WSJ: Is Apple Losing Its Sheen?
Its iPod Is Still a Hot Player, But Core Macintosh Sales Lag Behind Overall Market
By PUI-WING TAM
Staff Reporter of THE WALL STREET JOURNAL
June 28, 2004; Page B1
David Foley, a reseller of Apple Computer Inc. products in Philadelphia, is having a quiet summer. So far, sales of Apple's sleek G5 desktop computers and iBook laptops have been a "tiny bit on the slow side," he says. Other Apple Macintosh models, such as PowerBook laptops, have been moving at a "more consistent level" at his Bundy Computer Co., he notes, with sales up about 5% over last year.
Still, Mr. Foley concludes, "We're not setting the world on fire."
This is a problem for Apple, which convenes its annual world-wide developer conference in San Francisco today. The innovative computer maker, headed by Chief Executive Steve Jobs, has lately been showered with acclaim for its iPod digital music players and its iTunes Music Store download service. But amid the hoopla, the Cupertino, Calif.-based company is facing a dilemma: As the rest of the personal-computer market recovers from the protracted technology downturn, Apple's mainstay computer business isn't participating in the resurgent growth.
APPLE'S CORE
Even as overall PC shipments grew 12% in 2003, Apple's computer shipments were flat for the year, according to research firm Fulcrum Global Partners. At the end of March, Apple dropped out of research firm IDC's top 10 list of world-wide computer makers for the first time ever. Apple's share of the global computer market has eroded across the home, business and government markets over the past year, dropping to 1.7% overall at the end of March, down from 1.8% in early 2003, says Gartner (though its share is up in the education market). And in the company's last fiscal quarter, Apple's computer sales were sequentially flat or down across all models, particularly for its flagship iMac desktops.
The trend lines are worrisome because, despite the success of the iPod, computers are still Apple's core business. The music players account for just 14% of overall Apple revenue while Macintosh computers make up most of the rest. What's more, the Macintosh is slightly more profitable for Apple than the iPod. Macintosh gross margins are 23%, according to Wall Street analysts. Gross margins for the iPod stand at 22% and are predicted to decline because of creeping competition in the music player market.
"The bottom line is, where's the money? And for Apple, the money still sits in the PC market," says Charles Smulders, an analyst at Gartner.
Behind Apple's disappointing computer sales is a lack of compelling reasons to buy a new Macintosh, say some customers. While Apple has bumped up the speed and power of its G5 desktops and PowerBook and iBook laptops this year, it hasn't incorporated any big breakthroughs as it has done in the past. Its distinctive iMac desktop, with its egg-like base, has been relatively unchanged for several years and is due for an overhaul. Macintoshes also continue to be priced at a premium to Windows-based PCs, with most Apple computers typically going for well over $1,000 while some basic Windows PCs can be had for $600 or even less.
Emanuel Ruffler, a founder of Mac-Tech, a New York firm of Apple technicians that caters to graphics designers and other creative professionals, says his clients are unlikely to buy new Macintoshes until the machines are better equipped to handle robust applications such as high-definition video. "At this point, if you have a Macintosh from the last few years and it's working fine, there's just no reason to buy new hardware," Mr. Ruffler says. An Apple spokesman declined to comment for this article.
In a recent interview, Mr. Jobs said the "Mac business is doing very well," stressing the company's profitability and goal to increase its base of Macintosh users beyond the current 25 million. "We're trying to do everything we can" to boost Mac market share," said the CEO in a separate interview. He added that the Macintosh division of the company is busy "working on a lot of different stuff."
Apple is planning to launch some new products soon. At its San Francisco developer conference, designed to inspire independent software makers to create more applications for the Macintosh platform, Apple will preview the latest version of its Mac OS X operating system, dubbed Tiger. With cooler graphics and easier maneuverability than its Panther predecessor, Apple is hoping that Tiger will excite more of its followers.
Behind the scenes, the company is working on other projects to jazz up the Macintosh. Among them: next generation word-processing and productivity software, according to a person familiar with the matter. Apple has also made several strategic hires to boost its computer business over the past year and a half, recruiting executives from Adobe Systems Inc., Microsoft Corp. and Critical Path Inc. as vice presidents, says a person familiar with the matter.
Attempts to recruit new users to its proprietary systems, however, have faltered. Apple has launched dozens of company-owned retail stores across the country, and spends millions of dollars a year on slick ads to tout such things as Macintosh's eye-popping software, such as its iPhoto system for digital photos. Yet most of the company's advertising is devoted to the iPod and iTunes -- a fact that turns out to be something of a Catch-22: Resellers like Mr. Foley in Philadelphia say that iPod buyers sometimes wander over to the computer displays in his showroom, but that the music players -- by now practically a fashion accessory -- rarely translate into new Macintosh sales. Apple has acknowledged the disconnect, having said in the past that the iPod isn't intended to drive Macintosh purchases.
In May, Apple reorganized to create an iPod division that is separate from the Macintosh hardware group. The company assigned Jon Rubinstein, formerly the head of Macintosh hardware and an Apple veteran who has worked alongside Mr. Jobs for years, to lead the new unit.
Many of Apple's recent announcements also have centered around strengthening its lead in digital music. Earlier this month, Apple released the AirPort Express base station, which helps transmit music wirelessly from a computer to a home stereo. It followed this move by launching its iTunes Music Store for the British, French and German markets. Last week, Apple introduced a special adapter that integrates the iPod with the stereo systems of certain BMW models.
Despite the focus on digital music, some Apple resellers say the beat of their Macintosh sales goes on. Don Mayer of Small Dog Electronics Inc. in Waitsfield, Vt., for instance, says his company is experiencing 10% to 15% sales growth from a year ago across most Macintosh categories. The only model where sales are "flatter" is the iMac, he notes. But overall, "we see pretty steady growth in the marketplace," Mr. Mayer says.
Others are less sanguine about their slowing Macintosh business. One reseller in the Midwest, who declined to be named, said his Macintosh sales are down 25% from a year ago. "This isn't a seasonal blip," said the reseller. "Apple isn't successful because its computers are priced higher than Windows PCs. If Apple would just sell for less, they just might get a higher market share."
