Recession Presents Challenge to Apple's Mac That Competes on Features, Not Price

MAC DEMAND CONCERNS:
For the past couple months, Wall Street’s concern du-jour for Apple (AAPL) has been Mac demand. No PC / consumer electronics firm is immune to this economic downturn, but many analysts believe there is substantial downside risk for Mac sales.

Analysts claim the contracting economy is causing changes to the complexion of industry demand that could have further negative implications for the Mac segment. Specifically, the slowdown in consumer spending will cause industry demand to contract, and within the computer industry, demand will shift away from Mac to lower-priced PCs.

This double-blow presents a considerable threat that Mac sales will come in way below expectations. Some argue the popularity of netbooks and other low-price PCs present a major challenge for Apple since Macs’ price points encompass the high-end of the spectrum. Thus, Apple lacks a low-price offering within the price range where demand has been and will continue to be strong.

Given the pullback in spending and the shift to lower-priced PCs, analysts have been calling for Apple to introduce a cheaper Mac to become more competitive. Many were expecting just that when Apple unveiled its new MacBooks last October. Missing from the event were price reductions. The legacy white plastic, low-end MacBook received a $100 price cut ($1099 -> $999), but the mid-range model’s price ($1299) was unchanged, and the high-end MacBook price increased $100 ($1499 -> $1599). This was a disappointment for those who were expecting price cuts of $200-$300, at minimum.

There was ample speculation for Apple’s Black Friday discounts. Most analysts / journalists were predicting larger than usual discounts, 15% compared with Apple’s typical discounts of 5%-10% from previous years. However, Apple offered modest discounts that were in line with its previous Black Friday promotions.

Some were disappointed, notably Shaw Wu of Kaufman Brothers: “We would have hoped that with its nearly $25 billion net cash position and very favorable component pricing environment, that Apple would have taken slightly more aggressive action on pricing given that consumers are still hurting from the tough credit environment.” Ben Reitzes of Barclay’s Capital says “[I'd] like to see Apple get more aggressive in terms of pricing.” The crux of the matter is that if Apple believed steeper discounts would significantly lift demand then it would have cut prices more aggressively.

Aside from the Mac Mini and legacy plastic MacBook (October price reduced to $999), Apple doesn’t offer a sub-$1,000 model. In September, Kathyrn Huberty at Morgan Stanley cut her price target on Apple citing slowing global PC sales. The next Monday, Huberty cut her rating on Apple, and slashed her price target to $115 from $178 based on the concern that “PC unit growth is decelerating and the remaining source of growth is increasingly in the sub-$1000 market where Apple does not play.”

According to NPD, Apple had 66% market share for the above $1000 price category, and 14% overall. In an August 2008 NPD study, Apple’s market share for the past 12 months in the above $1500 price segment was 69%, up from 41% in the August 2007 survey.

Huberty points out that revenue for the premium segment has been declining (y/y) every month since the winter, and that the sub-$1K market’s revenue has been growing. She concludes that consumer demand is shifting to the low-end, where Apple does not have a presence. In addition, Huberty claims Apple is at risk because it’s highly exposed to the premium-end, where demand has been falling. However, Mac unit sales grew nearly 40% for 2008, and its share in the premium segment almost doubled. Mac sales have been growing roughly 3x the market.

Therefore, it’s Windows PC demand that is shifting to the lower-end.

If the overall industry is trending to lower price points, how does Huberty reconcile the sub-trend of increasing Mac demand, which is mostly confined to the premium segment? If Mac demand runs counter to the premium segment’s overall trend, one can’t make the assertion that there’s a strong correlation. There is a convincing relationship between ASP and growth for the industry, but not for Macs. The PC industry is comprised almost entirely of Windows PCs, thus demand for Windows machines determines industry demand.

In short, Macs and Windows PCs are not similar product offerings. Some analysts, notably Huberty, appear to conflate the two. Macs are Windows machines, for one can install Windows OS on Mac hardware and use it just as if it were a Dell (DELL) or HP (HPQ). But, PCs such as Dell and HP can’t run Mac OS.

MAC VS WINDOWS HARDWARE:
The reason why demand has shifted towards cheaper PCs is because of substitution. A $1500 Windows PC may not be noticeably different from an $800 machine for most users. With economic fears engulfing the consumer, a less expensive PC still can do everything that a higher-end PC does, albeit with less performance.

However, many consumers are not heavy users where such a difference would be detected. Even so, for most users, less performance can be tolerated. Therefore, the question is “What more do I get from spending more? What am I sacrificing by spending less?” For many, the answer is “nothing.” In short, there isn’t much difference. The consumer isn’t going to pay more if he / she doesn’t have to, especially in a tough economy.

Windows machines increasingly compete on price, and price alone. PCs have become commodities; there is little, if any differentiation among hardware manufacturers, especially desktops. Essentially, the sole proprietary aspect of a Windows machine is the brand name; most of the hardware components are sourced from 3rd party manufacturers. Whether it’s Dell, Gateway, HP, or Sony (SNE) hardware makes little-to-no difference.

