Earlier this month Sanford C. Bernstein & Company, a New York-based research firm, released results of a report based on data collected from Apple User Groups. The study shows that demand is strong for new Apple products, but that supply issues could limit revenue growth.
“Our survey of 700 Mac consumer users (biased toward high-end enthusiasts) suggests strong demand for recently introduced Power Mac and PowerBook products, as well as interest in upgrading to Mac OS X,” the Bernstein report says. “The 1QCY01 break-even target appears to be achievable, but there is some risk to revenues as Apple appears to be supply restrained and several resellers cite shortages. Longer term risks include successful roll-out of new iMacs/iBooks, relative obscurity of iTunes, iDVD, and an inability to catch-up in the growing handheld market.”
Apple has predicted a “small” profit for the financial quarter being discussed. Concern over iTunes may not be an issue, as the product appears to be a massive hit. As for the new iMac line and iDVD, it’s too soon to know how well they’ll be received. As for Apple’s “inability to catch-up in the growing handheld market,” so far the company has expressed no interest in entering this area, much less trying to catch up.
Be that as it may, the Bernstein report says that recently introduced Power Mac and Book products should stimulate a “normal” upgrade cycle in the high-end user base, who have “older” equipment and weren’t motivated by Cube to upgrade due to its high price. There is even some spillover effect as the lower end iMac users are looking to move up to higher price, higher performance products, the study says.
The impact of the mix shift by the iMac owners should be positive for profit margins, but appears unlikely to raise the overall average selling prices of the systems sold as current Power Mac owners become more price sensitive, according to Bernstein. Over 40 percent of the Power Mac/book users and 30 percent of the iMac users are planning to upgrade to Mac OS X, with 20-25 percent planning to delay a computer system purchase in order to obtain a pre-loaded Mac OS X, the study says. Other “key findings” reported include:
It’s unclear if Apple’s supply problems pose a risk to targets or simply limit revenue upside.
While current product rollout is correctly aimed at the high-end users, who as a group have slightly older PCs, Apple should also derive benefit later this year with introduction of new iMacs in order to meet the demands of lower end users.
Likewise, the PowerBook should address a fundamentally different market from that of iBook, as perceived price differential is high and “ease of use,” as opposed to power or design, remains the key purchase criteria. Assuming that Apple undergoes a product refresh, iBook sales should remain strong as users have aging PCs and appear ready to upgrade.
The impact of the iTunes and iDVD remains unclear. Product awareness among the surveyed users is 70 percent, which is actually low given that we surveyed the ultimate Mac enthusiasts (User Group members). Likewise, this new software had only a modest impact on the purchase decision.
One of the conclusions of the research is that success of Apple products is tied to the company’s ability to stimulate a segment of the installed base to upgrade. Another conclusion is that Apple must sequence product rollouts and carefully target them to avoid “cross-cannibalization and high volatility.” In particular, the company must time introductions to offer products that have a “natural affinity for users” that have an aging (two-plus years) personal computer base as it did in 1998 and 1999 with low-end consumer users.
Alas, the news isn’t so good with the critically praised but under-selling Cube.
“The most recent introduction of the Cube, which was aimed at the high-end consumer failed to stimulate an upgrade,” the study concludes. “Part of the problem stemmed from the perception that the Cube was simply too expensive. As a result, the high-end, enthusiast consumer market failed to upgrade. It appears that the recently introduced Power Mac and PowerBook products addressed some of the perceived deficiencies and will be successful in stimulating replacement demand at the high-end of the user base.”
Only 1 percent of the users in the survey bought the Cube. Though most admired its design, over half said it was too expensive.
Bernstein reports that the PowerBook will appeal primarily to the “price insensitive” buyer, while Power Mac systems that span several price points have actually generated “significant interest” among iMac users.
As for Mac OS X, its release this Saturday should give Apple “additional flexibility in managing near-term earnings, and provide a modest boost to margins,” Bernstein says. At least 10 percent of the installed base are interested and able to upgrade during the next six months, the survey notes. However, there is some “potential for purchasing delays” as 52 percent of “power users” said that they would wait until OS X is pre-loaded or more apps are available before buying the new system.
The folks at Bernstein believe that new products are “supply-constrained” due to SuperDrive (the DVC/CD-RW combo) availability (or lack thereof) and production issues rather than microprocessors. CompUSA claims that demand for the new Power Macs and PowerBooks has exceeded expectations, but supply is weak and they’re pushing the SuperDrive. There also seems to be a shortage of the new iMacs, according to the Bernstein report.
“There also appear to be other distribution issues, which could adversely affect sales in the current quarter,” the report says. “Many of the Circuit City stores across the country admitted that they are currently unwilling to stock any newly introduced Apple product lines, including PowerBooks, iMacs, or Cubes with CD-RW drives, before there’s clear evidence of strong sell-through. While this partly reflects the lower-end focus of Circuit City, it may also be a result of Apple’s inventory problems from the third and fourth calendar quarters and general PC industry weakness.”
According to the Bernstein group, during the September/December quarters of 1998 and the March/June quarters of 1999, low-end users responded “strongly” to Apple’s rollout of iMacs. As a result, unit sales grew 50 to 100 percent. Those strong upgrade cycles resulted in an average iMac life of 18 to 24 months, at least 1-2 years below the point where you’d expect low-end consumers to upgrade, according to the study.
“Apple needs to be especially careful in positioning of the new iMac line, so as to avoid cannibalization of the high-end products,” the Bernstein report concludes. “The cannibalization problem is partly mitigated by Apple’s decision to first introduce the higher end Power Macs and delay the iMac rollout. The pricing issues appear to be also relevant for the iBook segment, given the wide price gap. A refresh of the iBook line is likely to be high efficacious in stimulating an upgrade cycle within the ‘aging’ installed base.”
Surprisingly (and against some of the evidence we’ve seen), the Bernstein group feels that iTunes and iDVD may not be as successful as iMovie. The company claims that an unexpected high 32 percent of the respondents to their survey were unaware of either product. And of the 32 percent who were both aware and planning to either buy a new system in the next six months or were undecided, only 18 percent said the new software titles had any influence over their upgrade decision.
“This suggests that Apple has to do significant additional market education before these tools can make a strategic impact,” Bernstein notes.