The Bet: Apple, Faster, Better & Still a Loser
June 20th, 2003
In reading one of TMO editor Bryan Chaffin's excellent articles, I found myself disagreeing with some of his assertions.
Mac Users Values Are Different
I think that Bryan refuses to believe to what extent Macintosh users are afflicted with a kind of disease -- the everyone-should-see-and-value-things-just-like-I- do disease. And Mac users tend to see and value the high fit-and-finish and design of Apple computers more than the average person. Now many other users might "see" there is higher fit-and-finish in Apple products, however, for them it's not worth the extra cost. As it turns out, only about 2.1% of the computer buying population is valuing Apple's designs and fit-and-finish enough to spend such a high premium on their computers. When it comes to computers, most people place a value on a certain feature set they require to get a job done at a minimum price. And on such a comparison, not only does Apple suffer greatly with their over-priced, slow performing computers, but they will continue to do so.
IBM's 970 Won't Completely Bridge the Mac/Intel Performance Gap
Mac users and Apple are betting their money on the IBM 970 processor saving Apple. That, and the final availability of Quark Xpress. I do not believe that the 970 will save Apple performance-wise, or that Apple will offer the devices with feature sets at prices attractive enough to substantially change the market share outlook for Apple. For one thing, everyone seems to gloss over is that the 970 does not perform better than the Pentium 4 on integer/logic operations. From arstechnica's morbidly detailed discourse on the topic:
"Based on the discussion so far and the bullet points above, here are my predictions for the 970's performance vs. the P4:
Integer : The 970's integer hardware
starts to look less impressive next to the P4. Therefore I don't expect the 970 to close the performance gap for Apple on integer code."
Integer performance is what most Mac users are suffering from! Most of us are not performing AltiVec accelerated vector and floating point calculations. Most of us are rendering and scrolling around Web pages or dealing with the crappy performance of Microsoft Word. In that regard, the 970 isn't going to do much except give us a few hundred megahertz boost (e.g., from 1.42 GHz to 2.0 GHz)--and that will likely become available only on Apple's most expensive machines.
So my prediction is that the average professional/consumer will continue not to buy Apple's machines in droves, as they will still be over-priced and under performing; the additional fit-and-finish will not be of enough consequence to change things. To prove I'm right, I'm willing to make a bet with Bryan. He and I have discussed this at length, and worked out the terms of the bet together. Here are the terms (in short I'm betting Apple's market share will not be up a year from now):
Subsequent to the release of a Macintosh with a 970 processor, a measure of Apple's overall market share for each full quarter, thereafter, will be made for a total of four (4) quarters. Should the release of the 970 occur in mid quarter, measurements will begin at the end of the following quarter. Market share measurements for each quarter will be compared to the preceding year's quarter.
John Kheit will be declared the winner for each quarter where the prior year's quarterly market share was greater.
Bryan Chaffin will be declared the winner for each quarter where the prior year's quarterly market share was lesser.
The loser will remit US$25.00 to the winner subsequent determination of market share for each quarter. In addition, the loser of the fourth (4th) measured quarter will also publicly admit they were wrong, and reveal a musical group of which they are fans that would be most embarrassing and difficult to explain.
I fully expect to lose two out of four quarters; one each for the release of pent-up demand for 970 enabled PowerMacs and PowerBooks. However, I think what will be more telling of Apple's sustained future is the result in the fourth bet quarter. I believe Bryan will be offering his own write up on this issue soon.
Computer and Car Market Share Are Apples and Oranges
Anyway, after reading Bryan's article, I found myself believing that price is an issue holding back Apple (the lack of Windows compatibility being the other major stumbling block). In Bryan's criticism of James Maguire's article, I found myself agreeing with Mr. Maguire more than with Bryan. The reason is I see that a good deal of Mr. Maguire's prediction has come to pass. Apple is losing market share "a quarter of a percentage point at a time" due to high prices.
