Friday, August 29, 2008

Mac Prices and Margins

Whatever one says about the competitiveness of Apple products on price and features in head-to-head lineups, the fact remains that Apple sells costlier machines. This doesn't mean they're overpriced, of course; they just don't sell low-end desktops. If you want to buy a computer for under $500, Apple offers the iPhone.

So, what's Apple to do if it wants to gain share in a market in which its products average twice the price of competitors' sales?

On the one hand, Apple can take Wil Shipley's position and say the low-end customers are lousy customers whom Apple doesn't want anyway. After all, will these low-end customers really buy applications and their updates, or subscribe to services, or buy extended warranties? Where's the money in a $500 notebook? Bleh. Maybe Apple doesn't need unit share, but profit share. Loss leaders isn't the way to lead there.

On the other hand, let's imagine Apple wants to do something about the fact that its low-end desktops -- because iMacs are powered by costlier notebook processors -- are costlier than competitors' low-end desktops, even given Apple's ownership of the operating system. Apple can't compete on price if, for engineering reasons, it can't use the same class of component parts and must spend more.

Maybe the way to get performance balanced against heat and space and so on is to better allocate processing demand to processing hardware. OpenCL stands to enable Cocoa apps to inherit creative ways to saturate GPUs that otherwise might languish with additional cycles to burn. Balancing more work on the GPU leaves the CPU available for things like scheduling user processes and managing I/O, which can help keep users feel their systems are responsive even when they're busy as all get-out.

Is there a strategy in here to decrease per-unit cost, or boost performance of desktops? I suspect there's a strategy here to sell top-end GPUs and chipsets designed to allow bigger video throughput, which would work well for nVidia and would work against Apple's margins, unless nVidia is so hungry to push this stuff into mainstream that it's willing in essence to buy placement in Apple's boxes. The mind reels.

We've seen the upside to becoming a consumer of commodity OEM parts: Apple doesn't have to re-invent the wheel, Apple can't get left behind based on its specialized chip vendor falling behind on a technical advance that's mastered by Intel, and any technology anyone else can get is subject to being readily incorporated the minute it seems a good idea. The downside to competing with commodity-component-based boxmakers is that the industry is full of highly competitive boxmakers who, in their zeal to make sales, will bid profits to the floor. It's in this atmosphere that Apple has been able to distinguish itself with software and to maintain pricing power.

How much price disparity will Apple be able to maintain and grow share? There's the rub. Sacrifice either margins or growth, and you have to worry about profits and their impact on share price multiples.

If Apple manages to make hardware capable of running its platform small and cheap (which is certain, given iPhones), Apple will face a hard question: does it want to risk cannibalizing higher-priced sales by offering bargain boxes? Historically, Apple's addressed this by crippling the bargain box. The Mini is terribly weak, though it allows one to select the monitor. The iMac can't handle much expansion in drives or RAM. If you want choice and expandability, you need the costly PowerMac. Offering capable low-end boxes could dramatically increase Apple's appeal ... but could also dramatically reduce Apple's margins.

If Apple discovers that buyers of discount boxes will buy extended warranties and software upgrades, then Apple may have the answer: it will make profit on the box once, but on the software repeatedly, and come out in the same place or better.

The bargain opportunity Apple can pitch would be quite a bit better if Apple could provide a better office productivity solution. The iWorks applications I use are cold-molasses-slow, and are candidates for substantial feature improvement. When fifty-page text-only documents cause the word processor to choke so badly you have to wait for each individual character to appear on the screen, something is amiss. Sun Microsystems offers what purports to be an Office replacement, and StarOffice 9 will purportedly fully support Macs ... Intel Macs.

The cheaper the box on which Apple can get its platform to acceptably run, the greater share Apple can chase. Because Apple owns the operating system it pre-installs, the incremental cost to produce another copy is vanishingly small. Apple's margins should continue to be better than competitors' margins at the same price points, given similar components, and simply moving down the price range may enable Apple to choke off profit from competitors who have been competitive chiefly at the low end. Apple won't be repeating the same trick it pulled in music players, but the strategy might be similar: compete all the way up and down the price spectrum, taking acceptable margin everywhere, and end up gaining unit share.

So long as Apple can convert hardware units into software and services units, Apple should do well at that game. However, Apple's never played it before, and there's no telling what Apple will find.

It would be nice to avoid becoming a mere commodity vendor, but if forced into the game Apple's advantage in owning the software platform should enable it to outcompete established competitors.

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