Stop the Noiz

'Snow Leopard' Pounces

Frank Fox - 2009.08.21 - Tip Jar

People like to talk about how great it would be if Apple licensed the Mac OS so that everyone could enjoy the benefits of a great operating system on cheap hardware.

Talk is cheap. No one seems to do the work of figuring out what would have to happen for Apple to make the switch.

The easy part of the argument is to point out how famously rich Microsoft has become from selling its cut rate OS. Let's take a walk of the dark side and see just how much that is.

Microsoft's Model

The first big question is: What does Windows cost? That sounds easy, just look up the price on Amazon.

But which price do we use? The price for Vista Home Basic, Premium, Business, or Ultimate? Should we use the upgrade price, OEM price, or retail?

Does any of that matter, since Microsoft discounts the price to PC vendors so that it can come preinstalled? Could Microsoft hide average cost better than this?

If the front door is locked, we just have to go around back. Our Linux fans have taken their copies of Windows back and gotten refunds. From this we know that preinstalled, Windows costs between $50 and $89. Full retail pricing is hundreds of dollars more, but who pays retail? The bulk of Windows sold is preinstalled. Even home builders can buy the OEM version. We'll estimate an average price of $100 to make the math simple.

Total annual PC sales are between 300 and 350 million.

Microsoft is raking in around $35 billion a year from the sale of Windows. If we use a 60% to 80% gross margin, Microsoft earns a profit of $21 to $28 billion per year for a product that costs it $6 billion to develop and market. That is a lot of money to invest, but the returns have been worth it. Anytime you can quadruple your profit within one year, you are doing something right.

Few Abandon Windows

That is definitely a huge pile of money for Apple and everyone else to go after. We can see from the poor adoption of Linux that even given away your OS for free is not enough to take market share away from Microsoft.

Apple has to be better than free in order to win.

Apple as a Software Company

Apple has another big negative to overcome if it were to start selling Mac clones: There would be a rapid drop in the number of true Macs sold. In the worst case, Apple looses all of its hardware business and only sells copies of Mac OS X.

We need to calculate the number of software copies to make up for the loss in hardware.

First, what is the typical profit Apple earns from its Macs?

The average selling price of a MacBook is $1,400 and Apple has a profit margin of around 35%. That makes for $490 profit per computer. Macs are about 3% of the computer market - about 10.5 million units a year. This gives Apple around $5.15 billion profit from Mac hardware sales each year. This is much less than Microsoft makes, but no one would want to lose a $5.1 billion business over a dumb mistake.

What happens if Apple only sold software? If we are generous and say that Apple can make $100 profit per copy of OS X sold, 10.5 million copies are worth $1.05 billion. That is a potential loss of over $4 billion.

How many copies of Mac OS X would Apple have to sell before it was at the break-even point? At $100 profit for the software, Apple would have to own 11.4% of the market and sell 40 million copies. Apple would have to more than triple the number of sales overnight.

That is a big business risk and not very likely to happen. You would need to have a sure fire way to grab big chucks of market overnight.

Apple knows that desktop sales are in decline; that's why Apple has concentrated on its MacBook and MacBook Pro lines. This was slowing giving Apple an edge - until netbooks came along. The netbook doesn't make anyone money, but it has reversed the decline of PC sales to Macs. It is too early to call the full effect of the netbook, but market decline has been delayed.

How would Apple grab big chucks of the market?

The Stealth Solution

This is where Mac OS X 10.6 "Snow Leopard" comes in. Snow Leopard is an Intel only operating system. This means that buying a full retail version to install on an old PowerPC Mac is out of the question. There will be a fixed number of copies sold that can more easily be accounted for. The smaller market will give Apple better insight to what is going on with purchases of a Mac OS than ever before.

This is still not the end of the story. Apple has to gain market share without any public notice. Why? Because a sleeping giant (Microsoft) is a lot easier to handle that an angry one. We can see that if Apple has 3% of the market, Microsoft will spend millions on negative ads targeting Apple (Laptop Hunters). Imagine what Microsoft would do if Apple started to openly sell OS X to Dell or HP? A direct assault would cost the company millions in advertising and lawyers.

Apple vs. Psystar

If Apple secretly wants clones, why did it go after Psystar?

First, it had to because if you don't protect your trademarks and brands, people will step all over you. Second, it helps to keep Microsoft asleep. Third, because Psystar's product looked bad, and Steve Jobs can't overlook that.

For a more hidden switch, Apple needs a million or more people to install Snow Leopard on their own computers. Sure, this sounds crazy, and it would be if most computers were big name brands with the operating system installed.

The 'White Box' Market

The truth is just the opposite - "white box" PCs are the most common type of PC.

At last check, the top three computer makers in the world had the following market share:

  • HP 19%
  • Dell 13.1%
  • Acer 13.0%.

Combined, these three giants sold less than half the world's computers. There are many smaller brands and millions of generic no-name desktop computers call "white boxes" that get sold every year. All of these generic computers fly under the radar, and no one keeps track of what is going on. It is a perfect place to hide a million or so Hackintoshes from public scrutiny - and especially from Microsoft.

An extra million copies of Mac OS X 10.6 sold will look like more people are upgrading from Mac OS X 10.5. Analysts will just report how great Apple is doing getting people to switch. But Apple will have the actual sales data, and it will be able to spot any unusual trends.

A million Hackintoshes should not go unnoticed. They have probably estimated within a few percent exactly how many people will switch.

In order for Apple to see the spike in demand, everyone needs to wait a few months and then buy the full copy (not the upgrade). This will send a strong message to Apple when it sees the spike in full copy sales. (It's even better if you buy the family pack and build five Hackintoshes.)

Is This Apple's Plan?

How will we know if this was Apple's plan all along? If Apple hasn't made Snow Leopard more difficult to install on a generic PC, then that can only be on purpose. Apple certainly has to know that people are trying, and if they release the software without any major new roadblocks, then it was by choice. Any minor update will be quickly bypassed.

Do I really think that this could happen?

Not unless enough people are serious about wanting the Mac OS opened up to more choices. If most of the people who are complaining won't make the effort, then Apple is right, and everyone else should just stop complaining. If people do speak with their wallet and send Apple a strong message, then Apple would be forced to move forward or close down access more. If people steal their copy of Mac OS X to install it for free, then Microsoft is right, and Apple will have to lock down its OS for protection.

This is the true size of the problem and a practical look at what it would take. Realistically, most people are too lazy to invest the effort to make the change - and that is why the Mac is so great. Buying something that just works is a wonderful thing, and it sure saves a lot of labor. LEM

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