Taking Back the Market

The Macworld Bonus

Tim Nash - 2002.03.29

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For shareholders, there was a huge bonus. After a rash of warnings from analysts about dire flat panel iMac shipments and the effect on this quarters' results, there is some hard news. With 125,000 already shipped and daily shipment rates of over 5,000, the problems have been sorted out. So we can look forward to shipments of 170-180,000 flat panel iMacs by quarter end. This compares to the 200,000 that most analysts were looking for, so it is unlikely there will be a profits warning.

The $100 increase in iMac prices shows that Apple has not managed to lock in enough flat panels at low prices. Flat Panel iMacDespite the comments in DigiTimes about Apple being unable to provide Quanta with a stable supply of flat panels, this is very unlikely to be true. Apple made an investment in Samsung to guarantee a stable long term supply.

A previous report by Gillian Munson of Morgan Stanley indicated that Apple had contracted for 100,000 panels a month for the next year. Apple would have also contracted for the rest of the iMac components, including memory, at the same rate, and would not have launched the product without having these supply contracts in place.

These supply contracts will help Apple maintain margins over the next quarter while it is clearing the backlog and honoring the old prices for existing orders.

What is clear is that Apple underestimated demand for the new iMac. This is probably fallout from the costs of the failure of the Cube. As I pointed out in The New Order, the flat panel iMac is the new midrange, and therefore it is the Cube's replacement. If this iMac had failed to sell, part of the cost of failure would have been questions from analysts and shareholders as to why management had made the same expensive mistake twice. This would have had a long term negative effect on the share price and therefore management made the safe bet and was only willing to commit to the numbers that could easily be sold.

Nevertheless, if the new pricing does not kill the iMac momentum, shareholders can look forward to a very good next quarter. Unit sales of all systems should be close to or over 1 million -- and with the usual margins.

The Other Bonus

Losses in the Apple Retail Division will be much reduced this quarter. Certainly this is a short term fix, but allocating 10% of iMac production to the Apple stores means they should have sold 17-18,000 flat panel iMacs by quarter end. When sales of other systems are factored in, total sales should exceed 25,000 -- compared to 14,000 last quarter. As the analysis by Charles Woolf of Needham & Co. shows break even at roughly 1,000 system sales per store per quarter, the retail division should at least be close to reaching that.

The New iPod

Apple has now launched a 10 GB model which, at $499, is $100 more than competitors and yet has half their capacity. This is not the way to dominate a consumer electronics market, and the danger is that iPod will become another Newton -- an excellently designed product that is priced out of the main market. If Apple had launched the new iPod at $399 and cut the price of the 5 GB model, the iPod range would have been well placed, continuing to be attractive to Wintel users and keeping the pressure on competitors such as Rio and Archos.

As it is, Gateway has already launched a USB 2.0 model. As soon as this new standard becomes more common in the Wintel world, the iPod will have lost its main advantage: fast transfer rates. The iPod's other advantages can not maintain such a big premium, so pricing needs to be competitive long before USB 2.0 is widespread.

The new software, which allows up to 1,000 contacts, will extend iPod's reach into the PDA market. It also helps to show iPod's versatility. However it will take relentless price cutting to make the Wintel market wait for iPod.

Bluetooth

Showing this working well will keep Apple in the forefront of the digital hub providers as many smaller devices will use Bluetooth rather than the 802.11 (AirPort) standards.

New Cinema Display

At 23", this is a minor step from the previous top of the range. The press release showed this to be aimed at media editors for use with Final Cut Pro on HDTV programs. This positioning again shows Apple's interest in reinforcing its user base in film and TV.

Although the keynote was less than well received by many Mac sites, there was more useful information than in previous years. Also, announcements in Tokyo are primarily for the Japanese. This is the most important market for Apple outside of North America, and it sounds as though the new Kanji software from Ergosoft will help to strengthen the Mac's position there. LEM

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