Taking Back the Market

How Apple Could Sell 100 Million OS X Machines in 2010

Tim Nash - 2010.02.15

I consider iPhones, iPod touches, and iPads computers because of the applications they can run. The iPhone OS, which they all run, is based on Mac OS X, making them OS X devices.

Macintosh Sales Growth

Mac sales have grown faster than the market for 20 out of the last 21 quarters, and the total of 3.36 million units sold in the December quarter was a new record - up 33% Year on Year (YOY). However, even if growth increases to 40% YOY - as it was before the recession started - Mac sales this calendar year will be around 15.7 million units. Unless there is no cannibalization from the iPad, 14 to 15 million looks more likely. While inventory was low, with three to four weeks instead of the targeted four to five weeks at the end of 2009, this will only add around 250,000.

All the market growth last quarter came from the new iMacs, and Apple is still not meeting demand for the 27" iMac. This could be because of reported screen problems delaying production, but Apple is claiming strong demand. With the aggressive pricing for that quality, size of screen, and resolution, I would expect high demand, but any problems will need to be sorted for that to continue.

Sales of MacBooks, however, were very much in line with overall market growth - but with the amount of iPad speculation, at least some buyers would have waited to see what was coming in January.

With the iPad priced to compete with cheap laptops, it looks as though MacBooks will keep the same prices, and Apple will continue the strategy of every year adding more value at the same price point. Possibilities for this year are adding screens with the same IPS technology as iMacs so buyers can see the difference, more use of cheap SSDs leveraging Apple's long-term contracts in the flash memory market, extending the AT&T iPad network deal so that MacBook buyers know they can get online at reasonable cost on the road, and more Windows XP users deciding that OS X is a better upgrade than Windows 7, with Parallels or Fusion to let them run their old programs.

iPhone Sales Growth

Of the 100 million OS X units projected for 2010, 40% to 50% is likely to come from iPhones. Looking at the iPhone sales table (below), all quarters show Year over Year increases. Sales for the launch quarter of the 3G plus the two following quarters were 8,218 million, and sales for the three quarters since the introduction of the 3GS were 21,312 million - up 159%. 13.7 million were sold in 2008, and 25.1 million iPhones in 2009, up over 80%.

iPhone sales are growing at rates which suggest 40 to 50 million in 2010, if the iPhone OS 4.0 is A+, as Steve Jobs said.

iPhone Sales by Quarter, 2007 to Present

2007 270 1,119
2008 2,319 1,703 717 +166% 6,892* +516%
2009 4,363 +88% 3,793 +123% 5,208** +626% 7,367 +7%
2010 8,737 +100%

Figures are for Apple's fiscal year, which ends in September, so sales for calendar year 2009 include the sales for FY2009 Q2+Q3+Q4 plus Q1 of FY 2010.
*3G launched
**3GS launched

Where will Apple sell another 15 to 25 million iPhones on top of the 25 million it sold last year? IDC estimates 174.2 million smartphones (15% growth) were sold in 2009. Just the same growth rate would lead to 200 million sales in 2010, and this is likely to be an underestimate, as markets like China and South Korea are opening up, another group of two-year contracts are up for renewal, and smartphones are getting more attractive and cheaper year by year.

If it continues to follow the iPod marketing model in the annual refresh, Apple will upgrade the introductory 8 GB iPhone model - probably with a 3GS chip - and offer it to carriers at a cost which allows them to offer cheaper 18- or 24-month contracts with no money up front. This will squeeze all the other manufacturers' margins, and the weakest, like Palm, will probably go to the wall.

Windows Mobile, even with a massive upgrade, will look unattractive to most corporates compared to RIM and iPhone. It doesn't have the ecosystem or the base of enthusiastic users to compete. The expected heavy drop in licenses to around 10 million for the fiscal year will persuade many to look elsewhere, and only companies with a strong commitment to Windows Mobile will be likely to stick with it. Licenses could easily fall to 5 million in the 2010 fiscal year, leaving another 5 million handsets up for grabs.

The International iPhone

Most countries didn't get the iPhone until at least mid-2008. For them, the network effects from seeing it, playing with apps, and trying out a friend's didn't start for at least a year after the AT&T launch. These sales have been building out for at most 18 to 20 months. As in the US, major markets like Germany (T-Mobile) and Spain (Telefonica) are still with one carrier, and if these were two-year exclusives like in the UK, Apple can add new carriers in the summer.

