As Apple Computer Inc.'s (AAPL) eye-catching iMac G5 PC began appearing in late September, Mac lovers were buzzing about how much the machine resembles a certain portable music player. A canny move by the folks at Apple, no doubt. But the question remains: Will the new iMac duplicate the iPod's megahit success and revive Apple's waning fortunes in the cutthroat PC business?
Well, it won't be anything quite so dramatic. A $1,300 Cadillac in a world dominated by $700 Chevys, the iMac G5 appeals to just 5% of PC buyers, says NPD Group Inc. But the new iMac, along with Apple's popular notebook computers, could help the company find modest market share gains that could have an outsize impact on sales and earnings. If Apple can boost its global market share in PCs by just a half-percentage point, to 2.5% by 2006, says Piper Jaffray analyst Gene Munster, it could boost revenues over current estimates by 24%, to $12 billion, and earnings by 23%, to $491 million.
That could pay for a whole lot of research and development -- crucial if Apple is to keep out-innovating its rivals. "Our primary goal is to make the world's best PCs," says CEO Steven P. Jobs. "Our secondary goal has always been to make a profit, both to make some money but also so we could keep making those great products."
Why the sudden bullishness about the Mac? Part of it is the iPod halo effect. Many of the iPod's 3.7 million buyers had never before owned an Apple product. Ever attuned to tech fashions, Jobs is doing his best to turn that familiarity into PC sales. The tag line for the new iMac is "From the makers of iPod," and insiders hint that a new ad campaign may focus on the products' similar aesthetics. "It may be a stretch to get the iPod generation to embrace the Mac," says Merrill Lynch & Co. (MER) analyst John Roy. "But they might consider it."
That might bring more shoppers into one of Apple's 86 stores, where business is already brisk. Piper Jaffray says fourth-quarter retail sales could hit $420 million -- up 54% from last year. One of those buyers might be Gus Zinn, a tech analyst from Overland Park, Kan. A happy iPod owner, Zinn ventured into Apple's new Kansas City (Mo.) store at its grand opening on Sept. 25. Now he's considering an iMac G5. "Before this, there was no place to play with the products and talk to knowledgeable people," he says. "So long as Apple has good products, the stores will be a big advantage."
For all the hype about the iMac, though, the biggest contributor to a Mac resurgence would likely be Apple's PowerBook notebook and its cheaper cousin, the iBook. These models, which start at $1,599 and $1,099 respectively, have been gaining share -- particularly with college students. And since the notebook market is expected to grow three times faster than the market for desktops, Apple stands to gain ground if it can maintain that momentum.
Apple has other advantages that could come into play in the next few years. So far, its operating system has proved relatively immune to the hacker attacks plaguing Windows. What's more, Microsoft Corp. (MSFT) has delayed the debut of the next Windows upgrade until 2006 -- handing Apple a golden opportunity to extend its innovation lead. Apple will roll out a new version of its OS early next year that will include point-and-click videoconferencing and a search feature called Spotlight that makes it easier to find data on a PC.
Some say that by sticking to his high-priced strategy, Jobs is wasting an opportunity to grab market share. That's missing the point. Every other major PC maker has struggled to make money while going head to head with commodity king Dell Inc. (DELL) Only by focusing on innovative, premium products has Jobs avoided that fate. If he can keep delivering on that formula, Apple's future looks surprisingly bright.
By Peter Burrows in San Mateo, Calif.