Washington Apple Pi

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Riding Out Uncertain Times

by Lorin Evans

Washington Apple Pi Journal, reprint information

I was struck by the differences between two views of the January Macworld trade show as posted by two reporters I know. Dennis Sellers is an on-line Macintosh reporter for the web site Maccentral.com. He attended his umpteenth show and closed his last column from the Moscone Center this way: "It's been an exciting show and one that seems to bode well for the Mac community in 2003. Thursday's attendance was still strong and the level of excitement very high."

Rob Pegoraro is one of the technology reporters for the Washington Post. He is neither a stranger to the Macintosh platform nor to the Macworld gig. He closed his coverage this way: ". . Apple's problem has never been wowing Macworld attendees -- it's been drawing customers from the masses who don't pencil Macworld Expo into their calendars."

I accept that each is working to his audience: Dennis writes to and for the faithful, while Rob addresses a mixed audience of users and smerkers. Their stories read like the blind folks and their elephant. Is it possible that there is something happening in the retail marketplace that the buzz of a Macworld obscures?

I, too, found differences. Mine are between what I heard in the keynote of Steve Jobs and what was said later by Fred Anderson, the Chief Financial Officer of Apple, when he released Apple's quarterly financial summary after Macworld closed. What would happen, I wondered, if I compared the two?

I offer that there is something puzzling about the content of Steve Job's upbeat keynote. Upbeat it is supposed to be and he is one good spinmeister. It was interesting to learn that the application he uses to develop his presentation, Apple calls it Keynote, was originally written by a company called Lighthouse Applications for NeXT and called Concurrence. If you use presentation software, do look at Keynote, it is getting very good reviews.

I knew something was up when Steve did not open by telling the assembled that the company would announce a profit for the quarter; he likes to do that whenever possible. My antenna picked up on his not mentioning what is said to be the bread-and-butter of the product line--i and eMacs. Later, when I tried to get the numbers Steve presented in his effusive fashion to fit with the numbers presented by Mr. Anderson in his financial report, I couldn't. Let me put some of them on the table and see if you can get them to play nicely together.

A Few Numbers

  • while most look at the computer market as a monolith, it is and it isn't. 90% is based on the Windows/Intel combination, about 5% Apple, and 5% other. That 90% breaks down into a few 20 to 35% national brands, and a small percentage of house brands.
  • Apple's market share is now below 5%. In 1994, Gartner Dataquest estimates Apple accounted for over 11% of the personal computers shipped in the United States; for 2002, that number is 3.6%. Each PC person who can be convinced to 'switch' is a big plus for Apple. Thus,
  • the thrust of Apple's national advertising is the theme "Switch." Said Steve, 8 million people visited the "Switch" web site and of those, 60% visited the site via a non-Macintosh platform. While that sounds good, a visitor at work might sign-in on a PC, while having a Mac at home. Second, I know of no way to make a correlation between all those visitors and first time buyers for Apple products.
  • Market research done for Apple shows that when they asked buyers contemplating a computer purchase, the name Macintosh did not register as one of the options available to the purchasers. Put another way, the 95% of the shoppers out there replacing a PC may not have rejected the Macintosh; they never considered it. The Switch campaign is one way Apple is raising awareness among those buyers.
  • Apple retail stores grew from 8 at the end of fiscal 2001 to 40 at the end of 2002. Sales increased from $102 million to $148 million. According to Mr. Anderson, 50% of the customers who bought computers didn't own Macs, up from 40% the previous quarter.
  • the 170 CompUSA stores that have Apple-badged employees on the retail floor saw a 42% increase in Apple sales.
  • In 2000, Apple's share of educational sales was estimated to be 20%; today it is somewhere between 13 and 15%. When asked about the education market, Anderson said "I don't want to get into forecasting the education market."
  • Steve said at the 2003 Macworld keynote that 5 million Macintosh owners have switched to Mac OS X, the new Macintosh operating system; according to Apple, there are 25 million owners of the platform--of all vintages. Most of those won't run the new Macintosh operating system.
  • Apple shipped 743,000 Macintosh computers during the quarter, about even with the same quarter one year ago.

