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Apple and the Mac: By The Revenues...

|Includes: Apple Inc. (AAPL), MSFT

It's clear (to me at least) that Apple's current trajectory is going to follow a reasonably reliable trend for at least the next 3 years. Why? Because Apple is far from saturating any of its primary markets (Mac, iPhone and iPad/iPod) and it is forging ahead in all these markets. In this article I'll try to answer 3 questions about the Mac market (in isolation):
Why did the Mac become so successful?
What part does the Mac play in Apple's overall success?
And what will the Mac market be worth over the medium term?


When is a Mac not a Mac?

Apple’s success is founded on the Mac; not the Mac that Apple startled the world with in 1984, but the reanimated Mac (with OS X) that first appeared in September 2000. Apple acquired Next Software and reacquired Steve Jobs in 1996. The turn-around clearly began then. But it took a further four years before Steve Jobs had the software platform Apple needed. OS X, a re-energized version of the Next OS, replaced the original “Classic” Mac OS. The migration to OS X wasn’t complete until the Mac jumped to Intel chips in 2005, and the Classic Mac OS ceased to be fully supported. Such migrations take time.

OS X is, at its foundation, Unix – a version of BSD Unix with the Mach microkernel. The important word there is microkernel. Technically a microkernel is the bare-bones component of the OS that manages addressing, threads and inter-process communication. There are advantages and disadvantages to having a microkernel. A microkernel is a little slower than its alternative, a full kernel. But it’s a lot simpler. With a microkernel it’s really unlikely that one app failing will bring down another app. The much despised Blue Screen Of Death (BSOD) is rare indeed on OS X (and it's grey not blue on the Mac). You can provoke one by removing the keyboard – it’s the only way I know how to force one. An app can’t cause one without getting really irresponsible. Additionally, with OS X, apps don’t need to get anywhere near the system internals. Everything they might want to do is available as an OS service.

That is why the Mac + OS X is so reliable and why Apple marketed it with the slogan “it just works.” Compar to Windows it does "just work." Apps can and do fail, but OS X rarely fails and it doesn’t to degrade over time, as Windows seems to. The Mac rarely needs rebooting. If you run too many apps, just start quitting them and most of the system resources they were hogging will start freeing up.

Nowadays, OS X is the Mac. While Apple was busy getting OS X right, Microsoft was busy getting Windows wrong, with Longhorn/Vista. The success of the Mac over the last decade would have been much less, had Microsoft not dallied for so long on Longhorn. After a while, OS X had moved so far ahead of Windows that Microsoft was reduced (yet again) to copying the Mac rather than innovating.

The Touchy Feely Emporia

The Microsoft malaise helped, but what really gave the Mac escape velocity was the Apple Stores. Most financial commentators believed Apple was making an error when it opened its Apple Stores in 2001 – and they were unrepentantly wrong. Historically, the Mac market had failed to grow fast because few people outside marketing and design departments ever got their hands on a Mac

You rarely saw Macs. They weren’t on sale in office stores or even many computer stores. The Mac was missing from the PC consumer’s radar. So Steve Jobs invented the Apple Stores and changed the game. Those touchy-feely-emporia were showrooms as much as they were shops. Here are some stats: it takes an average of six visits to an Apple Store for a consumer to switch from Windows to the Mac. As a result, about half of the Mac buyers on any day in the typical Apple store are switching from Windows.

The Apple Stores were also tech support locations – a retail idea that could have been disastrous if Macs hadn’t been so reliable. The Apple chapels (as they call them in the UK) are a stunning success. In the US the Apple chain hit $1 billion annual sales faster than any other retail operation in US history. The stores account for one sixth of Apple’s worldwide revenues. The chain boasts the highest sales per square foot of any major US retail chain and it sells only one brand of computer, one brand of phone and one brand of music player.

Like Nike

In the late 1990s, anyone could have told you that the next step for PC was to be the media player and household media hub. Microsoft knew it, Dell knew it, HP knew it, as-yet-undiscovered-tribes-deep-in-the-Amazon-jungle knew it. But no-one knew how to make it happen. Apple stumbled on the key to the door. It did two things:

  1. It did something technical. It created a media suite (the ubiquitous iLife) with iTunes and some music making software (GarageBand) and gave it away as part of OS X.
  2. It did some brilliant positioning. It positioned itself as “consumer-youth-cool” like Nike, and it designed its products accordingly. Apple products had always been well designed – but from 2000 on they were cooler than absolute zero.

Apple infiltrated the home through the youth market. It’s been known for a long time that trend leaders (especially technology trend leaders) are more prevalent in student populations and Apple targeted them remorselessly. Apple reinvented the Mac as the media computer for the youth market.

The Apple of Discord

PC vendors; HP, Dell, Acer, Toshiba et al, never used to notice what Apple’s PC market share was. They saw Apple as living in a different market. Prevailing wisdom said that the Mac would be confined to its niche and Apple would never impact the vast expanding PC empire. But prevailing wisdom didn’t prevail.

From 2001 onwards, the Mac began to outgrow the PC market. Apple started from a low base and didn’t initially make much of an impact, but by 2005 when Apple jumped into Intel’s arms, Macs sales began to grow at around 30% per annum or more. The PC market as a whole was averaging less than 10% per annum in total at the time and it continued to do so (even falling in 2009 but reviving this year.)

Suddenly the Mac was a factor. The Mac is now huge in the US market. It has 90 percent of the market for PCs priced above $1000 and 8.8% of the market by units. (For an overview of how to assess Apple market share meaningfully read: How Not To Underestimate Apple’s Market Share.) Right now, in the US, Apple lies fourth in the market after HP, Dell and Acer.

Apple’s growth in the US market may be slowing. The June 2010 figures show Mac growth in the US at 15.4% only about 3% more than the growth of the market as a whole. The previous quarter in the US was better, showing 34% growth when the market grew at 20.2%. The Mac used to outgrow the market by more than 20%. As the Mac is relatively high priced and Apple has no desire to cut its margins, it may be that the Mac will never grow beyond about 15% of the market. If so the Mac still has plenty of space to grow into, even in the US.

The rest of the world is a few years behind in Mac adoption, partly because it has far fewer Apple Stores per head of population and it has not yet been targeted by the Apple marketing machine. The US PC market is, after all, only about one quarter of the World market and Apple has less than 4% of the world market.

Apple will most likely triple its current share of the world market as a matter of course, by virtue of momentum and opening up new foreign markets. That would give Apple revenues of about $55 billion per annum just from the Mac. At current growth rates it will take Apple about 4 years to grow to that level of Mac revenue. I suspect it may happen about a year earlier because of an "iPad halo effect", but once it gets to that level I suspect we'll seen signs of market saturation and the Mac growth rate will start to diminish.

The Path of a Juggernaut

This is one of a series of articles I’m doing to try to estimate where Apple will incur saturation in its markets. For PCs (laptops and desktops) I’m suggesting it won’t happen until at least triple the current revenues. In the next article on this topic, I’ll look at the possible saturation point for the iPhone.

 


Disclosure: Appl long