Apple: Will A New MacBook Add $10 Billion Per Year?

Jul. 8.13 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) has disrupted several industries over the last decade or so. Are they about to do it again?

In my previous post, Apple Developing New MacBook Ether?, I noted that web site Quartz suggested that Apple might ditch Intel (NASDAQ:INTC) chips in its MacBook Air line of laptops, in favor of its own A-series chips. I responded that I think it more likely that Apple would preserve the Air series as a low end "full-powered laptop," and create a new line of lower priced "internet appliance" type computers.

I have fancifully dubbed this hypothetical product the "MacBook Ether," which I went on to describe in the second part: The Design Case. Here I will discuss the Financial Case.

Background

Recently, Mac Daily News reported that the MacBook Air currently dominates the "thin, light laptop" product space with a whopping 56% market share.

You can see this just a bit by viewing the popularity ratings of the Mac laptops in Amazon.com (NASDAQ:AMZN) where they do very well against machines running Microsoft (NASDAQ:MSFT) Windows and Google's (NASDAQ:GOOG) new Chrome operating system. When I looked, Apple laptops - the MacBook Air (MBA) and MacBook Pro (MBP) - took 5 of the top 12 spots in spite of the fact that the other machines averaged a lot cheaper. The average price of all in the group was $847 (including the Macs), that for the Macs alone was $1442!

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Another interesting view is to limit the price to those laptops selling above $800. Here MacBooks take all first 9 of the top 12 spots! Worth noting is that there are less than 200 models of the Macs, but almost 6,000 of laptops in this price range.

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These laptops are indeed very popular. So what would be the effect of Apple entering into a lower price range? In the past, they have fiercely avoided doing this, with the late Steve Jobs saying that they would not make a product that would not provide a satisfactory user experience. But now several years have passed and technology has moved forward.

We should remember that the new MacBook Ether is a hypothetical product based on news that Apple would be going to chip foundry TSMC for the next generations of their mobile A-series System on a Chip (SoC) processors. (This is why I always italicize the name.)

Let's examine some potential financials.

Cost

In order to get a rough figure of the costs, I will define the MB Ether system, and then compare it to the iPhone 5.

- Configuration

I see the configuration as being similar to the MB Air - an 11.6 inch screen, the same keyboard, and a similar aluminum body. The I/O ports would be the same with 2 USB-3 ports, and a Thunderbolt port, plus magsafe, and headphone/microphone. The big difference is the processor, RAM, and SSD.

The processor would be what I call the A7XX system chip. This would be a new model with a ramped up graphics capabilities that would more or less match that of Intel's 4000 series Graphics Processing Unit (GPU) on the lower end Core i5 series. This provides significantly lower performance than the 5000 GPU on the i5 used in the new MB Air, but equal to the older model. In short, this would be sufficient to power not only the Ether itself, but an external monitor as well. This capability will differentiate it from the low priced Chromebooks.

Memory would be at 4 GB, and system storage would be a 32 GB SSD (solid state drive). This would place them above base Chromebook specifications, and more or less in line with the Samsung (OTC:SSNHY) Series 5 550 Chromebook (Wi-Fi) which sells for $529.

As stated in the previous article, the new MacBook Ether would run full Mac OSX, not iOS. This is why it is a MacBook.

- Price of i5 CPU

There are several large savings between the Air and the Ether, the most notable being the CPU. The base models of the MB Air have Intel Core i5 CPUs, model i5-4250U, which is listed at a cost of $342.

Of course Apple pays a lot less than this, to be sure. Let us suppose they pay $100 less. That is still $242 when an A7XX will likely be on the order of $24. That alone saves almost $320 on the cost. Add on 40% markup and it gives a saving of $452 on the sales price.

- Comparison to iPhone 5

The closest item I could find with a complete price breakdown was the iPhone 5. (Sorry, but I do not have the resources to accurately price components. I have to rely on other were available and educated guesses beyond that. In the end, the exact figures are not as important as the general point.)

I have here a table of the iPhone 5 breakdown by iHS iSuppli Research, from September 2012, and with my estimations of comparative costs for the MB Ether.

