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The Economics of Apple

By Teri Robinson
Sep 24, 2002 4:00 AM PT

Before Steve Jobs retook the reins at Apple Computer (Nasdaq: AAPL) in 1997, many in the industry had begun to sound the death knell for the innovative but beleaguered company.

The Economics of Apple

But in a stunning turnaround, Apple pulled itself out of a pool of red ink and began booking positive earnings. Now, despite shrinking market share -- about 4 percent compared with Windows' 95 percent -- Apple is holding its own and making money.

One key reason for the company's success is its ability to sell both software and hardware at reasonable margins -- a goal that has eluded many PC makers, which have found their hardware products commoditized. In fact, hardware is "still Apple's bread and butter," Roger Kay, director of client computing at IDC, told the E-Commerce Times.

Margin Envy

While detractors periodically slam Apple for the relatively high sticker prices of its computers -- the industry widely criticized Jobs when he revoked the licenses of Mac clone makers, which produced lower-priced machines, several years ago -- the company's strategy seems to have paid off. Apple has carved out a small but profitable niche among an influential group of users, primarily consumers.

In addition, the company understands that future growth in the PC market will occur, as a Forrester study noted, as consumers upgrade or replace existing computers. That may be one reason why the company has been aggressive with its "Switch" ad campaign, which showcases users who have migrated from Windows to Mac and urges others to follow suit. In July, Jobs said the campaign had been successful, luring more than 1.7 million unique visitors to the "Switch" Web site, 60 percent of whom logged in from Windows machines.

Features Galore

Jobs and his cohorts also are taking advantage of Microsoft's negative publicity, including reports that suggest the Redmond, Washington-based software giant has been overbearing, invasive and misguided in its attempt to restructure licensing terms for its software.

In addition, Apple followed up its marketing efforts by releasing Mac OS X version 10.2, also known as Jaguar, which makes it much easier for consumers to switch to the Mac platform, according to Forrester research director Carl Howe. "Jaguar 10.2 has a lot better support for a Windows network, so I can mount all the Windows file shares from here," Howe told the E-Commerce Times. "I can browse the network just like the Windows guys do."

Wow Them Again

However, if Apple is to continue its trek through the land of black ink, it will have to produce even more innovations like those it has been hailed for in the past.

"Everyone is wondering if Apple can repeat the success it had with iPod," Giga Information Group analyst Ken Smiley told the E-Commerce Times. Jobs has declared publicly that the iPod, a handheld device that can store several gigabytes of audio and other files, is a way for Apple to worm into the Windows world and lure consumers away from Microsoft products.

Apple also has spent a great deal of time developing software like Rendezvous, iChat and iSync. These programs help users communicate more easily and synchronize data on handhelds, laptops, cell phones and desktops. Their capabilities are intended not only to endear the company to its existing user base, but also to attract newcomers who may be sitting on the fence.

Enterprise Chances

There might even be some room for Apple in the enterprise market if the company can anticipate business needs and innovate in the space, according to Smiley. As a role model, he cited Research In Motion (Nasdaq: RIMM), which bested Palm (Nasdaq: PALM) by producing and selling a targeted wireless e-mail application while Palm was focused on providing users with a way to browse the Web on their handhelds. "Apple could have done that [e-mail] application," Smiley said.

Brian Croll, Apple's senior director of software and worldwide product marketing, told the E-Commerce Times that the company will probably attract enterprise users with iSync, which, among other things, allows companies to network printers without the usual torturous configuration work.

Less likely is that Apple will make inroads into the enterprise through the Xserve, which it unveiled during the summer. According to Smiley, Unix, Microsoft and Linux servers already dominate the enterprise, and Apple does not bring anything compelling to the table. "It doesn't have the power of a Unix server, it doesn't have the application support of a Microsoft [server], and it isn't free like Linux," he said.

Building on Mac

Although Apple has achieved financial solvency in a difficult climate by knowing its audience and preserving its margins, the company's struggle is not over. According to experts, Apple must lure developers to the Mac platform to extend its profit streak. "They are moving beyond the box, as everybody is," said Kay, "trying to develop new revenue streams."

He added that the company's future success "depends on ga-ga design. Like a Milanese fashion show, they have to hit it exactly."

The company also needs to get a better handle on marketing costs and learn to synch inventory with demand, according to Kay. He noted that Apple spends a significant number of dollars on advertising and marketing. By doing so, the company successfully created a buzz about and demand for its 15-inch flat-panel iMac, but actually generated too much heat and sold out of iMacs. It then scrambled to produce more units, only to end up with excess inventory.

"They did a poor job of supply chain management," Kay said.

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