Apple Harvests the Fruits of Innovation


By Charles Haddad Apple is the Mount Washington of the computer industry, generating a weather system all its own. No matter how sunny the outlook for the rest of the computer industry, it will rain on Mount Apple if the company fails to produce innovative new products.

That's what happened five years ago, when Apple churned out uninspired beige boxes indistinguishable from rival PCs. The company's lookalikes were nearly swept away in the tsunami generated by the long-awaited arrival of Windows 95.

SIZZLING PRODUCTS. Today, it's the reverse. PC sales are underwater, while it's nothing but sunshine atop Mount Apple. The reason? Apple has not one but four hot products: the iBook, the new iMac, the titanium PowerBook, and the iPod MP3 player.

The numbers are breathtaking, given Apple's 4% market share in computers. In second-quarter results announced last week, Apple said it has shipped 57,000 iPods and 220,000 iMacs. At the end of the quarter, the company was producing 10,000 machines a day. A day! The new flat-screen iMac is so hot that, to meet demand, Apple had to air freight iMacs from its Asian plants to stores. That's not a good thing, given the expense. But it's a problem Hewlett-Packard or Gateway wished it had right now. PC sales have been as stagnant as a weed-choked drainage pond, though recent price increases indicate the market may be looking up a little.

Why should sales diverge so much between the Mac and the PC? After all, they're largely identical machines with the same working parts performing similar tasks. Microsoft Word works the same on both platforms. But they represent two different markets, each driven by a dynamic as different as a cold front is from a hot one.

BLAND PCs. PCs represent a mature market. Today, nearly every person who wants a PC has one -- and many households have more than one. And, while they might gripe about ease of use, consumers tell marketers they're pretty much satisfied with what they have. Their PCs are fast and powerful enough to do what they want, which is largely type letters, e-mail friends, and play games.

In short, PCs are the victims of their own success. They've become household appliances, little different from the toasters and televisions consumers tend to keep around for years. Why upgrade if your computer works perfectly well? No wonder it has become a real challenge to persuade PC owners to buy a new machine. Slashing prices under $1,000 has worked to some extent, but it has turned PCs into a high-volume, low-margin business that differs little from selling Styrofoam peanuts.

Macs users, by and large, are different animals. They tend to be restless and demanding, expecting computer use to be enjoyable, even if they're just pounding out an angry e-mail to the boss. They're forever on the lookout for something new and better in a computer. That's why they'll upgrade en masse if Apple releases a significant new product -? no matter how depressed the economy. Their product-driven demand generates Mount Apple's separate weather system.

RECOGNIZING THE OBVIOUS. Such users will always be a minority. That's why Apple will never rule computing. But there are now enough of these picky users -? some 25 million worldwide -- to make a very nice business for one company. Apple has cornered that market.

Wall Street is starting to wake up to this difference between Macs and PCs. A couple weeks back, UBS PaineWebber analyst Don Young wrote, "We no longer view Apple as being in a battle for PC market share ?-- instead, we see the platform becoming a premium PC, capturing selective demand." Well, duh.

Of course the sunny weather won't last forever. Sooner or later Apple will generate its own storm. Blinded by arrogance or just bad judgment, it will turn out a colossal dud or miss a big turn in the market. Remember the Cube? Or those beige boxes of the early 1990s? Already I can see some clouds on the horizon. Component parts are rising sharply and crimping profit margins. So enjoy the sunshine while it lasts ?- but keep those umbrellas handy. 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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