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  • On Becoming a Consumer-Oriented Company

    February 5th, 2005

    Through a large part of Apple’s history, it has focused primarily on the higher-cost, fully-outfitted professional models, with prices to match. As a result, profits were kept high, but sales figures weren’t so terrific. Sure, Apple made occasional forays into the consumer market, but not with such great results. The Performa series comes to mind. But the most successful efforts really began with the introduction of the original bondi blue iMac in 1998. The iBook followed, and you know the rest.

    The problem with cheaper products is that the profit margins aren’t as high per unit sold, so you have to sell more of them to compensate. This is, of course, one of the reasons Apple eschewed the idea of a sub-$500 Mac for so long. Only the unexpectedly high volume of iPod sales paved the way for widespread acceptance of a cheap Mac. If the early success of the Mac mini holds, and assuming enough of them can be built, the Mac’s market share may be poised for plenty of growth.

    Sure enough, the sales potential seems huge. Even though the mini has been on sale since January 22, try to find one. Yes, you can place an order and have it delivered within maybe three or four weeks, or at least that’s the current estimate, but how many dealers have one available today? That’s going to be a hard nut to crack. Same for the iPod shuffle. No doubt Apple is trying to ramp up production to fill all the back orders and keep the sales rolling. But let’s not forget that it took quite a few months before availability of the iPod mini caught up with demand. If you were one of the lucky souls who got the shuffle on the day it was released, or shortly thereafter, before the rest of the world got the message, you can feel confident that your choice to be an early adopter was correct.

    Naturally, the rapidly growing sales of consumer products is probably going to change Apple’s financial focus. To get an indication of the potential impact, you might want to examine Apple’s Quarterly Form 10-Q, filed with the SEC. The document doesn’t paint as rosy a picture as the standard press release. And while much of it relates to the arcane details of handling a company’s finances, there are a few significant details that deserve notice.

    For example: “Unit sales of professional products (Power Mac and PowerBook), generally have higher gross margins than consumer products (iMacs, iBooks, iPods, and content from the iTunes Music Store). A shift in sales mix away from higher margin professional products towards lower margin consumer products could adversely affect future gross margin (GM) and operating margin percentages.”

    Another factor is the fact that Apple “believes that weak economic conditions over the past several years are having a pronounced negative impact on its professional and creative customers who are significant users of its professional systems.”

    But this is the killer: Although you may believe that the so-called megahertz myth is dead and buried, it is still hurting sales. Witness the statement that “despite its efforts to educate the marketplace to the contrary, the Company believes that many of its current and potential customers believe that the relatively slower MHz rating or clock speed of the microprocessors it utilizes in its Macintosh systems compares unfavorably to those utilized by other operating systems and translates to slower system performance.”

    In addition, delays in getting enough G5 chips isn’t helping.

    Now I’m not about to tell Apple how to market its products, but maybe it should be more aggressive in battling the megahertz myth. While some of you are apt to dismiss all those performance claims for the Power Mac G5, the fact is that the chip is definitely faster than Pentium 4 chips with much higher clock speeds. Too bad potential business customers aren’t getting the message.

    Add to that the fact that the iBook and iMac G5 are, in part, apparently cannibalizing sales from PowerBooks and the single processor Power Mac G5. That may be one significant reason why a modest PowerBook upgrade was rushed to market. You’ll also notice the price cut, which makes Apple’s professional laptops an easier sell when compared to the iBook.

    From all this, it definitely appears that Apple is having trouble boosting sales of Macs to its traditional market segments. At the same time, sales of lower-profit consumer products are going through the roof. It’s also true that cash-starved businesses are finding creative ways to use consumer Macs in their offices. Consider the iMac G5, which is the perfect front office computer. Or the Mac mini, which is an ideal choice for a low-cost server, so long as you plug in a big, fast FireWire drive.

    In fact, the mini is the ideal replacement computer for offices now using a Dell, particularly since more and more businesses are becoming disgusted with the various problems affecting the Windows platform. If all you need to do is run Word or perhaps a customized database program for your business, the mini has all the power you need and then some. You can use the same display, keyboard and mouse you have now. In fact, some reviewers have even connected minis to Dell peripherals, just to show how easily this tiny Mac mates with existing hardware. By the way, if your PC input device has a PS/2 connector, no problem. You can buy a PS/2 to USB adapter from your favorite computer store for as little as $5.

    Of course there’s another way to look at this: A sale is a sale. If Apple is selling more computers, market share increases. Now maybe it has to sell, say, two or three Mac minis to get the same profits as it receives from a single Power Mac G5 sale. But maybe that’ll encourage Apple to cut the prices of its professional computers, and that would raise potential sales even higher.

    And if consumer models still outstrip higher-priced products by a large margin, the higher overall unit sales will still make Apple a far more credible player in the PC industry. I wonder what Michael Dell would think of that.

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