Get a grip Apple folks

Yesterday Apple posted some great numbers.  As the Guardian Unlimited Technology blog reported in their article, "Apple reports record revenues (again) - but is it enough?," Apple did break the 1,500,000 unit target that I had set out for them.  However, they did miss my yearly goal of 6 million units, but I had already figured out that was going to happen long ago.

Apple's Q4 numbers were great, but there are reasons for concern, at least in computers.  I'll leave the iPod analysis to MP3 experts.

First of all, you just can't ignore the worldwide market.  The lead statement in the Macsimmum article, "Gartner, IDC agree: Apple’s market share up," is the following.

Apple’s market share of the personal computer industry in the U.S. grew to 6.1 percent from 4.6 percent from the same period in 2005, according to Gartner

A lot of the rest of the article is about "worldwide personal computer shipments."  There is conspicuously no talk of Apple's worldwide market share.  There a good reason behind that, it's still two and change or more specifically about 2.7%

The reality is that worldwide computer sales grew about 3.7 million units.  To keep your perspective Apple sales grew 233,000 units.  Looking at it another way, just the growth in personal computer sales was 2.3 Apples based on Apple total units shipments for their Q4. 

Now there is much good news, Apple 233,000 units of growth is a robust 6.3% of worldwide increase. That definitely shows that Apple is on a growth path.  However, to be really honest, and I love my Macs, Apple just can't scale large enough, fast enough to really take a lot of market share from the rest of the vendors.  It's been a huge boat anchor around Apple's neck forever.

There are some legitimate arguments that Apple doesn't even need to go after unit growth since they are making boatloads of money from higher than average margins, and doing what they are already doing.  Yet we all know that technology companies face a fickle changing market, and being on a lot of desktops around the world gives you a leg up on the competitors especially if your operating system is your key product.

Being a worldwide contender should be on Apple's radar. Why is it that important?  Well first off, once someone become hooked on an operating system, there needs to a tremendous amount of pain before they will switch.  Look at how many Mac users refused to leave the Apple platform during the crash and burn days of Apple in the mid-nineties.  Then there are the millions of people who steadfastly clung to their Windows PCs during the recent virus storms.  Change is hard, but Apple already knows that.

It is just a fact that the longer Apple can't catch up in the worldwide market, the harder it will be for the company to play anything more than a bit part in the operating system world wars.

Still Apple turned in some great numbers, but I'm willing to bet most folks are completely missing a couple of points which are always huge when it comes to Apple.

Apple new product purchases go through a very fast bell curve because Mac users are early adopters and in the case of these most recent numbers, there were some starving, long suffering Mac laptop users, who may well be inflating the numbers.  In fact this years numbers, as good as they are, need to be sustained through next year to make a statement.

To really play catch up in the worldwide computer slug fest, Apple needs growth which defies seasonality. 

Here's is a good business goal for Apple.  If they're really serious about computers and not just personal digital devices,  maintain a 17% quarter to quarter unit growth through out FY2007 with no seasonality factor.  That would demonstrate serious growth and commitment to being a real player on the world stage.  I'm sure Steve could pull the right levers if he tried.

That 17% unit growth is the approximately the growth that Apple just demonstrated from Q3 of this year to Q4 of this year.  If Apple maintains that growth, they'll take their annual computer unit total for FY07 to 9.9 million or nearly ten million, which by the way is approximately what HP and Dell are already shipping each quarter as reported by IDC.

There is no reason that Apple can't do this unless there is a lack of will to do it at the executive level.

They certainly have the money in the bank for whatever resources anyone could imagine.  Should the Board of Directors be asking Apple management to bring in ten million units next year?  It obviously would be a huge challenge, given some of the recent product problems and Apple's penchant for doing any sales effort outside their marquee stores on the cheap.

Yet Apple has some great hardware products with the world's best operating system, and Apple hardware can even run the other operating systems.  The systems are priced pretty competitively and you no longer have to sell the processor difference.  It should be easy decision at the board level as to whether or not this makes sense for Apple in the long term, but therein lies the problem.  My guess is that Steve is about as interested in selling ten million units next year as he is in taking a trip to the moon.  It's far easier just to ship the next OS release and make another fortune off of existing Mac users than it is to go and take a significant chunk of the worldwide computer market.  Unless it's Steve's goal, it won't come from the board.

