Explain how Apples philosophy and organizational culture have impacted how they handle ethical decisions Why is Apples industry so competitive and how could this affect the ethi

486 Case 11 Apple Bites into Ethics

This case was prepared by Kelsey Reddick, Jennifer Sawayda, Harper Baird, Danielle Jolley, and Julian Mathias for and under the direction of O.C.!Ferrell and Linda Ferrell © 2019. It was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. All sources used for this case were obtained through publicly available material.

Introduction Headquartered in Cupertino, California, Apple Inc. has experienced many successes throughout their business history. Apple’s journey to success has not been without ethical challenges along the way. Apple’s success can be seen from their stock price, up 43,000 percent since their IPO in 1980. For the last 12 years, Apple earned first place among Fortune’s “World’s Most Admired Companies.” To millions of consumers, the Apple brand embodies quality, prestige, and innovation. Although companies try to copy the Apple business model, none have been able to discover what it is that makes Apple so unique. Apple is a market leader in the development and sales of mobile devices. As a “tech giant,” Apple is monitored extensively due to their extremely large market share and consequently the ability to abuse this power. Consumers and regulators stay alert for instances of abusive power, monopolies, and unfair practices that should be rectified.

Apple’s History Apple’s first product, the Apple I, was vastly different from the Apple products most are familiar with today. This first handmade computer kit was constructed by Apple cofounder Steve Wozniak. It lacked a graphic user interface (GUI), and buyers had to add their own keyboard and monitor. Cofounder Steve Jobs convinced Wozniak that it could be sold as a commercial product. In 1976, the Apple I was unveiled at the Home Brew Computer Club and put on sale for $666.66.

Jobs and Wozniak continued to create innovative products. Soon their new company, Apple Computer Inc., surpassed $1 million in sales. However, the mid- 1980s brought difficult times for Apple. In 1983, the company introduced the Apple Lisa aimed at business users for $10,000. The product flopped. In 1985, Steve Jobs was ousted after internal conflicts with Apple’s then-CEO. The company’s products, such as the Mac I and the Newton, an early personal digital assistant (PDA), were not successful, and the company underwent several CEO changes. With declining stock prices, the future of Apple was in jeopardy.

Steve Jobs returned to Apple in 1997 to try and save the struggling company. The return of Jobs introduced a new era for Apple. Jobs immediately began to change the company’s corporate culture. Before Jobs’s return,

employees were more open with the public about Apple projects. After he returned, Jobs instituted a “closed door” policy. Aside from efforts to protect intellectual property internally, Jobs was also a proponent of using litigation against rival companies suspected of pat- ent infringement later in his tenure. As competition in the smart phone category heated up, Apple sued Nokia, HTC, and Samsung in 2009, 2010, and 2011, respectively. Perhaps the most notable lawsuits were made against Samsung, where both companies filed suits against each other across nine countries over a three- year period. In total, Apple and Samsung filed more than 40 patent infringement lawsuits and countersuits related to intellectual property rights. The companies decided to end litigation outside of the United States, choosing to focus instead on cases that are still active in the United States. Today, Apple continues to remain vigilant in protecting their technology and ensuring information remains proprietary.

Jobs also created a flattened organizational struc- ture; rather than go through layers of management to address employees, he addressed them directly. Perhaps one of the most noticeable changes, however, was Apple’s expansion into new product lines within the electronics industry. In 2001, Apple launched the iPod—a portable music player that forever changed the music industry. The company also introduced iTunes, an application that allowed users to upload songs from CDs onto their Macs and then organize and manage their personalized song libraries. Two years later, Apple introduced the iTunes Store, where users could download millions of their favorite songs for $0.99 each online. The introduc- tion of the iPhone in 2007 was a turning point for Apple and the beginning of a paradigm shift for the entire world. The iPhone was a revolutionary new smartphone with the music capabilities of an iPod. As of this writing, the iPhone still has about 40 percent of the market share in North America.

