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Apple's no-price-cuts-needed recipe for success

Meet your next computer: It's no cheaper than the model it replaced, and its new features consist of processor and memory upgrades you probably won't notice and some design refinements you've lived just fine without until now.

09macbook.jpg

In that light, the rather pricey new desktop and laptop computers Apple introduced this morning will flop in the market.

Its updated $999 MacBook, $1,199-and-up iMac and $599 Mac mini models may look sharp, and some add such thoughtful features as a wireless mouse that includes the "multi-touch" technology first seen on the iPhone. But Windows-based computers can cost half as much--even before you factor in Apple's inflated charges for memory and storage upgrades on these machines. Since there's a recession going on and we're all smart capitalists, buyers will switch their purchases to those more affordable alternatives. Clearly, Apple is doomed.

Except it's not.

In its quarterly earnings announcement Monday, the Cupertino, Calif., company blew away Wall Street's expectations, shipping more Macs in a quarter than ever before--3.05 million--for a $1.67 billion profit. The New York Times noted that "Macintosh sales have now grown faster than the rest of the PC market in 19 of the last 20 quarters." TechCrunch marveled at the firm's $34 billion cash reserves--more than the entire market value of Dell or Yahoo.

These results suggest that Apple has been able to accomplish something that a functioning market should make nearly impossible--rake in consistently higher profit margins for a product that could be replaced by cheaper alternatives from other suppliers.

If anything, that trade-off has become easier in the last year. The same switch to Web-based applications that has freed Mac users from having to worry about finding a Mac equivalent to some Windows program can also free Windows users from putting up with the hassle of software installs and uninstalls, one of uglier aspects of life in Microsoft's operating systems.

My own computer-shopping advice points out this difference in cost before getting into the comparative advantages of Macs and PCs. When coworkers with tight budgets have asked me directly what laptop to buy, I've told them to go ahead and get a PC (after which I've counseled them on how to uninstall the bundled trialware junk on the average Windows machine).

And yet a year and a half ago, an NPD Group analyst calculated that Apple's sales amounted to one quarter of every dollar spent on computers in the United States.

How can Apple keep printing money as it were silicon wafers?

It's unwise, not to mention insulting, to explain away Apple's success by calling its customers "fanboys" or describing them as members of a cult. (Though it may be tempting to trot out that theory when observing the Twitter chatter about a new Apple product or the reflexive coverage this company can draw in the traditional media--things that never happen with PC manufacturers.)

The best explanation for it may be seen sitting in traffic right now: Apple has made a business out of selling a premium product, just like BMW , Cadillac or Lexus.

Analysts and critics can insist that Apple has to ship a netbook to stay competitive, and Mac shoppers can wish that the company would turn its considerable talent for design to that category of computer. But Apple doesn't have to do that any more than Cadillac owes the world an $18,000 subcompact.

As grotesque and incomprehensible as Apple's existence may seem to people content with an affordable PC, the company seems to have taken up residence at a spot in the market that other vendors seem unable to barge into.

Manufacturers of Windows-based PCs can craft higher-end models--Hewlett-Packard's Voodoo line of desktops and laptops have offered as much style as many Macs. But they can't do much to differentiate the software on those deluxe models--whether it's Windows Vista or the new Windows 7, shipping Thursday--from what they ship on the $400 boxes lining mass-market retailers' shelves. Apple won't license Mac OS X to them, and most won't ship the free, open-source Linux operating system on anything bigger than a netbook.

This could be a self-reinforcing trend: As PC builders keep having their profit margins squeezed, they have fewer resources to devote to high-end consumer products, while Apple's focus on the most profitable end of the market leaves it with ever more money to dump into product design. Or buying small islands.

By Rob Pegoraro  |  October 20, 2009; 6:00 PM ET
Categories:  Mac  
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Comments

It's the software that makes the difference. I have both Windows PCs and Mac, and without question, the Mac is superior. It is well worth the additional cost.

Posted by: homeyjim | October 20, 2009 6:35 PM | Report abuse

Yeah sure it's well worth the additional cost. The truth is for most home computing uses, a cheaper PC is a better alternative to a more expensive MAC or a more expensive PC. Why? Because most things are on the web.

Posted by: tundey | October 20, 2009 9:11 PM | Report abuse

"Why? Because most things are on the web"

...including Zeus, Clampi, and thousands of other malware just a click away from turning your beloved Windows machine into a Borg Drone.

Posted by: Annorax | October 20, 2009 9:35 PM | Report abuse

I get a little tired of the "PC machines cost half as much".