There really are no good excuses for Apple not getting to 10 million units in computers next year aside from just not wanting to do it, but logic is rarely a useful predictor in guessing what Apple will or won't do. After all, logically you would think that a company even vaguely interested in the enterprise space wouldn't just stop making servers for a while, but Apple has done that with the Xserve until they can get out their Intel version.

For what it is worth,  I hope that nearly 10 million units is the Apple business plan goal for FY07.   Adding some good manuals for switchers in the box would be a good idea as some readers have suggested.  It would make that almost 10,000,000 units a lot easier to achieve.

There is one more thing. Since I'm also a Windows and Linux user with my ear to the ground, I detect some ground rumbling near Seattle.   Actually you would have to be living under a very big rock not to understand that many Windows users aren't buying new hardware right now because they're waiting for Vista.  The pricing for Vista reported in the blog, "Living without Microsoft," is enough to make many people question their need to upgrade.  However, once you're over on the "Darkside" you know that the best way to upgrade is to just buy another computer.  The Vista software will be tremendously expensive except when you buy it as an OEM license on a brand new computer. Vista will even require an almost new computer to be fully functional. That's no surprise.  That way it will sell lots of new computers and Microsoft's partners will be very happy.

This will be the first upgrade cycle in years for Microsoft and the mainline PC vendors.  It will be an extremely interesting time.  Apple is going to have to run very hard to keep from falling behind if there is a boom in computer purchases fueled by Vista's shipping.  I certainly don't think that is a certainty but maybe it will happen and move my long suffering MS stock upwards.  I don't own any Apple stock since I still believe there is significant downside risk with Apple.  Just imagine if Steve get further dragged into the options scandal.  I wouldn't want to be holding any Apple stock.

One interesting side note is that as I reported in my recent post, "One of those times I'm glad I have a Mac,"  the website that I'm monitoring was showing 6.46% Mac visitors this month.  That turns out to be not too far off Apple's 6.1%  US results according to what Macsimmum reported from Gartner. 

Maybe the website which I monitor is a pretty good prediction tool for Apple market share.  I'll have to watch the results closely.  So here's hoping that Apple hits 10,000,000 units next year, and that I end up regretting that I don't have Apple stock in my portfolio.

 

Comments

[Travis Bell]

Good article man. You bring up some completley valid points and I am glad that you still recognize the fact that Apple still has a long way to go if being a "worldwide player" is something they're after.

But like you said, there's nothing wrong with making these millions every quarter... pile up a bunch of cash and reef the ol' R&D wagon so they can make even better products ;)

[pauldwaite]

> "Apple new product purchases go through a very fast bell curve because Mac users are early adopters and in the case of these most recent numbers, there were some starving, long suffering Mac laptop users, who may well be inflating the numbers."

Good point. Although I think Apple did mention something like 50% of people who bought Macs in Apple stores were buying their first one. Difficult to measure that kind of thing across all sales, though.

[afpilot]

Sorry, but I don't buy into the market share myth: that Apple HAS to grow their marketshare in order to survive or even prosper. The fact is, I doubt it will ever grow significantly (10%). Like you point out: the horizon is growing faster than Apple is travelling. But that's ok. I have my Mac(s) and will continue to buy them as long as they keep putting out insanely great software (and hardware). I will continue to extole Mac as a superior experience.

While I normally find your commentary interesting, this post puzzles me as it seems a contradiction.

"Then there are the millions of people who steadfastly clung to their Windows PCs during the recent virus storms."

And yet you say:

"There is no reason that Apple can't do this unless there is a lack of will to do it at the executive level."

Welllll.....could it be those millions?

Try as they might, Apple will always be fighting the good fight: it's just flat out of their control. What would you have them do? Spend the $10B by subsidizing price points to the point of selling below cost? Even that won't help much as there are millions who still won't switch. Apple would have to GIVE them away and there STILL will be millions who would decline.

I do buy the BMW theory: as long as your selling lots of cars and making good money, you'll be fine with small market share. What is BMW's? 1.5%? As long as Apple makes their own (great) software that supports certain standards (jpg mp3 html etc etc) and do the things people want to do, they will continue to be successful.

[milevin]

Apple could achieve those financial targets discussed in this post. However, Apple would need to stop shitting on their customers and build a credible marketing departmenting.

