23 May 2006

Apple mid-term review

It's been 14 posts here since the last significant article on Apple, so I know you're all looking for a big one, so here it is! Please join the debate by submitting a reasoned comment.

The release of the MacBook this week marks a major milestone in Apple's strategy to be a major force (and leading innovator) in the post-PC era* of converged lifestyle devices. Less than a year ago, Apple surprised most of the technology world by announcing a switch to Intel chips, a move which was not especially popular with the faithful, or even the hardcore techies (who believed if anything it should be an AMD chip inside). They announced that the transition would begin within 12 months, and be complete within 18 months after that. In fact, apart from the Pro tower line and Servers, the transition has been COMPLETED within the first 12 months. We also now have an idea that with Intel's release of Conroe/Woodcrest/Merom chips starting in June through August, we will see the completion of the plan all within a 14-15 month period (though I'm hedging on whether the IntelXServe will come out in that timeframe).

While Apple, perhaps, set expectations ludicrously low in terms of the timeframe, and that financial pressures meant they had to be faster, I think most people would accept the speed and quality of the transition has been on the whole incredible. There have been issues reported with the MacBook Pro of course, but none more than I've seen with most other laptop releases (my last-iteration Powerbook had well-publicised battery and sound problems, both fixed). All-in-all the rev A. machines have actually been relatively problem free. Some might say that Apple has accomplished this by in fact being comparatively un-radical in design - all machines were basically very similar in form factor at least to the previous PowerPC based machines.

The MacBook represents perhaps the first diversion from that - with it's wide screen and thinner profile, but is still similar to older iBooks in terms of materials used, port configurations etc. Apple can now move on to the super exciting products that Steve has been telling the press are in the pipeline. The MacBook is of course a vital computer for Apple - the laptop market is still growing much faster than the desktop one, the previous iBook was getting VERY long in the tooth, and Apple was conspicuous by its absence in the low-price notebook category. It is also a vital machine in the education market too.

I am surprised at the overall specification of the machines. They seem quite close to the MacBook Pros, and yet are priced pretty aggressively for Dual Core notebooks. I had perhaps expected a lower-end single core machine and I am also surprised that the lowest spec machine still uses the 1.83Ghz processor rather than the 1.66Ghz baseline Core Duo. Inclusion of the iSight and magsafe are also pleasant surprises if not completely unexpected. I'm not quite sure about the rationale for the Black machine effectively having a premium of $150, but then that's a choice that people can make for themselves. Compared with MacBook Pros, the MacBooks lose a few features - eg the Expresscard slot and perhaps they are heavier in relation to their size - the 15" and 17" MacBook Pros are weight class-leaders in that size and feature set. Apple could clearly have made a single core machine at a price point of $999 quite easily, but has chosen not to (yet?). For comparison, I priced a brand new HP DV1000T with similar Core Duo, memory, wi-fi etc and it came in at $1216. The new HP's have been well reviewed as price competitive.

The Challenges

With this announcement behind us what can we look forward to, and what are the problems Apple has to face?

In December - before the MacWorld announcement of the first Intel products I covered 4 areas in which much was being said and written about Apple and termed this series the "Myth or Reality" series. Essentially I tried to look at what was being said that Apple would do or needed to do in each area and then concluded whether much of the thinking would turn out to be Myth or Reality. The 4 areas I covered were 1. Timing; 2. Pricing; 3. Performance and 4. Functionality. It's time to review those areas again and see how things have changed.

1. Timing. There were commentators questioning how quickly Apple could move given Intel chip availability and other factors. Who would have thought in early January that in a little over 4 months Apple would be SHIPPING it's four major product lines on Intel? I expected that Apple would attempt to move quickly, and that indeed the Intel chips they needed were essentially available. But, I think Apple has exceeded even my expectations here, and they have been backed up by pretty impressive Intel availability - including, we now hear, the earlier availability of the new Core line of chips code-named Conroe/Woodcrest/Merom. These represent the REAL Core chips (with the Yonah 32bit chips being an interim offering). These three chips should slot in nicely into the Apple line quickly upon their release, as they are pin-compatible, meaning that Apple may well be onto 2nd generation Intel products on iMac and MacBook Pro models before the start of their next fiscal year.

I think Apple has also done a much better job over previous years in product availability. There were serious delays to the iMac line for instance under PowerPC. We've not had that here. Products announced have been shipped pretty much on time with decent availability.

But Apple's challenge on timing now will be to match the other manufacturers in keeping products updated. Apple's product lifecycle has typically in the past been 9 months or so even for minor upgrades, with major product refreshes every 2-3 years or more. How quickly will Apple have products using Conroe/Merom/Woodcrest? What happens when the next/faster variant of those chips is released? Will Apple match other manufacturers in this regard? In fact, we may already have that evidence. Since the MacBook Pro was announced for instance, it has essentially had 2 speed bumps and a small price cut in the UK. That bodes well for Apple's flexibility.

2. Pricing. In this article, I argued that for those thinking Apple was already expensive, things wouldn't change. Moving to Intel was not done to reduce prices. In my conclusion to this article I said:

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.