You can say the same thing about a Lexus, BMW or Mercedes by comparing them to a Hyundai.

Apple chooses to build high end systems, and deliver systems with high profit margins. Apple does not deliver stripped down systems and compete at the bottom end.

For example, try to find a simple monitor with a resolution like the 27" iMac. They run $1200+, and they don't include a computer. At that price, the 27" iMac seems like a bargain.

I think if you take a Mac and a PC and compare similar systems, the Apple premium does not exist.

Now it is true that if you want a bargain system and don't want to pay a lot of money, and don't need the extra bells and whistles, the PC systems are definitely a better deal. I would not recommend a Mac to anyone on a budget.

However, if you want a high end high quality computer, I think that a Mac is the best thing going.

Ron

Posted by: rmiller10 | October 20, 2009 9:40 PM | Report abuse

You get what you pay for!

buy cheap, get crap components, shoddy design, lower resale value, lesser overall experience.

And that's BEFORE factoring in the "it just works"ness of the OS and software bundle.

Posted by: Bush--notrelated | October 20, 2009 10:16 PM | Report abuse

I have to say I am one of those users who buys into the Apple hype over "incremental upgrades." I had put off buying a new work computer since July, hoping that they would update the iMac in September. It did not happen but I waited until yesterday to buy a new machine. Whoops. Thank goodness for the red tape involved or else I would not have been able to rescend my order and send a new one for the machine I wanted (I got upgrades that would have cost me an extra $400 buying yesterday).
I will say that I am not a fan of the lack of choice you get in buying Mac products, but the reliability is key for many things I do. A reasonably priced tower rather than just the outrageous Mac Pro that could be modified would be nice (upgrading the graphics capabilities would be spectacular).
I have to say that I disagree with the idea that Apple does not have a loyal fanboy following. It certainly does and they make up a respectable part of their sales. The reason they are doing so well at this point is that Apple has offered itself as a stable, non-comp sci degree requiring alternative to Windows machines. This has lead to huge sales on college campuses like Cornell where I work. The last 3 years I have seen worlds more Mac laptops than I ever have before. Mostly because they are just easier to use and trouble shoot.

Posted by: ThatGuy1 | October 20, 2009 10:49 PM | Report abuse

The other thing I notice is the high resale value with Apple machines. For example ...fanboy1 buys a $1200 laptop, resells it 1.5 to 2 years later for around $900 and essentially upgrades for $300. If you consider it more like a 'lease' then the price of the computer isn't a big deal.

The loyalty is there initially because of the quality - and a big reason for that quality is the exclusivity of Apple machines and its OS. There a lot of nice PCs ...but nice hardware without the nice software doesn't cut it. This is Apple's biggest advantage I feel.

Posted by: troyn | October 20, 2009 11:56 PM | Report abuse

Let's see, my last year's iMac now features a faster processor, a bump up from 24 to 27 inch screen -70% more screen space, an added SD slot, standard wireless bluetooth keyboard and new mouse technology all for the same price, and you call these "a few refinements I won't notice?" Shouldn't you be working for FOX "news?"

Posted by: buzzard_ef | October 21, 2009 12:28 AM | Report abuse

Wow, dense analysis.

Posted by: dcv3 | October 21, 2009 1:28 AM | Report abuse

A co-worker who was buying a laptop for her college bound daughter recently asked me why the Macbook cost roughly $1000 when Dell was offering the same thing for $499. I went to the Dell store and spec'ed out as similar a machine as possible and the price difference came out to a little under $100. And here at work, those high end Dells and Toshibas drop like flies after a few years while we end up donating our 10-year-old and still working strong Macs to charity. Then there's the thing that you seemingly are incapable of comprehending: You can't buy a pc that's just like a Mac because pc's don't run the Mac OS. There are no alternate suppliers. The market is functioning just fine. People are free to choose quality over whatever else may be available.

You find Apple's existence grotesque and incomprehensible? Dude, sounds like you've got a personal problem. Did Steve Jobs kick sand in your face and steal your girlfriend, or what? And as a journalist, isn't it your responsibility to comprehend the companies and markets you write about? None of this is remotely incomprehensible.

