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Fortune: Apple's High Margin Approach Has Risks

by , 12:30 PM EDT, October 11th, 2007

Bernstein Research Analyst Toni Sacconaghi has found both strength and vulnerability in Apple's high margin sales approach, according to Fortune/CNNMoney on Thursday.

Mr. Sacconaghi noted that Apple's global PC market share has increased in 10 of the last 11 quarters. It is now 2.7 percent. Also, notebook sales have been particularly strong. They account for 47 percent of Apple's unit growth.

However, the analyst sees some risk for investors. Some may think that Apple has plenty of room to grow globally, but the problem is that if one breaks down Apple's penetration into price ranges, Apple already has significant market share in the highest ranges.

The net effect is that while Apple continues to obtain high margins in the high price ranges, the tactic is not so good for gaining market share.

"Accordingly,” Sacconaghi concluded, “we believe Apple faces a trade-off in its Mac business over the next 2-3 years: either lower price (and margin percentage) to sustain share gains, or retain its current price premiums and face slowing unit growth."

Observer Comments

Show: Subjects Only | Full Comments
Close Name:Sir Harry Flashman Posts: 792 Joined: 08 Feb 2007
Subject: Going where

Apple stock shot up to $170 on news of Sacconaghi's comments

Close Name:Guest
Subject: Living in the BIG

everyone seems to think that apple should have the biggest or even bigger market share. These must be share holders, but us mere users really only prefer good hardware, software and support.
While some of that comes with BIG, the net result inevitably drops with BIG US Micro$oft. Now I know everyone loves to hate them, well most, but there biggest problem isn't themselves. Its trying to please everyone.
Apple has said we won't please everyone all the time or even most but that is ok. Small is freedom. The goal is not to be Big but profitable
Remember if your not profitable than you will eventually close the doors.

Close Name:brett_x Posts: 322 Joined: 24 Jan 2006
Subject: it rolls downhill

Quote
article wrote:
“we believe Apple faces a trade-off in its Mac business over the next 2-3 years: either lower price (and margin percentage) to sustain share gains, or retain its current price premiums and face slowing unit growth."


In other news, Sacconaghi recommends that Ferarri starts selling a hybrid minivan in the entry level price range to capture more market share.

I think he faces a trade-off for getting his name published on Mac sites (and traffic to his company's site) in exchange for looking like someone who doesn't use a Mac and just "doesn't get it". Why don't financial analysts use the products they are analyzing before blabbing? Sometimes there's more to a product than all of the data that is available.

Seriously, he's not taking into consideration that Macs are a better choice for a lot of people on any given day. That carries enough weight to get the ball rolling over any minor speed bumps that Mac market share may hit over the next few years.
The reason they aren't the 95% of the market is due to history, not current Mac OS or Mac Hardware issues. Over time, the switchers will keep switching. Eventually, we will be at a point where everyone at least considers a Mac for their next purchase.
And it's been said many times before that Apple isn't in it for market share necessarily. They are in it to make the best products they can, and sometimes having a smaller market share helps that cause.

Close Name:Bosco Posts: 1002 Joined: 03 Jun 2002
Subject: Analysts have funny names

Tony "Sack on a guy"? What's next, "Gene Munster"?

Close Name:Guest
Subject: Another choice beyond margins v low price ...

Apple could (and will) provide a lower end computing platform. The iPod Touch provides evidence that this is a ready option for Apple. Such products might, on the surface, have lower margins (as entry level platforms often do). But they will capture share, and create revenue opportunities for nearly pure margin offerings of Apple software and online services such as .Mac.

Recall Apple coming out with the Shuffle in the music space.

Close Name:Guest
Subject: I sure hope so

I hope you are correct that Apple has a lower price, lower margin strategy in the works. I love the way my Mac operates but I am continually irritated by websites that do not work properly with anything except IE and the lack of specialized software that I need. This is a result of the tiny market share of the Mac, which is a result of Apple's refusal to release Macs that hit the price point that many people want. Specifically, Apple could make desktops that are price competitive and have reasonable margins if they would use desktop rather than expensive laptop parts in them. As underpowered and overpriced for the specs as it is, the Mac Mini is a reasonable choice for some people, but Apple seems constantly on the verge of killing it.

Close Name:Guest
Subject:

Quote
Guest wrote:
everyone seems to think that apple should have the biggest or even bigger market share. These must be share holders, but us mere users really only prefer good hardware, software and support.
While some of that comes with BIG, the net result inevitably drops with BIG US Micro$oft. Now I know everyone loves to hate them, well most, but there biggest problem isn't themselves. Its trying to please everyone.
Apple has said we won't please everyone all the time or even most but that is ok. Small is freedom. The goal is not to be Big but profitable
Remember if your not profitable than you will eventually close the doors.


Agreed, but the point is that they are reaching a limit to the profit growth with that model. If Apple wants to see greater profits they will need to learn how to scale, to accept smaller margins per unit, but larger total profit. Or, they can chose to doing smaller things, with a bigger markup on the price to the consumer, but they will not be able to sustain as significant profit growth with that model. One would argue that there is more freedom in the newer model because then cannot control everything your user is going to do, and you have to be able to support all different kinds of technologies. However, if Apple choses to stay small, they can keep a tighter control on their consumer base, such as locking people to a certain carrier or hardware set, and then charge them a higher premium for their products and services to keep profits up.

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