I understand why consumers aren’t paying-up for Windows PCs. How are HP, Dell, Acer, Toshiba (TOSBF.PK), etc different from each other if they all use Intel (INTC) chips, run Windows, and have many other of the same components? Consumers don’t see the value in paying a higher price for a Windows PC versus another.

For a significant portion of consumers the main purpose of owning a computer is internet / email access, as well as the ability to create documents. Any computer accommodates those needs, thus for many, price is the most relevant attribute. I believe this is the driving force behind netbook popularity. Many consumers desire a computer capable of performing basic tasks, such as email, internet, etc. Netbook CPUs are low-powered, and are not suitable for heavier usage, such as graphic intense games or spreadsheets containing complex formulas.

Consumers perceive less differentiation among Windows hardware, thus they are more likely to select whichever brand offers the best price for the desired configuration. Consumers are not necessarily shifting to cheaper PCs solely based on price. Consumers trade down because there isn’t sufficient value-added to justify paying a higher price.

Conversely, there is a stark difference between spending less for a Windows PC (or any amount) as opposed to buying the higher-priced Mac. Mac OS X and the associated user experience are significantly different from Windows. Hardware isn’t the differentiating factor; it’s the OS.

PCs are not substitutes for Macs. People who desire Macs have to spend more, but those who don’t care for Macs don’t have to pay the high prices due to the availability of less expensive Windows machines. Consumers desiring Windows OS don’t purchase Macs to exclusively run Windows since it would be a waste of money. Consumers purchase Macs for the value-added benefits supplied.

The robust growth in Mac sales demonstrates that consumers are willing to pay more for Macs. Mac’s 70% share of the premium segment suggests that Macs are essentially the only computers for which consumers are willing to pay up. Windows PCs can’t compete in the premium segment against Apple. Premium Windows PCs can’t even compete against lower-priced Windows PCs.

Since Macs run Windows (many say Windows runs best on Macs), PCs don’t provide any value-added benefits over Mac. Thus, to create value to the consumer, PC hardware firms cut prices to make their machines relatively attractive. Since the Mac offers Windows OS plus Mac OS, it provides additional benefits that command a premium price.

PC prices have come down a great deal, and continue to fall. However, Mac ASPs have been relatively flat since 2003 (~$1500). It should come as no surprise that Apple’s GM has risen from 26% to 35%, while Hewlett-Packard and Dell have seen their margins shrink. Where are these analysts getting the notion that cheap netbooks will pressure Mac sales when notebook prices have been relatively cheaper for years?

APPLE’S MAC SALES STRATEGY:
The two main reasons why consumers buy a Windows PC instead of a Mac are: 1) Unaware of added benefits 2) Aware of added benefits, but assign little value preferring a low benefit package at cheapest price, i.e. price-sensitive. For many, they choose a Windows machine because it’s cheaper. Consumers would pay more if they believed the incremental value added exceeded the incremental cost. Many are unaware / unfamiliar of the incremental value the Mac provides, thus Apple’s primary goal is to inform consumers most likely to perceive added-value.

The primary challenge facing Mac growth is educating the market about Mac benefits. Due to Apple’s tiny market share, its growth potential is massive. At the start of the decade, Apple’s share was roughly 1%-2% and will likely reach 10% by decade-end. The major catalysts to share growth have been the iPod, iPhone, and Apple’s retail store strategy, which have increased Mac curiosity and awareness. For the past couple years, Apple has been reporting that more than 50% of retail Mac sales are to new Mac users. This is no surprise since Mac sales have outpaced the industry by a factor of three (3x).

Remember that Apple’s share of the computer market has been in the low single digits throughout time, only in the last several years did Mac sales takeoff. Therefore, most haven’t used or possibly seen a Mac in the wild. With little or no Mac experience, an individual would have difficultly justifying the higher price.

In addition, consumers don’t actively seek to acquire more information on products that are relatively more expensive. One has to spend more time and effort learning about a product that costs more and ultimately may not be suitable or worth the price. Therefore, expensive, less-known products experience greater difficulty in making the short-list of a consumers consideration set for a given purchase decision.

Apple believes its Macintosh provides a superior computing experience. There is evidence supporting that claim as Apple earns the highest satisfaction ratings and gets the best reviews from industry pundits. So, it’s more about informing consumers that its product is the best than it is making its product the best.

Apple leverages the popularity of its iPod and iPhone to heighten attention for Mac. These gadgets arouse curiosity and interest about the Mac, as well as driving traffic to its stores where consumers can experience Macs first-hand.

MAC PRICING STRATEGY:
Since Macs are highly differentiated and offer features / benefits unique to its brand, Apple is afforded significant pricing power. Apple believes since it offers a premium product it should charge a premium price. Exploding demand for Macs seen in the past several years demonstrates that consumers justify paying a higher price (relative to PCs) for the extra value / benefits unique to Apple. Apple believes that there are many potential consumers that would share the same opinion if they were more knowledgeable about Macs.

