Seeking Alpha
Long only, tech, chipmakers, software
Profile| Send Message|
( followers)  

Summary

  • Apple's Macintosh computer line has surprising growth potential, despite declines in the overall PC market.
  • This potential derives from missteps in Microsoft's attempt to converge mobile and PC operating systems in Windows 8, as well as Apple's more successful and gradual approach.
  • A low cost MacBook Air, based on Intel's Bay Trail, affords an opportunity for significant growth in Apple's Mac revenue and PC market share.

Apple's (NASDAQ:AAPL) Mac OS X hasn't received much attention from the tech/business media, as the iPhone has become Apple's most important revenue source. But OS X has been quietly getting better, year after year, in a gradual, evolutionary way. Unlike Microsoft's (NASDAQ:MSFT) Windows 8, Apple has avoided a disruptive convergence of PC and Tablet. In doing so, Apple has achieved something remarkable with OS X: it has gradually gained market share, and that market strength promises even greater gains in the future.

Two Paths to Convergence

In comparing the gradual evolution of Mac OS X with the great leap of faith that is Windows 8, it has become all too common to pick on Microsoft's attempt to converge the tablet and the PC.

Anything can be forced to converge. . . you can converge a toaster and a refrigerator, but you know, those things are probably not going to be pleasing to the user. - Tim Cook

In fact, Apple began the process of converging its mobile and Mac operating systems with the "Back to the Mac" themed preview of OS X Lion in October 2010. Lion incorporated many of the features of iOS, including full screen apps, an app launcher similar to the iOS Home screen, multi-touch gestures through a track pad, support for a Mac App Store, and an Internet-based Mac OS X upgrade to Lion. Platform convergence has enhanced the "halo effect" of iOS on Mac OS X, and helped new Mac OS X users to get comfortable with the operating system.

At the time, rumors were flying about a touch-screen enabled Mac, but during the OS X Lion preview, Jobs drew the line at providing a touch screen version of Mac OS X:

We've done tons of user testing on this, and it turns out it doesn't work. Touch surfaces don't want to be vertical.

It gives a great demo but after a short period of time, you start to fatigue and after an extended period of time, your arm wants to fall off. It doesn't work, it's ergonomically terrible.

When I've brought up the concept of a touch screen Mac, I've received comments that repeat Jobs' statement almost word-for-word, but the ergonomics issue is really a red herring. Touch screens on Windows 8.x laptops or even desktops don't have to be used vertically, and they don't have to be used exclusively. Win8 always allows the option of a track pad or mouse.

While avoiding touch screens, Apple has continued on its own path of mobile/desktop convergence, incorporating features of iOS while maintaining the distinct identities of the platforms. The latest OS X version, Yosemite, continues this. Yosemite has been visually overhauled to match the look and feel of iOS 7 and provide continuity of activities between iOS and Mac OS, as I discussed in my post-WWDC article.

In contrast to Apple's gradualism, Microsoft's approach has been very brute force: glue a desktop and mobile operating system together and force the user to alternate between them. Apple's approach has been more subtle and seamless and far better executed. This is where I fault Microsoft. I buy the concept of ubiquitous touch screens for computing devices of all types. In this regard, Microsoft has correctly foreseen the future, but that future is still not quite within its grasp.

Apple will put off this future for as long as possible, deriding Microsoft's clumsy form of convergence, but its motives are primarily economic. Touch screens would add hardware cost, while providing marginal benefit for Mac OS devices, especially those equipped with Apple's excellent track pads. It's ironic though, since with little modification, Mac OS X would make a far better touch-screen capable OS than Win8.

Market Strength

The impact of the different approaches to platform convergence can be seen in how the platforms have performed since the iPad was introduced in 2010. The chart below shows the long-term trends in the PC market, which is dominated by just two operating systems, Windows and Mac OS X. The starting conditions as of 2010 Q4 were:

Mac OS X Unit Shipments per quarter: 4.134 million (source Apple)

Windows PC Unit Shipments per quarter: 88.727 million (source IDC)

Mac PC Market Share: 4.45%

(click to enlarge)

From Q4 2010 to Q4 2013, Windows PC shipments have declined more than 12%, Mac shipments increased by 17% and Mac market share has grown to 5.88%, an increase of over 32%. This may not sound like much, but it's almost triple the market share increase of iPhone over the same period. Since Q4 2010, iPhone's market share has been mostly flat, with unit sales gains keeping pace with the rapidly expanding smartphone market, as the chart below shows. The starting conditions as of 2010 Q4 were:

iPhone Unit Sales per quarter: 16.011 million (source Gartner)

Android Smartphone Shipments per quarter: 30.801 million (source Gartner)

iPhone Market Share: 15.83%

(click to enlarge)

Some may look at these charts and say, "See, this is why you shouldn't pay any attention to market share numbers. Mac OS market share went up in the midst of a declining market, leading to stagnant sales. Why should we care?"

I see more significance in the market share behavior of Mac OS than just the unit sales figures. To me it conveys what I will call for lack of a better term, market strength. Strength, of course, is relative, so you could also think of this as Microsoft's market vulnerability. Microsoft has made itself vulnerable through its handling of Windows 8, and its early adoption of touch screens makes for a slight cost disadvantage relative to Mac.

Unexpected Revenue Potential

What I'm suggesting is that Apple is poised for growth in an area where most would least expect it, the PC market. This market is still very large, with 73 million unit shipments in 2014 Q1 vs. 50.4 million tablet unit shipments. It's a market that is rapidly being dominated by low cost laptops, so it's already becoming a mobile device market, albeit with more computationally powerful devices. And in laptops, Apple is an acknowledged leader, as I pointed out in "Apple's Laptop Opportunity."

But the laptop market is also a very price sensitive market, where the sweet spot is about $500. Apple will probably never go that low, but since I wrote the "Opportunity" article, Apple has dropped the entry level price of MacBook Air to $899, demonstrating some cognizance of its opportunity in the PC market.

Could Apple go even lower than the current entry level Air? It could, simply by offering a Mac Book Air with an Intel Bay Trail processor. Windows 8.1 currently runs on Bay Trail in 64 bit form, so I don't see why Mac OS X couldn't. And Intel has been offering Bay Trail at very competitive prices. I've estimated an ASP for Bay Trail Atoms of about $31 vs. the tray price of the Intel Core i5 processor used in the MacBook Air of $315. So it appears Apple could drop the price of a Bay Trail equipped Air $100-200 without impacting its gross margin.

What's the revenue potential of a Bay Trail Air? Low-cost laptops are currently estimated to take up about a third of the overall PC market, or roughly 25 million units per quarter. If Apple only grabbed 20% of that it would still more than double its quarterly Mac unit shipments, and add about $2.5 billion in revenue, a 50% increase in Mac revenue for a typical quarter.

I look for a Bay Trail MacBook Air to be introduced sometime in Q3, in time for back-to-school shopping.

Source: The Growth Potential Of Apple's Mac