Apple Incorporated

The Jobs Touch

But even as the company began 2011 with strong sales across its product lines, a significant question was raised by Mr. Jobs's announcement in January that he was taking a medical leave of absence — his third — a year and a half after his return from a liver transplant.

Mr. Jobs, who recovered from pancreatic cancer after surgery in 2004, had looked increasingly frail in the weeks before the announcement. He also took a leave of several months in 2009, when he left Timothy D. Cook, the chief operating officer, in charge. Mr. Cook is widely believed to be the most likely candidate to permanently replace Mr. Jobs.

In March 2011, Mr. Jobs made a surprise public appearance to introduce the iPad 2, which he described as a faster, lighter version that would sell for the same price as the original.

Mr. Cook, who took over day-to-day operations, joined Apple nearly 13 years ago and is otherwise responsible for the company’s worldwide sales and operations. He kept the development of products like the iPhone 4 and the iPad on track, increased Macintosh computer sales and improved Apple’s financial performance during an economic downturn. A day after the announcement of Mr. Jobs’ medical leave, Apple reported record sales and profits for the last three months of 2010 that far exceeded analysts’ bullish forecasts.

The 2010 holidays were really good to Apple. Consumers around the world snapped up iPhones and iPads at a dizzying rate and also bought millions of laptops, especially the new ultralight MacBook Air.

The iPhone 4 became Apple’s most successful phone introduction yet, and with Apple expected to bring the iPhone to Verizon early in 2011 the sales growth may well accelerate. 

But for all its success in the phone business, Apple suddenly has a real fight on its hands. Americans now are buying more Android phones than iPhones, and analysts say that by late 2011, Android will have erased the iPhone’s once enormous lead in the high end of the smartphone market.

The company's iPad tablet computer — an idea that has flopped before — also drew enormous attention; the device, with a 10-inch multi-touch screen, is intended to fill a gap between laptops and smartphones.

Apple’s profit margins are the envy of the consumer electronics industry, but buried among quarterly results that any company would be more than happy to emulate was a decline in gross profit margins. The problem was that the company’s newest products ware not as profitable as its computers and iPod music players. Strong sales of lower-margin products — the iPad among them — caused the decline, according to Apple executives.

Apple and the Competition

As one success follows another, the company finds itself in a bewildering position. As the tech industry's perennial underdog, Apple was frequently scorned and dismissed by larger and more successful competitors like Microsoft or Dell. Now, with growing frequency, the company is seen by competitors and other industry players as a bully.

Companies like Google and Adobe have accused Apple of unfairly using its clout to exclude their technologies from the iPhone and iPad. And some application developers are fretting under Apple's tight control of those devices.

Perhaps the loudest complaints came after Apple barred some third-party programming tools from the iPad, including Adobe's Flash software, which is widely used to create online videos and Web applications.

The decision led to a very public war of words between Adobe and Mr. Jobs. It also prompted the Federal Trade Commission to begin asking questions about the effect of Apple's decision on competition.

Then in June 2010, Apple appeared to make the switch from excluded to excluder in the mobile ad market. New policies for the iPhone 4 bar Google and AdMob from selling ads on the device, resulting in a complaint to the FTC from Google, which was in the unusual position of playing victim.

The FTC inquiry is not the only one concerning potentially anticompetitive behavior by Apple. The Justice Department recently began a preliminary investigation into whether Apple pressured music labels to exclude Amazon.com, its rival in digital music distribution, from certain licensing agreements. And Apple is one of many Silicon Valley companies whose hiring practices are being examined by the department.

The latest inquiry from the commission has raised eyebrows among some antitrust experts, in part because Apple currently controls less than a third of the smartphone market in the United States.

Apple likes to maintain tight control over what programs can appear on the iPhone — a task that became a little bit harder on July 26, 2010, when the Library of Congress, which has the power to define exceptions to an important copyright law, said that it was legal to bypass a phone's controls on what software it will run to get "lawfully obtained" programs to work.

The issue has been a topic of debate between Apple, which says it has the right to control the software on its devices, and technically adept users who want to customize their phones as they see fit.

Apple also said that altering the phones encouraged the pirating of applications, exposed iPhones to security risks and taxed the company's customer support staff. But iPhone hobbyists say they simply want to have free range to use certain features and programs on their phones that Apple has limited or failed to offer.