Cutting prices does little to advance product knowledge for the uninformed consumer. Macs would still be pricier, and the consumer still wouldn’t know why. Thus, reducing Mac prices wouldn’t substantially boost demand. Many analysts miss this point. Amazon’s (AMZN) best selling notebooks are all within the $350 - $600 price range. If Apple cut the price on the $1299 MacBook to $1000 or even $800, it’s still more expensive than the more popular, cheaper notebooks.

The $999 legacy white plastic MacBook has been less popular at Amazon than the $1299 new aluminum MacBook. There is a bifurcation in the computer market- 1) consumers seeking lowest price 2) consumers seeking value-added. The former are buying netbooks and the latter are buying Macs. If price were as significant an issue as analysts claim, then the $999 MacBook (actually $910) wouldn’t be ranked #15 behind the $1299 MacBook ranked #7.

I believe it’s not the size of the price differential versus the amount of added benefits that is in question. To clarify, it’s not that consumers don’t believe that the higher price of Macs aren’t justified by their unique features, it’s that consumers aren’t aware or don’t care for Mac features. Those who are price-sensitive and seek bare-bones machines are a waste of Apple’s time to pursue.

Apple would have offered larger discounts (as analysts were predicting) on Macs for its Black Friday sale if it thought lower prices would materially affect demand. Unit sales wouldn’t increase very much, but dollar revenue would decline (lower ASPs) when customers are willing to pay the higher prices.

Apple still has an abundance of potential consumers willing to pay premium prices for a computer that Apple has not yet penetrated. It is these consumers that Apple is chasing, the mid to high income demographic, which are less price-sensitive and receptive to a product that offers value-added benefits. Generally, these consumers understand that “one has to pay more to get more,” and that if a product is cheap, “then it’s cheap for a reason.”

In addition, sometimes saving some bucks might result in owning a product that is unsatisfactory, or possibly worthless. In these circumstances, one often is forced to make another purchase since the original product was a dud. Thus spending the extra cash, on the margin, makes the most economical sense. In essence, by spending more, one may be actually be paying less considering the long-term costs and product life.

On the 4Q08 conference call (from Seeking Alpha), Steve Jobs remarked:

There are some customers which we choose not to serve. We don’t know how to make a $500 computer that’s not a piece of junk, and our DNA will not let us ship that. But we can continue to deliver greater and greater value to those customers that we choose to serve and there’s a lot of them. And we’ve seen great success by focusing on certain segments of the market and not trying to be everything to everybody. So I think you can expect us to stick with that winning strategy and continuing to try to add more and more value to those products in those customer bases we choose to serve.

APPLE’S CHALLENGES:
The economic turmoil presents a significant challenge for Apple. As I mentioned previously, it’s not consumers that normally would buy a Mac trading down as some analysts suggest. Consumers either want the added benefits Macs provide, or they desire the basic functionality of Windows OS PCs. If one wants a Mac, then there are no other alternatives; Macs can’t be substituted by Windows PCs opposed to the substitutability of cheaper Windows PCs for more expensive Windows PCs.

The recession won’t cause cheap Windows PCs to take sales away from Macs, instead it will slow the rate that Macs take share from PCs. The higher-end consumer that Apple targets is less sensitive to the economic cycle, yet not immune. Consumers are less receptive to learning about / trying out unfamiliar products, as their mood to spend is subdued. During periods of rising asset prices, the wealth effect reduces the threshold for capturing a consumer’s attention and subsequently closing a sale.

I eventually expect Apple to address the popularity of the netbook segment by introducing a computing device in a tablet form. I imagine it will be something similar to the iPod Touch, yet with more power and viewing area. It will offer the same functions that consumers look for in a netbook, yet the form factor will be different.

CONCLUSION:
The popularity of low-priced PCs stems from the lack of added value for pricier Windows computers, rather than the inability / unwillingness to spend more for a computer. Lower prices are driven by the intense competition among Windows PC manufacturers whereby the primary differentiating factor is price as opposed to other value-added benefits. The fact that Mac demand growth (which sell at higher entry price points) has been much higher than the industry indicates that Macs don’t compete on price, but rather features / benefits.

It’s incorrect to assert that Mac sales growth is vulnerable to netbooks or cheap PCs. The real challenge facing Apple in this rough economy is attracting new users and enticing current users to upgrade / replace. New models, the expansion of the retail store footprint, the halo effect from iPod / iPhone, and positive word of mouth are the primary driver in sustaining Apple’s Mac sales.

Disclosure: Long AAPL

Comments

[sleepy:]

It is said that in a recession, for those who can still afford to pay, there is a "flight to quality". No throw-away purchases. The motivation is more "what shold I buy bearing in mind that I may not be able to afford any change for several years" than "what should I buy to minimise my current expenditure" (to which the answer is "nothing" regardless of the price of the alternatives).

In this context, the state of flux with MS-Windows is a strong disincentive to spend money now. OS X, with only one version and open source compatibility, is a more comfortable multi-year commitment.

2008 Dec 22 03:28 AM

[jmmx:]

Pretty good article, but very repetitious, I suggest you print it out and read it through a couple of times before posting.

Regards.