Posted by: mhwebster | October 21, 2009 8:44 AM | Report abuse

The writer is trying to make an economics-based argument to make his point that Macs are "more expensive" than PCs. The problem with that argument is that, while windows machines are commoditized, Apple is not. There is no "alternative" to an exclusive product. The tired song and dance about Mac is more is misleading. First, you get more performance per dolalr with the Mac, second, it holds it's value, unlike the plastic paperweights that are older windows computers, finally the Mac works. No configuration issues, no "system registry," no uninstalls, no drivers to download, nearly no viruses, no malware. Finally the actual product quality blows windows machines away. Look at the build quality of the Macbook Pro -- unibody, machined aluminum, tough and beautiful. They even have built in accelerometers and shock sensors to protect your hard drive if dropped. No $1000-$1900 Dell comes anywhere close. One must compare apples to apples. Macs and PCs aren't alternatives to each other.

Posted by: superacidjax | October 21, 2009 8:59 AM | Report abuse

The issue to me is life-cycle cost. A PC particularly in a production environment or mission critical environment requires a lot of care and feeding. A Mac in a production environment requires very little. I have had 15 engineers working with MAC's as their primary internet machines and we were able to maintain C2 security, avoid worms, viruses, malware, with one guy working part time occasionally fixing the odd snafu. I've worked in shops with 10 PC workstations with almost a full time IT tech, installing anti virus, keeping up patches, debugging strange problems with network cards, etc......


Posted by: patb | October 21, 2009 10:00 AM | Report abuse

Wow! In defense of Rob's rather accurate review, have none of you heard of the literary term - irony?

Posted by: john_in_dallas | October 21, 2009 11:31 AM | Report abuse

This is an interesting, if not overwrought, debate that I've seen take place for years, through the bad times for Apple and the good. I think the main difference now is that Apple has had a consistent vision and message since the original iMac and has been able to bolster that message with the iPod and the iPhone. Whether completely true or not (and I think it is generally true), Apple has convinced a sizable segment of the consumer population that their products are really not that more expensive and that from a value perspective, are actually a better deal. And this, more than anything, resonates when people have access to reviews, statistics, and all kinds of buying advice on the internet.

This argument is exactly why I thought Microsoft was making a mistake with its series of commercials that emphasized price vs Apple; first, in some cases the argument fails on a factual basis and second, it sets Microsoft's hardware partners up for an ever-devolving price war. At some point, that potentially backfires -- see the evidence from the last two quarters.

The risk for Apple is that they lose focus and become disconnected from their successful message (which would also mean losing clout with critical sectors of the buying public). Will be interesting to see how things play out over the next ten years.

Posted by: teamn | October 21, 2009 11:47 AM | Report abuse

>"Why? Because most things are on the web"

>...including Zeus, Clampi, and thousands of other malware just a click away from turning your beloved Windows machine into a Borg Drone.

>Posted by: Annorax

Exactly. Time and peace of mind may not be quantifiable in dollar terms but for me, and many others, it's worth the extra money not to live paranoid, constantly be downloading "critical" security updates, and suffering few crashes (and never a loss of data).

Posted by: GWGOLDB | October 21, 2009 2:02 PM | Report abuse

Rob is right about most of the upgrades on the new iMacs being mostly insignificant to most users. The $1,200 dollar model went from 2 to 4 GB of ram, a 320 GB to 500 GB hardrive, and a slightly larger screen. None of that will greatly effect the usefulness of the computer for a majority of users. If you can fill up a 320 GB hard drive, it is not that much harder to fill up a 500 GB one. If you need need a machine for High resolution graphics, you probably wouldn't buy an all in one machine you cannot upgrade monitors/graphics cards on. In my case the RAM upgrade is key to a lot of very large data processing functions I need to do, but for most users who will check email use a word processor, surf the interwebs, and maybe play a few games 4 GB versus 2 GB does not affect their use.
The wireless keyboard/mouse offering is just a gimmick as well. Who really needs a wireless keyboard or mouse with a desktop? It saves space, but is not entirely necessary. Plus the lack of a numberpad on the keyboard and the unreliability of the previous generation mighty mouse means serious users will most likely not use either if they get this machine.
Also when I think of Mac hardware, I do not think quality. I have owned 6 Macs and every single one I have had hardware failure on (logic boards, hardrives, screens, etc.) . The thing that really sells me on Mac is how good the extended warranty is on the machines( Call Apple to say it is broken, they send you a box that arrives next day, ship the computer back to them, get it back in a week fixed). That is a lot more than I can say for nearly any other brand of computer including powerhouses like Dell. That customer service plus the reliability of the operating system and other software is what really sells Apples despite the higher upfront costs.

Posted by: ThatGuy1 | October 21, 2009 2:23 PM | Report abuse

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