Riding Out Uncertain Times
by Lorin Evans
Washington Apple Pi Journal, reprint
I was struck by the differences between two views of the
January Macworld trade show as posted by two reporters I
know. Dennis Sellers is an on-line Macintosh reporter for
the web site Maccentral.com.
He attended his umpteenth show and closed his last column
from the Moscone Center this way: "It's been an exciting
show and one that seems to bode well for the Mac community
in 2003. Thursday's attendance was still strong and the
level of excitement very high."
Rob Pegoraro is one of the technology reporters for the
Washington Post. He is neither a stranger to the Macintosh
platform nor to the Macworld gig. He closed his coverage
this way: ". . Apple's problem has never been wowing
Macworld attendees -- it's been drawing customers from the
masses who don't pencil Macworld Expo into their
I accept that each is working to his audience: Dennis
writes to and for the faithful, while Rob addresses a mixed
audience of users and smerkers. Their stories read like the
blind folks and their elephant. Is it possible that there is
something happening in the retail marketplace that the buzz
of a Macworld obscures?
I, too, found differences. Mine are between what I heard
in the keynote of Steve Jobs and what was said later by Fred
Anderson, the Chief Financial Officer of Apple, when he
released Apple's quarterly financial summary after Macworld
closed. What would happen, I wondered, if I compared the
I offer that there is something puzzling about the
content of Steve Job's upbeat keynote. Upbeat it is supposed
to be and he is one good spinmeister. It was interesting to
learn that the application he uses to develop his
presentation, Apple calls it Keynote, was originally written
by a company called Lighthouse Applications for NeXT and
called Concurrence. If you use presentation software, do
look at Keynote, it is getting very good reviews.
I knew something was up when Steve did not open by
telling the assembled that the company would announce a
profit for the quarter; he likes to do that whenever
possible. My antenna picked up on his not mentioning what is
said to be the bread-and-butter of the product line--i and
eMacs. Later, when I tried to get the numbers Steve
presented in his effusive fashion to fit with the numbers
presented by Mr. Anderson in his financial report, I
couldn't. Let me put some of them on the table and see if
you can get them to play nicely together.
A Few Numbers
- while most look at the computer market as a monolith,
it is and it isn't. 90% is based on the Windows/Intel
combination, about 5% Apple, and 5% other. That 90%
breaks down into a few 20 to 35% national brands, and a
small percentage of house brands.
- Apple's market share is now below 5%. In 1994,
Gartner Dataquest estimates Apple accounted for over 11%
of the personal computers shipped in the United States;
for 2002, that number is 3.6%. Each PC person who can be
convinced to 'switch' is a big plus for Apple. Thus,
- the thrust of Apple's national advertising is the
theme "Switch." Said Steve, 8 million people visited the
"Switch" web site and of those, 60% visited the site via
a non-Macintosh platform. While that sounds good, a
visitor at work might sign-in on a PC, while having a Mac
at home. Second, I know of no way to make a correlation
between all those visitors and first time buyers for
- Market research done for Apple shows that when they
asked buyers contemplating a computer purchase, the name
Macintosh did not register as one of the options
available to the purchasers. Put another way, the 95% of
the shoppers out there replacing a PC may not have
rejected the Macintosh; they never considered it. The
Switch campaign is one way Apple is raising awareness
among those buyers.
- Apple retail stores grew from 8 at the end of fiscal
2001 to 40 at the end of 2002. Sales increased from $102
million to $148 million. According to Mr. Anderson, 50%
of the customers who bought computers didn't own Macs, up
from 40% the previous quarter.
- the 170 CompUSA stores that have Apple-badged
employees on the retail floor saw a 42% increase in Apple
- In 2000, Apple's share of educational sales was
estimated to be 20%; today it is somewhere between 13 and
15%. When asked about the education market, Anderson said
"I don't want to get into forecasting the education
- Steve said at the 2003 Macworld keynote that 5
million Macintosh owners have switched to Mac OS X, the
new Macintosh operating system; according to Apple, there
are 25 million owners of the platform--of all vintages.
