03 January 2006

Myth or Reality #2: PRICING

The thinking on this one goes something like this:
• Intel Macs will be cheaper/substantially cheaper than current Macs.
• Moving to Intel will allow Apple to become much more price competitive.
• Dell will be in Apple's sights.
• We should expect equivalent Apple machines to today (mac mini) at $399 levels for instance, $599/$699 for laptops (iBook).

Paul Murphy got me thinking about this when he claimed that in order to do this, Apple would take a huge hit on margins, particularly because they'd be paying MORE for their chips, not less.

The pricing issue is something that concerns me a lot, because in reality, most people do not do a serious comparison of functionality when buying a personal computer for the home (or indeed for buying many items). People expecting Apple to come up trumps on price are certain to be disappointed. Why? Many reasons reall

1. Apple has a tiny market share. Yes, the market may be fragmented, and Apple is among the top 5 or 6 manufacturers, but it does not have the volume to be the price leader even if it wanted to (more about that in a minute). Being a price leader has to be a sustainable strategy. If Apple did reduce prices significantly, it would only help to foster a price war - something it could not win. But in doing so, it would destroy it's own margins as well as that of many competitors. This has never been Apple's strategy and at this point it would be foolhardy to do so. (Contrast this in the iPod space where Apple's dominant position has now allowed it to at least price competitively if not be the best - so destroying margins at competitors such as Creative who do not have the volume to compete).

2. When there are hundreds of choices out there from hundreds of sources at any time, you can never hope to be the cheapest. Apple could price an iBook less than a comparable HP machine. But out there somewhere you'll be able to buy the HP for less. And if not, you'll find something that is similar to the HP for your purposes that is less. If it's not a Dell, it will be a Toshiba, or an Acer or some cheap no-name brand. Most purchasing of home computers is done from the heart and from recommendation than from the head. And most people don't know enough to do a detailed evaluation. Many people will compare for instance an Apple Powerbook to a Dell Inspiron (not Latitude or XPS even). In some ways the move to Intel will help Apple because at least one element of comparison is simplified - the CPU/chipset. No longer will people be able to say the Apple ONLY has a 1.4Ghz processor (G4) compared with a Celeron 1.8Ghz. IT Pro's know such comparisons to be meaningless, but the general populace do not. This new transparency will on the whole help Apple, but it will not disguise the fact that there will always be something cheaper giving fuel to those who maintain the Apple is expensive argument.

3. There is a fundamental belief that Intel chips are going to be cheaper than PowerPC. This is Paul's main point made in the opposite direction (he claims PowerPC chips are cheaper). While I don't agree with Paul's analysis, neither can his argument be discounted. It is likely that Apple's agreements with Freescale and IBM gave very good pricing - especially on slower/older chips. New Intel chips will be priced higher than older chips, and it is the newer chips that Apple will use. But I think Apple will use slower versions of the new chips in the bottom end machines (and these DO cost a lot less), so mitigating this difference. And, I'm sure Apple has negotiated great deals with Intel, though of course, I doubt if their pricing would be as good as Dell who still would buy 4x as many chips. What I'm pretty sure about is that the switch to Intel was not an economic one based solely on the wholesale price for the chips themselves. If Apple can deliver machines for a lower price it will be more likely to do so via savings in design and manufacturing of the complete machine through use of more common parts, adoption of complete platforms, outsourcing some design etc.

So, where do I stand exactly on this? While I think Apple will have SOME room on pricing - especially if it gets clever on cutting a few bits and pieces without compromising the system - this is mostly myth. For those who think Apple is already expensive today, it will be complete myth. But it will be as much about perception and value. What I think Apple will have to do at the same time as this is advertise more heavily. It will need to get over to people the functionality of the hardware in comparison with others, as well as the superiority of the Apple experience. It needs more than anything to demolish the view that it is SIGNIFICANTLY more expensive. With Vista not expected until much later in 2006, it's best economic argument revolves around the notion that a Mac today with 10.4 and iLife is better value than a Wintel machine with XP and a separate copy of Vista later, especially if people realise that many Wintel machines sold today are not fully capable of exploiting the Vista featureset. Score 1 for Myth.

Next: (3) Performance and (4) Functionality.


Paul Guinnessy said...

Especially considering today's announcement about the newly discovered security holes in windows. This should make an ibook very attractive to individuals not wanting to spend a lot of money on virus checkers and security updates.

Apple also spends about 5% of its revenue on R&D. Dell spends under 1%. Now although 1% of Dell's revenue is a lot of money, that's still nowhere near what Apple could afford to spend and keep its business going (especially as it has to pay for developing Mac OS X and the other multimedia products like iMovie). Therefore the new Mactel ibooks will most likely be around the existing price points, $899 to $1199.

Ian Hobson said...

Thanks for your comments Paul. Indeed the WMF hole is very timely, though I've always felt Apple reluctant to exploit this in case it invites problems to itself.

I am grateful to you for quantifying the R&D spend. 1% is poor for a technology company isn't it? I've seen some mention that Mac OS X costs Apple "nothing" so gives it an advantage against other PC manufacturers, but of course it's the opposite. As long as Apple takes R&D seriously is as long as Apple will never be the low cost provider. I hope that day never happens, but I wish more people understood what it takes to make a great computer and that for a small difference their own experiences would be greatly enhanced.

Do you think a lot of people will be disappointed with that pricing or do you think it's just as a vocal minority?

Paul Guinnessy said...

You're right that 1% is poor for a IT company, but Dell, HP and others don't really spend anything on their computer business anymore, they let intel do it and concentrate on cameras, LCD displays etc... Its how Dell beat Compaq and IBM afterall. I don't think people will be surprised if the Apple price points remain the same, as long as they get something for the money, i.e. better screens, intel chips, decent keyboard.