Will Apple Keep On Keeping On?

To depict Apple’s (AAPL) extraordinary growth over the past 6 years as a "revival" is to understate the truth. Apple is not just revived, but energetic, ambitious and kicking ass. At no time in its history did Apple achieve the success or momentum that it now has. But how long is this likely to continue?

The Origins of Success

Apple drove innovation in the early years of the PC market and was universally admired for it. But its ground-breaking products delivered neither a defensible share of the PC market nor a firm financial foundation. Apple was unorthodox, unruly and almost ungovernable. CEO John Sculley, who had been drafted in to solve that problem, sacrificed Steve Jobs in a fit of corporate insanity. Having banished the goose that laid the golden eggs, Apple entered a period of graceful decline and Microsoft took off like a rocket.

The golden goose returned from exile in 1996, just before Apple adopted the advertising slogan “Think Different” and he began to demonstrate what that slogan meant. The first noticeable change that Steve Jobs made (if you remember) was to manufacture Apple Macs and Apple laptops in different colors. The move was derided by no less an industry expert than Bill Gates, but it was actually the first maneuver in a long campaign to truly differentiate the Mac and establish it as the ultimate consumer computer .

Steve Jobs understood that the PC of 1997, just like the PC of 2008 was not a consumer device at all. No computer company had ever designed a PC for the consumer and, remarkably, no company had ever seen the need to. In fact the whole of the PC industry had adopted a structure that defeated attempts to pursue such a goal. Microsoft had a lock on the component that best enabled innovation - the GUI. You can have any PC you want as long as it’s Windows.

So Jobs designed and implemented a different product for a different set of buyers, using what he had at hand. Apple was thinking different in a big way, but it took a long time for anyone to understand what was going down. When the iPod was launched it was roundly hammered by loyal Apple fans. Peruse Why the iPod will fail - a MacRumors forum thread from 2001 to get a flavor of this. I particularly like the comment “Great, just what the world needs, another freaking MP3 player.” And indeed that’s all it was, another freaking MP3 player that established a $6 billion revenue stream.

Few commentators got it when Apple began opening Apple Stores. Read Commentary: Sorry, Steve: Here’s Why Apple Stores Won’t Work for a convincing explanation of why it’s a crazy idea. I particularly appreciate the wisdom of David A. Goldstein, president of researcher Channel Marketing Corp in that article.

Since PC retailing gross margins are normally 10% or less, Apple would have to sell $12 million a year per store to pay for the space. Gateway does about $8 million annually at each of its Country Stores. Then there’s the cost of construction, hiring experienced staff. “I give them two years before they’re turning out the lights on a very painful and expensive mistake,” says Goldstein.

Apple started the Apple Stores because it saw that its retailers were doing a poor job of showcasing the Mac. So Apple hired a seasoned retail executive, Ron Johnson, formerly with Target Corp., to build a retail strategy. It worked. Apple Stores constitute the most successful retail chain launched since Wal Mart. Apple now has a sure fire method for growing its revenue. It just opens new Apple Stores in new areas and new customers appear.

The Net Net

Jobs introduced highly differentiated products into a commodity market.

Many commentators view Apple’s dynamic commercial success through the success of the iPod or the iPhone, expressing vague disappointment with the Apple TV and some disdain for the “bread and butter” business of computers. I prefer to take the opposite view. There can be little doubt that the iPod gave Apple the impetus it needed to re-establish its credibility, but it was and is the iMac that is the foundation of the business. The iMac is the platform from which other products spring. It gave birth to the iPod via the iTunes player and it gave birth to the iPhone via OS X. Eventually it will give birth to an Apple TV that people actually want.

Jobs gave the Mac a complete makeover. First the operating system was swapped out, with OS X being based primarily on what was good in Jobs’ NeXT computer, then the hardware was revised by swapping out IBM’s Power processor for Intel’s line of processors - not because the Power chip was deficient, but to allow the iMac to be compared directly with PCs.

This makeover has given Apple dominance of the PC market and this dominance is starting to show.

In the posting Apple’s Market Share Is Bigger Than You Think, I showed, in various ways, that Apple’s market share as expressed in global or even simple US figures is highly misleading. It’s a lot bigger than you think. The latest quarterly figures from Gartner, by the way, suggest that Apple now has about 6.5% of the US market by units. Its market share just continues to grow and grow. Its share of the world market would be 6.5% too, if it had Apple Stores in countries across the world and it will in time. Apple’s iMac sales have been growing at 30% or more for at least a couple of years - and now its beginning to show up in a big way. In its latest quarterly returns, the growth rate is actually 51%. The rate of growth is growing!

When Apple’s iMac sales are gathered up with PC sales, it creates a misleading impression. Consider this table showing US sales in thousands for the first quarter this year and the same quarter last year (as estimated by Gartner):

The PC Vendors	1st Qtr 2008	1st Qtr 2007	% Growth
Apple	1010	762	32.5%
The Rest	14210	14014	1.4%
Altogether	15221	14776	3.0%

Notice that if you take Apple out of the equation, the PC market in the US is barely growing (at an anemic rate of 1.4%) but Apple is growing at over 30%. The market as a whole seems to be growing at 3% - but more than half of that growth is attributable entirely to Apple. If you focused on the consumer market alone, the disparity would be greater. PC sales would be declining.