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The result is a total manufacturing cost (parts + assembly) of roughly $337. If sold at $489, then this would give a 45% gross margin, somewhat higher than the MB Air.

Strategy

Apple is a company that moves very strategically. They always have very clear goals with their products that are more than simply to maximize the short term profit. Look at the introduction of the original iPad. Before the announcement, pundits were all saying how it would need to be under $1000 to be reasonable.

Some tech writers said they were shocked that the iPad's price is so low, when they had predicted it to cost about $1,000. [source]

Yet it was announced starting at $499. Apple wanted to move aggressively into this market. So they did.

Apple has competing strategic interests in this new product. Its positive interests include:

  • Increasing market reach into lower price space,
  • Increasing capture into iOS/Mac ecosystem
  • Limit Google Android/Chrome advance
  • Increase sales/revenue

These tend to pressure for a lower price.

But Apple also has what I call reverse interests, those that pressure for a higher price:

  • Retain image of quality/exclusive products
  • Limit cannibalization of the MBA

Price

I think that the Ether will sport a price that is low enough to reach squarely into the lower price market, yet retain its premium brand appeal - along with high margins.

- Reduce cannibalization

The combination of features and price point will act to restrict cannibalization of the MB Air. The computing power and limited features will severely hamper anyone who wants to run serious programs such as photo or video editing, etc. Word processing, browsing, spreadsheets, presentations, all these will run very acceptable.

The price point of the Ether will be both far enough below the Air to differentiate it strongly, yet high enough that those who can afford the Air will make the jump to the higher price point. It seems to me that at this price, the only Air customers who will go for the new Ether will be those for whom the purchase of the Air was a real stretch in the budget. These people will be hugely outnumbered by wholly new customers. Furthermore, as time goes on, many of these new customers will experience the "halo effect." That is, once they experience the Apple ecosystem, they want to buy more products from Apple.

Outlook

The big question is how many of these new computers would they sell. I think that the Ether will draw from the $300 - $700 price point market.

It has been noted that according to NPD Group, the MB Air has 56% of the thin-and-light laptop market. Obviously, this price band includes many of the "thin-lights" referenced above, but it still excludes the Air.

Canalys analyst Pin-Chen Tang replied to my query:

…just to share with you a little historical info, the price range which you seek ($300-$699) took up slightly more than 50% of the total notebook market in Q1 2013. The share in this price range sees little fluctuations as this price range is normally what most would label as 'mainstream' price points and will take up the bulk of shipments from vendors.

Now the report from Canalys and that from IDC differ a bit on projections for annual laptop sales now through 2017, but both of their numbers hover in the roughly 200 million range for the whole period. If the price point data maintains at 50%, then the MB Ether will be drawing from around 100 million sales in its market segment.

If the Air can take 56% in its cohort, then surely the Ether should take at least 20% of its. This would give it sales of 20 million units per year. Obviously it would take a few years to reach this point, but if Apple did add these as incremental sales, this product by itself would double Apple's overall worldwide computer market share.

Conclusion

If Apple does indeed produce the MacBook Ether more or less as described, this would mark the first time that Apple has entered this price point in laptops. The analysis is most certainly speculative, but still rather reasonable. In fact, the share percentage in the price point band of $300 - $700 might turn out to be conservative.

Assuming there are layered models at higher prices, we can reasonably assume $500 as an average sales price. This times the 20 million sales would give a new revenue to Apple of $10 Billion per year. At 20% NET, this would be $2B in earnings or an additional $2.20 EPS (very roughly). At a P/E of just 10, this would add $22 per share to the stock price.

Apple certainly is able build serious new laptops on top of its ARM-based A-series CPUs that will provide a quality experience. Doing so, they will finally enter the low cost computing world, opening up a whole new market.

They have the technology. They have the overall ecosystem, they have an economic rationale. So just one question remains:

Do they have the desire to do so?

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Related Articles:

Apple Developing New MacBook Ether?

New MacBook Ether - No. 2: The Design Case

Ultraflops?.

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Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.