Doesn't Add Up

My problem is that I can't get those numbers to play nicely with each other.

  • education sales were down 5%
  • 50% of sales in the Apple stores are to first time buyers
  • sales at CompUSA stores with Apple-badged employees up 42%
  • overall sales are flat for the quarter

So, here is my problem. 50% of sales this last quarter are to first time buyers; yet, sales are flat. That can mean that there would have been a 50% dip in sales if not for switchers. If that number is close, the Switch campaign is a rousing success.

Put another way, people who normally make a Macintosh computer purchase in the past quarter sat on their wallets for some reason. Why? What is going on that some percentage of the Macintosh operators are not upgrading and/or buying a new Macintosh? Is it possible that there is nothing new that grabs wallets, or are we witnessing a distancing of the faithful from Mother Apple? Do existing owners see no utility in upgrading; or is the money going into a different platform? I don't know. If you cut through Steve's euphoria about millions visiting an Apple website or downloading gillions of copies of something-or-other, you get a couple of clues; but, from Fred Anderson, many more. Each addresses Apple's market presence in terms of numbers; I'll summarize that part. Neither made mention of a touchy-feely component; so I will.

The Big Picture

High end boxes [G4 towers] are not selling; schools that are buying Macs are buying those bullet-proof white iBooks [one-third of all school sales] and school versions of the iMac; meanwhile, you and I sit on our cash for some reason that Apple would like to understand. Money came in from the Apple Stores, other retail channels, and investments. One Wall Street wag was overheard to comment that Apple gets a better return on its investments [$29 million] than its products. Think about it for a moment. Apple has $4.5 billion in liquid assets. Were its stock price to drop under $10.00, it could becomes a buyout target. Can you picture Carl Icahn and Michael Milken trying to outbid each other so as to become the next keynote speaker?

But Fred Anderson does not talk about that. He is focused on positioning Apple to have neat new products when the economy turns around, products that will get you and me to reopen our wallets. As he put it: "We don't think it is . . .[in the] best interest [of Apple] . . .to focus on short-term profit maximization at the expense of future growth. Accordingly, we're going to continue to keep investing through this downturn, and continue to move our products further ahead of our competitors, so that when the economy rebounds, we will be positioned for significant growth." You and I are not privy to what the company has in mind for things that move its products further ahead of the competition; so let's take a look at the pieces we can see.

PC Moo Moos

To give you another perspective on this story, look at this snapshot of Gateway, the PC box assembler. They sold 720,000 units in the same reporting period in which Apple sold 743,000. Gateway lost $72 million, its eighth quarterly loss in nine quarters. Apple lost $8 million on $1.47 billion in revenue, its second quarterly loss. Gateway has negligible software and hardware R&D to fund, fewer and smaller stores that help separate it from the rest of the PC market, and new funny looking moo-moos. But, it plays in a very price driven market. Clearly Apple is a larger operator than Gateway. One big difference: if Gateway goes poof [moof?], there is always H-P, or Acer, or Dell, etc. If Apple goes moof, well . . . .

Apple Stores

On average, each store brings in $13 million. That is a nice buzzy number as are the sales totals and the greater return per box from an Apple owned store sale than from a franchised sale. Be careful if you are tempted to play with store and sales numbers. A more meaningful measure of their success will develop one year from now when the retail industry yard stick-- sales volume per store one year later - can be applied.

Whichever size store you have in your town you can see that they are doing wonders for Apple's bottom line and bring misery to the established Apple dealers that were there long before an Apple store showed up. What has happened is this: Corporate Apple repeatedly said that the company owned stores are not there to take business away from the independent authorized dealers who still account for most Mac sales. Further, assurance was given that shipments of new models would not favor Apple-owned stores, nor would they offer discounts and promotions that were not also available to the established shops. Well that is the way the dealers remember it anyway.

