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JULY 19, 2004
Why Apple Needs To Shine Up iMac Despite iPod's success, the company gets most of its sales from computers Apple Computer Inc. (AAPL ) is known for its remarkable ability to wow the world with its hot new products. That's why its July 2 announcement was so disappointing. Without citing specific reasons, the company said it would not roll out a new version of its iMac home PC until September, rather than in July, as it had hoped. Since the outfit also announced that it would run out of stocks of the existing iMac in a few weeks, Apple won't have a home PC to sell for the most crucial part of the back-to-school buying season. Investors reacted quickly, pushing down the stock 3.7% that day, to $31.08. It was a stark reminder that Apple does more than make the iPod. Given the ubiquity of the elegant little music player, it's easy to forget that Apple is still at heart a computer company. While commanding just 2.8% of the global PC market, the company's line of Macintosh PCs -- including the iMac, PowerBook, and PowerMac G5 -- still accounts for 58% of its overall revenues. By focusing so hard on the iPod and the iTunes Music Store, has CEO Steven P. Jobs taken his eye off the Macintosh franchise? By itself, the iMac delay doesn't prove that he has. Despite investor jitters, the postponement will have a negligible effect on Apple's already depleted market share or on earnings. In fact, analysts think Apple will actually save money by not incurring the cost of extending the life of the current, aging iMac by a few more weeks. Since Mac customers are loyal to the brand, "they're not going to miss much in terms of lost sales," says NPD Group Inc. analyst Stephen Baker. But Apple can't afford many more missteps, because it needs the Mac to pull its weight. The company has less margin for error than meets the eye. Analysts expect Apple to rack up $235 million in net earnings this year, double last year's tally. But Apple relies more on interest from its $4.6 billion cash horde than do rivals. Backing out its expected after-tax $34 million in investment income, Apple's net would fall to $201 million on expected sales of $8 billion, says Albert Meyer, a general partner with 2nd Opinion Research. What's more, if the company were forced to expense options, as expected, that number would fall at least 50%, to just $100.5 million, says Meyer. That's why reinvigorating the iMac is urgent. Apple needs it to help regain share in the education market, where the company has staged a modest comeback in recent months, grabbing a 14.1% share in the past quarter, up from 12% in the fall, says IDC. While more students are opting for laptops such as the PowerBook, Apple needs a strong iMac to prevent further share gains by now-dominant Dell Inc. What's more, having evidently made peace with its meager market share, Apple is now clearly milking the Mac for profits. After all, its PowerMac and PowerBook models reap fatter margins than the iPod, especially when loaded with Apple's iLife suite of software. The company also is charging higher premiums for its PCs than are rivals. Two years ago, says First Albany Capital Inc. analyst Joel Wagonfeld, the average selling price of a Mac was $154 higher than that of a Windows PC. Now it's about $400 higher. There could be good news on the Mac sales front, too. A revival in the advertising industry may boost sales of the G5 PowerMac so prized by creative types. And while only 3% of full-time college students now own a PowerBook laptop, 14% intend to buy one, says researcher Student Monitor. Mac sales could get another bump when Apple introduces a new version of its operating system, dubbed Tiger, next year. If the new iMac is a hit, Jobs's focus on innovation will again be vindicated. It's instructive that investors didn't hammer the stock harder upon learning of the iMac delay: Shares are still up 42% for the year, compared with Dell's 2.7% rise. Rather than demand Microsoft-style market share or Dell-like operational consistency, investors value Apple's cool products. When you build concept cars for the industry, there are bound to be some crashes. This one won't be fatal.  By Peter Burrows
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