Apple Inc (AAPL)

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From the WSJ ...


Apple's iMac Is No Longer the Core
Former Flagship Product Has Become Minor Player In the Company's Portfolio

By PUI-WING TAM and CASSELL BRYAN-LOW
Staff Reporters of THE WALL STREET JOURNAL
September 1, 2004; Page B8

The last time Apple Computer Inc. introduced an all-new iMac computer, back in January 2002, Apple Chief Executive Steve Jobs was featured smiling with the desktop on the cover of Time magazine. In order to give the iMac maximum exposure, Mr. Jobs even changed the date of the computer's unveiling to coincide with the publication of the Time story.

But yesterday, when Apple revealed its first new iMac in more than two years, there were no splashy magazine covers. Mr. Jobs, who is recovering from cancer surgery, wasn't there to promote the new flat-panel desktop. While Apple heralded the machine as a "breakthrough," the company didn't bother to have a live Webcast of the event, which took place in Paris at an Apple Expo conference.

The low-key unveiling highlights how much Apple has now moved beyond what was once its flagship product. After Mr. Jobs returned to head up Apple in 1997, he worked to revive the then-floundering company by revamping its computer lineup. The first fruit of his efforts was the iMac, an all-in-one desktop computer that made its debut in 1998. The machine quickly caught the public's imagination with its ease of use and distinctive candy-colored designs, helping to rebuild the Cupertino, Calif., company's reputation as a maker of user-friendly computers and innovative technology designs.

Apple's new iMac G5 includes a faster processor and a more compact design.

Computers still remain Apple's key revenue source, but the company's business and product strategy has since evolved away from the iMac. Indeed, sales of the computer peaked in the quarter ended in late December 1999.

Apple now relies heavily on its portable laptops, such as the iBook and PowerBook, which formed more than 50% of the company's computer revenue in its last quarter. Graphic designers and other professionals favor high-end models, such as the Power Mac G5, which are easy to upgrade with accessory hardware.

What's more, Apple is increasingly focused on its faster-growing business of digital music, which includes the white-hot iPod music player and the online iTunes Music Store.

Still, the iMac makes a statement for Apple. Apple designers spend years finessing the shape and style of the machine. Greg Joswiak, an Apple vice president of hardware product marketing, says the iMac remains "very important" for the company because the desktop "fulfills the brand promise of Apple, which is elegance and simplicity."

Mr. Joswiak also acknowledges Apple is "obviously a very different company" today than at the iMac's inception. At the height of the iMac's popularity in 1999, more than 700,000 units of the computer were sold a quarter, but sales have since leveled off at around 250,000 units a quarter. In the last quarter, the iMac was just 11% of Apple's revenue, making it the smallest sales contributor out of the company's computer portfolio.

Indeed, in a sign of how little Apple now relies on the iMac, the company was barely affected recently after it botched the computer's latest introduction. In July, Apple announced that it had to delay shipping the new iMac until this month, two months later than originally planned and well after it expected to run out of existing iMacs.

The setback, attributed primarily to manufacturing problems at International Business Machines Corp., which supplies Apple with the PowerPC G5 microprocessors used inside the iMac, meant Apple had no new low-end desktop during most of the crucial back-to-school shopping season. Despite the slip-up, Apple forecast strong earnings for the quarter.

The new iMac is already causing ripples, however, with its unusual design. The computer -- a screen with the innards of the computer cleverly tucked behind it -- is less than two inches thick, with speakers mounted underneath the monitor to reflect sound off of the desktop, and a neat row of ports for cables at the back. It is more powerful than its predecessor -- using a G5 chip compared with the previous G4 chip -- and does away with the half-moon-shaped base that formed the foundation of the previous generation of iMacs. The machine was designed by Apple industrial designer Jonathan Ive and his team, who also created the look of the iPod. Indeed, the new iMac bears a striking resemblance to the iPod.

That similarity is no accident. Apple, which will start shipping three models of the new iMac in mid-September, is aiming to convert iPod buyers into purchasers of the iMac, which, like all Apple computers, uses the proprietary Macintosh operating system.

In the past, the company has anecdotally noted how owners of its iPod, which works with both Macintosh machines and computers that use rival Microsoft Corp.'s Windows software, have become more interested in acquiring Macintosh computers after using an iPod. The iMac is calculated to capitalize on that trend.

Apple also is hoping the iMac will convince its existing Macintosh users to upgrade from their current Apple computers to the new desktop, especially as the key end-of-year holiday shopping season approaches. To expedite that process, Apple has built in a migration tool for the first time into its computer, allowing a user to transfer data and information from an old Macintosh into the new iMac through a FireWire cable.

The price could be a hurdle for some consumers. Apple is pricing its new iMac line at between $1,299 and $1,899, compared with between $1,299 and $2,199 that it charged for the previous generation of machines. While buyers will now get more for their money -- the new iMac's $1,299 model comes with a 17-inch screen as well as the G5 chip, versus the older iMac's 15-inch screen and a G4 chip, for example -- the iMac is still priced far more expensively than some Windows-based machines, which can cost just $800.

"Once the new iMac gets through its first burst of interest, will it really sell? That's the big question," says Steve Baker, an analyst at NPD TechWorld.

Apple's Mr. Joswiak says the iMac has a lot of appeal, particularly because of its design elements, including its thinness and quietness. The machine's noise level is at 25 decibels, lower than the previous iMac's 28 decibels and quieter than a whisper, he says.

The computer is kept cool by three different cooling zones inside all of its machinery. Unlike one general cooling mechanism that is generally found inside most computers, the three zones inside the iMac are designed to cool certain portions of the machine, allowing the fans to run more slowly and quietly, Mr. Joswiak says.

Write to Pui-Wing Tam at [e-mail] and Cassell Bryan-Low at [e-mail]