2008 Dec 22 03:49 AM

[luisVs:]

macbooks are a little expensive, right now ...

2008 Dec 22 07:37 AM

[Jon T:]

Kathyrn Huberty at Morgan Stanley does no thinking at all judging by her output.

She epitomises the type of banking that got the world into this mess. Her ethos is to bet the house on a complete and utter collapse in consumer spending, and Apple products with it.

In a word, she is a nightmare.

2008 Dec 22 08:46 AM

[GSlusher:]

Re: Huberty

Besides Jon T's comments, Huberty seems to have the WORST record predicting Apple performance of any "major" analyst. Referring to her "output" in this article damages its credibility.

2008 Dec 22 09:36 AM

[uncle:]

Apple has chosen not to compete in the low end (low margin) computer space. Lowering pricing even temporarily for any reason runs the risk of brand destruction. Apple's consistency on pricing has enabled them to maintain quality and this has translated into the company's good fortunes.

Weathering this economic downturn with their business model intact should make for a stronger position when the economy turns around. 25 billion in case gives them the luxury to wait out any trouble for quite some time.

2008 Dec 22 10:13 AM

[Roger Knights:]

Here are a few ad-ideas I've had that would remind consumers of the Mac's benefits in a memorable, entertaining way. (Apple's print ads have been fairly unremarkable and ineffective):

1. A big picture of an apple with a bite out of it and a smile on its “face.”

2. A caption beneath it: "Keep the Doctor Away"

3. A small picture, off to the lower right, in black and white of a PC monitor with a non-smiley face and X's for eyes. A puzzled, goofy-looking doctor in a white coat stands alongside applying a stethoscope to its side.

================

1. A drawing of a balance scale. On the right-hand pan is a smiling, stylized (bitten) apple. On the left-hand pan, decisively outweighed, is a small “hill of beans.” (I.e., the thing that matters to bean-counters.)

2. The caption: "Weighed and Found Worthy." This implies that persons who count only beans (price) are overlooking the bottom line (which pan has the most weight).

3. (Optional): Testimonials from large businesses that have switched to the Mac (like Der Spiegel) on the basis of benefits to their bottom line, when all things are accounted for.

I think these ads are as good as the classic minimalistic Volkswagen ads from the 1960s. (E.g., “Think Small” and “Lemon.”)
================

Here's an idea for an animated cartoon that could be 30-second TV spot for the next Superbowl. The artwork would be Simpson’s-like, especially the first view from above, which would resemble, in style, aerial views of “Springfield.”

1. An isolated medieval-style circular tower, surrounded by a small, shallow moat. A small white pennant with four color-quadrants (i.e., the Windows icon-flag) flutters from its top. It has a window about a dozen feet high, with a 2-by-4-type crossbar holding it shut from the outside.

2. A medieval-style princess (in a pointed hat with a gauzy trailer) sits in her room, which is dark and gloomy, with cobwebs and roaches (bugs) on the floor. She is squinting at the window, which is heavily coated with grime, and trying to paint the trees outside.

3. She spies a mammoth approaching the moat, lowering his trunk into it, and drinking. She quickly paints “Wash Me” on the back of her canvas and places it in the window.

4. The elephant notices the sign and gives the window a mighty squirt, cleaning it. The princess removes the sign and gives him a smile and/or a wave and points to the crossbar. The elephant, with the “fingertips” of his trunk, then lifts out the crossbar and drops it. The princess swings open the window and stretches out her arms. The elephant wraps his trunk around her waist and lifts her out through the window and onto the back of his neck. He then returns to drinking from the moat.

5. A fire-breathing dragon hops up, making ducking and lunging motions and grinning wolfishly. A squirt from the elephant and the dragon’s flames are extinguished; he stands back, thoroughly drenched. (A hissing sound is heard as his flames go out.) The elephant trumpets in triumph and walks off.

6. A series of snippets show the elephant crossing the moat, covering lots of landscape (putting the tower miles in the distance), stepping over a fence, and stopping in an idyllic orchard.

7. The princess grabs a rope ladder and lifts herself onto the porch of a charming, hobbit-style tree-house in one of the trees. Through a picture window, its inside can be seen to be attractive. She looks around the charming landscape while the camera’s eye tracks what she sees.

8. The princess reaches out to an apple hanging from the tree, takes a bite, removes it from her mouth, and smiles.

9. The camera zooms in on the bitten-out apple, which morphs into the striped Apple logo.

10. The words “The Grass IS Greener” (in Apple-stripes) fade in, accompanied by the sounds of an elephant squirting, an angry hiss, and an elephant trumpeting.

11. The apple morphs into a smiley face fades in and winks, then looks up and off to the side while whistling with an “innocent” look that says, “Mind you, I’ve said nothing.” (There’s a standard emoticon (on some sites) that captures this look beautifully.)

2008 Dec 22 11:42 AM

[User 324271:]

How the hell is this at all related to this article?


