Should Apple Get Out of the PC Business?

By Rob Enderle  |  Posted 2004-05-09

Should Apple Get Out of the PC Business?

Following Apples recent financial report, there are two questions on the table: What business is Apple really in, and does it even make sense for Apple to be in the PC business anymore?

OK, maybe theres more, but two is an easy number to deal with.

Speaking of numbers, thats part of Apples trouble. The PC market is growing at a rate of between 16 and 20 percent, but Apple is growing its PC business at only a 5 percent clip. This means Apple is still dropping market share at a rapid pace.

On the other hand, the MP3 player market is growing at a whopping 85 to 90 percent pace. Apples growth in that market is an almost unbelievable 900 percent, currently accounting for much of the companys profit and revenue growth.

Still, with this massive revenue shift and a vastly stronger focus on software over hardware, the answer to the question of whether Apple is even in the PC business is harder to decide than you would think.

Yet, from its investment in software properties such as Final Cut Pro and iTunes to its entry into the audio market, it is looking increasingly as if Apple is carving out a place in the multimedia market that has little, if anything, to do with PCs in the long term.

In addition, for a company building hardware, the cost and overhead of that hardware generally exceeds by a significant margin the costs and overhead associated with the related software. Just as Sun appears to now realize with its own platforms, this situation leaves Apple solidly in the PC hardware business until it can no longer build its own platform.

Granted, Apple has shifted its marketing from a hardware focus to other things, and to some, the company appears to be trying to get out of this business. But Apple hasnt exited the party yet, and until it does, the company remains one of the most important players in this segment.

In a contrary opinion, Jim Louderback suggests that Apple would be better off as a consumer electronics company. Click here to read more.

But should Apple remain in the PC segment? This is an even bigger question, and it has two aspects. The first, an emotional aspect that deals with the subjective parts of what would likely be Steve Jobs most important decision ever. The second concerns the objective aspects of that same decision.

Lets look at each in turn:

Apple should remain a major PC player: the emotional argument. Certainly the emotional part of this argument goes to the good Apple does for the industry. The company delivers some of the most innovative and physically attractive designs, and its user-interface work is often used as a template by others looking to approach similar excellence.

Granted, like Sun, they havent been particularly good at understanding market dynamics, picking their fights or understanding market-selected standards. But by taking another path, they provided an alternative that otherwise would not have existed.

Choice is amazingly important to this market, and even Apples use of BSD Unix over Linux showcased an intelligent choice that has since been copied in large enterprises, government offices and businesses looking for the advantages of open source without the negative aspects of Linux.

The Apple user community remains one of the most loyal in the PC business, and abandoning them would likely be substantially more painful than abandoning OS/2 was for IBM.

In short, were Apple to exit the PC business, the company simply would cease being Apple. And while the company would be replaced by a white-goods vendor by the same name, it would be a suicide-rebirth, nevertheless.

In addition, the disruption and pain felt by the loyal Apple users would simply be too costly for Apple to sustain in the long term.

Next Page: The objective argument for Apple staying in the game.

Objective Argument

Apple should remain a major PC player: the objective argument. The MP3 market is a rapidly changing one with little sustained loyalty and where power is controlled, for the most part, by the content owners, not the device makers.

Technology in this segment is moving very rapidly, and whoever owns the digital rights management (DRM) standard adopted by the major content owners probably will own the core components of the standard solution.

Now, Apple isnt a content owner, and its recently demonstrated unwillingness to license its DRM scheme to RealNetworks, Musicmatch and others indicates that it probably wont win the standards fight. Besides, thats where Microsoft increasingly has the inside track.

The consumer electronics space is in constant flux. Take a look at how companies such as Sonic Blue have struggled in this market and how, increasingly, firms ranging from Sony to GE have found that holding a segment can be difficult, even with their massive resources.

For example, its useful to recall that entrenched products or standards such as BetaMax, Munz eight-track audio, projection TVs and Polaroid cameras, as well as Atari and Commodore game systems, enjoyed strong consumer market positions. But these products ended their existence so quickly that many couldnt even remember them just a few years later.

Handheld computers and a new class of video media players are both aggressively targeting this segment. Even old partners such as Adobe are starting to position against Apple.

These moves show that while the PC market is clearly competitive, the consumer electronics market has, historically, been more so. The trading floor is littered with companies such as RCA that once were dominant and now are only a brand or, like Munz, not even that.

The end result is that while Apple is doing very well in this new multimedia market at the moment, this opportunity could evaporate in less than a month. Without the much-slower-moving PC business as a backstop, Apple could be out of business long before it had a chance to react.

More important, iPod users who also own a Macintosh will be the most loyal to the audio platform. Why? Because if a newer, better product should enter the market from another vendor, it is unlikely that the new player would even work on the Mac platform. This provides Apple with an additional hedge should the more-fickle WinTel user base jump to the newer offering.

On one point, I do agree with Jim Louderbacks thesis that Apple should quit the PC business: The company is moving away from its PC roots and appears to be quietly reaching a point where it will have no choice but to abandon the PC market. However, I disagree that this is the right direction or choice.

Apple needs to find a way to grow market share and interest, even if, like Sun, it must come to some disagreeable choices. An Apple without PCs would probably lead to a world without Apple. And we should do whatever we can to ensure that that result doesnt happen.

Rob Enderle is the principal analyst for the Enderle Group, a company specializing in emerging personal technology. Full disclosure: One of Enderles clients is Microsoft as well as Advanced Micro Devices, Dell, Gateway, Hewlett-Packard, Intel, Transmeta, VIA and Vulcan. In addition, Enderle sits on advisory councils for AMD, ClearCube, Comdex, Dell, Hewlett-Packard, IBM, Intel, Microsoft and TCG.

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