I'd like to think that was a fairly accurate comment. Mac mini pricing certainly was not cut (though one could argue that machine is still very good value today). Other machines came out pretty much on a par (or cheaper - eg 17" MacBook Pro) with previous PowerPC models. But I think it is now becoming easier to compare Apple products to others, and that, with the announcement of the MacBook, there is now a product that covers just about all price points. While that may not be the exact product someone was looking for, it is at least easier to compare the models. It is also easier to look at the Apple premium for features and software and understand how large that is. I believe that if people really add up the featureset then that premium ranges between -10% and +10%.

Those that argue you can have another vendor's laptop that does what a MacBook Pro does for half the price are exposed more easily now. Apple's problem in the price arena is that there are thousands of competing products giving truly huge choice. If you don't want to pay for a built-in iSight camera, Firewire, magsafe adaptor for a MacBook Pro you have no alternative in the Apple range. Or, if you're happy with a single core laptop, you've no product in the Apple line-up. In the WIntel world, you choose a model that has exactly what you want, and no more (though how many people do that is open to question as emotions enter this area more than most people care to admit).

What has also changed of course is that Apple IS advertising the Mac again, and stressing the superiority of the experience (that was prescient then!). Vista is delayed at least into early 2007, and perhaps what many of us didn't see coming was Apple's positive support of allowing Macs to run Windows XP via Bootcamp,

Pricing is a very difficult area. Apple is making good, but not enormous, margins on it's computers, so its room for manoeuvre is limited. It must do its best to offer a great choice of models covering most price points and needs, and stress the value offering. But if a PC price war breaks out, this will hurt Apple too. Last week, several news sites carried coverage of research by Piper Jaffray analyst Gene Munster about Apple pricing showing it in a favourable light (net: on average only 10% premium for Apple experience). I have my own criticisms of this coverage (eg comparison of Mac OS X next to XP Home rather than XP Pro), but nevertheless I think the world is starting to get the message that Apple is not 30% or so more expensive if at all. That image certainly resulted in a lot of people dismissing Apple outright. If they start to include a Mac in their purchase considerations that's a big hurdle overcome for Apple. Most people can afford 10% more for something with greater value. Now the challenge is convincing them of that value - the affordable argument should go out the window.

3. Performance. I covered this topic by saying that performance couldn't be so radically different from PowerPC machines that it would cannibalise the top end machines immediately. I had assumed at the time that the first machines would be the low-end machines - mini and iBook. Of course, Apple surprised most of us by dealing with the mid-range machines - iMac and Powerbook first. And the numbers were certainly attractive. But held back by some applications not being universal, this allowed the top end PowerMacs to still look good. Apple's early problem was that for the mainstream market it now only had old stodgy slow products. With the mini and now MacBook that has changed.

So, for the most part, the performance area has turned out well - very well. I expected this would take until late 2006, or 2007, and for certain pro apps such as those from Adobe, that may be true. But for most Mac users, most of the time, I think Apple can now claim to have a great-performing solution. The debate will now move on to absolute performance of OS X and its applications next to Windows. That's not a bad thing.

Now the interesting thing for Apple is if it can use it's control of the whole chain to drive performance significantly better than in the Windows world. This may not become apparent until Leopard, or even after that. But Apple will be supporting far fewer chip types in it's machines than Microsoft. It may therefore be in a position to make significant optimisations for such chips in both the OS and its applications (eg video encoding).

4. Functionality. I concluded the article on functionality thus

How easy will Apple make it to run Windows on the same machines? Will Apple increase support for switchers - perhaps by bundling something like move2mac into? Will we see greater integration for iPods? Will they open up FrontRow to run on all machines?

Well, we have answers to many of these questions now. Certainly, Apple didn't push the Mac mini as a media center-like device, which many commentators were asking for but nor did they discourage it (see "Big Ideas" on right side of page). And in the other areas, Apple has made huge strides. FrontRow is now on all Intel Macs, and all Intel Macs can of course run Windows XP in various fashions. Their capability in this regard will be enhanced as Leopard emerges, and as third party solutions become more mature.

I think where Apple is still weak - and needlessly so as there are solutions - is in making it really easy for people to switch. A very bright friend recently switched and while impressed by much of the capability, he was also frustrated at the difficulty of moving things across AND that he didn't find the Mac intuitive. In fact, he is an expert computer user who does most things via the keyboard. He had not picked up that he could do many of the things that way (eg Ctrl key combinations were not apparent, nor Command Tab or indeed many keyboard shortcuts). Combined with not having his second mouse button, this created frustrations that in fact (mostly) didn't need to be there. While he was able to move most of his stuff (eg iTunes) across, this was also not as easy as it might have been.

If Apple is to satisfy the switchers with the experience most of us regular users expect, then it has to do more to get them productive quickly. That means appealing both to low end users for moving a few photos, documents and tunes over, as well as to the really sophisticated user who still wants that part easy, but also wants to be super productive on the new machine quickly. I've not used move2mac, but something like that would clearly make some sense to offer for a very low price or ideally bundled.

