Apple's New iMac: Skin-Deep Beauty


By Alex Salkever After weeks of intense speculation about the new iMac, Apple (AAPL) finally pulled back the curtain on the latest iteration of its consumer desktop mainstay at the Apple Expo in Paris. By Apple standards, the Aug. 31 unveiling was a relatively low-key affair. Standing in for CEO Steve Jobs, who is recuperating from surgery for pancreatic cancer, Apple marketing guru Phil Schiller trotted out a sleek machine that's essentially a flat-panel monitor with the component enclosure hidden behind it.

With prices ranging from $1,299 for entry-level configurations with 17-inch flat panel monitor to a stiffer $1,899 tag for a more powerful version that includes a DVD burner and a 20-inch monitor, the new models leave the existing iMac pricing structure intact.

HUSH POWER. Unlike the old line, however, the new iMacs sport G5 chips, Apple's 64-bit silicon powerhouse, which has enabled Jobs & Co. to appease, at least for now, critics of the aging G4 chipset in earlier models. "The performance is a substantial improvement. The industrial design is great. I think it simplifies the desktop a lot," says First Albany analyst Joel Wagonfeld.

Whisper-quiet at 25 decibels and weighing a full 15 pounds less than the old floating-arm flat-panel iMac models it replaces, Apple's latest elicited oohs and aahs from design freaks and Wall Street analysts alike. As well it should. As with the first two generations of the iMac, Apple has come up with an innovative design that could provide an interesting alternative vision for what a desktop PC looks like.

Resembling a blown-up, stretched out iPod, it seems to be an effort to reach out to Windows PC owners who have already fallen in love with the diminutive digital music player. Several analysts, including influential Merrill Lynch's Steven Milunovich, upgraded their ratings, in part due to their impressions of the new machine. The stock closed at $34.49, up nearly 40 cents -- a tribute to Apple's packaging prowess, if nothing else.

MINIMAL MEMORY. However, the new iMac will have to overcome both failings and history. NPD analyst Steven Baker cut to the chase by pointing out that it's a slick and well-executed compendium of existing design ideas. "If you are a Mac person or are looking for some kind of cutting-edge product, you are not getting that," says Baker. "You are getting a basic product with elements that we have seen in lots of other products." Baker believes the new iMacs are aimed at Windows users who have been wowed by iPods and are now contemplating entering the Mac kingdom.

And you're not getting the most bang for the buck on what's inside. Apple included only 256 megabytes of RAM (random access memory), the type that helps computers handle taxing applications. Most PC makers ship only low-end boxes with 256 MB of RAM. To use graphically intensive applications such as editing digital images or movies, a full gigabyte of RAM is the accepted norm.

That means new iMac owners will need to cough up an additional $225 to get enough RAM to fully take advantage of the much touted Apple "digital lifestyle" software that Jobs has made the centerpiece of his pitch to Windows users. The policy follows a trend in Apple's standard configurations to skimp on components, such as lower-end graphics cards or memory, in order to preserve profit margins.

EARLY PEAK. True, other PC makers use similar tactics to push buyers into spending more. But this means Apple's iMac, even in its basic configuration, will prove to be a fairly expensive desktop. This was precisely the problem that befell the previous iMac G4 line. Although it launched with a bang and put Jobs on the cover of Time, that incarnation sold well only during its first year. Sales actually peaked at 448,000 in the second quarter, after its release in January, 2002, staying above 400,000 for just one more quarter before sliding to current sales levels of 217,000 units per quarter.

If history is any guide, simply building a pretty box isn't enough to entice people to buy into the Mac-o-sphere. While analysts and others agree that the new product should spur strong sales increases for at least the next few quarters, Apple could have difficulty sustaining that momentum. For a company that still gets 60% of its revenues from PC sales, that's an issue.

The real X-factor in this equation, of course, is the iPod. Apple's wildly successful music player has clearly enticed many Apple newbies to cough up a couple of hundred dollars or more for a singular digital music player. The success of the iPod Mini also illustrated that people are now willing to pay a premium for devices that are just a bit more comfortable and portable. The new iMac, which is extremely stingy on desk space and easy to move around, could fit the bill.

SWEET MUSIC. Apple makes no bones about heavily relying on its iPod success to market the new iMac. "It makes sense to take advantage of their strongest general brand, which is the iPod," says NPD's Baker.

All of this assumes, of course, that people bought the iPod mostly for its comely looks and not for the innovative graphical interface. This interface was the first to allow easy navigation of thousands of music tracks using only a tiny LCD screen. If that was iPod's key sales driver, then Apple could have a problem, because the new iMacs offer a pretty package but nothing much that is new or different on the inside.

Trying to sell form over function, ultimately, could prove a losing proposition for Apple. That's really too bad. Salkever is technology editor for Business Week Online


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