TMO Reports - Apple's Consumer Hardware Battle Plan

by , 9:00 AM EST, March 4th, 2004

It's strange. After so many years of hearing pundit after pundit describe Apple as if it were suffering from stage four cancer, about the only people forecasting Apple's demise nowadays are its competitors, some timid analysts, and a smattering of journalists who didn't receive a reviewer's copy of the new iPod Mini . . .

Recently Merrill Lynch analyst Steven Milunovich rated Apple a "strong buy," calling the iPod the "killer app" that will again make the company "relevant."

Meanwhile, other analysts, like IDC research manager Roger Kay, are finding Apple's latest iApp GarageBand a blast.

"I love GarageBand. I minored in music at Bennington College, and I can't begin to imagine what it would have been like to have something like this," Mr. Kay told The Mac Observer. "I can actually hear what I'm writing. For the consumer enthusiast it's so much fun."

Citing company policy, Apple declined to discuss its consumer product and marketing strategy with The Mac Observer. Still, the company's latest offerings and its recently announced partnerships with HP and Pepsi make predicting its battle plan irresistible.

Hot Portables

Notebooks are the hottest sector in the PC market, and Apple is getting a good piece of that, Mr. Kay said. "The greatest change is happening on the consumer end. Not only are notebooks increasingly affordable, they offer mobility, as more people take advantage of wireless capabilities," he said.

"No one has forsaken the desktop lines, but the reality is notebooks are the real future in terms of serious profits and growth," BusinessWeek online technology editor Alex Salkever told The Mac Observer. "In that sense, Apple is doing okay because they have much more than 2 percent of that market."

According to figures supplied by IDC personal computing analyst Alan Promisel, Apple's portable market share in 2003 was 3.5 percent worldwide and 5.6 percent in the US.  iBooks made up 71.2 percent of Apple's US portable shipments and 64.3 percent of global shipments last year.

"Apple's limited market share is related fundamentally to its usage of the Macintosh operating system and PowerPC processor in a 'Wintel' client world," Mr. Promisel told The Mac Observer. "However, the company's lack of price competitiveness with other Windows portables has also proven to be an inhibiting factor."

For his part, Mr. Salkever said that Apple is doing great in the laptop sector.

Apple has "been smart and lucky enough to hitch their wagon to a much better chip benefactor this time around," Mr. Salkever said. "The PPC 970 is integral to IBM's server business in a way the G-series never was for any line of business at Motorola, so Apple will get a free ride as IBM builds better and better PPC chips."

The Desktop Conundrum

Apple's line of iMac desktop consumer computers is not faring as well, however. "It's hard to tell if it has to do with the category itself, with consumer behavior, or if the iMac is just long in the tooth," said Mr. Kay.

"Consumers were buying lots of desktops in the late 90s, and the first iMac rode that wave. The iMac flat panel product has not done as well because times are different," Mr. Kay said.

While consumers in the PC space are notoriously fickle, Kay said that those interested in a desktop machine will have different requirements than those buying a comparable notebook. "They want 'comfort,' something big with lots of screen real estate, perhaps a big keyboard, that offers high performance," he said.

Kay wasn't sure what road Apple should take in providing a refreshed product. He said that gamers and prosumer customers would most likely buy the Power Mac G5. "Meanwhile, if Apple came out with a vanilla box with a last generation G4 chip, they might just get slaughtered," he said.

"Whatever they do, they need to remain innovative, above the crowd," Kay said. "If the iMac is too long in tooth, they need to come up with another class act. They cannot revert to business as usual and do any old desktop."

In the meantime, Salkever said that Apple can revitalize the iMac by dropping its price significantly. "All-in-one desktops won't sell well in the $2k neighborhood when value-oriented customers can buy an eMac for far less," he said.

Attack of the iPod People

Two years after its introduction, the iPod has grown into a cultural phenomenon. Despite comparable offerings from Rio, Dell, and Samsung, the iPod continues to hold the lion's share of the digital jukebox market. And despite being criticized for its high price point, Apple had 100,000 pre-orders for its new iPod Mini, and has been selling out of them since its late-February introduction.

Gartner G2 research director Mike McGuire told The Mac Observer that many of the iPod's rivals make good players; however, none of them offer the compelling one-stop shop package that the iPod-iTunes Music Store combination offers. Also Apple, unlike its competitors, understands that, in the consumer electronics space, it's the experience, not the technology per se, that matters.

"The other guys don't seem to get that," McGuire said, right as he received an e-mail telling him he was to receive a reviewer's copy of the iPod Mini. Although earlier in the interview he evinced little interest in the new model, he disclosed offhandedly that he hoped he could get one in green.

Meanwhile, Jupiter Research senior analyst Joe Wilcox called the HP deal a huge win for Apple, although he told The Mac Observer that it would have been even bigger if it had come sooner.

"The HP deal doesn't kick in until June, and the real sales benefits would take another couple of quarters, at least. Summer is typically a slower PC sales period, although Apple could see benefit during the back-to-school buying season," Wilcox said.

"So that means no big benefit for maybe 10 months, and look how much the online music biz changed in the last 10 months. Remember that on the PC side, existing HP customers would have MusicMatch, unless there is some program to get iTunes into their hands," Wilcox said.

Wilcox said that this poses a larger question: will there eventually be a hidden cost? HP's existing customers that have bought songs from MusicMatch or Napster will find they can't play their songs in iTunes or on HP-branded iPods unless the company demands Apple support WMA DRM.

Apple Obsessions

Mr. Salkever went on to say that the general public is more aware of Apple than it has been before. According to him, the flat-panel iMac and later the iPod, really captured people's imaginations. "I see a gradual but steady improvement in the broad view of Apple, a transformation from that wacky Mac company to a really innovative, interesting company," he said.

"Apple and Steve Jobs are the best marketers in the business," Mr. Salkever said. "They create beautiful, eye-catching products. Their advertising campaigns are way cool. Journalists would rather write about Apple and its new products than about some beige box blah factory, even if that beige box maker moves billions more in annual revenues than Apple."

Salkever said that people are Apple-obsessed and with good reason. "Sometimes [Apple is] innovative. Sometimes they are over-hyped; but almost always they are interesting," he said.

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