The same year that Apple introduced the iPhone, Jobs announced Apple Computer, Inc. would be renamed Apple Inc. This signified that Apple was no longer just a computer manufacturer but also a driver in consumer electronics. Some saw this as a shift away from comput- ers toward consumer electronics such as Apple TV, iPods, iTunes, iPhones, and iPads. However, it may be more accurate to say Apple is reinventing computers, or at least what they look like and how they are used. With the introduction of tablet computers such as the

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iPad, Apple began to take market share away from their top competitors in the computer industry. However, in the process, sales of their Mac computer line were also cannibalized by consumers opting for a tablet. Sales of desktops, laptops, and netbooks began to decline after tablet computers were introduced.

Although analysts believed tablet sales would con- tinue growing at a rapid rate, the tablet market eventually became saturated with fewer than expected customers upgrading their current tablets to newer versions. Because nearly half of all U.S. households now own at least one tablet, this has translated into stagnating industry growth. Consequently, just as Apple cannibalized their own line of Mac computers with the introduction of the iPad, it appears that their newer iPhones, which feature a larger screen, are eroding the iPad market. The dynamic fluctuation in PC and Mac computer sales and the frequent introduction of new smartphones make it difficult to predict future sales of Apple products. Only time will tell if Apple’s devices improve in market share or are overtaken by a rival platform.

In October 2011, Apple Inc. lost its iconic leader with the death of Steve Jobs. Apple’s current CEO Tim Cook takes a more traditional approach in his manage- ment style by prioritizing project and supply chain man- agement over creative engineering, attending investor meetings, being accessible to the media, and paying out dividends to stockholders. He still maintains the secre- tive nature of the company but is more approachable than Jobs. Yet, while Cook seems to possess the skills necessary for the CEO position, some fear he lacks the creative skills that made Jobs such a visionary.

Apple is attempting to design products to continue expanding their customer base and remain relevant in the industry. In 2015, the Apple Watch was released, making waves in wearable technology. It is a wearable computing device that functions as an extension of the iPhone. With its easy-to-use interface and broad selection of apps, Apple has dominated the smartwatch category. Though many of Apple’s competitors, like Samsung and companies targeting fitness enthusiasts, have extensive lines of wearable devices that sync with various operating systems and mobile platforms, Apple holds 46 percent of the market share. It’s next closest competitor, Samsung, only holds 16 percent of the market. Apple followed up this win with the introduc- tion of Airpods, wireless Bluetooth earbuds, in 2016. Cook contends that wearables are a top contributor to the company’s growth.

Apple’s Corporate Culture Apple’s transition from a computer to a consumer electronics company is unprecedented—and hard to replicate. Although many can only speculate about why Apple succeeded so well, they tend to credit Steve Jobs’s

leadership abilities, Apple’s highly skilled employees, and their strong corporate culture.

The concept of evangelism is an important component of Apple’s culture. Corporate evangelists refer to people who extensively promote a corporation’s products. Apple even had a chief evangelist whose job was to spread the message about Apple and gain support for their products. However, as the name evangelism implies, the role of evangelist takes on greater meaning. Evangelists believe strongly in the company and will spread that belief to others, who in turn convince other people. Therefore, evangelists are not only employees but loyal customers as well. In this way, Apple was able to form what they refer to as a “Mac cult”—customers who are loyal to Apple’s Mac computers and who spread a positive message about Macs to their friends and families.

Successful evangelism only occurs with dedicated, enthusiastic employees who are willing to spread the word. When Jobs returned to Apple, he instituted two cultural changes: he encouraged debate on ideas and he created a vision employees could believe in. By implementing these two changes, employees felt their input was important and they were a part of something bigger than themselves. Such feelings created a sense of loyalty among those working at Apple.