Should this happen, I would fully prepare for the End of Days.

[squishy]

Here's some numbers for you...
Gateway has more marketshare than Apple.
Gateway lost 8 Million last quarter.

Dell has 5 times the market share that Apple does
but less profit 503 million.

Apples profit last quarter 546 million...

Market share?

[msiller]

I agree on the worldwide market comments.
Apple needs to make Macs more accesible to the rest of the world outside of the US, Europe, and Japan.
I live in Mexico, and you can't imagine what you have to go through just to get a Mac in this country.
As hard to believe that may sound, believe me, it's nothing short of an adventure.
There are no Apple Stores, obviously, and the few resellers that carry the Apple Macintosh line of products seem to want to have a 40% profit.
Macs in Mexico are rare because of this. The extremely limited availability and paying sometimes almost twice as much on some products, like the iPods, makes them impossible for the majority of the market to even consider them as an option, specially against comparable computers from, say, HP or Sony.
Personally, what I do is take a trip to the US (I live 3 hours away from the border) and buy Apple products on US soil. It's way less complicated and far cheaper.
And, ask anyone who owns a Mac in Mexico that has had the need to call the mexican branch of AppleCare... and they'll agree with me 100%... it's a nightmare.
2 months ago when I was having trouble with my MacBook Pro's battery (the one's that got recalled) the rude guy on the phone ended up saying "You know, what? Sue us... I don't know what you want me to tell you... It's up to US to decide if we want to repair your Mac. I don't care if it's new, under warranty, on extended AppleCare... It's a common problem, I know, but still... if we say no, it's no."
So... yeah... I think Apple would have a lot more market share if they took better care of these points.
Just my 2 cents.

[Piot]

"There really are no good excuses for Apple not getting to 10 million units in computers next year aside from just not wanting to do it"

Crazy talk!

Let's see if Dell, HP or Lenovo can increase their sales by 90%. After all, according to you, all they have to do is "want to" !

[ocracokewaves]

There always lots of reasons that Apple folks trot out as why not to go for market share.

The biggest being that going for market share will completely destroy profits.

That's just a complete red herring. Apple went for market share with the iPod and figured out how to do it. It's a relatively inexpensive device. They make money on it.

I believe there is plenty of room left for innovation in computers and some of that innovation could drive market share just like it did with the iPod. Putting an Intel motherboard in the old G5 case isn't exactly Apple style innovation.

Secondly HP and Dell don't have to shoot for 10M units annually, they're already doing that on a quarterly basis. Besides no one is suggesting that Apple emulate Dell and HP. Apple doesn't need to control the market to be successful, but as the market continues to grow Apple has to grow faster to keep from falling farther behind.

The real challenge is that Apple has never (or at least not recently) seriously tried to sell lots of computers. In order to sell lots of computers you have to devote human resources to it. Outside of major metro areas where Apple has its own stores this has not happened.

Most people would be shocked to learn that Apple probably has less than 100 outside sales people selling to business and government in the US. When I first covered the federal government for Apple, I was given two people for sales, one on the east coast and one on the west coast. Though Apple has improved its federal coverage, I still doubt that they have more thirty people covering the market.

In order to sell computers to a market which is already saturated with computers, you need human resources, equipment, marketing support, and a commitment from the top. While some computer companies match their outside sales people with both an inside sales person and a system engineer, Apple often has their sales people share resources. Apple system engineers also generally are no longer allowed to do a lot of post sales work.

All of this is in the name of profit, but the truth is that spending more on support and sales now while building a larger market for Apple products isn't going to put much of a dent in Apple's ten billion dollar nest egg. Apple especially needs better support if they are ever to increase their high margin server sales which were at one time doing really well. Assuming they ever ship the new Intel ones and start selling servers again, there's a real opportunity there if Apple would really make it a priority.

Ask around and see when the last time someone has seen a live outside sales person from Apple.

Next I'm sure I'll hear that BMW doesn't care about market share. Well that's just bull. If you followed Volvo or Audi over the years, you know that even niche makers can have a crisis.

I'm not suggesting that Apple try to dominate the market. I just want Apple to be more than a niche player.

There are lots of benefits to that and we're already seeing some of those, like increased peripherals that work with Macs and some additional software.

In the Mac world we've been living in a marketing lull which is about to end. We will soon face the full jugernaut of MS marketing which has usually been far more effective than MS's product development.

