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by Wes George



and Trading.

Mmmmmmm...... Good

Apple's K-10 And Apple's Future
December 18th, 2000

The majority of the Company's research and development activities, its corporate headquarters, and other critical business operations, including certain major vendors, are located near major seismic faults. The Company's operating results and financial condition could be materially adversely affected in the event of a major earthquake.

From Apple's fiscal year 2000 annual report

Lightning Strikes Twice

Hey, you never know — anything can happen. Who could have imagined just six months ago that the U.S. economy would be careening towards the brink of recession by the end of the year? Who would have guessed Apple's price per share would collapse to within a few dollars of its book value?

It's a truism that complex systems never fail for simple reasons. By a complex system I mean any entity that functions as a whole and is greater than the sum of its parts. Human beings, space shuttles, election processes and electrical grids are all examples of complex systems. So are economies, stock markets and individual corporations.

In fact, the catastrophic failure of a complex system is almost always the result of a cascade of unlikely events spiraling into a scenario unimagined by the designers and other participants in the system.

For instance, a simple chilled rubber O-ring blew out causing the Space Shuttle Challenger to explode moments after lift-off one cold morning in 1986. But on closer inspection, the moment the O-ring blew out was merely the culmination of a long string of unlikely decisions, deadline pressures and human error, combined with unusual weather.

Apple's inability to continue to grow its unit sales as the millennium dawns is the result of a confluence of factors — not any single event, person or problem, many well beyond Apple's control.

Lets do the short list:

It's the economy:

U.S. consumer spending is largely linked to how American consumers feel. This Christmas still finds more Americans working than at almost any other time in the last 30 years, but the tech stock crash has made anyone with a mutual fund or 401K feel somewhat less exuberant, irrationally or not. The predominant "let the good times roll" attitude of businesses and individuals has faded into a saving-for-a-rainy-day mind set. Perhaps Steve ought to trade in his $50 million dollar jet that Apple bought him for a more economical Cessna. (In retrospect, Apple's gift of a Gulf Stream jet to Steve Jobs during the peak of the tech stock bubble was a classic contrarian indication of a market top. When things look as though they can't get any better, they usually don't.)

Moreover, high fuel prices are draining the confidence and discretionary cash of many Americans. Add the coldest winter in many years and the fact that Americans are more in debt than ever before and a Fed-induced economic slowdown and you get the grimmest holiday shopping season in years.

Now that the stage is set for a cyclical downturn in the economy, unfortunate Apple enters with its own unlikely set of cascading failures.

It's the megahertz upgrade cycle:

"Apple has been unable to ship Macintosh systems with PowerPC G4 microprocessors running above 500 megahertz since such systems were first announced in August of 1999 due to its G4 microprocessor supplier's inability to provide the Company with faster G4 microprocessors," complains Apple's latest annual report. "The Company believes that this inability to obtain faster microprocessors had an adverse impact on the Company's results of operations during 2000, particularly towards the end of the fiscal year."

No doubt about it, most consumers have no compelling reason to ditch their 1998 266 MHz G3 for a new G4, although faster CPUs aren't really the answer. The average Power Mac G3 user wouldn't need to upgrade even if there were gigahertz G4s available. The CPU speed increases that Motorola and IBM have promised for the first half of next year may do little to entice more than high-end graphic professionals to upgrade.

The problem is the lack of killer apps that really utilize all those clockcycles packed into even low end PCs. To its credit Apple seems to fully grok the situation. That's why Steve Jobs is so full of hype over iMovie, calling it the greatest thing Apple has done since the company single-handedly invented desktop publishing. Gotta have MHz, big drives and lots of DRAM to get the full iMovie experience. Jobs has promised to put more powerful content creation software tools into the hands of hoi polloi next year. Mac OS X will eventually drive a hardware upgrade cycle too, but not until late next year.

The real killer-apps that could lead to a MHz-upgrade revival are probably not video and sound editing software for the masses, but something more seismic, such as a way to ditch the keyboard and mouse paradigm. Perhaps, high-MHz or GHz chips could make life easier by supplying the horsepower for a new breed of task-based rather than command-based software. Whatever evolves, it is clear that the fine art of software design is falling further and further behind Moore's relentless law.

Apple has also attempted to replace the MHz upgrade cycle with industrial design as a driving factor behind PC sales and it has worked well with the iMac and iBook. But good design introduces the fickle forces of fashion into the marketing of PCs. Apple has become more like a film company with each new design's success as predictable as a debuting movie. Will it be a hit or a flop? The G4 Cube garnered rave reviews from the critics but has so far flopped at the box office.

This is a far cry from the staid old beige box days where each new model sold largely on the merits of its specs. Not only is it far more difficult to forecast Apple's future with any accuracy but for the type of industry experts who have followed the PC manufacturers over the years, it's impossible. It's a whole new ball game with a whole new set of rules. Cautious institutional money will tend to avoid Apple's stock, at least until Cupertino has another new product go platinum.

The iMac's Swan Song

"The medium is the message," said Marshall McLuhan. For a corporation, the medium is the market.

The iMac's form hasn't changed much since its introduction in 1997. That's not surprising since corporate managers are loath to alter a product that's selling like hot cakes. Don't fix what ain't broke.

However, in industries where "fashion-sense" plays a significant role in the purchasing pattern of consumers, sophisticated strategies have evolved to ride the fashion cycle. Such strategies include allowing successful products to evolve into new models with new form factors well before the bottom drops out of the market. Allowing a flagship product to fall out of vogue can hurt sales as much as becoming fashionable helped in the first place. PC manufacturers, including Apple, have corporate cultures unschooled in the fickle ways of markets dominated by style. However, that's exactly what the PC and Internet device market is maturing towards, thanks in large part to the pioneering efforts of Steve Jobs.

By definition, what is fashionable must sooner or later become unfashionable. My neighbor's teenage daughter doesn't want an iMac because her school is full of them, so they can't be that cool, but the iBook is still dernier cri in her mind's eye because it is sufficiently rare to differentiate her as a unique and stylish individual. The wise corporate manager assumes a similar, if more sublimated calculus, proceeds every consumer's purchase.

Who wants to buy a new iMac that is indistinguishable from a 1998 iMac? Apple was the first to introduce design as a factor driving PC sales, but now they aren't following through on the implications of their own marketing decisions. The iMac's form needs to morph into the 21st century or risk becoming a lost franchise — a design stigmatized as a symbol of yesterday. Perhaps it's already too late.

BAM! Like that.

Apple has other issues leading to missed earnings and slower growth projections for 2001 — a complex system failure in shareholders' eyes. The most prominent issue being Apple's ill-fated decision to offer another consumer desktop (the G4 Cube) in a year when what every one really wanted to find under the Christmas tree was a wireless, MP3-ready Mac handheld. But I've whined enough for one day.

The important thing to remember as we languish near the bottom of this bear market is that fiscal 2000 was a great year for Apple, building on the successes of 1999 and 1998. And while there is no hope for the next two quarters, an astounding comeback could be in the cards for the second half of 2001. Who says lightning doesn't strike twice?

I'll have more to adumbrate about that next year. Happy Holidays!

Your comments are welcomed.

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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!

Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.

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