Independent Apple dealers on the west coast are so unhappy with the way they see Apple not living up to its agreements, that they are suing Apple. A company called Macadam, one of the largest independent Apple dealerships in the United States, filed a multi-million dollar complaint last month that accuses your favorite platform maker of fraud, breach of contract, unfair competition, false advertising and other evil things. For a good overview of this unfolding story, read Henry Norr's piece in the San Francisco Chronicle.

Mr. Anderson acknowledged part of the higher return to Apple is from a greater percentage of all sales coming from what he calls 'direct sales'--the Apple retail stores and its web store. He's got to like that money. He went on say that ". . a substantial portion of the retail segment's net sales are incremental to the company's total net sales." Ouch! That sounds to me like he does not care if franchise stores go poof.

Business Week magazine believes Apple is in the midst of a big shift in its retail strategy and should just see my quote from Fred to its logical conclusion: pull the franchise from any Apple resellers within some radius of an Apple store. Having spent some time with franchise brick and mortar dealers listening to their woes in dealing with corporate Apple and its distributors, it sure looks like Apple is employing classic drip torture to wear these folks down.

I am conflicted here. If you have read anything I have written, you know my sympathies are with street-level retailing; I am the same person who cheered Apple's retail initiative as essential to its survival. The Pi was involved in a piece of that initiative well before you knew about the stores. I want both to succeed. So, my wiggle room at the moment is that a cursory examination of the history of Apple reveals a company that can't walk a well worn path for long. Apple's commitment to their retail strategy had better be chiseled in stone. Why? Well, let's see: how much should one charge Apple to take one of its new franchise offerings when the existing boutique stores get passed on to a subcontractor to run -- into the ground? Won't happen, you say? Ask me about MarketSource some time.

Got To Sell Boxes

When you hear someone discuss sales numbers, separate hardware from what Apple calls 'beyond-the-box' stuff. Beyond-the-box revenue comes from sales of things like iPods and software. They represented 26% of total revenues. Box sales, on the other hand, were essentially flat from one year ago when they had a profit of $38 million on $1.38 billion in revenue. Yet this time, the company lost money. Why? Apple had to reduce prices as a sales incentive. High end stuff with accompanying high margins is not selling--sales are down 25%, revenues for the line down 20%. Basic units are selling well, but carry a low mark-up. Take the iBook. Sales were up 1%, but revenue was down 11%. A basic iBook now priced at $999, and average iBook selling prices in the last quarter were around $1160. There are a couple of reasons given for your lack of interest in a new box.

Apple, like the rest of the personal computer industry, has relied on processor speed as the measure which gets you to replace an existing box. However, you have discovered that for Internet travel, e-mail and word processing, the computer you now own is already more than fast enough. Thus, the industry finds itself looking for reasons to get you to replace old faithful. If you don't upgrade, then you don't have to acquire newer copies of your favorite applications, don't need to replace that scanner and printer, and on it goes. This could be part of the reason why Apple is frustrated that more users are not moving to Mac OS X. There are 25 million Macintosh computers out there, but only some five million copies of Mac OS X, which, by the way, does not mean all are being used. So many recalcitrants to convert.

"Switch:" Meet iCheap

"Switch" people are serious price comparison shoppers. The whole consumer PC market is very price driven. Apple's store managers are discovering that it takes a bit of explaining to help a person interested in switching to compare and adjust the price in an enticing advertisement for a PC box so as to understand all the built-in features found in a comparable Macintosh. This is one of the reasons given for the latest round of price reductions by Apple. It is also why there is interest at the retail level for a Macintosh model with the moniker "iCheap." Picture the igloo iMac without the screen selling for around $500 and you have iCheap. Such a model is aimed directly at two groups: the price comparison PC shopper and the price conscious school. A "Switch" person buys iCheap, adds their present monitor, and off they go. For a school, Apple returns to being a price competitive alternative to Dell and Hewlett-Packard.