No matter how good their product is, Apple cannot afford to become complacent. Worldwide market share matters. Not being a player in emerging markets is a huge mistake.

[Tommo_UK]

What a silly article :)

All that matters is this: AAPL is growing by about 40% YoY. It looks like it can continue to do so for thenext few years, given Mac sales growth, the iPod, and future products like the iPhone and iTV.
Yet it trades with a forward PE of around 23 (if you back out the $10BN in cashit holds in reserve).
So if you simply factor in the true earnings growth potential of the company, it should be at around $120-130 now, not $80. And if you look further ahead over the next few years, AAPL stands to double in value by sometime 2008 - once the Street realise that their growth forcast of a pathetic 20% for 2007 and just 12-16% for 2008 is so low as to be almost farcical.
Your opinion of Apple, and the Mac, and its market share is irrelevant. It is earnings growth that matters, and Apple is achieving that like almost no other company in the US - and is perhaps unique amongst US tech megacaps in doing so.
Back to stocks 101 for you. Or if you're interested in following AAPL and contributing to the discussion, you'll be welcomed at:
http://www.macobserver.com/forums/viewforum.php?f=7

[ocracokewaves]

Well actually, I'm willing to sit back and see who has the "silly article."

Apple has never performed like the experts predict. It's much more volatile than many other stocks.

You might want to factor into your forecasts something to cover Steve Jobs not being around forever.

Also no product lasts forever, not even the iPod. Are you comfortable that the next product will be another iPod or will it be an Apple ///, Lisa, or Cube?

[buzzin55]

You wrote: "However, to be really honest, and I love my Macs, Apple just can't scale large enough, fast enough to really take a lot of market share from the rest of the vendors. It's been a huge boat anchor around Apple's neck forever."

Nothing is lasting forever. Everything is subject of innovation and marketing.

I disagree with your findings because you are not discussing the music business of Apple as well. It is a big mistake because it's the other side of the coin.

Apple follows the Digital-Hub-Strategy. That means they create software and gadgets around OS X and the Apple hardware (the platform) with only one target in mind: selling more Macs to the public. Everything Apple is doing in the gadget scene is to get more customers to the platform.

The first step was iTunes, iPod. The next one is iTV and 50" screens. The third one is iPhone. Each step is driving freshmen to the brand and to the computer hardware. To get the story (gadget and platform) across Apple created its own retail chain to make shure the truth is well told.

This in mind I have to make four remarks to your article:

1. You wrote: "If they're really serious about computers and not just personal digital devices ..." . I can not belive you didn't get the idea of the digital hub lifting Apple's hardware sales. Come on ... . Previously heard about the 'halo effect' ?

2. The crucial point in this strategy is the success at the retail front. Every retailer has to be aware of the rules. You have to concentrate your money in one region (the home market USA) to gain critical mass. Afterwards you can spend an aweful lot of money on advertising. This said it is clear that the Digital-Hub-Strategy (retail included) has to be set to work in the USA at first. Apples worldwide market share doesn't matter in this chapter of the story.

3. You described correctly the users addicted to their platforms. But I wonder what kind of conclusions you get out of this. Should Apple compete with HP and Dell by lowering the prices while praising OS X? You made the point yourself: This strategy wouldn't work because PC users are tied to Windows. To be successful with this kind of "strategy" Apple has to adopt Windows, drop OS X and transform itself to a SUPER-DELL. This would be a terrible waste of money, know how and engeneering skills Apple has and is proud of. If Apple can compete using its brains why should they throw money on each box they sell? A closer look to the balance sheets of Apple, HP and Dell will give you an idea what I am talking about.

4. Apple makes big money selling gadgets to the crowd in order to drive them to another platform. This is why Apple is a myth again. This is marketing at its best. Apple replaces the youngsters hearts with Apples inside. But what is going to happen when the Apple crowd has to leave the campuses and gets out in real life? Arriving in the business they have to drop OS X for Windows.

Today it is pretty unclear, if at this point of the Apple Story Big Brother Gatesware is going to drive away Apples customers again. If so, Apple has to get into the enterprise market. And this means Apple has to license OS X. But before this is going to happen, Apple is on the safe side by installing its retail chain in all major markets of the planet. And this is the chapter when we have to discuss global market share again.