Some Mac aficionados have responded to this reality with a bit of denial saying, in effect, "who cares about market share, Macs are the BMW of computers and don't need high market share to stay viable." This is wrong because the car analogy fails to take into account the disparity in standards. All cars work on the interstate highways, and can pull in and use gasoline from any station. With computers we rely, for better or worse, on platform specific software. If BMW's market share is low, that will not affect the tax revenue for roads or the ability of a gasoline station to make money. However, if your market share is low in the computer world, developers will dump your platform and develop software to reach a wider market. Steve Jobs said it well himself:
"But Apple is just gliding down this slope, and they're losing market share every year. Things start to spiral down once you get under a certain threshold. And when developers no longer write applications for your computer, that's when it really starts to fall apart."
Apple's Prices Don't Help Gain Market Share
Regardless of whether you think Apple's Macs are "good deals" for their feature sets, the bottom line is their price points are high and drive off wide audiences. Other PC vendors offer "good enough" feature sets at price points that do pull in wide audiences. Although the disparity in market share is not simply explained by price alone, price does play a role. So, after noting that Bryan found a Dell that cost as much as the 17" PowerBook, I did some snooping myself to see if I could find feature sets I found attractive at better price points on the PC side, and of course I did.
I was interested in a fast computer that could do video editing (i.e., FireWire and DVD burner) and had a very high-resolution screen. I looked on the Dell site and found I could get a heavy and extremely ugly Dell laptop, the 8500, for US$2,635 (it comes with a Wordperfect office suite, DVD burner, 60 GB hard drive, 512 MB RAM, 2.6 Ghz mobile P4, and 15.4" WUGXA screen having an awesome 1900x1200 resolution -- the same as on the 23" Apple Cinema HD display). Also, Sony sells a slightly less ugly laptop, the PCG-GRT170 model, for US$2,199 with similar specs (i.e., heavy, 2.8 GHz, 16" high resolution screen, etc.). Granted, the Dell and Sony don't have the same specs or fit-and-finish as the 17" PowerBook, but most people don't care.
For most people, a minimum feature set, which is required to perform their desired set of functions, and cost guides their choice of computer, and that is not unreasonable. People need to get a job done; and while good looks and extra electronic doodads might be nice, they want to get away with the lowest price and happily sacrifice those extras. Right now, although I prefer Macs for my own use, for my family, I often end up having to direct them to Windows machines even where a Mac would make sense (i.e., digital video). I have to direct them to lower cost options because with kids, and a limited disposable income, their priorities force them to spend a minimum on a computer. I might be willing to spend US$1,000 more to use a nice desktop Unix (i.e., OS X) on a nice machine, but most people are not.
Not Learning From Past Success
What amazes me is every time Apple has gotten close to being price competitive, they have been rewarded in the market share race, but they always crap out in sustaining the competitive pricing. The last time that happened was with the original iMacs. The new iMacs are just too pricey. Further, Apple has no market entry in the US$400-$500 computer category, which is now a large volume category. You can go to Best Buy and get a decent, not great, but decent, computer with CD burner for that amount. If price is your limiting factor, then you simply cannot get a Mac in this price range; and if price is not a limiting factor, then you simply have to give up too many performance features to get the Mac. Now I'm not suggesting Apple has to undercut the cheapest PC prices. Apple can and should charge some premium over the competition, perhaps, in the order of 20% of any given popular PC price point. I am suggesting, however, that charging an order of magnitude more than a given PC price point for a given functional performance/feature set is conducive to losing more market share.
Steve Jobs should take his own advice and sacrifice some profit margin in exchange for some market share. When Apple releases 970-based Macs, they may well be better than their PC counterparts, but Apple's current price structure will drive the masses off to the competition. Uncurbed, continued falling market share will result in things really falling apart for Apple. Apple needs to get more price competitive. It should also consider dropping a bomb on Redmond and release a Classic-like emulation environment to run Windows programs in OS X. Lower prices and Windows compatibility are the keys to increased market share for Apple -- neither of which are coming anytime soon, if ever. I don't know if not lowering prices will spell doom for Apple. However, I am fairly confident that if Apple does not lower prices and offer more feature and price point competitive machines, then it will not attract buyers at higher rates than now-2%.