Apple's Hot New Market: PC Converts


By Charles Haddad PC users beware: You just might find yourself drawn to the new iMac like a moth to bright light. It happened to Esme Vos, a Californian working as an intellectual-property lawyer in Amsterdam. She "broke down" and bought a new flat-screen iMac after 17 years as a diehard PC loyalist. "I never thought I'd buy anything from Apple, but I did," Vos wrote in an online piece for Europemedia.net.

Vos's conversion illustrates why Apple stands a good chance of outperforming the PC industry in the next 18 months. Not only are Mac faithful buying the new iMac, first-time users and PC diehards are falling for it, too. Nine of the 22 consumer reviews of the new machines on Amazon.com are from PC users. These converts represent the icing on the cake in terms of demand (check these results of a BW Online Reader survey).

"People are crossing over the wall," says Charles Wolf, PC analyst at Needham & Co. "The new iMac is going to be more successful with Windows users than the first one." Indeed, Apple has sold 125,000 revamped iMacs already, and they're now flying off the shelves at a rate of 5,000 a week.

SWELLING COFFERS. Wolf and other industry observers aren't saying Apple will suddenly quadruple its current 3% to 5% market share. But even a spurt of a few percentage points would represent a huge gain. "It's not outrageous to think Apple might double its market share, given the company's small base now," says David C. Bailey, a PC analyst with Gerard Klauer Mattison.

Apple's profits are expected to surge. For the company's fiscal second quarter ending Mar. 31, Wall Street is estimating that Apple will report earnings of 11 cents a share, on revenue of $1.43 billion. Wolf is forecasting that Apple's earnings per share will grow to 95 cents next year, from 55 cents this year. Revenue should climb by $1 billion, to $8 billion by 2003, estimates the analyst. He expects the earnings surge to play out over the next six to seven quarters, with Apple leading every other PC maker except Dell Computer.

And it's not just iMac that's powering Apple. OS X, the new Mac operating system, is also coming into its own. Longtime users are buying new machines as they upgrade to the new system. That trend should accelerate as OS X versions of important software hits the market this year. One of the biggest upgrades will be Photoshop, the workhorse of the Mac-dominated graphic-design community. If it's a strong upgrade, as expected, then art studios will adopt it as the new standard when the advertising market revives.

WEAK SPOTS. While Jobs & Co. deserve much of the credit for the company's current success, Apple is also lucky. Its core market is consumers, the one segment of the computer industry showing "decent" demand, say Wolf and Bailey. In contrast, Apple has only 1% to 2% of the corporate market, which remains depressed, with companies showing little interest in buying new computers.

Apple does have its Achilles' heel. The company's largest single market is schools. And their budgets are starting to shrink, with a slide in state revenue and, at private schools, endowments. That could hit Apple hard, with schools canceling programs to upgrade to the popular ghost-white iBook.

Another potential weak spot is the graphic-design community. This market, which produces art and design for everything from TV ads to Web pages, has been hit hard by the advertising downturn. Even with the fancy new OS X-optimized Photoshop in the offing, designers probably won't have the budget to buy new iMacs and PowerMacs until the ad market turns around, no matter much they might crave them. Right now, ad spending remains moribund.

20-WEEK WAITS. Apple is also a victim of its own iMac success. It's struggling to meet demand, with a shortage of flat-panel displays holding up production. Some dealers are telling customers that they might have to wait up to 20 weeks for a new machine. Such problems aren't new for Apple. As the sole producer of Macs, the company has had a hard time persuading manufacturers to make enough parts -? and make them quickly ?- when demand surges for any one product.

So far, buyers -? Mac faithful and newbies alike ?- have been willing to wait. Demand hasn't fallen off. The new machine is that good. Just ask Vos, who abandoned her PC for the iMac -- even after friends and family cited it as evidence of an "existential crisis." If Apple can win converts in the face of that kind of peer pressure, you know it has a hit on its hands. 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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