Apple prides themselves on this unique corporate culture. On their job site for corporate employees, Apple markets the company as a “demanding” but rewarding workplace where employees work among “the best of the best.” Original thinking, innovation, inventing—all are common daily activities for Apple employees. By offering both challenges and benefits to applicants, Apple hopes to attract those who fit best with their corporate culture.

Apple also looks for retail employees who fit well in their culture. It wants to ensure that their retail employees make each customer feel welcome. Inside Apple retailers are stations where customers can test and experiment with the latest Apple products. Employees are trained to speak with customers within two minutes of entering the store. To ensure their retail employees feel motivated, Apple provides extensive training, greater compensation than employees might receive at similar stores, and opportunities to move up to higher level positions, such as manager, genius (an employee trained to answer the more difficult customer questions), or creative (an employee who trains customers one-on-one or through workshops). Apple also offers young people the chance to intern with the firm, become student representatives at their schools, or work remotely during college as home advisors.

Another benefit Apple offers combines employee concerns with concerns of the environment. In an effort to reduce their overall environmental impact, Apple offers incentives such as transit subsidies for employees who opt to use public transportation. In addition, as part of their long-term commitment to sustainability, Apple is spending $850 million for 25 years of solar power.

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Their Cupertino facility runs on 100 percent renewable energy and is equipped with shuttles for employees. Apple’s free buses are powered by biodiesel. Apple also opened a new facility, named Apple Campus 2. With a budget of $5 billion, the new facility include a fitness center, underground auditorium, and 300 electric vehicle charging stations. The new buildings at the campus are Leadership in Energy and Environmental Design (LEED) certified and incorporate solar technology. The campus is also conveniently located so that many employees can walk, ride, or carpool to work. These incentives reduce fuel costs for employees while simultaneously lowering emissions released into the environment. Over the last few years, Apple has reduced their carbon emissions by 35 percent, making significant progress toward their goals related to renewable energy, low-carbon design, and energy efficiency.

Apple’s Ethics Apple has tried to ensure their employees and those with whom they work display appropriate conduct in all situations. They base their success on “creating innovative, high-quality products and services and on demonstrating integrity in every business interaction.” According to Apple, four main principles contribute to integrity: honesty, respect, confidentiality, and com- pliance. To thoroughly detail these principles, Apple drafted a code of business conduct that applies to all their operations, including those overseas. They also provide specific policies regarding corporate governance, director conflict of interest, and guidelines on reporting questionable conduct on their website. Apple provides employees with a Business Conduct Helpline they can use to report misconduct to Apple’s Audit and Finance Committee.

Many of Apple’s product components are manufac- tured in countries with low labor costs. The potential for misconduct is high because of differing labor standards and less direct oversight. As a result, Apple makes each of their suppliers sign a “Supplier Code of Conduct” and performs factory audits to ensure compliance. Apple may refuse to do additional business with suppliers who refuse to comply with their standards. To emphasize their commitment toward responsible supplier conduct, Apple releases an annual Apple Supplier Responsibility Report that explains their supplier expectations as well as audit conclusions and corrective actions the company takes against factories where violations occur.

Ethical Issues at Apple Although Apple has consistently won first place as Fortune’s “World’s Most Admired Company,” they have experienced several ethical issues in recent years. These issues could have a profound effect on the company’s

future success. Apple’s sterling reputation could easily be damaged by serious misconduct or a failure to address risks appropriately.

Privacy Consumer tracking is a controversial issue. With the increase in social networking, mobile devices, and internet use, the ability for companies to track customers is greater than ever before. For Apple, more customer information can help the company better understand consumer trends and subsequently market their products more effectively. However, a perceived breach in privacy is likely to result in backlash against the company.

