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Apple Computer


It's remarkable that Apple Computer Inc. (APPL), heading the BusinessWeek 50 list of the best corporate performers, was on the brink not so long ago. "Oh, the company was going bankrupt, all right," recalls ex-board member Edgar S. Woolard Jr. But in mid-1997, Woolard called Steven P. Jobs and asked him to retake the helm of the company Jobs had co-founded in 1976. In short order, Jobs tightened up operations, re-energized Apple's talented troops, and in 2001 oversaw the debut of a magical little device called the iPod.

Those cute gizmos, in their various digital-music-and-video-playing incarnations, have made Apple more powerful than ever, a Wall Street darling that has the early lead in the race to define the world's digital media future. The question of Apple's social and cultural impact was perhaps settled once Jobs was the subject of a Saturday Night Live parody (for cranking out iPods so small they're invisible). But the question still dogging investors, who have bid up Apple shares more than 100% since January, 2005, to around $64, is: Can the company keep it up?

The answer will depend not only on successive generations of the iPod but also, to a large degree, on Apple's Macintosh PCs. While the iPod gets most of the headlines, the Mac still brought in 39% of Apple's sales in 2005. And while most analysts think that iPod sales will continue to skyrocket for the next couple of years, they also believe that the music player market will come back to earth at some point. "The Mac will be increasingly important [to Apple's growth] in the last years of the decade," says Needham & Co. analyst Charles Wolf.

The reason is straightforward: On the whole, PCs are much bigger than digital music. Right now, Apple dominates the digital music player market, which is expected to hit $12 billion in 2009, with a share of more than 70%. But Apple has just 5% of the $75 billion home PC market. Each additional point of PC market share that Apple gains would equal roughly $750 million in sales. That's a big chunk for a $16 billion company. Shaw Wu, an analyst at American Technology Research, thinks Mac sales could grow 25% in 2007, vs. 10% for the broader industry. Beginning in 2007, says Wu, "I think the Mac business will outgrow the iPod business."

Of course, not everyone agrees Apple can make that happen. Indeed, Apple shares have dropped 25% since mid-January on fears that the iPod wasn't lifting Mac sales, and that the "iPod halo effect" hasn't materialized. In fact, as Apple is converting from Macs that use IBM's PowerPC processors to ones with chips made by Intel Corp. (INTC), its market share gains have stalled. Also contributing to the concerns are some well-publicized hacker attacks on the Mac, which have sullied its pristine reputation as a virus-free alternative to Windows. "I really don't think there has been much of a halo effect," says Roger L. Kay, president of technology consultant Endpoint Technologies Associates Inc. "Most of what they've done is reconvert the faithful."

Nevertheless, there are plenty of reasons to expect a Macintosh renaissance. Currently, Apple is struggling to meet demand for its new MacBook Pro laptop despite a $1,900 price tag that is nearly twice that of garden-variety rivals. Apple-watchers expect the company to launch lower-priced MacBooks in coming months to compete for the lion's share of the market. By early next year, Adobe Systems Inc. (ADBE) will have converted its popular graphics and Web publishing software to run at top speed on the new Intel-based Macs, a critical event for Mac power users. "They should regain share in the back half of the year," says Smith Barney Citigroup (C) analyst Richard Gardner.

Opening New Windows

Apple has some wild cards it can play to goose the Mac's market share, as well. While Apple won't comment, Needham's Wolf believes that the Intel-based Macs will be able to run Windows programs right along with Mac titles by yearend. That could entice hordes of disgruntled PC owners to give the Mac a shot, secure in the knowledge that they can continue using familiar programs. This prospect seems to resonate among younger buyers, where Apple's resurgence has been most pronounced. Earlier this year, Wolf surveyed 255 college students, and the number of Windows-compatible PC owners who said they would "definitely" buy a Mac if it had this capability jumped from 1.8% to 13.5%.

In the longer term, Apple could still try an oft-debated strategy: licensing its Mac software to other PC makers. Dell Inc. (DELL) has already expressed an interest in stamping out Mac clones, much as it does with Windows-based PCs today. With more companies hawking Macs, Apple's market share could rise into double digits. "Multiple PC makers have expressed an interest. It's not just Dell," says Kay. Such a scenario could eat into Apple's own hardware sales. But it would boost margins by bringing in a royalty stream that could approach $1 billion per year, guesses Kay.

For the moment, Apple is plenty tied up in its transition to Intel and in creating the next headline-grabbing digital entertainment device. Each week the company is adding content to its online iTunes music and video store, everything from The Daily Show episodes to Walt Disney Co.'s (DIS) High School Musical, a full-length movie. As a result, analysts expect more products aimed at the living room. Many also expect the company to unveil an Apple branded cell-phone-cum-iPod by yearend. All those pots on the fire could well help Apple continue to remake our entertainment diets. But if Apple manages to maintain the kind of stellar performance it delivered in 2005, the Mac will be a major reason why.

By Peter Burrows


Toyota's Hydrogen Man
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