In Search Of The Killer Application

There is a free ride in Steve's Gulfstream for the person who can find THE application which gets you off top dead center and out shopping. One approach Apple is using is to create applications which allow your creative interests to express themselves via a mix of four multimedia programs that only run under Mac OS X -- iTunes for managing music, iPhoto for digital photography, iMovie for editing digital video and iDVD for creating your own DVDs -- and integrate them so that they work together seamlessly. The package is called iLife.

One researcher with whom we work mentioned Rendevous as having the potential to be 'it.' Rendezvous is a networking technology that lets you create an instant network of computers and devices without any configuration work by you. Think about it for a moment: how cool it would be if you could buy a PowerBook, digital camera, printer, iPod, Airport base station and whatever else you have room for in you home, turn them on and they automatically negotiate with each other to create a network. No IP addresses to learn, no configuring the printer, no mumbo-jumbo to get the Airport to connect everything together.

Denver Meanies

G-series towers are big-time profit to Apple, but they are not selling. Sales are down 25% from 212,000 a year ago to 158,000 units. Why aren't you buying them? Well, last time the subject came up, Steve said it was uncertainty over the new operating system, Mac OS X. We are told OS X 10.2 fixed that, but it had little effect on sales. Now he says the drag on the anchor is QuarkXPress. If only they would release Version 6, the native OS X rewrite, all will be better.

The Quark folks give new meaning to the word acerbic. They appear to have no timetable for a release of V6. If you don't like it, go buy PageMaker [soon to be discontinued] or InDesign. You'll be back. Apple dreams of something by August Macworld. Otherwise, we will hear a new story as to why the tower is not selling. One of the items on Apple's wish list is an early warm spring in Denver. That way, the code writers will spend more time at their desks than on the slopes.

Schools

Steve did not touch the subject, but Fred did obliquely. Apple continues to find itself more on the outside looking in -- a market where Apple has, in the past, enjoyed unparalleled success. It has yet to undo the damage done two years ago when it canceled sales and support contracts with regional vendors. I can make the case that Cupertino still does not understand how dumb a move that was. Apple mouths the words, but conveys no sense of understanding. The brand needs local presence for sales and support, yet Apple won't allow its local brick-and-mortar dealers to sell to schools. With net sales in education down a scary 15 % in 2002 (compared to a 4 % decline in 2001), Apple ascribes the market losses to 'them': them being increased competition from PC vendors; them being more skittish buying habits from cash-strapped school districts. But, not them: Apple.

Said Fred Anderson: "I would tell you that we continue to remain cautious about the education market, particularly given the funding constraints in states such as California.. . . . The situation is the same in other states, too." Using Cupertino reasoning, I will make the case that those constraints could work to Apple's benefit, if it uses that time to rebuild its relations with school systems. Don't look for me to turn blue.

The bright spot for Apple: iBooks and integrated wireless technology. According to the folks who survey schools concerning technology purchases [Technology Purchasing Forecast], almost one-half of the districts surveyed report current ownership of wireless devices. In addition, one-third of all districts report they will purchase wireless devices this year. As a sign of this growing trend, 9% of districts plan to buy all wireless computers this school year. Of wireless devices, 72.5% are laptops. iBooks account for one third of units sold.

And some not so good news. While Macintosh is the single most common brand of instructional computer in schools today, Dell is the leading brand in district plans to purchase instructional computers for this school year, with a 35% share to Apple's 21%. As one IT person put it to me: "Macs may be cheaper to own, but not to buy." Yes, I know. Life cycle costing is something taught in school; it doesn't mean they use it. Hello "iCheap".

Laptops

30% of the computers sold by all major brands are laptops. Apple's percentage was once 35% of its total and is now down to 28%. Steve wants it back up, eventually to reach 50% of total sales. To that end, Apple's new PowerBooks are strong contenders. Why even Consumer Reports (gulp) likes the iBook.