In 2011, Apple experienced just such a backlash. Apple and Google disclosed that certain smartphone apps and software, often utilizing the phones’ internal GPS devices, collected data on the phones’ locations. Consumers and government officials saw this as an infringement on user privacy. The companies announced that users have the option to disable these features on their phones, yet this was not entirely true for Apple’s iPhone. Some smartphones continued to collect location information even after users disabled the “location” feature. Apple attributed this to a glitch they remedied with new software. In subsequent iPhone releases, Apple improved the privacy features of iOS, the mobile operat- ing system found in the iPhone and iPad. The security upgrades have included enhanced Wi-Fi security and a default policy that location features are turned. Once the smartphone is set up, users have the option of turning on the location feature if they desire. Both Google and Apple defend their data-collection mechanisms, but many government officials question whether these tracking techniques are ethical.

Another privacy controversy was related to Apple Pay, software that allows consumers to purchase items both online and in-person through their iPhones. The mobile payment system became a target for hackers, who exploited vulnerabilities in the verification process of adding a credit card to an Apple Pay account. The issue with hackers gaining access to payment informa- tion is at least partially the responsibility of the banking institutions, since they approve the addition of credit cards to Apple Pay accounts. Banks did not ask enough security verification questions, making it easier for consumers to add credit cards to their accounts and also leaving the door open for increased fraud. Apple released a credit card in 2019 with advanced security features to make credit card fraud significantly more difficult. The Apple Card, intended to replace a traditional credit card, is built into the iPhone Wallet. Its enhanced security and privacy features mean Apple, unlike regular credit card companies, will not know purchase data for its custom- ers. Additionally, the card uses one-time unique dynamic security codes, replacing the static three-digit CVV.

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To improve the security of their devices, Apple launched a bug bounty program designed to reward security researchers who discover and disclose to Apple vulnerabilities in Macs, MacBooks, Apple TV, and Apple Watch. Apple then resolves the security issues and rewards the finder with $1 million. Before the bug bounty existed, security researchers could discover system flaws and abuse them or sell the knowledge to exploit brokers. Additionally, under the new iOS Security Research Device Program, Apple gives development phones to trusted security researchers to discover vulnerabilities in the underlying software and operating system.

In 2016, after a couple opened fire in an office in San Bernardino, California, killing 14 people, Apple faced a privacy issue that pitted them against the FBI. The FBI believed that the husband’s encrypted iPhone could reveal important information about the attack. Interestingly, only a few years earlier, Apple had developed encryption systems making it more difficult for forensic investigators to get into the system. The FBI asked for Apple’s help, but Apple claimed that providing the government with a way to bypass their own security measures would set a dangerous precedent that could place the privacy of millions of customers who use Apple products at risk. The FBI issued a court order mandating Apple to help the government in this matter. Apple refused, and the FBI dropped the case after they were able to hack into the iPhone without Apple’s help. The conflict elicited mixed feelings from the general populace. Some felt that this was a special case that could be used to fight terrorism while others believed it would allow the U.S. government, and possibly other governments, to hack into the phones of private citizens whenever they felt a need. This is just one of several cases where the government has asked for access to secured tech devices in their investigation. Privacy advocates believe the conflict between the government and tech giants like Apple is far from over.

Another large complaint from consumers and devel- opers occurred when Apple removed several screen-time and parental control apps from the App Store. In some cases, Apple asked companies to remove parental control features from their apps, and in other cases the apps were simply removed from the store entirely. One app, Freedom, which allowed users to temporarily block certain sites and apps on their devices, had more than 770,000 downloads before it was removed. Apple stated that the apps they removed violated their rules because they allowed one iPhone to control another. However, these practices had been allowed for years and the apps had approved hundreds of versions of their apps over this time period. Apple responded that they made these changes because of the risk that these apps could gain too much information from the users’ devices, particularly a concern because the devices often belonged to children. The threat against privacy and data security is something

that Apple does not tolerate, but the timing of the ban on these particular apps brought suspicion. Shortly after the incident, Apple launched their own Screen Time tool, allowing users to limit and monitor their use of apps and overall phone usage. Such timing focused antitrust con- cern and scrutiny on the issue of Apple’s dominance and control over apps in their marketplace. Apple denies that the timing of these changes had to do with the launch of their Screen Time tool. Users have voiced discontent with Apple’s Screen Time tool, stating it provides less restrictions and is more complicated than the apps they were previously using. Another issue raised is that the new tool included in Apple’s software requires all users within a family to have iPhones, whereas the apps used previously allowed parents with iPhones to control their child’s Android devices.

