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What Would We Do Without Analysts?


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October 19, 2006

What Would We Do Without Analysts?

Arik Hesseldahl

What, did I fall into a time machine back to 1997? You know those days when Apple was the computer industry’s hard luck case, and when the triumvirate of Microsoft, Intel and Dell were on their way to conquering the world? Well that was nine years ago, and if Apple’s earnings report plus a few other industry indicators didn’t suggest that times have changed a great deal then you’re just not paying attention.

To sum up: Apple’s now a nearly $20 billion company on an annual sales basis; It sold 5.3 million Macs worldwide, and in the U.S. market is now within less than 40,000 units of overtaking Gateway as the third largest PC vendor. Meanwhile Hewlett-Packard has eclipsed Dell as the world’s biggest PC vendor, Intel is fighting off a serious competitive threat from rival Advanced Micro Devices, and Microsoft, is still turning out second-rate computer operating systems, and constantly missing delivery date targets on its major upgrades.

So what’s to complain about? Well, this. Here we have a report from Gartner, the uber-IT consultant firm, saying that Apple should license the Mac OS to Dell, and stop making hardware.

Yes. Read that one again. My head hurts at all the many things that are wrong with this argument, that I don’t know even where to start. But I'll do my best , after the jump.

It turns out, the Gartner report argues, that what Apple does best is not hardware, but – wait for it -- software. Never mind that fabulous, often-copied consumer PC called the iMac. Never mind that Apple has over the last decade been first in the industry with such steps forward as dumping the floppy disk drive, adding the USB port, and designing personal computers to look in a way that they turn out not like an eyesore, but are widely used as props in TV shows and movies about what a computer should look like.

“Apple should leverage its close relationship with Intel and team up with Intel's closest ally, Dell,” the report reads. Perhaps the analyst at Gartner hasn’t been paying attention: Since Dell started using AMD chips in its servers and desktop machines, after more years than I can remember of being an Intel-only operation, the relationship between Intel and Dell isn’t nearly as cozy as it once was.

Apple, one of maybe two companies actually innovating the design of the personal computer, get out of the business in favor of Dell, whose Research and Development work is essentially outsourced to Intel, and couldn’t design its way out of a

The result of an Apple-Dell-Intel tie up of this nature could eventually push the Mac platform’s share of the personal computing market to north of 20%. Never mind that Apple has found its own way to grow its market share: The Apple stores. One fascinating stat that emerged from Apple’s earnings conference call on Oct. 17 was that each Apple store sold on average 1,000 Macs to customers who were “new to the Mac.” Additionally, more than half of the 323,000 Macs sold in the stores were to new Mac converts. And that retail footprint is only going to get bigger: Best Buy now has Macs in 50 stores, up from seven at the beginning of the quarter, and will only add more as time goes on.

Well it gets better, this report. The author views Intel as “subsidizing” and “propping up” Apple. I can’t quite figure out where words like this come into play, as though Apple were a charity case. Sure, Apple doesn’t take near as many chips as say, Dell or HP. But let’s remember how many computers Apple sold in the fiscal year just concluded: 5.3 million.

Let’s assume that number grows only a little in 2007, and hits, say 6 million units. That’s business that even so big a behemoth as Intel can’t exactly sneeze at. In January of this year, Intel had $310 worth of silicon in an Intel-based iMac. Let’s assume that since microprocessor prices are generally under pressure and that because Steve Jobs is a tough negotiator, the price of Intel’s components in the Mac’s across the entire Mac family averages out to a conservative $250. That’s for the microprocessor, chipsets, and any other Intel components a Mac may need. That works out to a cool $1.5 billion, which amounts to nearly 4% of Intel’s sales in 2005. I’d use many words to describe the Apple-Intel relationship, but describing Intel as “propping up” Apple isn’t a characterization that comes to my mind.

“Whether Apple's Steve Jobs would sanction any of the suggestions made by Gartner is hard to gauge. However, comments made by the Apple chief executive in April this year suggest that he is not unduly worried by his company's limited share of the PC market,” the report goes on. No, I doubt he’s worried about Apple’s place in the market at all. I can give you many reasons why – 1.9 billion reasons why, in fact, as that is number of dollars Apple made in profits in its fiscal year 2006. Indeed there are yet another 10 billion reasons I can think of, and that would be the amount of cash that Apple has on hand.

And by the way, have you looked to see which company is more valuable these days? Apple’s market cap as of the close of market today was $67.4 billion. Dell’s? $52.5 billion.

Yes, I can think of many “sanctions” that Steve Jobs might have in mind for Gartner report this subject: The first would be putting in the trash where it belongs.

06:56 PM

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Way to go Arik. As well as being a freelance consultant with many years experience in IT, I am also an avid industry watcher. My own conservative estimate is that Gartner in the last 5 or 6 years has been wrong more than 50% of the time. I am even thinking about running a Gartner commentary on my site.

It is refreshing to read your article which addresses the real issues without resorting to mindless personal abuse. Perhaps the real reason for the anti-Apple pro-Dell analysis is that the author has Dell shares and is worried by their loss of market position, declining capitalisation, and so forth. I think maybe he is assuming that because Apple is now price competitive that they must be subsidised. Well I think we are witnessing the beginning of a new wave that no longer includes Dell among the technorati.