Most of those won't run the new Macintosh operating
- Apple shipped 743,000 Macintosh computers during the
quarter, about even with the same quarter one year
Doesn't Add Up
My problem is that I can't get those numbers to play
nicely with each other.
- education sales were down 5%
- 50% of sales in the Apple stores are to first time
- sales at CompUSA stores with Apple-badged employees
- overall sales are flat for the quarter
So, here is my problem. 50% of sales this last quarter
are to first time buyers; yet, sales are flat. That can mean
that there would have been a 50% dip in sales if not for
switchers. If that number is close, the Switch campaign is a
Put another way, people who normally make a Macintosh
computer purchase in the past quarter sat on their wallets
for some reason. Why? What is going on that some percentage
of the Macintosh operators are not upgrading and/or buying a
new Macintosh? Is it possible that there is nothing new that
grabs wallets, or are we witnessing a distancing of the
faithful from Mother Apple? Do existing owners see no
utility in upgrading; or is the money going into a different
platform? I don't know. If you cut through Steve's euphoria
about millions visiting an Apple website or downloading
gillions of copies of something-or-other, you get a couple
of clues; but, from Fred Anderson, many more. Each addresses
Apple's market presence in terms of numbers; I'll summarize
that part. Neither made mention of a touchy-feely component;
so I will.
The Big Picture
High end boxes [G4 towers] are not selling;
schools that are buying Macs are buying those bullet-proof
white iBooks [one-third of all school sales] and
school versions of the iMac; meanwhile, you and I sit on our
cash for some reason that Apple would like to understand.
Money came in from the Apple Stores, other retail channels,
and investments. One Wall Street wag was overheard to
comment that Apple gets a better return on its investments
[$29 million] than its products. Think about it for
a moment. Apple has $4.5 billion in liquid assets. Were its
stock price to drop under $10.00, it could becomes a buyout
target. Can you picture Carl Icahn and Michael Milken trying
to outbid each other so as to become the next keynote
But Fred Anderson does not talk about that. He is focused
on positioning Apple to have neat new products when the
economy turns around, products that will get you and me to
reopen our wallets. As he put it: "We don't think it is . .
.[in the] best interest [of Apple] . . .to
focus on short-term profit maximization at the expense of
future growth. Accordingly, we're going to continue to keep
investing through this downturn, and continue to move our
products further ahead of our competitors, so that when the
economy rebounds, we will be positioned for significant
growth." You and I are not privy to what the company has in
mind for things that move its products further ahead of the
competition; so let's take a look at the pieces we can
PC Moo Moos
To give you another perspective on this story, look at
this snapshot of Gateway, the PC box assembler. They sold
720,000 units in the same reporting period in which Apple
sold 743,000. Gateway lost $72 million, its eighth quarterly
loss in nine quarters. Apple lost $8 million on $1.47
billion in revenue, its second quarterly loss. Gateway has
negligible software and hardware R&D to fund, fewer and
smaller stores that help separate it from the rest of the PC
market, and new funny looking moo-moos. But, it plays in a
very price driven market. Clearly Apple is a larger operator
than Gateway. One big difference: if Gateway goes poof
[moof?], there is always H-P, or Acer, or Dell, etc.
If Apple goes moof, well . . . .
On average, each store brings in $13 million. That is a
nice buzzy number as are the sales totals and the greater
return per box from an Apple owned store sale than from a
franchised sale. Be careful if you are tempted to play with
store and sales numbers. A more meaningful measure of their
success will develop one year from now when the retail
industry yard stick-- sales volume per store one year later
- can be applied.
Whichever size store you have in your town you can see
that they are doing wonders for Apple's bottom line and
bring misery to the established Apple dealers that were
there long before an Apple store showed up. What has
happened is this: Corporate Apple repeatedly said that the
company owned stores are not there to take business away
from the independent authorized dealers who still account
for most Mac sales. Further, assurance was given that
shipments of new models would not favor Apple-owned stores,
nor would they offer discounts and promotions that were not
also available to the established shops. Well that is the
way the dealers remember it anyway.