Price Fixing Another major ethical issue for Apple includes allega- tions of price fixing. A judge ruled that Apple conspired to fix prices on e-books in conjunction with five major book publishers. A federal judge ruled that Apple was part of a deal that required publishers to give Apple’s iTunes store the best deals in the marketplace for e-books. According to allegations, Apple allowed publishers to set the e-book prices for the iPad, and Apple received 30 percent of the proceeds (known as the “agency model”). The agency model is thought to be less competitive than the wholesale model, in which retailers and publishers negotiate on the price. However, if a competitor was found to be selling the e-book for less, Apple was to be offered the same lower price. This scheme is more commonly referred to as a most-favored- nation clause and can be used by companies to dominate the market by keeping competitors out. After striking the deal with Apple, publishers approached Amazon about participating in the contract. In court, Apple faced fines totaling $450 million as part of a settlement agreement.

Price-fixing allegations against Apple are not con- fined to the United States. Russia’s Federal Antimonopoly Service found Apple guilty of forcing 16 retailers to fix prices on the iPhone. Allegedly, Apple even contacted retailers who they felt were not adhering to the agreed- upon price. Apple has denied these charges and claims resellers have always had the right to price their products as they choose.

Antitrust Just months after the introduction of the iPhone, a class action lawsuit was filed against Apple claiming Apple illegally formed a monopoly with AT&T. The claim was that Apple violated California’s antitrust law and the Sherman Antitrust Act. At the time, customers who

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purchased an Apple iPhone signed a two-year service contract with AT&T, the exclusive carrier of the iPhone. This locked in Apple customers with only one option. The five-year exclusivity agreement between Apple and AT&T was publicly reported. However, many argued that the exclusivity was not disclosed in the contracts customers signed, and customers were not aware they were ultimately locked into five years of AT&T service. This lawsuit resulted in many other similar lawsuits being filed. The case went to the Supreme Court.

The antitrust case against Apple turned its focus to the App Store practices of Apple. Apple charges up to a 30 percent commission to app developers, bans them from selling their apps elsewhere, and ultimately drives the price of apps. The 30 percent commission fee forces app developers to increase the price of their apps in order to maintain profits. App makers have complained for years that the practices are unfair, and that Apple has used monopoly power to raise app prices and become a tech giant. The app store has more than 2 million apps and these apps drive the daily lives of customers. Without the app store, iPhone users could not listen to music (Spotify), catch a ride (Uber), or share photos (Instagram). Some competitors of Apple such as Spotify, Netflix, and Amazon have sought to avoid these fees paid to Apple by encouraging their consumers to subscribe directly to their services, but small app developers do not have this option.

Apple’s questionable app store practices resulted in more legal attention. In previous litigation against Apple, the court noted that the 30 percent commission fee is a cost that in the end falls on consumers because consumers pay the premium app price, a price that developers have set to cover their fees. There was much controversy over whether consumers could sue Apple for the practices they use to regulate the app store or not. In Apple v. Pepper, Apple argued they were simply re-selling the apps from third-party developers to consumers and therefore had no direct relationship with the consumers. They argued that consumers had no grounds to seek damages from them, as they were a marketplace from which developers could sell their products. They held the position that app developers set their own prices therefore the apps were actually purchased from the developers, not from Apple. Apple’s evidence supported that app developers were the only party able to bring antitrust lawsuits against them. The Supreme Court, however, did not agree, and the case ruled that since consumers purchased apps directly from Apple, the consumers did have the ability to seek antitrust charges against Apple. This court case made clear that consumers may sue Apple for allegedly monopolizing the market for the sale of iPhone apps. However, this case did not address whether Apple is guilty of violating antitrust laws. The ruling simply allowed antitrust cases to proceed forward. The lawsuit has raised anti-tech sentiment among the big tech giants

and concerns of their dominance have grown causing a wide-spread antitrust of these large companies.

