It’s Apple’s Way or the Highway
Business + Economy

It’s Apple’s Way or the Highway

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Sprint Nextel CEO Dan Hesse is betting his business on Apple’s iPhone. Having slipped far behind Verizon Wireless and AT&T, Sprint was so eager to land the latest iPhone that it reportedly committed to buy more than 30 million of the devices, at a cost of some $20 billion, over the next four years.

Hesse’s big-money play to boost Sprint’s dwindling customer base shows just how mighty the iPhone has become, and how willing Apple is to flex its muscle to revolutionize supply chain relationships, from chipmakers to retailers.

That strength is apparent even on a consumer level, if you know where to look. When you buy a smartphone from Verizon Wireless, for example, it comes with a Verizon logo emblazoned on the case – unless it’s an iPhone. Then the only visible branding is Apple’s.  For wireless operators, who want you to think of your Verizon or AT&T phone, this is no small deal.

Apple, under CEO Steve Jobs, began imposing its will on the supply chain at the very beginning of the iPhone era. When Verizon initially balked at Apple’s demands, including no carrier branding on the phone, Apple struck an exclusive deal with AT&T. And Apple is quick on its supply-chain feet: In July, 2008, as iPhone sales were ramping up, it nailed down a substantial share of the world’s flash memory, a purchase estimated by the Taiwan trade paper DigiTimes as 50 million eight-gigabyte chips.

Apple has been very careful to maximize its control over the supply chain. The iPhone 4 comes in two basic models, one for each of the two major radio technologies in use. The iPhone 4S, announced at Apple’s media event yesterday, will simplify things even further by including both technologies, known as CDMA and GSM. Other than that, the only variations in its worldwide models are color—black or white—and the amount of memory.  Samsung, by contrast, sells nine different handsets through AT&T alone.
The extreme simplicity of Apple’s product line confers some huge advantages. All of the phones—20 million in the June quarter alone—use the same displays, batteries, and other components. They all use the same processor, a custom Apple design built on ARM Holdings technology and fabricated by Samsung.  According to research firm IHS iSuppli, Apple has passed Hewlett-Packard as the world's largest purchaser of semiconductors. In 2010, Apple bought $17.5 billion worth of chips, compared with $15.2 billion for HP and $13.9 billion for Samsung. Maximizing the quantity of each part used achieves great economies of scale and lets Apple buy at rock-bottom prices. Minimizing the number of components needed for manufacturing lowers costs by simplifying inventory management and reducing the chances for supply disruptions.

And while Apple is in a position to negotiate favorable prices with its suppliers, the vendors benefit from the sheer volume of business that Apple brings them.  For example, manufacturing both the iPhone and iPad has allowed Taiwan-based Foxconn to capture half the global market for electronic manufacturing services, according to Thomas Dinges, supply chain analyst for IHS iSuppli.

Apple did have one notable failure in its efforts to use the iPhone to remake the supply chain. Carriers in the U.S. and many other countries typically subsidize the purchase of new phones and recover the subsidy through two-year contracts for service. Apple introduced the iPhone in 2007, without any subsidy from AT&T, at $600. Sales were slower than expected, and two months later, it cut the price to $400.  When Apple negotiated with carriers to take the second-generation iPhone international in 2008, it ran into great resistance to the unsubsidized model. The iPhone 3G was introduced by AT&T at $200 with a two-year contract, and Apple has stuck with the traditional carrier-subsidy model.

Since then, sales of iPhones have skyrocketed, and analysts expect the company will sell more than 100 million next year. That should further boost Apple’s incredible power up and down the supply chain.