On Dec 22 11:42 AM Roger Knights wrote:

> Here are a few ad-ideas I've had that would remind consumers of the
> Mac's benefits in a memorable, entertaining way. (Apple's print ads
> have been fairly unremarkable and ineffective):
>
> 1. A big picture of an apple with a bite out of it and a smile on
> its “face.”
>
> 2. A caption beneath it: "Keep the Doctor Away"
>
> 3. A small picture, off to the lower right, in black and white of
> a PC monitor with a non-smiley face and X's for eyes. A puzzled,
> goofy-looking doctor in a white coat stands alongside applying a
> stethoscope to its side.
>
> ================
>
> 1. A drawing of a balance scale. On the right-hand pan is a smiling,
> stylized (bitten) apple. On the left-hand pan, decisively outweighed,
> is a small “hill of beans.” (I.e., the thing that matters to bean-counters.)
>
>
> 2. The caption: "Weighed and Found Worthy." This implies that persons
> who count only beans (price) are overlooking the bottom line (which
> pan has the most weight).
>
> 3. (Optional): Testimonials from large businesses that have switched
> to the Mac (like Der Spiegel) on the basis of benefits to their bottom
> line, when all things are accounted for.
>
> I think these ads are as good as the classic minimalistic Volkswagen
> ads from the 1960s. (E.g., “Think Small” and “Lemon.”)
> ================
>
> Here's an idea for an animated cartoon that could be 30-second TV
> spot for the next Superbowl. The artwork would be Simpson’s-like,
> especially the first view from above, which would resemble, in style,
> aerial views of “Springfield.”
>
> 1. An isolated medieval-style circular tower, surrounded by a small,
> shallow moat. A small white pennant with four color-quadrants (i.e.,
> the Windows icon-flag) flutters from its top. It has a window about
> a dozen feet high, with a 2-by-4-type crossbar holding it shut from
> the outside.
>
> 2. A medieval-style princess (in a pointed hat with a gauzy trailer)
> sits in her room, which is dark and gloomy, with cobwebs and roaches
> (bugs) on the floor. She is squinting at the window, which is heavily
> coated with grime, and trying to paint the trees outside.
>
> 3. She spies a mammoth approaching the moat, lowering his trunk into
> it, and drinking. She quickly paints “Wash Me” on the back of her
> canvas and places it in the window.
>
> 4. The elephant notices the sign and gives the window a mighty squirt,
> cleaning it. The princess removes the sign and gives him a smile
> and/or a wave and points to the crossbar. The elephant, with the
> “fingertips” of his trunk, then lifts out the crossbar and drops
> it. The princess swings open the window and stretches out her arms.
> The elephant wraps his trunk around her waist and lifts her out through
> the window and onto the back of his neck. He then returns to drinking
> from the moat.
>
> 5. A fire-breathing dragon hops up, making ducking and lunging motions
> and grinning wolfishly. A squirt from the elephant and the dragon’s
> flames are extinguished; he stands back, thoroughly drenched. (A
> hissing sound is heard as his flames go out.) The elephant trumpets
> in triumph and walks off.
>
> 6. A series of snippets show the elephant crossing the moat, covering
> lots of landscape (putting the tower miles in the distance), stepping
> over a fence, and stopping in an idyllic orchard.
>
> 7. The princess grabs a rope ladder and lifts herself onto the porch
> of a charming, hobbit-style tree-house in one of the trees. Through
> a picture window, its inside can be seen to be attractive. She looks
> around the charming landscape while the camera’s eye tracks what
> she sees.
>
> 8. The princess reaches out to an apple hanging from the tree, takes
> a bite, removes it from her mouth, and smiles.
>
> 9. The camera zooms in on the bitten-out apple, which morphs into
> the striped Apple logo.
>
> 10. The words “The Grass IS Greener” (in Apple-stripes) fade in,
> accompanied by the sounds of an elephant squirting, an angry hiss,
> and an elephant trumpeting.
>
> 11. The apple morphs into a smiley face fades in and winks, then
> looks up and off to the side while whistling with an “innocent” look
> that says, “Mind you, I’ve said nothing.” (There’s a standard emoticon
> (on some sites) that captures this look beautifully.)

2008 Dec 22 01:07 PM

[Roger Knights:]

"How the hell is this at all related to this article?"

These suggested ads would educate consumers about the Mac's benefits. I posted them in response to the author's statement, "The primary challenge facing Mac growth is educating the market about Mac benefits" I alluded to that statement in my opening sentence, "Here are a few ad-ideas I've had that would remind consumers of the Mac's benefits in a memorable, entertaining way."

2008 Dec 22 01:19 PM

[Infinite loop:]

Then please explain to me how Apple has grown 30% every Q this year, all the while we have been in a recession?

Those analysts can't seem to explain that one.

Apple will be perfectly fine. They cater to a higher income segment of the market. Always have and always will. I have no problems running out today and buying a Macbook Pro if I so choose. And the last time I checked 94% of the public that chooses to have a job does so.