The Early Years

Founded in 1976 by Mr. Jobs and Steve Wozniak, Apple came of age as one of a wave of firms — including Atari, Radio Shack and Texas Instruments — that were looking for ways to transform the digital computer into a home appliance. Of that first personal computing generation, it is Apple and the charismatic Mr. Jobs that have consistently found a way to touch the zeitgeist. Apple's microprocessor-based consumer products have found expanding consumer markets around the world, beginning with the Apple II computer, widely adopted in education during the 1970s.

In 1979, Mr. Jobs made a legendary visit to Xerox's Palo Alto Research Center, where he saw a prototype personal computer called the Alto. He took away a range of ideas about computer design and graphical user interface and developed two families of computers, the Lisa and the Macintosh. Aiming to make Apple's products "insanely great," Mr. Jobs was convinced that they could change the world.

Although the Lisa failed commercially, the Macintosh succeeded, reshaping the computer industry over the next decade. Its success, however, came at great cost to Mr. Jobs, who was forced out of the company in 1985 by his handpicked chief executive, John Sculley, a recruit from Pepsi.

Apple initially prospered under Mr. Sculley, and the Macintosh briefly reached a market share of more than 15 percent of the personal computer industry, but the company foundered as Microsoft's Windows operating system became the desktop computing standard.

The company began to unravel when Mr. Sculley placed a large bet on the arrival of the hand-held computing market. When Apple's Newton failed commercially, he was forced out in 1993.

In 1997, Apple's current era dawned as Mr. Jobs returned after more than a decade in exile. At the time, many analysts gave him little chance of resurrecting the company, which had largely been written off by the computer industry. Michael S. Dell, who built his own PC empire, was even quoted as suggesting that Apple's smartest move would be to "shut it down and give the money back to the shareholders." Starting with the title of interim chief executive, however, Mr. Jobs systematically rebuilt the company's Macintosh franchise by adding an operating system he had developed at Next Inc.

The Beginning of a Revolution

In 2001, Mr. Jobs introduced the iPod music player, setting the company on its current course as a major force in consumer electronics. The iTunes Music Store, created to enable users to fill the device with audio, has made Apple an important force in the music industry as well. Over 10 billion songs from the store have been downloaded since the site went active in April 2003.

In 2007 Apple introduced the iPhone, a convergence of entertainment, computing and communications that has roiled the cellular phone industry. Its Apple TV set-top box has had less impact, but signals a continuing interest in the living room.

For now at least, Apple appears to have a comfortable lead in the simmering smartphone battle. Since 2007 it has sold tens of millions of iPhones and the similar-looking iPod Touches, and the devices have become its most profitable product category.

In April 2010, Apple announced that it had sold more than 300,000 iPads on the device's first day on the market, a figure that included preorders. That met the expectations of financial analysts who were keeping tabs on the release of the company's highly anticipated tablet computer. Apple also said iPad users had downloaded more than one million apps from the company's App Store and more than 250,000 electronic books from its iBookstore.

Wall Street warmly greeted the news in May 2010, of Apple's dominance over Microsoft, calling it the end of an era and the beginning of the next one. Microsoft, with its Windows and Office software franchises, has dominated the relationship most people had with their computers for almost two decades, and that was reflected in its stock market capitalization. But the click-clack of the keyboard has ceded ground to the swipe of a finger across a smartphone's touch screen.

And Apple is in the right place at the right time. Although it still sells computers, twice as much revenue is coming from hand-held devices and music. Over all, the technology industry sold about 172 million smartphones in 2009, compared with 306 million PCs, but smartphone sales grew at a pace five times faster.

The Android Challenge

Apple already competes with Research In Motion, maker of the BlackBerry. And the iPhone will soon have one more powerful and familiar foe: Microsoft. That company’s well-reviewed Windows Phone 7 software will appear in as many as nine new smartphones beginning in November 2010. Others like Nokia cannot be counted out.

That leaves little room for error at Apple. The company must continue to create hit products, as a single misstep could give Android and other rivals an opportunity to make inroads.

Also, as the number of people with Android phones grows, Android will grow more attractive for app developers. For now, Apple’s App Store, with more than 250,000 applications, enjoys a large advantage over the Android Market, which has about 80,000. And those numbers don’t tell the whole story.

Apps made for the iPhone tend to be of better quality, are more frequently downloaded and on average are more profitable for developers.

But that edge may not last, especially as many developers fret about Apple’s tight control over the App Store.

For now, the smartphone market is growing so rapidly that the rise of Android has not necessarily been at the expense of the iPhone. That will change as the market matures.

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