Independent Apple dealers on the west coast are so
unhappy with the way they see Apple not living up to its
agreements, that they are suing Apple. A company called
Macadam, one of the largest independent Apple dealerships in
the United States, filed a multi-million dollar complaint
last month that accuses your favorite platform maker of
fraud, breach of contract, unfair competition, false
advertising and other evil things. For a good overview of
this unfolding story, read Henry Norr's piece in the
Mr. Anderson acknowledged part of the higher return to
Apple is from a greater percentage of all sales coming from
what he calls 'direct sales'--the Apple retail stores and
its web store. He's got to like that money. He went on say
that ". . a substantial portion of the retail segment's net
sales are incremental to the company's total net sales."
Ouch! That sounds to me like he does not care if franchise
stores go poof.
Week magazine believes Apple is in the midst of a big
shift in its retail strategy and should just see my quote
from Fred to its logical conclusion: pull the franchise from
any Apple resellers within some radius of an Apple store.
Having spent some time with franchise brick and mortar
dealers listening to their woes in dealing with corporate
Apple and its distributors, it sure looks like Apple is
employing classic drip torture to wear these folks down.
I am conflicted here. If you have read anything I have
written, you know my sympathies are with street-level
retailing; I am the same person who cheered Apple's retail
initiative as essential to its survival. The Pi was involved
in a piece of that initiative well before you knew about the
stores. I want both to succeed. So, my wiggle room at the
moment is that a cursory examination of the history of Apple
reveals a company that can't walk a well worn path for long.
Apple's commitment to their retail strategy had better be
chiseled in stone. Why? Well, let's see: how much should one
charge Apple to take one of its new franchise offerings when
the existing boutique stores get passed on to a
subcontractor to run -- into the ground? Won't happen, you
say? Ask me about MarketSource some time.
Got To Sell Boxes
When you hear someone discuss sales numbers, separate
hardware from what Apple calls 'beyond-the-box' stuff.
Beyond-the-box revenue comes from sales of things like iPods
and software. They represented 26% of total revenues. Box
sales, on the other hand, were essentially flat from one
year ago when they had a profit of $38 million on $1.38
billion in revenue. Yet this time, the company lost money.
Why? Apple had to reduce prices as a sales incentive. High
end stuff with accompanying high margins is not
selling--sales are down 25%, revenues for the line down 20%.
Basic units are selling well, but carry a low mark-up. Take
the iBook. Sales were up 1%, but revenue was down 11%. A
basic iBook now priced at $999, and average iBook selling
prices in the last quarter were around $1160. There are a
couple of reasons given for your lack of interest in a new
Apple, like the rest of the personal computer industry,
has relied on processor speed as the measure which gets you
to replace an existing box. However, you have discovered
that for Internet travel, e-mail and word processing, the
computer you now own is already more than fast enough. Thus,
the industry finds itself looking for reasons to get you to
replace old faithful. If you don't upgrade, then you don't
have to acquire newer copies of your favorite applications,
don't need to replace that scanner and printer, and on it
goes. This could be part of the reason why Apple is
frustrated that more users are not moving to Mac OS X. There
are 25 million Macintosh computers out there, but only some
five million copies of Mac OS X, which, by the way, does not
mean all are being used. So many recalcitrants to
"Switch:" Meet iCheap
"Switch" people are serious price comparison shoppers.
The whole consumer PC market is very price driven. Apple's
store managers are discovering that it takes a bit of
explaining to help a person interested in switching to
compare and adjust the price in an enticing advertisement
for a PC box so as to understand all the built-in features
found in a comparable Macintosh. This is one of the reasons
given for the latest round of price reductions by Apple. It
is also why there is interest at the retail level for a
Macintosh model with the moniker "iCheap." Picture the igloo
iMac without the screen selling for around $500 and you have
iCheap. Such a model is aimed directly at two groups: the
price comparison PC shopper and the price conscious school.
