Investors were underwhelmed by Apple's lineup at this year's Macworld conference. Give it time
There was little loving for Apple (AAPL) on Wall Street after Steve Jobs delivered his keynote speech at his company's Macworld Conference & Expo on Jan. 15. The company's shares fell 5.5%, more than twice the 2.5% decline by the tech-laden Nasdaq Composite Index, as analysts and investors digested news of an ultra-slim laptop, a video rental service, and a much improved Apple TV set-top box. The lineup satisfied the Mac fans in the crowd, but none of it was unexpected or as dramatic a move as the introduction of the iPhone at last year's show.
But longtime Apple watchers say the disappointment won't last. Ultimately the new lineup will help Apple take fuller advantage of the demand it's already created among both Mac fans and the swelling ranks of consumers weighing a jump from PCs to the Mac. "Even in a year where there were no tsunamis coming out of Macworld, the company showed that it can still make waves," says Jupiter Research analyst Michael Gartenberg.
More than ever, Apple is offering a complete slate of products that share Apple's aesthetics and ease of use; there's even a new Time Machine gizmo that can back up all of your Macs or PCs. "One of the digs on Apple at past Macworlds was that they were preaching to the choir," says Gartenberg. "But they've broken out of that mold. They're creating products that hard-core fans and new customers can love, too."
Case in point: the svelte MacBook Air. At just 0.8 inches thick, the computer feels sturdy in the hands and offers a screen and keyboard just as nice as those on high-end laptops. And rather than pursue the same corporate muckety-mucks who tend to gravitate toward such devices, Apple priced the Air for wide appeal. It costs $1,799, or about $200 less than a top-of-the-line MacBook Pro. Piper Jaffray analyst Gene Munster thinks the MacBook Air could become Apple's best-selling portable, resulting in a 10% increase in the number of Macs sold this year. "This is a really mainstream price—or to put it another way, a really, really low price," Jobs says, though he expects the $1,100 MacBook to remain Apple's biggest portable seller.
Apple made a few compromises with the Air. For instance, it has only a single USB port, the battery isn't replaceable, and there's no optical drive for playing CDs or DVDs. Still, analysts including Jupiter's Gartenberg say the new computer will bring people into stores. "Even if they don't buy one, they may leave with a MacBook instead," he says.
Apple TV: "Nailed It"
What's more, the new products will reinforce an already widely held perception that Apple stands for products that are tied together by the iTunes store and its ever-widening selection of entertainment content. "They are building an entertainment ecosystem, and that's going to be a major driver of the stock," predicts Piper Jaffray's Munster.
For that ecosystem to flourish, Apple has needed to extend its influence to the TV, by far the most-used screen in most homes for entertainment. The company went a long way toward that goal with the improved Apple TV and movie rental service unveiled at Macworld. Scuttlebutt before the conference held that Sony (SNE) and Vivendi's (VIV.PA) Universal would never agree to rent through iTunes. Yet they, and all four other major studios, agreed to make some of their films available. "When Steve came to us with this idea, it was a no-brainer," says Jim Gianopolus, CEO of News Corp.'s (NWS) 20th Century Fox. While he admits there are many other ways to get movies, he thinks Apple can cut through the clutter. "I think this will be a transformative version of the rental model," Gianopolus says. Holders of Blockbuster (BBI) shares appear to concur. The company's shares plunged 17% amid concern Apple will eat into its film-rental business.
Jobs denies there were any last-minute dramatics or super-charged negotiations involved in getting the studios to back his plan. "It wasn't a big deal," Jobs says in an interview. "The studios are all run by smart guys. They have iPods, and their kids have iPods, and they just want to get their movies out there." He says studios were enthusiastic when Apple came to them with an Apple TV that lets consumers buy from iTunes without leaving the couch. That wasn't possible with the first iteration of Apple TV, which even Jobs concedes was ill-concieved. "I used [the first Apple TV model] for a few weeks, and then I didn't use it much," Jobs says. "This time, I think we've nailed it."
The Entertainment Choice?
Jobs didn't get everything he wanted. The movies will only be available for rental 30 days after they become available as DVDs on store shelves. Over time, the industry will evolve to where digital rentals and DVD sales will start on the same day, Jobs reckons. Also, he won't discuss whether the studios will also let Apple sell their recent movies on iTunes. So far, only Disney (DIS) allows for sales as well as rentals. "We think this is the way most people are going to want to get their movies," says Jobs. "The lightbulb went off for us on this quite a while ago. Our focus is on movie rentals."
And the new services won't revolutionize how people watch movies. To some degree, the offerings emulate what is available through such means as ordering video on demand from cable or satellite systems, or via the Net using a Microsoft (MSFT) Xbox game console, TiVo (TIVO) set-top, or Netflix's (NFLX) new download feature.
Yet, Apple doesn't have to dominate the digital living room to benefit from Apple TV. The real win is if more customers—existing and potential—decide that Apple can meet the range of their digital entertainment needs. Once people make the shift to Apple's universe, they'll be tough to win back.