By now, everyone knows about Apple’s frighteningly negative first quarter earnings. In short, the company was forced to sell products practically at a loss to clear inventories left on the shelves from the fourth quarter.
Investors were fully prepared for Apple to lose money, but their real concern prior to the announcement was that the company couldn’t pare its bloated inventory to normal levels in just one quarter, thereby undermining earnings for the current quarter. Fortunately, Apple reported that inventories have been reduced to near-normal levels, albeit at a high price. “We took our medicine last quarter and brought our channel inventories back down to about five and a half weeks,” said CEO Steve Jobs in a prepared statement announcing the Q1 2001 earnings.
Apple’s price-slashing, combined with an advertising blitz, worked. The company cleared out more than 300,000 Macs. It can now resume business as usual as it anticipates a small profit, despite slackening demand and a decelerating economy.
Even in the face of the worst single-quarter sales drop-off in Apple’s history, investors cheered the reduced inventory by pushing the stock price up 16 percent after the announcement. Clearly, Wall Street believes (for the moment) the worst is behind us, but make no mistake — the skies ahead are hardly blue.
Business as usual?
Apple’s problems are by no means all its own. The entire PC industry has slammed into a brick wall. “PC shipments in the U.S. in 2000’s fourth quarter grew by just 6.4 percent, or 13.2 million units,” noted the
Wall Street Journal, “the worst showing since Gartner started keeping quarterly records in 1993.”
Worldwide PC shipments — once expected to grow by 17 percent in the fourth quarter — upset industry plans by climbing only 10.1 percent or 37.9 million units.
Even more disconcerting is the volatility in PC purchasing trends, which exhibit a lack of brand-name loyalty. While Dell’s sales climbed 37 percent in the fourth quarter and Hewlett-Packard gained 20 percent, Compaq lost 8.7 percent and Gateway gave back 7.1 percent. Apple’s unit sales during the period were off a whopping 50 percent in the U.S. and 40 percent worldwide.
Normally, PC vendors’ sales figures move together in a more-synchronized fashion. Low brand-name loyalty has historically characterized industries whose bread-and-butter products have degenerated into boring, low-margin commodities far from the cutting edge of consumer interest.
The slowest PC markets seem to be the ones that are the most mature. U.S. PC shipments gained a measly 0.3 percent year-over-year growth in the fourth quarter and were down 3.6 percent from the third, according to
IDC, a market research firm. Apple actually saw a slight unit sales gain in Europe, the Middle East and Africa.
The industry is shocked by the nosedive in November and December sales. As recently as October, analysts were expecting about 14 percent yearly growth in U.S. sales. With the steepest descent in unit sales coming during the traditionally strong holiday season, one must wonder if the PC market is phase-shifting away from the steady double-digit growth it maintained for decades.
Business as usual will no longer cut it. Something fundamental has changed in the PC biz.
A brave new century
The PC industry is experiencing its biggest crisis since its dawn in the early 1980s. At Macworld, Jobs concisely described the history of the PC era as two distinct waves. The “First PC Golden Age,” from 1980 to 1995, was driven by increased productivity for those who used the new desktop publishing and accounting killer apps.
In 1995, just as the first PC boom had saturated its market, the World Wide Web’s appeal proved to be the ultimate consumer pied piper, pushing market saturation to the point where 53 percent of all U.S. homes have at least one PC today. Jobs called this the “Second PC Golden Age.”
In 1999, Internet-driven PC sales peaked, accentuated by Y2K upgrade buying and a tech-stock bubble that made many feel wealthier than they really were. Today, that bubble has popped. Y2K was a non-event and the initial rush of getting online is long gone.
After five years of easy sales, the PC market is saturated, particularly in Europe and the U.S. Worse, the PC industry allowed itself to stagnate, gradually lulled into a false sense of security by continual high demand and often constrained supply.
During this lull, the industry developed no new killer app or paradigm-shifting innovation to drive market penetration into the remaining 47 percent of U.S. households that are still holding out.
PC manufacturers have devolved into mere parts assembly lines, prettified by glossy marketing schemes and totally dependent on Moore’s law as the driving force behind upgrade sales. Meanwhile, industry linchpin Microsoft is behaving like a classic monopoly, offering only “innovations” that serve to separate Wintel users from their cash ever more efficiently, such as its new ”
product activation ” technology.
“Perhaps weaker-than-expected year-end sales of computers and consumer devices alike aren’t just symptoms of ‘consumer fatigue’ but evidence of a more profound disappointment with technological evolution,” ventures Andreas Pfeiffer, an industry analyst, in a recent
ZDNet article. “If so, technology providers may have to rethink some fundamental tenets, since simply coming out with a cheaper, more-powerful version may no longer be enough.”