Sustainability Apple has taken steps to become a greener company and reduce the environmental impact of their facilities. They also have restrictions addressing the manufactur- ing, use, and recycling of their products. However, the company admits that most of their emissions come from their products. Since Apple’s success hinges on constantly developing and launching new products, the environmental impact of their products is a serious issue.

One practice for which some consumers have criticized Apple is planned obsolescence—pushing people to replace or upgrade their technology whenever Apple comes out with an updated version. Since Apple constantly releases upgraded products, this could result in older technology being tossed aside. Apple has under- taken different approaches to combat this problem. For one, the company strives to build quality, long-lasting products with materials suitable for recycling. The MacBook Air and Mac mini enclosures are made from 100 percent recycled aluminum, one of the many ways Apple is improving their environmental impact. In addition, in the past 10 years the average energy consumption of their latest products has decreased by 70 percent. To encourage recycling, Apple implemented a program at their stores, Apple Trade, so old devices such as iPods, iPhones, and Mac computers can be recycled. Apple securely wipes the data and resells or recycles it. In fact, more than two-thirds of the iPhones Apple receives through Apple Trade are used by new owners. If a phone is not in good enough shape to refurbish, Apple invented a disassembly robot, Daisy, that can take apart iPhones to recover the materials.

Consumers that trade in their old iPods receive a discount on newer versions; those with old Mac computers that still have value can receive gift cards. Apple partners with hundreds of regional recyclers and has established recycling programs in 99 percent of the countries where their products are sold. Despite the recycling programs, many consumers still throw away their old products out of convenience, particularly if they have no value. E-waste remains a significant issue as consumers continue to improperly dispose of their old electronic devices.

Intellectual Property Intellectual property theft is a key concern at Apple and is an issue the company aggressively pursues. As we’ve discussed, Apple is serious about keeping their proprietary information a secret to prevent other com- panies from acquiring their ideas. This has led to many lawsuits between Apple and other technology firms. In 1982, Apple filed a lawsuit against Franklin Computer

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Corporation that impacted intellectual property laws. Apple alleged Franklin was illegally formatting copies of Apple II’s operating system and ROM so they would run on Franklin computers. Franklin’s lawyers argued that portions of computer programs were not subject to copyright law. At first, the courts sided with Franklin, but the verdict was later overturned. The courts eventually determined that codes and programs are protected under copyright law. This law provided technology companies with more extensive intellectual property protections.

Another notable case was Apple’s lawsuit against Microsoft after Apple licensed technology to Microsoft. When Microsoft released Windows 2.0, Apple claimed the licensing agreement was only for Windows 1.0 and that Microsoft’s Windows had the “look and feel” of Apple’s Macintosh GUI. The courts ruled in favor of Microsoft, deciding the license did not cover the “look and feel” of Apple’s Macintosh GUI. Although there were similarities between the two, the courts ruled that Windows did not violate copyright law or the licensing agreement simply by resembling Macintosh systems.

Two other lawsuits involved more serious ethical issues on Apple’s part. One involved Apple’s use of the domain name iTunes.co.uk. The domain name had already been registered by Ben Cohen in 2000, who used the name to redirect users to other sites. Cohen eventually used the domain name to redirect users to the Napster site, a direct competitor of Apple. Apple attempted to purchase the domain name from Cohen, but when negotiations failed the company appealed to U.K. registry Nominet. Usually, whoever registers the domain name first gets the rights to that name. However, the mediator in the case determined that Cohen abused his registration rights and took unfair advantage of Apple. Apple won the right to use the domain name, which led to complaints that Apple was b

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