College students are taking laptops to school in lieu of desktop models in significant numbers. The problem for Apple to attract high school or college bound student buyers, is the general absence of Apple in the school market. By high school, a student has less and less of a chance of being exposed to a Macintosh product. Sure, the graphic arts department most likely has some; but the general trend is not something to take to the bank. The question becomes: how does Apple induce Mary Lou to ask her parents for an iBook when, statistically, she has little chance of having used one?

iMacs

You would not know they existed if you listened to Steve. Fred, however, was pleased. The company shipped 298,000 iMacs: 58,000 were classic CRT iMacs; 106,000 were eMacs;and 134,000 were flat-panel iMacs. The 17-inch flat-panel iMac was Apple's most popular flat-panel offering.

The Touchy-Feely Component

We know Apple has a monopoly on the Mac OS operating system and the hardware. That in and of itself has not bothered us. It does, however, allow Apple to get away with things that companies in a more competitive environment couldn't. Historically, that has not bothered us too much either. But, historically the gap between how you and a Mac box interact versus a comparable WinTEL box were different enough such that crossing over didn't cross your mind. As a result, people who make a living measuring brand loyalty are in awe of whatever it is that causes that to be -- or is it caused?

Tom O'Guinn, is a professor at the University of Illinois' College of Advertising. He co-authored a paper with Albert Muniz of DePaul University in the Journal of Consumer Research titled Brand Community [March, 2001] in which they introduce the idea of brand communities -- a community that has developed around a brand, instead of, say, a neighborhood or a church, etc. They see the Mac community as a prime example.

Tom offers: "You may get mad at the company [Apple] , but the bond with the [Macintosh] community means you don't really have a choice," he said. "You may complain, but you're not going to leave. In a cohesive community, the marketer can get away with all kinds of stuff because the cohesion is so strong."

Marc Gobé is President and CEO of d/g* worldwide <www.dga.com>. He is the author of Emotional Branding, a book on how to engage today's increasingly cynical consumers at deeper emotional levels. He sees Apple as profoundly humanist. Its founding ethos was empowering people through technology. "Somewhere they have created this really humanistic, beyond-business relationship with users and created a cult-like relationship with their brand." said Gobé.

I am asking if those folks are making a living on out of date information. Is there a confluence of two different factors at work against the Apple brand here? Is the touchy-feely component of the Apple/consumer relationship sliding off the tracks at about the same time as the difference between your working with either operating system [Mas OS or Windows] grows smaller? Is some of this the unquantifiable in the equation that helps explain why 50% of the people who would otherwise have shopped last quarter for a Macintosh didn't?

Customer loyalty was one thing that helped save Apple during the late 1990s, when the company was in danger of going out of business. So, what happens when the loyal sense that their enamorment is being taken for granted? What happens when the followers become increasingly cynical; when the marketing folks at Apple can no longer get away with the usual smoke and mirrors routine because the old cohesion no longer has the strength Tom O'Guinn wants to ascribe to it?

Take a look at these examples: Apple's treatment of its franchise dealers, its alphabet soup folks, and its relations with its street-level user group supporters.

Franchise dealers in this area report being denied payment for warranty work for the most trivial of reasons; denying a warranty claim made through a dealer, but accepting the same claim at an Apple owned store; and refusing to accept the return of new units defective out of the box.

Henry Knorr's story includes a recorded conversation in which an Apple sales representative is trying to get a customer to buy directly from Apple. The rep is quoted as saying: "They [Apple Specialists] are not actually certified, they just sell our computers." "You gotta beware when you go to a reseller. You have to make sure you know what you are getting into."

Apple Specialists, Value Added Retailers and others are people who pay Apple big bucks, $500.00 and up, to add that title [alphabet soup] after their name. They want to solve your problem with some mix of Apple hardware and software--and in the process get a fee for selling the equipment and some dollars for their support services. These people could just as easily find a Windows-based solution to your problem. So, should Apple make their life easier or harder. Correct, harder, or at least extract a few more dollars from them so that they can add that alphabet soup after their name. Small example: each quarter Apple used to give those folks and user groups an informational CD with training and support materials included on the disc. Starting this year, each disc is $10.00 please. Small, yes; petty, you bet. Am I watching them save a dime and lose a dollar?