2008 Dec 22 01:29 PM

[maniac:]

I do not know why people still continue to force Apple business to model itself along the rest of the PC world.
Apple has never gotten itself into the cheap PC space because it does not need to. It is doing well competing against Dell and HP in the high end category where it is gaining market share. Why should it move into that low cost arena which is going to be a money loosing proposition because Apple genius bar will loose out trying to service all these low cost units. The point for Apple is not to go after market share and fight over the crumbs, but to make sure that it keeps the quality of its brand intact. Make sure that its operating system is kept at the cutting edge and is perfectly integrated with its hardware. People who cares about quality will pay for it. Just imagine BMW trying to go after market share by putting out cheap beamers. It will be the surest way to trash its brand name altogether. And the Apple brand should not be trifled with like this. Besides, Apple has cheaper and very nice computing devices that are selling very well. They are called the iPod Touch and they can do quite a lot of nifty tricks, including handwriting Chinese characters input of all things!!!!!!!! It also has a more expensive version of this pocket size computing wonder and it is called the iPhone. Nah, Apple is doing very well and must not move in the direction you are advocating.

2008 Dec 22 01:34 PM

[FuturamaFan:]

@ Roger Knights

Normally I don't try and flame and I leave people alone but I just had to say something...

Now I know why you are not in marketing. Such contrived, lengthy adds never do look or seem to work correctly and are confusing. And that's considering the fact that measuring the success of ANY type of add is dubious at best.

Besides what's up with your fixation on smiley faces and emphasizing the bite out of the Apple? Do you work for Wal-mart?

As a designer just visualizing the amount of 'stuff' your add ideas invoke is just too much. Ugh...stick to your day job. Apple's got it right.

2008 Dec 22 02:48 PM

[brewer:]

Huberty=Hubris+Bull

2008 Dec 22 04:27 PM

[Roger Knights:]

@FuturamaFan
You wrote:

“measuring the success of ANY type of add is dubious at best.”

It’s not an exact science, but successful ads are generally memorable, and the memorability of an ad is routinely tested by surveying a sample of readers of a magazine in which the ad ran after a month or two and asking them what product-related ads they recall. The VW bug ads scored high on those surveys—and, not coincidentally, they were remarkably effective as well. Such surveys can also attempt to get a feel for how persuasive, or at least intriguing, readers considered the ads to be.

“Apple's got it right.”

Not really. The Mac has had a couple of grade-A ads (1984 and “I’m a Mac”), neither of them print-related. Its print ads have been elegant and tasteful, but not memorable “grabbers” that “move product.” They’re grade-B or B+, which isn’t good enough (not for Apple, anyway). For instance, the most recent print ad I saw, for the MacBook Air, had a picture of the product and the caption, “Thinnovation.” That’s not bad, but it’s not great either.

What Apple needs from its fans, more than pats on the back, are kicks in the can—i.e., constructive criticism. Opposition is true friendship. Apple’s Mac print ads are too safe—they aren’t daring enough.

“Such contrived, lengthy adds never do look or seem to work correctly and are confusing. … As a designer just visualizing the amount of 'stuff' your add ideas invoke is just too much.”

On the contrary, the two print ads I described (“Keep the Doctor Away” and “Weighed and Found Worthy”) are the opposite of “lengthy”: they both consist of only four words, an iconic apple, and a simple image (a doctor diagnosing a sick patient and a balance scale, respectively). Nor are they “contrived” in the sense of being labored. (“Contrived” describes a neologism like “Thinnovation” instead.) I like to think they are slick. They give the reader a little puzzle to solve (the way “Think Small” and “Lemon” did) and reward him/her with the “click” of comprehension when he/she “gets it.” By involving the reader in decoding the meaning of the message, it makes more of an impression on him—especially if the puzzle is apt and sophisticated. My inventive wordplay, “Weighed and Found Worthy” (against a pile of beans) is a puzzle of that nature: it implies that a Mac’s value justifies its $ (bean) premium. The other ad’s message, “Keep the Doctor Away,” insinuates that a Mac will reduce the need for tech support and virus-removal. Any reader with a room-temperature IQ should be able to “get” those insinuations, and will feel pleased about so doing. (The text at the bottom of the page will make those points explicitly, for those who are slow on the uptake.)

My print-ad ideas are handicapped because I’ve presented them in words, rather than as a visual prototype. If I could sketch them up and show them as first drafts, their clarity and impact (or lack of it) would be apparent at once.

“Lengthiness” applies only to the Princess-and-the-Mammo... ad. But it needs lots of words because it’s going to occupy 30 seconds of TV time. A full description of any ad of that length must be about a page long, like mine. (Even ads in the “I’m a Mac” series, which are just about pure text, must have lengthy scripts describing the motions and expressions of the actors, the “stage set” or backdrop that’s used, etc.) I grant that the Princess ad itself is chock full of action and elaborate, exotic settings—but they aren’t bugs but features. Their richness will keep the viewer intrigued and involved, because they will be unlike any ordinary commercial. He will wonder, as did the viewer of the 1984 ad, “What’s this all about? Who’s the sponsor?” The punchline will be delivered when the apple the princess bites morphs into Apple’s icon and the words “The Grass IS Greener” appear. Then the viewer will enjoy a delightful cascade of realizations about the meaning of the window, the fence, the dragon, the moat, the bugs, etc.

