[31 October 2007]
San Jose Mercury News (MCT)
SAN JOSE, Calif. - For years, Apple has really been two companies: a mature, slow-growing one paired with a new, dynamic one, with the upstart driving the company’s renaissance.
Apple’s vibrant business was, of course, its iPod unit, and its stodgy old business the Macintosh division. Indeed, the company in January dropped “Computer” from its name.
But since the name change, something funny has happened: The Mac business has been the star, as iPod sales have started to look a bit anemic.
“Apple managed to pull the digital music player market into the mainstream and penetrated it pretty quickly,” noted Tony Ursillo, an analyst with investment firm Loomis Sayles, which owns Apple’s stock. “It’s a maturing market at this point.”
In contrast, Apple’s computer business “has lots of running room” to outgrow the broader market, Ursillo added.
While the company sold a record 2.1 million computers in its most recent quarter, its sales accounted for little more than 3 percent of the worldwide PC market, based on data from industry research firm IDC, meaning there’s plenty of room for it to take share from competitors.
So far, the change in the two businesses’ fortunes hasn’t affected Apple’s overall robust financial health. The company posted record sales and earnings for its past financial year, far exceeding Wall Street’s expectations. And many analysts expect the company’s strong Mac sales to continue at least for the near future.
But becoming dependent for growth on its computer products could be a difficult bet in the longer term, given that the PC industry is mature, and competition over market share can be intense. And it highlights the importance of the company’s iPhone effort - both as its next big growth driver and as a replacement for slowing iPod sales.
Indeed, even though the iPhone has been on store shelves less than four months, it “is already more important” than the iPod for Apple’s future growth, Ursillo said.
That the iPod is no longer Apple’s top growth driver would have been hard to fathom even a year ago. At that point - just five years after Apple unveiled its first iPod - its music players for the first time accounted for a larger portion of its full fiscal-year sales than its computers.
That achievement was built on years of torrid sales growth.
In contrast, the company’s computer sales had grown much more modestly.
But in its fiscal year that ended last month, Apple’s computer business grew 39.9 percent to $10 billion, marking a record sales year for the Mac - and a pace that was more than twice that of the overall PC market.
But just as consumers seemed to be getting excited about the Mac, their enthusiasm for the iPod seemed to ebb. Apple’s iPod sales grew just 8.2 percent last fiscal year to $8.31 billion.
The Mac is faring well in part because the iPod and now the iPhone have attracted new customers to Apple’s other products, analysts say. And consumers fed up with crash- and virus-prone Windows PCs have been increasingly receptive to Apple’s longtime message that the Mac is an easier-to-use, more stable and safer computer.
Additionally, the move to Intel chips in the Mac has allowed the company to offer more competitive hardware - and attract consumers who need to have a computer that can run Windows-only programs.
“There’s no one thing that is most important. It’s a combination of all the above,” said Bob O’Donnell, an analyst who covers the PC industry for IDC.
There’s less consensus about what’s happening to the company’s iPod business. Some analysts argue that the company’s media-player lineup was simply in need of the revamp Apple announced last month, or that all the iPhone hype has drawn consumers’ focus away from the iPod.
Others chalk the slow growth up to the “law of big numbers,” the idea that while the business is still growing significantly in dollar terms, the large base it’s growing off of makes percentage growth more difficult.
For their part, Apple representatives say they are unconcerned with the company’s slowing iPod business. They note that unit sales of iPods are still healthy - up 31 percent last year - and the product still dominates the market. And sales of the devices picked up after the recent revamp, they say.
“We are shipping the best iPod lineup ever as we head into holiday season,” company Chief Financial Officer Tim Cook said on a recent conference call.
But with the average price consumers pay for an iPod falling, the company faces the prospect of having to sell more and more iPods to bring in the same amount of money from them - at the same time that at least some analysts think Apple has saturated the market.
No one really expects iPod sales to fall off a cliff; instead, many analysts expect them to rebound this holiday season. But the best of times for the iPod may be past.
In fact, some analysts think the market for portable media players is starting to give way to that for music-playing cell phones such as Apple’s very own iPhone.
“When Apple did the iPhone, it really signaled the potential end for the stand-alone iPod,” said Rob Enderle, principal analyst at the Enderle Group, a tech consulting firm.
APPLE’S MAC LINEUP
Apple offers five different flavors of Macintosh computers, each targeting a different market segment.
Type: Consumer notebook
Base price range: $1,099-$1,499
Last update: May
Type: Professional notebook
Base price range: $1,999-$2,799
Last update: June
Type: Budget desktop
Base price range: $599-$799
Last update: August
Type: Consumer desktop
Base price range: $1,199-$2,299
Last update: August
Type: Professional desktop
Base price range: $2,499
Last update: August 2006