An Opening for Apple


By Charles Haddad Never mind that Apple posted a $38 million profit in its first fiscal quarter of 2002, when most PC makers are losing their shirts. Or that its gross profit margin for the same period topped 30%, vs. 18.4% for market leader Dell (DELL). Such successes are soon forgotten in the kvetching on Wall Street that accompanies every earnings release by Apple.

Now, pundits are worried about Apple's puny share of the worldwide market for PCs, which has been holding steady at about 3% for the past three years. Bummer, all right -- and it gets worse. At best, Apple (AAPL) might be able to boost its share of the PC market to 5% over the next year or two. But to tell you the truth, I doubt it. Seems to me that Apple has reached its natural place in the PC market pecking order.

WINNING STRATEGY. So is Apple doomed? Hardly (see BW Online Special Report, 1/18/01, "The Future of Apple"). In fact, its minuscule market share may turn out to be a blessing. First, look at the PC market. Total unit sales fell 4.6% in 2001 -- only the second decline in the market's history. Margins are falling along with sales. The picture looks quite similar to the long-distance phone market, where the price of calls has fallen to pennies per minute.

For years, long-distance leaders AT&T and WorldCom tried to bail out of the market they created. Now they've concluded that a bigger pie is meaningless if it's all crust and no filling. Bill Gates certainly understands this. Why else is he continually pushing Microsoft (MSFT) into new markets, such as video-game consoles?

I think Apple CEO Steve Jobs sees this, too. That's why he has steered clear of refighting lost battles or focusing on gaining share in a maturing market. Microsoft and Intel conquered the desktop PC. Neither Apple, Sun, nor Linux is going to win back more than a few yards here and there of lost ground.

FRESH BATTLES AHEAD. The war, however, is far from over. Digital technology keeps opening up new fronts, including handheld computers, camcorders, cameras, MP3 players, and TV set-top boxes. None of these devices is dominated by Microsoft's Windows operating system. The Palm OS runs more than 80% of handheld computers. And Microsoft last week disbanded the unit that makes its Ultimate-TV set-top box.

In the greater realm of consumer electronics, of which PCs are but one small part, no single Windows-like operating system dominates. Apple has as good a chance as any -- better, given the worldwide recognition of its brand -- to wire all these myriad devices through one platform. It won't usurp giants like Sony (SNE). But even Sony has agreed to incorporate Apple software that enables the quick transfer of video and photos from its digital cameras.

That software is QuickTime and iMovie, which respectively enable the playing and editing of video. These programs exemplify what Apple is really selling: ease of use. No computer company is better at hiding the inherent complexity of electronic devices under a fun and easy-to-understand interface. And without such an interface, no consumer-electronics device will succeed in the mass market.

BEYOND THE MAC. So here's a clear and compelling opportunity for Apple to play in the market -- and it's moving quickly to seize it. Software such as iMovie was the first move. Then came iTunes for music, iDVD for burning sound and video onto DVDs, and now iPhoto.

Such software is turning the Mac into a digital warehouse and routing station. It has become a device for users to send music from the Internet into MP3 players. Or transfer photos from a camera onto a Web page.

Apple's real challenge now is to move this strategy beyond the Mac, making it one leg of a larger platform. Sony is just one of a dozen different camera makers incorporating Apple software. Kodak will print digital files shipped electronically from iPhoto.

Apple could turn iTunes and iMovie into software usable on any platform. The promise is huge. Powered by iTunes, Apple's iPod digital-music player sold 125,000 units in the first two weeks after its release. Imagine what the iPod could do if it worked with PCs? Apple's 30% margins would be a sure thing -- and the envy of the PC world. Haddad, Atlanta-based correspondent for BusinessWeek, is a long-time Apple Computer buff. Follow his weekly Byte of the Apple column, only on BusinessWeek Online


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