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NOVEMBER 6, 2002 BYTE OF THE APPLE By Charles Haddad Why Apple Keeps Clicking Once again, the buzz says its end is nigh. Too bad Jobs & Co. is too busy satisfying consumers to go along with the doomsayers
The latest death sentence comes from respected Boston-based computer consultant Giga Information Group. In a report dated Oct. 28, Giga says Apple (AAPL ) is in full retreat in almost every market segment, home users being the prominent exception. The report maintains that buyers have become more conservative than ever and are shunning non-Windows computers, except in the case of Linux-driven servers, which companies are increasingly considering as a low-cost alternative to Sun Microsystems (SUNW ) and Microsoft (MSFT ) servers. BEAT THE REAPER. Giga's report contains some truth about Apple's problems. But -- once again -- the company has life in it yet. In the past, experts have been notoriously wrong in foretelling Apple's downfall. To see just how wrong they've been, check out a listing recently posted by Mac Observer, an online Mac magazine. It chronicles nine death sentences going back to 1997. In October of last year, for example, TheStreet.com said, "Apple's story now is fodder for business historians -- don't make it fodder for your portfolio." The same year, the Motley Fool described Apple as "nothing more than a niche player fighting for its survival." With so many predicting doom, why does Apple refuse to die? For one thing, despite its relatively puny market share, it commands one of the highest -- if not the highest -- profit margins in the computer business, typically, in the 30% territory. That's a figure Gateway (GTW ) or the Compaq, now part of Hewlett-Packard (HPQ ), would have dearly coveted. These same margins kept Apple in the black when most others were losing money during the past two years. In fact, Apple remained profitable until the most recent quarter, an amazing feat considering the worldwide slump in PC sales. Although relatively small, Apple's fan base is remarkably loyal. Of an estimated 25 million Mac users, most will upgrade to a new Mac -- in contrast to PC users, who typically switch manufacturers, depending on price and software bundling. Yet despite brand affection, Apple faces difficult times right now. CROSSOVER HIT. Giga is right, Steve Jobs & Co. is losing ground in important markets it once dominated, such as education. Sales to schools fell 12% year-over-year -- despite huge publicity coups like persuading Maine to equip 241 elementary schools with wireless-ready iBooks. Overall, Mac shipments fell 14%, to 734,000, vs. the same quarter a year earlier. Behind these clouds, though, are a few rays of sunlight that have escaped Giga's keen eye. For one, Apple is diversifying out of the depressed PC market. Its iPod MP3 player is a huge crossover hit. Both Best Buy (BBY ) and Target (TGT ) are now carrying the device, which now comes in versions for either a Mac or a PC. Even Dell (DELL ) plans to sell versions of the iPod. Another instance of Apple successfully expanding beyond its traditional customer base is the new wafer-thin Xserve, a server whose sales have quadrupled. Granted, those numbers are coming off a very low base, but the Xserve is clearly gaining share in the server market. Trade journals are reporting that heavyweights IBM (IBM ) and Sun have started to add the Xserve to their product lineups, responding to consumer demand. Apple will never dominate the server market, but even a little extra in market share goes a long way in boosting sales and profits. Giga did concede that Apple was holding its own among consumers. A key explanation is its 40 branded stores, each expected to generate $12 million annually in sales -- about 40% of which are coming from first-time Mac buyers, according to Apple. Gateway, by contrast, is struggling to make its retail chain click. With successful stores and the clamor for the iPod, Apple will again rise from the ashes, avoiding the industry's obituary page once more.  Haddad, Atlanta-based correspondent for BusinessWeek, is a long-time Apple Computer buff. Follow his weekly Byte of the Apple column, only on BusinessWeek Online Edited by B. Kite Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | NOVEMBER |
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