Cheers

Posted by: Gary Hicks at October 20, 2006 09:39 AM

Thanks for the insightful, and intelligent article! You hit the nail on the head.

Posted by: Ken Davies at October 20, 2006 12:25 PM

Thank you for a realistic, accurate look at the absurd garbage that Gartner put out in this report. Perhaps they were pressed for time and just dug out an old file from 1996.

Posted by: thelt at October 20, 2006 02:35 PM

Good article. Another reason that an Apple-Dell partnership is unlikely is the polar opposites of the politics of their respective CEOs and company philosophies. Not to mention the fact that, to extend Jobs' gem of a quote on Microsoft "they have no taste".

It is quite likely that eventually Apple would loosen things up and allow other companies like HP or Sony or Fujitsu to sell Mac OS compatible PCs, to provide that 'freedom of choice' that business and government customers seem to demand of suppliers. They might even be forced into this situation if demand for Macs outstrips their ability to manufacture product.

But before that happens, I think there will need to be a critical mass of IT professionals out there that are well versed in UNIX and by extension OS X. At the rate that Mac sales are expanding on campuses and IT faculties, I'd say that's not very far away at all.

Posted by: Stuart at October 20, 2006 03:57 PM

Don't forget that Apple brings a great deal of Research and Development to the table. Apple owns a great deal of technology that was used by or developed in combination with Motorola and IBM, technology that Intel definitely can use in its fight against AMD. Apple can give (and probably has given) Intel access to certain technologies that can help reduce heat and power consumption, among other technologies.

Plus, having Apple tout Intel processors as the best in the business is great free marketing for Intel – after all, what chipmker wouldn't want to be associated with Apple? Much cooler than the Blue Man Group.

Posted by: Larry at October 20, 2006 06:01 PM

One reason Apple can be more price-competitive is Mac OS X. Apple does not need to "subsidize" Microsoft by paying a license fee for Windows. Yes, Apple does pay for the ongoing development cost of Mac OS X, but that's a long-term R&D investment, not an expense tacked onto the retail price of each Mac sold. Since Macs now use the same internal parts as HP and Dell, it is not surprising that Apple's Mac prices are comparable or lower than it's competition, AND how Apple still manages 25-30% margins. Apple has become one mightily effective machine.

Posted by: ken1w at October 20, 2006 06:22 PM

Thanks for being an educated technologists that writes well and does his research. You are indeed a rare breed. You actually used data to suport an argument, not a personal preference based on zero time sitting in front of a technology you're bashing. Keep up the good work.

Posted by: Barry Coyle at October 20, 2006 07:44 PM

Well, without Analysts, the first thing we might do is think for ourselves. Those of us that can, I mean.

Posted by: blinx at October 20, 2006 10:18 PM

Gartner has always been the company to go to when you want to buy a report to reassure your boss that it's a good idea to do what all the rest of the sheep are doing. I can't even call it conventional "wisdom", because trusting your business to Microsoft is about as foolish as you can get.

So now, Gartner is apparently trying their hand at Dvorak's line of work, making up nonsense for publicity's sake.

-jcr

Posted by: John C. Randolph at October 21, 2006 09:57 AM

The 3 main reasons Apple has done so well recently in my opinion have to do with

1) design. And how would you expect a me too co. like Dell to prolong that inheritance??

2) simplicity, both of hardware and software. Agian, Dell has not delivered anyting close to the iPod with it's simplicity.

3) Integration and it's resulting ease of use. It has always been the close link between the hardware and software design that has given Apple it's cutting edge. By splitting that, Apple would be competing with Microsoft rather than like currently with noone. If anything, in that case, it should rather license it's hardware to a no. of oter cies rather than team up with Dell.

Posted by: Jakob at October 23, 2006 08:28 AM

Apple's Q3-2006 worldwide market share is in the Others category, below HP, Dell, Lenovo, Acer, and Toshiba. Their US market share is a whopping 5.8%, compared to 31.0% for Dell. (Numbers from IDC.) In spite of all of the media hype, Apple's sales are comparatively weak.

Posted by: JohnJ at October 23, 2006 11:27 AM

To JohnJ... typical troll comment above. Apple has 12% of the US laptop market, up from 6% in January. It may have just 6% of the desktop market, but that's up from about 4% not long ago. If you were to just look at the consumer market, I am sure Apple would come in with 10-12% there too.

And Apple is growing Mac sales at 30% YoY compared with 8% for the PC industry as a whole.

Apple's sales are by no means comparatively weak. They may be comparatively low when measured against the whole PC market, but in the sectors of that market that it *chooses* to compete in, it has a much stronger presence than the total market share number suggests, as witnessed by its large share of total laptop sales.

Now, go back and look at the numbers. Look at DELL, and look at AAPL, and tell me which company is on an definite uptrend in terms of profitability, margins, sales, and market-cap, and which is on a downtrend in all those same areas.

Now tell me which company looks, comparatively, weaker.

Hint: you're DELLUsional if you think DELL is the stronger company :-D

Posted by: Tommo_UK at October 26, 2006 11:54 AM

Sigh. Only in the computer industry would a $20 billion a year company be called weak.

Posted by: frgough at October 26, 2006 12:04 PM


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