Apple CFO muses on iPod halo effect, Mac mini, more

Apple Chief Financial Officer Peter Oppenheimer was a featured presenter on Thursday at the Goldman Sachs Technology Investment Symposium, held at the Arizona Biltmore Resort & Spa in Phoeniz, Ariz. During the half-hour session, Oppenheimer answered questions about the iPod's "Halo" effect, the importance of the Mac mini, Apple's continued retail efforts and other issues facing the company.

The Halo Effect

Analysts and industry experts have talked much about the "halo" effect of iPod sales, or the idea that continued sales of iPods to Windows PC owners will eventually translate into increased Mac sales. Although Apple's marketshare hasn't moved significantly yet, Oppenheimer said there is anecdotal evidence to suggest that things are moving in that direction, including a steady stream (in the range of low to mid 40 percent) of first-time Mac buyers at the Apple retail stores and increased uptake of iBook and PowerBook systems by high school and college students who have already bought iPods -- an assertion supported by college student market research firm Student Monitor.

On the iPod, cell phones and satellite radio

Earlier this week Apple introduced its second-generation iPod mini, lowering prices for the 4GB model in the process, and introduced a new 30GB iPod photo. The company now sells iPod hardware in prices ranging from $99 to $449, spaced pretty evenly in $50 increments, with the exception of the 60GB iPod photo, which is $100 more than its 30GB sibling. Is Apple concerned that with pricing spaced so closely together, some models may cannibalize sales of others?

Oppenheimer said that it's simply too soon to tell, as Apple just made that announcement a few days ago. So the company is taking a wait-and-see approach to find out how consumers will respond to the refreshed product matrix.

Apple is also working with cell phone maker Motorola to develop an "iTunes mobile music player" that will work on cell phones. While Apple considers such capability to be "a great new feature" for cell phones, it's still hedging its bet on the iPod. "We think that the iPod, which is optimized to listen to music, is really the best way for people to listen to music while on the go," Oppenheimer said.

Oppenheimer also said that his company hasn't seen much customer demand for iPod integration with satellite radio services.

Oppenheimer was asked about lower iPod margins. In 2004, the company saw its margins on the popular music player drop from 27 to about 20 percent. Oppenheimer explained that this was due to increased production of the iPod mini, its own price cuts, and an increase in its production of iPods sold to Hewlett-Packard. Oppenheimer noted that margins on the iPod shuffle are "below the aggregate" of the margin for Apple's hard drive-based players. That contradicts a recent IDC report that suggested Apple's margin on the iPod shuffle is 35 to 40 percent.

Why the Mac mini?

Oppenheimer repeatedly stated when asked during his quarterly financial calls with analysts that Apple had no interest at the present time into getting into the low-end computer market. So it was a surprise to some to see Apple in January unveil the Mac mini, the first computer Apple has ever sold for US$499.

Oppenheimer said that Apple has had customer requests for a sub-$500 machine for quite some time, and that they're "encouraged" by the response to the system since its release. Oppenheimer was asked if Apple might go a step further by licensing the Mac operating system to another company. "We're happy with our company's rate of growth," he said, adding that Apple has no plans to license the operating systems. Oppenheimer also revealed that Apple's margins on the Mac mini are equivalent to its all-in-one eMac system. Both systems have margins below the corporate average, he said.

Three quarters of all desktop computers sold at retail cost below $800, according to Oppenheimer, so it's increasingly important for Apple to compete in that price range. He said that the low-priced Mac could be a good match if Apple chooses to expand its retail exposure using other national chains.

Retail opportunities

Oppenheimer said that Apple should exit its fiscal year with approximately 125 retail stores open around the world. Apple retail segment has seen 25 percent growth year over year, and Oppenheimer said that Apple is "very happy" with its sales of Macs at these stores. Accordingly, the company doesn't feel it will have overextended its reach if iPod sales at the stores suddenly drop off.

Oppenheimer said the new, smaller 4,000 square foot stores Apple is building in some locations are "working very well." The smaller stores -- about two-thirds the size of the regular retail stores -- lack a theater area, but they feature a Genius Bar and other amenities that have proven popular with Apple Store visitors. He said that customers enjoy the more intimate shopping experience.

Media Centers and digital video players

Oppenheimer articulated Apple's current philosophy when it comes to "media center" computers -- PCs designed to work in the living room as a component of a home entertainment system, recording video, playing back music and more. While Oppenheimer admitted some consumers may be interested in media center PCs and that a Mac mini might be suitable, he said that "most customers" would prefer to have a more powerful computer in their office or den and leverage wireless networking to stream content to their home entertainment system.

As a practical example, Oppenheimer pointed to AirTunes -- a feature of iTunes that works in conjunction with Apple's AirPort Express wireless networking hub. The AirPort Express features an audio jack that can connect to the home entertainment system using a mini jack or a digital optical cable. Music can then be streamed from the computer playing iTunes to the stereo.

The iPod won't be getting video capabilities any time soon if current players are any indication, said Oppenheimer. Today's crop of portable media viewers are too bulky to carry as comfortably as the iPod, yet have screens he said are too small to enjoy a movie the same way you would on a TV or laptop. "Our view is that they've failed in the marketplace," said Oppenheimer.

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