“Such contrived, lengthy adds never do look or seem to work correctly and are confusing.”

Kindly describe a couple of examples of unsuccessful ads you have in mind and point out how they resemble the ads I’ve suggested.

“Besides what's up with your fixation on smiley faces …?”

I like them because they provide a good-humored feel to the ad and give the audience a hint that the ad is “all in fun,” or anyway is “making a funny.” But they aren’t essential—they can be omitted.

“and emphasizing the bite out of the Apple?”

That’s necessary to identify the apple as being Apple’s icon. In the Princess ad, the bite is the transition from the world of make-believe to the real world: it’s a visual punchline.

“Now I know why you are not in marketing. … Do you work for Wal-mart? … As a designer … Ugh...stick to your day job.”

You sound very superior. But are you really? Let’s see YOUR “adds” so we can make a judgment. (Give us a few links—images can’t be posted here).

2008 Dec 22 09:50 PM

[Turley Muller:]

Thanks man, I am aware, brevity is my nemesis. I get a lot of ideas swirling in my head and I sometimes don't realize I'm running over the same ground. PED at Fortune told me the same thing.

I think my solution is to break my posts up into single ideas instead of trying to tackle more in one sitting, that's where I lose focus. Plus, a few people that really enjoy my work have voiced to me that they wish I write more often. So, I hope to post more of less.

Jmmx, your idea of printing it out first is valuable. I noticed already that I lose sight trying to edit "on screen" due to the loss of vision as I scroll down through the text. Great suggestion, thanks, I hope to improve. I know you read most of my work, I appreciate your attention.




On Dec 22 03:49 AM jmmx wrote:

> Pretty good article, but very repetitious, I suggest you print it
> out and read it through a couple of times before posting.
>
> Regards.

2008 Dec 23 01:04 AM

[Turley Muller:]

Yeah how is that Infinite loop? Mac unit growth in FY08 by qtr- 44%, 51%, 41%, 21%. That's exactly my gripe about Huberty's analysis- how does she reconcile that? You ask the same question I ask. That's why I deemed it worthy to opine about.

Windows PCs are a commodity. I just bought one for my housekeeper/PA since he has never owned a computer. Went to BBY and asked for cheapest notebook they had. That will be sufficient for him since he has no computer experience. In a year or so, and it's run its course, who cares, it only cost $350.

I have a G4 from 2001 that still runs perfectly. I would still use it if I hadn't just bought a new Mac Pro to run XP. (since it wasn't Intel), During 2000-2006: I have gone through 6 Windows PCs (3 Desk/3 note) - Compaq, Toshiba, Gateway, Dell, Gateway, Dell.

In 1986 (?) I bought a Apple IIc, Mac LC in' 91, Power Mac 9xxx 96 and G4 '01. Mac Pro '08.

Both my brothers just bought Macs, their first Apple. Why? One wanted one, and the other had his Windows PC fail for the 3rd time. Both have been through PCs like water. They realize the value, as other Mac owners, in Apple products. There are plenty of those that are unaware that could easily be brought into the fold. Look at how many have in the past year.

I don't think that Mac hardware is necessarily so much better (desktop comparison), but it's the OS. I think about the freeze-ups on my PCs where the CPUs get stuck in a look and race at 100%, that's not good, especially when I have been at the office all day and the screen saver gets hung, and the CPUs have been over clocking all day. It's like red-lining a car. Therefore, I;m not surprised when the hard drive or mother board fails.

I have never had a freeze-up on my mac. Safari may have gotten hung once or twice, where I could just right-click quit, but the only program that's ever crashed has been excel 2008. Fitting. Just fitting. And no I don't want to send an error report to Steve Ballmer.

I know Bill Gates is too busy trying to give away all his money before he dies, and that has led to the downfall of MSFT. And I know he has items more important that to get back involved with MSFT, but I just wish he would get Ballmer replaced. It's depressing to think of the downfall of Microsoft.

XP is an awesome product, by MSFT standards, finally it's pretty stable, and what does SB do? pull it. I paid $350 or so early this year for my Mac, and they pulled it this summer. Folks I know that have bought Macs recently would have ponied up to install XP, but due to it's scarcity, they balked at the thought of Vista. "are you kidding me, Vista? that's why I bought a Mac"

Anecdotal evidence I have collected suggests a portion of netbook popularity is due to XP. If a CPU is less than 1.6GHz ( I think) then it's eligible for XP. Everything else comes with Vista. From what I understand, one can pay Dell $150 extra for a "downgrade" for XP pre-installed. Why did MSFT abandon its best product for its worst? I don't know that Vista is that bad, but the public thinks its the anti-christ. BBY manager told me that rednecks straight from the trailer park come in ranting about NO VISTA, and he laughs because these people wouldn't know anyway. My point- public perception of Vista is so out of hand that it has helped Mac and considerably, significantly boosted sales of low powered PCs that come with XP.