And, I think Apple still has holes in the functional areas that are not the preserve of the PC (or iPod). If Apple is to be one of the leaders in the post-PC era, then it has to have broad appeal in a range of devices both mobile and fixed. If it doesn't produce such devices, it has to make sure that it has partnerships and can deliver top quality devices in that realm. At the very least it will need devices that allow the Mac and iPod worlds to be fully integrated into users' mobile experiences. The iPod nano was a great device to push out convergence in that market but it will happen. And Apple will need to ensure it has products that do not allow it to be found lacking in the areas that Windows Mobile and Windows XP Tablet edition cover today. In the home, Apple will need more than an informal EyeTV partnership and it's iPod/iTunes success.

So, timing, pricing and performance have all successfully (or just about) been negotiated. It now comes down to functionality. Apple lost the PC wars as the integrated experience didn't win out. In the post PC-era, it is betting that the integrated model can win out. If the PC is still relevant as the hub, it is what the hub does that is important, not what O/S it runs on. iLife and the whole Mac OS experience are critical in that battle - as exemplified in the new ads. But Apple has to make navigating into that experience easier. It is lacking in a low-end integrated office package (eg an Intel-based Appleworks) so is now exposed there. And, as new games consoles come out, new phone types, new tablet form factors, and even just simple consumer electronics devices like Tivo move on, it has to make sure that having buried its disadvantages in the old world, it doesn't become marginalised in the new world.

It cannot take the lessons of the iPod and just apply that to the Mac world - it is vastly different having a single-digit percentage of the market than having ownership of that market. But it must apply the relevant lessons of the iPod success to both the Mac market and it's future markets. It must build on it's new partnerships such as with Intel and its (as I've argued before) co-existence with Microsoft to make significant headway against Dell, HP, Sony, Lenovo, Gateway and others.

The Future

What have we to look forward to?

First of all, Apple has really just moved it's existing line over to one set of Intel chips - the Yonah Core Duo (and in one case Solo) range. It is using exclusively (so I believe) the T range of chips. Intel also offers L (Low Voltage) and U (Ultra Low Voltage) ranges of these chips. Such chips could be used in different types of products - or just to save weight and/or increase battery life. I think Apple's initial stress on performance is no bad thing. But it will need a wider portfolio of products. With Conroe, Woodcrest and Merom, it will also have greater choice (and these also will have LV and ULV variations). So, that's one area in which things will get even better. I'm sure its this variety of processors that is allowing Steve to be so bullish about the products in the pipeline.

Next up is 802.11n. I certainly expected products in this area by now. Apple was the first mainstream PC manufacturer to really push 802.11b and then g. I think it really needs "n" for further integration into the home. However, while some pre-n products are available the standard has been delayed and introducing such products now might be a PR disaster for Apple when the final specification renders such products obsolete. Without 802.11n Apple will be reluctant to introduce a video airport express which would be a key product in the living room. Perhaps this will come by MacWorld 2007 time, but really its outside of Apple's control and must be quite frustrating.

Finally, we have Leopard of course. If people compare Vista with the current Tiger release (which many commentators do, and not that favourably), then the arrival of Leopard with no prospect of a catch-up Microsoft product for, say, another 5 years will send a pretty clear message to consumers. I wonder if Apple will in fact wait for Vista to arrive before releasing Leopard and use that extra time (assuming it is extra time) to add a few more killer features. Apple's Worldwide Developer Conference in August may clarify this a bit more. Key to Leopard's success I believe will be the way it allows Macs to co-exist in a Windows world so nullifying the main arguments for not going Mac and indeed giving everyone a best-of-both-worlds experience.

Apple's business success in the next twelve months will be judged based on significant market share gains in the PC world combined with further iPod volume growth (and with little sign of marketshare loss), while not getting engaged in a price war to damage margins. In the PC business, nothing less than 50% growth of units in a market growing at just 10% will be considered sustainable in this area. Thus, in 2 years time, if Apple has not grown worldwide marketshare to at least 5% (which may imply a more sustainable 10% marketshare in the developed economies), then it will still be too small to have long term influence in this marketplace. Instead, history will judge this period as just another in which Apple had a chance and blew it. Ideally, Apple will also be seen to be inventing/succeeding in a 3rd area. I will allow a grace period of this quarter for things to settle down.

But, Apple's final fiscal quarter and final calendar quarter this year will need to show evidence of this absolute growth and marketshare growth (I would consider sales of 1.7m Macs in each of those quarters evidence that Apple can do: 2005 equivalent - just over 1.2m). Without that growth, even I will withdraw my bullish stance and recognise that Apple will forever be a bit player in the PC world and even the post-PC era. What do you think? Is this a low expectation or a high expectation? What should be considered success criteria for Apple?

For Mac evangelists, it's time to put up or shut up. There are no excuses any longer. The next twelve months should be really interesting!

*"Post-PC era": I have seen mention of this term frequently in recent months. I am assuming in this article that such an era is coming into existence. A definition of this is highly debatable and I'm going to skip this issue for another day! For now, let's consider that it does exist and refers to the new level of consumer choice in devices through convergence of hardware, software and services.

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