Why Apple Is Still in the Black


By Charles Haddad If you really want to scare people this Halloween, figure out a costume that somehow represents the state of the PC market. Is it possible to dress up as an empty showroom at CompUSA? This is the worst slump I've seen in 20 years of plunking around on a computer. Depending on who's counting, PC sales are off from 19% to 21%. It's as if PCs have suddenly become about as inspiring as a blender. Sure, people still need and buy blender, but nobody devotes magazines and cable channels to them as they do to PCs.

What, you may ask, do my musings about blenders and PCs have to do with Apple? Plenty. You see, Apple is one of only two major PC companies that's still making money during this slump. The other, of course, is Dell Computer. But the reasons Dell and Apple remain profitable are as different as, well, a ghostly white iBook and a boxy black Dell laptop.

Dell is the master of shaving costs and then waging bloody price wars to grab market share. Its computers will never win any awards for style or innovation. Apple has also become a master of cost control, something it has finally learned is a must for the survival of any industry Robin Hood.

CREATIVE SURVIVAL. But the real reason that Apple eked out meager profits during the past six months is innovative products. Its new consumer portable model, the iBook, caught fire in the fourth quarter. Apple sold 251,000 iBooks, a 182% jump from a year earlier and an outstanding figure for any computer model right now. The iBook's success is helping to strengthen a key market that Apple's rivals, especially Dell, had breached. That market is schools, where they've fallen in love with the iBook, snapping the machines up in record number and reestablishing Mac as the most popular computer brand in education.

Why is the iBook so successful? I believe it's the best portable computer on any platform on the market, maybe ever. It's lightweight, easily carried, and compact. Yet its screen is brilliantly sharp and the keyboard comfortable. Plus, it can do everything from surfing the Net wirelessly and playing full-length movies to running Apple's fancy new operating system, OS X.

The iBook's success, coupled with good inventory control and cost cutting, gave Apple a 30.1% gross margin in the fourth quarter. No other computer company -- not even Dell -- can boast such margins. The laptop illustrates why Apple remains profitable. As long as the company can keep surprising the market with stylish but useful innovations, it will remain the Robin Hood of the computer industry. You don't need to be the biggest with 30% profit margins.

That isn't to say Apple isn't hurting. While profitable, earnings fell to just $66 million this fourth quarter, a frightening 61% lower than the same quarter last year. Or, put another way, Apple earned $100 million less this quarter than in the fourth quarter of 2000, a number almost equal to what it spends every four months on research and development. Sales were off 22%, to $1.45 billion. That's a dizzying drop -- but not nearly as bad as such giants as Hewlett-Packard or Compaq, which saw sales declines of 25.5% and 51%, respectively. Dare I say these two merger-bound outfits deserve each other?

SEEKING A SUCCESSOR. What worried me most about Apple's fourth-quarter figures wasn't the drop off in sales or earnings. It was the accelerating decline of the iMac, the product that Jobs used to revive Apple three years ago. Sales of iMacs fell 49% from a year earlier, to 294,000. That's the single biggest drop for any Mac, and the iMac is arguably Apple's most important model. It anchors the company's consumer strategy and has become an icon representing Apple. Mention iMac, and people know you mean Apple.

Clearly, the company needs to either revamp the iMac or replace it with a new model. I don't have any inside information, but I'm certain that Apple is hard at work designing the iMac's successor. When it comes to innovation, Apple will never rest -- at least under Jobs.

Which gives me an idea for a Halloween costume for every Mac enthusiast: Why don't we dress up as ghostly iBooks? That ought to scare the heebie-jeebies out of our PC brethren. All in good fun, of course. Haddad, Atlanta-based correspondent for BusinessWeek, is a longtime Apple Computer buff. Follow his weekly Byte of the Apple column, only on BW Online


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