On Dec 22 01:29 PM Infinite loop wrote:

> Then please explain to me how Apple has grown 30% every Q this year,
> all the while we have been in a recession?
>
> Those analysts can't seem to explain that one.
>
> Apple will be perfectly fine. They cater to a higher income segment
> of the market. Always have and always will. I have no problems running
> out today and buying a Macbook Pro if I so choose. And the last time
> I checked 94% of the public that chooses to have a job does so.

2008 Dec 23 01:52 AM

[yu:]

The Digital Life theme was the most expressive way to contrast Macs from the rest. The Genius Bar and in store One to One experience allows the entire retail store to bring a Mac to life.

The best place to reduce the cost is the Apple Software not the hardware -the 10% + tax Apple places on 3rd Party Software providers is another option to reduce the life cycle cost of the Mac. Each version of the OSX cost $100 with tax. With Snow Leopard (10.6) this will have cost $600 for each OSX since the introduction of TEN.

The limitation of offering only 3 years for the extended warranty is not consistent with the BMW comparison. A 5 year plan including all OS upgrades would highlight the TCO advantage of the Mac platform. The new unibody frame is being marketed as a long life advantage why couple this with a 36 month warranty and typically 3 OS upgrades.
The old American Car industry tried planned or built-in obsolescence now Apple has mirrored this strategy.

A Mac which can last for 5 years is in fact the best way for the PC user
to get a taste of the Apple. A family who can count on passing a Mac
to a younger child or family member is in fact the best way to capture the PC mindshare. No one is going to offer a Mac to a pre teen at the current prices. The cost of a the proposed extra 24 months is a reasonable premium to capture a new user with this strategy.

A transferrable warranty will highlight the TCO (total cost of ownership)
just as the BMW offers with a certified used car. Perhaps Apple will allow a "family plan" warranty similar to mobile me or the OSX family packs.

The real premium Apple extracts is the combination of the high profit margin options to maximize the performance of the Mac. A price adjustment for upgrading to the faster CPU or disk drive would allow the customer to see the value advantage for maximizing the performance
upfront and keeping the Mac in use for the 5 year strategy. Apple should allow for a yearly subscription for the warranty vs collecting the 3 year cost upfront. The Mobile Me subscription could be packaged with
this warranty option and billed together. Apple has this billing plan already. If a customer wants to replace a Mac before 3 years they do not have the hidden cost of unused warranty coverage.

This 5 year TCO strategy is used by most technology vendors to justify
value premiums. The halo effect and present iPod Apple customer actually pass their old iPods to others when a new one is bought or received as a gift. To expand to the Macs really creates the Apple Difference to the marketplace that the PC machines can't match.

2008 Dec 25 11:36 AM

[User 353242:]

While I agree with most posters than Apple has "quality" as one of its major selling points and has been (happily) able to maintain higher profit margins as a result, I think Apple could still be successful entering a lower price tier market. In fact, I think Apple will need to be serious about such a market in the near future. I say this for two reasons.

1) With Apple already commanding nearly 70% market share in the $1K and over market, eventually it will hit a market share ceiling (even if it is that improbable 100% ceiling.)

2) This "economic downturn" is not a short term phenomenon. The job sector which has been slow to be hit by the downturn is Apple's sector, but it is not ultimately immune. The shrinking of "middle class America" is not a good thing for Apple's long term prospects, presuming that Apple wishes to stay in the "BMW" level of the computer market.

I'm not suggesting that Apple go head-to-head with the commoditized PCs, but rather carve itself a nice growth niche in the "less than $1K but more than $300" market. The Mac Mini is Apple's one (desktop) offering in this space. It was a nice machine at its introduction, but has been sorely neglected over the years. The CPU and memory options are woefully inadequate (particularly with Snow Leopard on the horizon). For anyone paying attention to components available in the marketplace (CPU, memory, video card), the Mac Mini is a very poor deal indeed. I think its current sales could be much higher if Apple would not neglect it so.

Beyond that, the "desktop computer" has a declining share of the overall consumer computer market. People (understandably) want portable computing. So even an updated Mini will be facing some declines. I think Apple could make a new market for itself if it were to offer a decently equipped 10-inch "Netbook Plus" [MacBook Nano?] in the $600-650 range. (Yes, this would be quite a premium to pay vs. the Windows machines, which often start at $300. But I think people would pay for the extra quality of OS X.) Apple could leave off the software free with other Macs (e.g. iLife), further emphasizing that the machine is really targeted at internet surfing and communications (email and IM). (The suites should still be offered as custom installs.)

Such an offering would open a new market for Apple... without eroding sales of Apple's more expensive products. (That's just my opinion, of course.) And it would help out one other little-known Apple customer base: The Just-Say-No-To-MS market.

As the one technical person among my relatives and friends, I am called too often for tech support. After years of unsuccessful attempts to convince my family and friends to abandon MS and switch to Macs (always rebuffed by the high initial cost of Apple machines), I finally succeeded... by purchasing Macs as gifts. Alas, at a minimum $1k per gift, the number of such gifts I can offer is limited. I could do a lot more giving (and a lot more expanding of Apple's market share) if Apple would build a Netbook Plus. :-)

$.02

Feb 08 04:14 PM