Apple Looking Less Shiny? Look Again

Investors were underwhelmed by Apple's lineup at this year's Macworld conference. Give it time

by Peter Burrows

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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.

Seductive Laptop

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.