What does any of this tell you about what is going on inside Apple these days? I accept that time are tough; but this stuff reads like managers of a "Dollar Store" are running the place. I also read into this collection of slights, take backs, chintziness, and corporate pettiness a belief in Cupertino about their owning some share of the computer market that is not grounded in retail reality. Decision makers are reading too much Tom O'Guinn and Marc Gobé, and not enough Norman Peale.

Dealers, customers, and groups that support the platform are feeling spurned by the arrogance, real or imagined, that emanates from the top of the company. This is one loop no company can afford, especially in a market as competitive as Apple's. I did not make up the numbers I cited at the beginning of this piece nor the tension between company franchisee and the company. All I did was fit those pieces together.

So far we have explored 'economic uncertainty' as a reason; that there is 'nothing wrong with what you have'; and, as a potential switcher, the Mac is 'too pricey'. Now I ask you to consider a fourth reason. Maybe those diehard Macintosh owners that market watchers portray as in some "humanistic, beyond-business relationship with Apple" are coming 'clear'? If you are in a relationship, both parties must nurture it. Offering us new hardware and a cold shoulder is not what I call a consistent message. I believe that it is dangerous for Apple to take for granted that a 'special' relationship exists with its troika of dealers, customers, and supporters.

Remember, you don't have to abandon the platform for the sales curve to flatten. Just sit on your cash. You could be doing that because of the uncertainty in these times, no additional productivity or incentive to be found in acquiring new, or replacing existing hardware. I sense that there is a mix of something's going on out there that I can't get my arms around.

Any experienced troika driver can tell you what happens when the team gets out of hand. No, I can't point to one catastrophic event that has chilled owners; no one affront that caused franchise dealers to sue; nor one slight towards user groups. There is, however, a decent collection of frustrations that has the synergy to change something somewhere.

(I want to remind all that Apple is extremely fortunate to have the design, production, and financial management team now in place. Overseeing the process of turning dreams into dollars is not done anywhere any better than at Apple. It would be nice to see some of that excellence seep into other parts of the company.)

On To The Big Apple

Fred and company are comfortable with the quantifiable. I am mucking things up by adding squishy stuff to the mix. Maybe Fred and I are addressing similar issues, each in our own language.

  • Fred says Apple, rather than focus on the current sales malaise, prefers to invest in the creation of innovative new products and services. That sounds like Apple is looking for ways to address the 'no reason to replace' issue.
  • On behalf of Apple, he wants to have enticing stuff in the stores so that when we feel better about spending money, Apple will be there to accept our plastic. Unfortunately for Apple, there are also a couple of far away sand traps to derail things on that front.
  • My request that he invest a few bucks to check into my touchy-feely question may not sit so well out there. The company likes to sound touchy-feely, but doesn't do so well when it comes to walking the walk. Why not send someone, who does not have "insanely great products" stenciled on her eyelids, street level to explore whether there are other reasons besides 'economic uncertainty' and 'unnecessary to upgrade' that are keeping potential buyers away from a newer Mac. The number of traditional Macintosh shoppers not shopping, or not shopping for a Mac, should bother someone in Cupertino. Depending on what is brought back, that individual could have a short life at Apple. Their habit of shooting messengers is not one of their more endearing attributes.
  • As for the school market, Mr. Anderson said "I don't want to get into forecasting the education market." My English would be that the company has a hard time being forthright in revisiting bad decisions. They really have to for lots of reasons.

If the 'Switch' campaign is as successful as Fred's numbers indicate, and the company can entice some number of wallet sitters back to shop, much looks brighter for Apple. In the meantime, don't rush out and sell your Apple stock to Carl Ichan just yet. There are several venues between now and Macworld New York for the company to make clearer what is ahead. Let's hope that those far away sand traps don't get in the way.