A "Switch" person buys iCheap, adds their present monitor,
and off they go. For a school, Apple returns to being a
price competitive alternative to Dell and
In Search Of The Killer Application
There is a free ride in Steve's Gulfstream for the person
who can find THE application which gets you off top dead
center and out shopping. One approach Apple is using is to
create applications which allow your creative interests to
express themselves via a mix of four multimedia programs
that only run under Mac OS X -- iTunes for managing music,
iPhoto for digital photography, iMovie for editing digital
video and iDVD for creating your own DVDs -- and integrate
them so that they work together seamlessly. The package is
One researcher with whom we work mentioned Rendevous as
having the potential to be 'it.' Rendezvous is a networking
technology that lets you create an instant network of
computers and devices without any configuration work by you.
Think about it for a moment: how cool it would be if you
could buy a PowerBook, digital camera, printer, iPod,
Airport base station and whatever else you have room for in
you home, turn them on and they automatically negotiate with
each other to create a network. No IP addresses to learn, no
configuring the printer, no mumbo-jumbo to get the Airport
to connect everything together.
G-series towers are big-time profit to Apple, but they
are not selling. Sales are down 25% from 212,000 a year ago
to 158,000 units. Why aren't you buying them? Well, last
time the subject came up, Steve said it was uncertainty over
the new operating system, Mac OS X. We are told OS X 10.2
fixed that, but it had little effect on sales. Now he says
the drag on the anchor is QuarkXPress. If only they would
release Version 6, the native OS X rewrite, all will be
The Quark folks give new meaning to the word acerbic.
They appear to have no timetable for a release of V6. If you
don't like it, go buy PageMaker [soon to be
discontinued] or InDesign. You'll be back. Apple dreams
of something by August Macworld. Otherwise, we will hear a
new story as to why the tower is not selling. One of the
items on Apple's wish list is an early warm spring in
Denver. That way, the code writers will spend more time at
their desks than on the slopes.
Steve did not touch the subject, but Fred did obliquely.
Apple continues to find itself more on the outside looking
in -- a market where Apple has, in the past, enjoyed
unparalleled success. It has yet to undo the damage done two
years ago when it canceled sales and support contracts with
regional vendors. I can make the case that Cupertino still
does not understand how dumb a move that was. Apple mouths
the words, but conveys no sense of understanding. The brand
needs local presence for sales and support, yet Apple won't
allow its local brick-and-mortar dealers to sell to schools.
With net sales in education down a scary 15 % in 2002
(compared to a 4 % decline in 2001), Apple ascribes the
market losses to 'them': them being increased competition
from PC vendors; them being more skittish buying habits from
cash-strapped school districts. But, not them: Apple.
Said Fred Anderson: "I would tell you that we continue to
remain cautious about the education market, particularly
given the funding constraints in states such as California..
. . . The situation is the same in other states, too." Using
Cupertino reasoning, I will make the case that those
constraints could work to Apple's benefit, if it uses that
time to rebuild its relations with school systems. Don't
look for me to turn blue.
The bright spot for Apple: iBooks and integrated wireless
technology. According to the folks who survey schools
concerning technology purchases [Technology Purchasing
Forecast], almost one-half of the districts surveyed
report current ownership of wireless devices. In addition,
one-third of all districts report they will purchase
wireless devices this year. As a sign of this growing trend,
9% of districts plan to buy all wireless computers this
school year. Of wireless devices, 72.5% are laptops. iBooks
account for one third of units sold.
And some not so good news. While Macintosh is the single
most common brand of instructional computer in schools
today, Dell is the leading brand in district plans to
purchase instructional computers for this school year, with
a 35% share to Apple's 21%. As one IT person put it to me:
"Macs may be cheaper to own, but not to buy." Yes, I know.
Life cycle costing is something taught in school; it doesn't
mean they use it. Hello "iCheap".
30% of the computers sold by all major brands are
laptops. Apple's percentage was once 35% of its total and is
now down to 28%. Steve wants it back up, eventually to reach
50% of total sales. To that end, Apple's new PowerBooks are
strong contenders. Why even Consumer Reports (gulp) likes
College students are taking laptops to school in lieu of
desktop models in significant numbers. The problem for Apple
to attract high school or college bound student buyers, is
the general absence of Apple in the school market. By high
school, a student has less and less of a chance of being
exposed to a Macintosh product. Sure, the graphic arts
department most likely has some; but the general trend is
not something to take to the bank. The question becomes: how
does Apple induce Mary Lou to ask her parents for an iBook
when, statistically, she has little chance of having used
You would not know they existed if you listened to Steve.
