apple would converse with more network providers in the US and around the world, they will get much larger coverage. Their deals will be of a smaller scale, and the monopoly situation will be lost, but the target group of consumers will grow significantly. They will have to give up the fortress they have built together with AT&T, in order to reach more customers and to stop the hacking of their systems. Because when the iPhone becomes widely available, phone networks will compete with iPhone-contract prices, and eventually these prices will decrease.
In that case, there is no more need to crack your iPhone system to gain access to more networks. Action plan Apple will have to act if it wants to stop the distribution of hacked iPhones. As mentioned above there is one major step to take which is to expand the availability of the iPhone by selling it through more network providers. By making the iPhone more accessible, the market will respond by buying more iPhones and hacking less. Both of which are positive facts for Apple. Right now there is a negative attitude towards the strategy Apple is applying because it has maneuvered itself into the monopoly position discussed earlier.
Customers are not given a choice at all, and that is why they look for ways to get around the will of the monopolists. Marketing research has shown that customers always rather would have a choice before buying a product. Even if the choice is obvious, it feels good to have made a decision about a product before you buy it. The increased availability of the iPhone will unavoidably lead to a decrease in output prices for Apple. The scarcity and mystique will be gone, and it will be a smartphone like any other. Apple will have to swallow the sour of giving up a bit of its exclusive image and appeal more to a wider public.
That is the only downfall of the idea, whereas profits will actually increase for Apple, they will lose an exclusive market position. Looking at the history of Apple and its marketing strategies, you can question whether they would be willing to do this. On the other hand, Apple has achieved making an extraordinary product, and the market will have to deal with the fact that not everybody will be able to have one. As with more exclusive and special products, they are not for everyone. All in all, Apple could gain some from taking action in this situation, but it will harm their image.
Reaching out to more customers might not be one of their main goals, as they rather focus on producing products to their internal standards. The latter they sure still do, as they have delivered an excellent product which, customers just have to accept, is not for just everyone.
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