Now reflect on the fact that Apple reported 51% growth in PC units in its quarterly figures. Gartner’s figures are way off the mark and Apple’s figures account for an even higher share of the growth of the whole market. The initiative belongs to Apple, and there’s little that the competition can do about it, because they are not selling the same product.

Disclosure: No position in Apple

Comments

[raman kandola]

https://citigroupgeo.com/pdf/S......

Apple Inc Summary of Price Target Changes for Apple - Price target raised to $180 from $170 at Bank of America. - Price target raised to $202 from $195 at Lehman Brothers; maintains "Overweight" rating

[Toni]

Nice article. It's nice to look back at what people said, sometimes.
It's too easy being wrong and then forget all about this, to start spread some new wrong concept until you finally get something right.

It's too easy, and too cheap.

[wallawallabingbang]

At the rate things are going, in 20 years Apple will be the ONLY one left in the game.

Go Apple!

[TanToday]

FINALLY.

A "greyhair" { seasoned observer with history inside of him } LAYS IT ALL OUT. Thank you, thank you Robin Bloor.

For once someone lays out the "Synchronizer's Synergism System"....my alliterative term for the BORG APPROACH that is going to move Apple hard and reletlessly. Just as in the Sci-Fi shows, where the Borg SUBSUMES, DIGESTS, and ADDS to "it's collective conciousness" every new technology it encounters, so to is Apple eyeing each segment, figuring out how it could be seamlessly integrated into the "SSS" refining it, simplifying it, and applying elegance for style, verve, and the "cool factor."

Each segment buttresses, enhances, feeds, and supplements every other factor.

The stores are "the Window to the World" { W2W } where doubters, sceptics, and loyalists can wander in, and do the hands on thing, without pressure, and if and when they have a question, there REALLY IS someone there that can, and usually WILL stop, hold your hand, and show you how your PROBLEM is a few clicks away from the APPLE SOLUTION. Unlike the horrid experiences with other computers, and the telephone linked to some gal in Banglalore who has never even seen the USA, let alone your community or school.

As an investor {2,000} shares, I was one of those Apple II geeks, that moved off and went Windoze for decades, I was totally skeptical of Apple, been burned once, you know how that one goes... Anyway, the never ending saga of viruses, drivers that don't work, incompatiblities etc were just the way things were, and what could you really DO about that, but suffer, and work around. I had Mp3s from other companies, routers, software, laptops and desktops. A total nightmare, BUT I did have them all working, even it WAS almost a fulltime profession to manage them.

Then I decided to download iTunes for Windows. Not too bad, I thought, works, and easy to use. So I got me the first iPod, now Four, and a laptop, now four, and a desktop, and a router, and and and ....

And darn it, it ALL WORKED, as advertised, and when I DID have a problem my extended Applecare allowed me to take the unit to the nearest Apple store, the Geek Genius, took it, diagnosed it on the spot, opened the machine, put in some new guts, and test it, hand it back to me, and in one hour, at NO additional cost { beyond the contract } I'm IN and OUT and back to work. AMAZING.

No, when the goofs looking at spreadsheets, STOP and learn to watch CUSTOMERS with money to spend, ACTUALLY STANDING IN LINE ALLNIGHT to be the first to buy ANY new Apple product...THEN and only THEN, will the Cubicle Clowns "get it."

[Tom B]

Superb article. Some key points in MY thinking:

1) at 7-ish percent US market share, AAPL has huge potential upside

2) AAPL's key competitor, MSFT has significant problems going forward:
A) They have not modernized their OS; Windows is still not UNIX based, which puts it way behind BOTH OS X and LINUX.
B) antitrust scrutiny, based on previous illegal activities
C) Lack of modern development tools (like Apple's free "Xcode").
D) unsolvable security issues on the desktop. These issues, additionally, will probably preclude MSFT from ever being a "player" in the "cloud".
E) Bill Gates has left the building.

3) Your comment on the iPod--"another MP3 player" has a ring of truth. Since podcasting was not really around at the time,I wondered about the need for such a device myself. But, having said that, it burst on the scene with 3 key differentiators: 1) excellent client software (iTunes) 2) fast transfer (Firewire (later USB2,also). Others were often using USB1 3) huge capacity, for the time 4) nice UI/looks.

4) iPhone's browser, Safari, is already changing the web; making the web more "standards-based&... IE-only web sites are a relic of the past, to a large degree.

[brewer]

Best financial article ever written. And I mean that. When will people wake up? Microsoft is the beleagured one now. The financial community are like Microsoft, about 10 years behind the curve. Apple is quickly reaching a tipping point. What will happen if they either A) release a low price model based on an inferior chip for the cheapskates, (e.g. Celeron) or, just decide to go ahead and sell OS X for any newish PC? (Of course, charging about what Microsoft tries to get, and rarely has any takers, for it's boxed product.) It would be the death knell for Microsoft, that's what.

I believe there is a new product in the wings that will be as big as iPod or iPhone. And yes, even the 'Apple faithful' (an awful, derogatory term, BTW) totally missed the iPod. Check it out for yourself, it's amazing the lukewarm response he got from the supposedly 'faithful'.

www.youtube.com/watch?...

[brewer]

Macbook Air was the same story. Even the Apple people were skeptical. Look at it now, it's selling great, and not taking sales from other (Mac) models.

The Author nailed the fact that all their products together form an incredible synergy. One sells the other sells the other sells the other, etc...