Fred, however, was pleased. The company shipped 298,000
iMacs: 58,000 were classic CRT iMacs; 106,000 were eMacs;and
134,000 were flat-panel iMacs. The 17-inch flat-panel iMac
was Apple's most popular flat-panel offering.
The Touchy-Feely Component
We know Apple has a monopoly on the Mac OS operating
system and the hardware. That in and of itself has not
bothered us. It does, however, allow Apple to get away with
things that companies in a more competitive environment
couldn't. Historically, that has not bothered us too much
either. But, historically the gap between how you and a Mac
box interact versus a comparable WinTEL box were different
enough such that crossing over didn't cross your mind. As a
result, people who make a living measuring brand loyalty are
in awe of whatever it is that causes that to be -- or is it
Tom O'Guinn, is a professor at the University of
Illinois' College of Advertising. He co-authored a paper
with Albert Muniz of DePaul University in the Journal of
Consumer Research titled Brand Community [March,
2001] in which they introduce the idea of brand
communities -- a community that has developed around a
brand, instead of, say, a neighborhood or a church, etc.
They see the Mac community as a prime example.
Tom offers: "You may get mad at the company
[Apple] , but the bond with the [Macintosh]
community means you don't really have a choice," he said.
"You may complain, but you're not going to leave. In a
cohesive community, the marketer can get away with all kinds
of stuff because the cohesion is so strong."
Marc Gobé is President and CEO of d/g* worldwide
<www.dga.com>. He is the author of Emotional Branding,
a book on how to engage today's increasingly cynical
consumers at deeper emotional levels. He sees Apple as
profoundly humanist. Its founding ethos was empowering
people through technology. "Somewhere they have created this
really humanistic, beyond-business relationship with users
and created a cult-like relationship with their brand." said
I am asking if those folks are making a living on out of
date information. Is there a confluence of two different
factors at work against the Apple brand here? Is the
touchy-feely component of the Apple/consumer relationship
sliding off the tracks at about the same time as the
difference between your working with either operating system
[Mas OS or Windows] grows smaller? Is some of this
the unquantifiable in the equation that helps explain why
50% of the people who would otherwise have shopped last
quarter for a Macintosh didn't?
Customer loyalty was one thing that helped save Apple
during the late 1990s, when the company was in danger of
going out of business. So, what happens when the loyal sense
that their enamorment is being taken for granted? What
happens when the followers become increasingly cynical; when
the marketing folks at Apple can no longer get away with the
usual smoke and mirrors routine because the old cohesion no
longer has the strength Tom O'Guinn wants to ascribe to
Take a look at these examples: Apple's treatment of its
franchise dealers, its alphabet soup folks, and its
relations with its street-level user group supporters.
Franchise dealers in this area report being denied
payment for warranty work for the most trivial of reasons;
denying a warranty claim made through a dealer, but
accepting the same claim at an Apple owned store; and
refusing to accept the return of new units defective out of
Henry Knorr's story includes a recorded conversation in
which an Apple sales representative is trying to get a
customer to buy directly from Apple. The rep is quoted as
saying: "They [Apple Specialists] are not actually
certified, they just sell our computers." "You gotta beware
when you go to a reseller. You have to make sure you know
what you are getting into."
Apple Specialists, Value Added Retailers and others are
people who pay Apple big bucks, $500.00 and up, to add that
title [alphabet soup] after their name. They want to
solve your problem with some mix of Apple hardware and
software--and in the process get a fee for selling the
equipment and some dollars for their support services. These
people could just as easily find a Windows-based solution to
your problem. So, should Apple make their life easier or
harder. Correct, harder, or at least extract a few more
dollars from them so that they can add that alphabet soup
after their name. Small example: each quarter Apple used to
give those folks and user groups an informational CD with
training and support materials included on the disc.
