The Future of the Low Cost Mac

Several cases have been made of late stressing the need for Apple to sell a less-expensive Mac. The arguments are appealing, but consider these questions:

• Will a less-expensive Macintosh increase Apple's market share?
• What is stopping Apple from releasing an inexpensive Mac?

Those who argue for an inexpensive Mac have an "if you build it, we will come" mentality, but history tells us otherwise.

The question of market share is mixed at best. Ben Wells wrote in his article, Resurrecting the Low Cost Mac:

"Apple nearly sank in 1996-97 because of its failure to provide affordable competitors to then-new Pentium-based Windows 95 and NT machines resulted in software developers and peripheral manufacturers abandoning the Mac platform."

The truth is Apple nearly sank in 1996-97 because they tried to compete with PCs on price by releasing several Performa models. Performas were poorly engineered compared to Power Macs, but they were comparable to PCs in price and performance. Performa sales did not expand Apple's market share. In fact, they took sales away from the more profitable Power Mac line of computers.

The core lesson Apple learned from the Performa fiasco is differentiation. Unless Apple's high-margin products are significantly different from their low-margin products, the lower priced products will cannibalize their profits. Great pain is taken to ensure that the iBook does not compete with the PowerBook. The eMac exists only because the iMac is significantly different to the consumer (TFT vs. CRT).

A low-cost Mac would a risky proposition for Apple. Consumers probably would not notice if, for instance, the high-end Power Mac had 800 Mb/s FireWire and the low-end Mac had only 400 Mb/s FireWire.

It would also bite into Apple's very lucrative upgrade market. An inexpensive Mac produced today would be faster than almost any Mac that is two or more years old, and it would run the latest Mac OS without a hitch. This would make it a very tempting and inexpensive upgrade option.

The proponents of the low-cost Mac favor releasing a computer with a modest CPU and a modest amount of memory. In other words, they are asking Apple to sell a bad-investment to consumers. These Macs will depreciate quickly. They will not run future releases of OS X well. Users may be dissatisfied with the performance.

How catastrophic would it be for "switchers" to take the Mac plunge for $500-600 on a low-cost Mac only to discover it is slow? PC users are used to windows flying open at lightening speed and applications launching instantly.

This sort of low-cost Mac is a terrible idea for schools as well. Schools keep their computers twice as long as the average business. Poorer districts keep them even longer. Asking a school to make such a poor investment on outdated hardware - and then keep it for five years or more - is ludicrous.

Another frequently discussed idea is dropping the all-in-one form factor in exchange for a few PCI slots. Apple's all-in-one strategy is the synergy of two ideas, differentiation from professional models and reduced support costs on Apple's end. As soon as the user is given incentive to open up his or her machine for any reason, support costs go up.

Remember, the more attractive Apple makes the low-end Macs, the more high-end sales are cannibalized. Apple sells most of its computers to existing Mac users, so the term "cannibalized" is particularly poignant in this scenario.

This reflects the market, as it exists today. Is there no hope for advocates of a low-cost Mac?

The Future

Apple's ability to differentiate between products is hampered by the PowerPC platform. The performance difference between an 800 MHz G3 and an 800 MHz G4 is not terribly large for anything other than Velocity Engine applications. Furthermore, there is little performance difference between Macs that use DDR SDRAM and those that use standard SDRAM. This will change sometime in 2003 with the next generation of chips, whether they are enhanced G4 processors or 64-bit IBM Power 970 CPUs.

Until that point, no Mac will be offered that is significantly less expensive than what is available today.

Over time I do not expect the price of a low-cost Mac to drop below $899. I also do not expect Apple to deviate from their all-in-one policy. They will never make the Performa mistake again and try to beat PCs on price. Conversely, they will never make the Cube mistake again and try to sell something that has no clear niche or demand.

An $899 Mac with an AOL or MSN rebate would cost a consumer something like $599, which is a very reasonable price.

This does not help schools, as they do not sign up for those types of rebates. Instead Apple might consider offering free AppleCare to schools. When an all-in-one goes bad, in most cases the entire unit has to be shipped for repair. Offering same-day replacements or service would be a tremendous selling point to system administrators. If you were purchasing for a school, would you rather have a low-cost Mac that is too slow to run the next generation of software or a Mac that performs well and has superior service?

Apple is definitely a premium brand. Moving down-market in price is always a challenge and requires original thinking. Mercedes sells something called a smart car in Europe; Audi sells a VW Golf-sized car that is all aluminum. These companies compete at lower price points by being creative, without creating Performa-like fiascoes that cut into their high-margin product sales.

I suspect Apple is trying a similar tactic and will look to expand their market share by releasing innovative products. Opportunities are everywhere - a tablet computer that is actually light and easy to use comes to mind - and it is up to Apple to find the right products.