Competition in France led to the iPhone taking 40% of the smartphone market within 6 months and in the UK, Vodaphone sold 100,000 in their launch week despite being the third major carrier to offer iPhones.

Technology Updates

What else could drive iPhone sales in 2010? A version of the A4 chip used in the iPad to increase the speed and battery life in the high-end models with the usual memory upgrades - this time to 64 G and 32 GB - would certainly help, especially combined with the better screens used in the iPad. The wildcard is a larger iPhone, big enough to see the difference, but still small enough be carried in a large pocket. For me, this would have a 5.25" screen (50% larger) with 720 x 540 resolution. (See High Def iPhone and iPod touch Could Make OS X the Mobile OS to Rule Them All.)

iPod touch Sales Growth

iPod touch sales were up 55% in the December quarter, and around 15 million were sold over the 10 months from the end of March 2009. From this, 20 to 30 million certainly looks possible for 2010. How much will the numbers be affected by the iPad launch? Current pricing is at $199, $299, and $399, so it is and will remain the cheaper, pocket-sized iPad.

In the annual refresh, if Apple keeps the entry model at 8 GB, the price could drop to $169 - the same as Nintendo's DSi - or even $149. With the speed boost from the 3GS chip, Sony's PSP range would look like a poor value - less screen resolution, not as fast, more expensive to buy, and much more expensive games. With Apple now selling as many iPhones and iPod touches in one year as the entire PSP installed base, third party games developers will look on the PSP as their third choice - something only worth supporting if the port is easy.

iPod touch Replacing iPod classic

It also looks like time to retire the iPod classic and replace it with a 128 GB iPod touch. The high-end range could then be 128 GB, and the current 32 GB and 64 GB models, adopting an Apple A4 processor for the annual speed increase. Even if Apple doesn't move the iPod touch into new areas like hearing aids, driving it into Nano price points and taking over from the Classic should boost sales to around half of the 50 million annual iPod sales.

Apple could keep the average selling price low and profits up by offering the next two OS upgrades for $15 when you buy a new iPod touch.

The iPad Forecast

Sales of 8 to 10 million iPads looks reasonable, even if this is much more than most analysts estimate.

Over 75 million iPhones plus iPod touches have been sold to date - more than 38 million in the last 10 months. The total will be over 80 million iPhone OS devices when the iPad launches and over 120 million by the end of the year.

All Apple needs is for 8% to 10% of the owners who "like to touch" more than use a keyboard/mouse.

Nobody knows how many people dislike the PC way or would prefer a different way, because there hasn't been a good alternative. All they need to decide is that they prefer using their iPhone or iPod touch to their PC and that they want a larger screen. Then those who like to touch will march with their wallets and pocketbooks to the closest iPad supplier, since nothing from Google or Microsoft is yet an alternative.

It's here that the agreement with AT&T will drive adoption. There's no two-year contract to get out of, just a simple start and cancel when you want. With Apple's 14 day no questions asked return policy, all anyone has to do is pay for the iPad on a credit card and a $15 contract for 256 MB download. If it works for them, great; if not, the total cost is $15 plus any restocking fee.

Apple Has Become the Consumer Choice

Whether Apple sells 80 million or 100 million OS X computers this year, it is rapidly becoming the consumer system of choice and moving towards Windows numbers. Developers are moving more and more to Apple's mobile systems, and in a world where operating systems and platforms need "Developers, Developers, Developers" (Steve Ballmer), Microsoft needs to find a better way forward.

As it is, Apple will probably pass Microsoft in revenue in the next two quarters, as the gap has been narrowing for over a year. If Apple's gross margin stays close to December's 40.9%, exceeding Microsoft's market capitalization is just a matter of time.

What effect this has on Microsoft and its customers is yet to be seen. How will Microsoft respond to being overtaken by a longtime rival it thought it had left in the dust? LEM

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Tim Nash is a Director of WattWenn which has a new approach to scheduling the production of TV and movies to make the most of budgets. The views in this article are his own and are prejudiced from spending more years working for computer companies than he cares to remember.

Tim lives with his wife, her website on the area ariege.com, two daughters, a cat, and a dog in the French Pyrenees. He lapsed for a while after the Apple II, but became a Mac fan when his wife introduced him to the Macintosh IIsi. If you find his articles helpful, please consider making a donation to his tip jar.

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