Starting this year, each disc is $10.00 please. Small, yes;
petty, you bet. Am I watching them save a dime and lose a
What does any of this tell you about what is going on
inside Apple these days? I accept that time are tough; but
this stuff reads like managers of a "Dollar Store" are
running the place. I also read into this collection of
slights, take backs, chintziness, and corporate pettiness a
belief in Cupertino about their owning some share of the
computer market that is not grounded in retail reality.
Decision makers are reading too much Tom O'Guinn and Marc
Gobé, and not enough Norman Peale.
Dealers, customers, and groups that support the platform
are feeling spurned by the arrogance, real or imagined, that
emanates from the top of the company. This is one loop no
company can afford, especially in a market as competitive as
Apple's. I did not make up the numbers I cited at the
beginning of this piece nor the tension between company
franchisee and the company. All I did was fit those pieces
So far we have explored 'economic uncertainty' as a
reason; that there is 'nothing wrong with what you have';
and, as a potential switcher, the Mac is 'too pricey'. Now I
ask you to consider a fourth reason. Maybe those diehard
Macintosh owners that market watchers portray as in some
"humanistic, beyond-business relationship with Apple" are
coming 'clear'? If you are in a relationship, both parties
must nurture it. Offering us new hardware and a cold
shoulder is not what I call a consistent message. I believe
that it is dangerous for Apple to take for granted that a
'special' relationship exists with its troika of dealers,
customers, and supporters.
Remember, you don't have to abandon the platform for the
sales curve to flatten. Just sit on your cash. You could be
doing that because of the uncertainty in these times, no
additional productivity or incentive to be found in
acquiring new, or replacing existing hardware. I sense that
there is a mix of something's going on out there that I
can't get my arms around.
Any experienced troika driver can tell you what happens
when the team gets out of hand. No, I can't point to one
catastrophic event that has chilled owners; no one affront
that caused franchise dealers to sue; nor one slight towards
user groups. There is, however, a decent collection of
frustrations that has the synergy to change something
(I want to remind all that Apple is extremely fortunate
to have the design, production, and financial management
team now in place. Overseeing the process of turning dreams
into dollars is not done anywhere any better than at Apple.
It would be nice to see some of that excellence seep into
other parts of the company.)
On To The Big Apple
Fred and company are comfortable with the quantifiable. I
am mucking things up by adding squishy stuff to the mix.
Maybe Fred and I are addressing similar issues, each in our
- Fred says Apple, rather than focus on the current
sales malaise, prefers to invest in the creation of
innovative new products and services. That sounds like
Apple is looking for ways to address the 'no reason to
- On behalf of Apple, he wants to have enticing stuff
in the stores so that when we feel better about spending
money, Apple will be there to accept our plastic.
Unfortunately for Apple, there are also a couple of far
away sand traps to derail things on that front.
- My request that he invest a few bucks to check into
my touchy-feely question may not sit so well out there.
The company likes to sound touchy-feely, but doesn't do
so well when it comes to walking the walk. Why not send
someone, who does not have "insanely great products"
stenciled on her eyelids, street level to explore whether
there are other reasons besides 'economic uncertainty'
and 'unnecessary to upgrade' that are keeping potential
buyers away from a newer Mac. The number of traditional
Macintosh shoppers not shopping, or not shopping for a
Mac, should bother someone in Cupertino. Depending on
what is brought back, that individual could have a short
life at Apple. Their habit of shooting messengers is not
one of their more endearing attributes.
- As for the school market, Mr. Anderson said "I don't
want to get into forecasting the education market." My
English would be that the company has a hard time being
forthright in revisiting bad decisions. They really have
to for lots of reasons.
If the 'Switch' campaign is as successful as Fred's
numbers indicate, and the company can entice some number of
wallet sitters back to shop, much looks brighter for Apple.
In the meantime, don't rush out and sell your Apple stock to
Carl Ichan just yet. There are several venues between now
and Macworld New York for the company to make clearer what
is ahead. Let's hope that those far away sand traps don't
get in the way.