Apple, perhaps spurred by the collapse of the AIM collaboration, was the first to introduce design as a factor in PC sales — tacit recognition that Moore’s Law wouldn’t continue to provide compelling reasons to upgrade once CPU speeds got past a certain point.
But insanely great design alone isn’t enough to save Apple from the implosion in consumer demand. A complex combination of strategies is required. At Macworld, Apple revealed its theme for 2001: the Mac as “the hub of your digital lifestyle.” It’s an acknowledgement that consumers’ infatuation has shifted from the PC to the emerging plethora of handheld devices.
Forever more, the PC industry is condemned to share consumers’ discretionary dollars with an increasingly long list of iGadgets. Some industry experts predict digital device sales will blossom into a $230 billion business by 2006, eroding PC dominance. PDA sales are booming even as PC sales slump, proving lack of demand for PCs isn’t an economic issue.
Interestingly, Steve Jobs, alone among industry leaders, sees the explosive growth in iGadget sales as a revitalizing opportunity for the tired PC market. He even hailed it as the dawn of the “Third Golden Age of PCs.” Jobs seems to believe that must-have digital devices will serve as the next killer app, pushing PC market penetration into those 47 percent of households who have yet to join the Information age.
From Job’s perspective, trumpeting the Mac as the most user friendly network/service hub for third party camcorders, DVD and MP3 players makes perfect sense — it keeps Apple in the game and, perhaps, buys some time while Apple readies its own sub-notebook device.
But does it answer the more immediate question of how Apple can once again grow unit sales and, above all, bleed market share from the Wintel world?
Must grow market share
Kevin Knox, an industry analyst at the
Gartner Group said that Apple’s sour numbers last quarter were due to, “selling into their installed base and not expanding it in any way. When you do that, you’re going to see numbers like this.”
For Apple to guarantee its long-term existence, it must continue to expand its less than 3 percent global market share by recruiting those who don’t have PCs, by convincing Wintel users to convert and by creating a serious presence in geographic markets not yet saturated.
By now, consumers who still haven’t bought PCs must have some misgivings about computers, maybe because they’ve trudged through the Wintel morass already at their workplace. Theoretically, Apple’s reputation for user friendliness should give the company an advantage in courting these souls.
However, newbies typically know little about computers, and given Apple’s market visibility, the vast majority are guided directly to Wintel solutions with no consideration of the Mac alternative.
Those without a PC may also represent the most price-conscious group of consumers, so if Apple wants a piece of that pie it will have to price computers “for the rest of us.” But the economics of scale make that strategy less than desirable. There will always be Wintel boxes cheaper than anything Apple can produce because more of them are manufactured.
Harvesting converts from the ranks of savvy Wintel users might actually be easier for Apple than scrounging for digital age hold-outs. This tactic also requires Cupertino to reinvent its marketing strategies at all levels.
Savvy Windows users are ripe for conversion — they are the class of user best able to distinguish and appreciate the subtle interface, design and system issues that make the Mac platform the BMW of the PC world.
Apple can win converts by introducing yet more stunning products like the Titanium PowerBook, that crush the competition with elegant design and unique must-have features.
Furthermore, with the release of OS X in late March, most of the obstacles holding Windows 2000 and Linux users from migrating to the Mac will be eliminated. Features like server-grade stability, multi-tasking, multiple-processor support, and open source code make OS X Apple’s first industrial strength operating system.
Turn up the volume
Delivering killer new products is only the first half of the game. It’s the second half — selling the goods — that all too often stumps Apple.
The problem is that while Apple’s ingenious engineers appear to effortlessly create drop-dead gorgeous hardware and innovative apps, the top brass then seems to sit back and smugly imagine that’s enough. They assume that everyone will see for themselves how incredible Apple’s achievements are, and that the products will simply sell themselves.
It’s characteristic of the hubris of an engineering mindset to assume that obviously superior products need not suffer the indignity of common mass marketing techniques to have broad appeal.
Dell — master marketer, mediocre engineering — has a new TV commercial explaining the concept of the wireless classroom as if it invented the idea!
Apple’s biggest strategic error of the last year was not implementing a ferocious, even controversial, marketing campaign designed to expose in detail the tangible benefits of migrating to the Mac platform.
Wes George has been actively trading stocks and options online–on a Mac–since 1996. But his fascination with financial markets extends back to his childhood, whiled away on the idyllic isle of Java, where he learned the rules of supply and demand from shrewd fishmongers. He is currently working on his first novel.