Industry watchers have noticed a “halo” surrounding Apple Computers iPod: The popular music player is helping to bring new users to the companys Macintosh line of computers. However, could the uncertainty surrounding the Macs upcoming switch from PowerPC to Intel processors take the shine off that halo?
When Apple Computer Inc. made that dramatic announcement that it would leave long-time PowerPC suppliers IBM and Freescale Semiconductor Inc. (formerly the semiconductor division of Motorola Inc.) in favor of Intel Corp., many of the Mac faithful were shocked.
Investors and industry watchers wondered if this would put a freeze on Mac sales, which had seen a strong upturn recently, with buyers putting a hold on purchases to wait for the new machines. Apple CEO Steve Jobs said it would take a year to bring Intel-based Macs to the market, but had also promised new PowerPC-based products in the interim.
Such a freeze is popularly known as “the Osborne effect,” in which a company loses sales after pre-announcing upcoming—and superior—products. (Though the original story which gave the effect its name is an urban legend.)
The question was whether this so-called Osborne effect would counteract another sales pressure: the iPod halo effect. Non-Mac-owning purchasers of Apples popular iPod are switching from Windows because of their love of the iPod.
Are these two competing pressures on Mac sales real? In a recent quarterly earnings call, Apple CFO Peter Oppenheimer offered cautious guidance about upcoming sales numbers. Is this evidence that a lean year is ahead for Apple? Ziff Davis Internet News canvassed industry analysts and Mac retailers to see what they thought.
The Analysts Speak
“There is a halo effect, leading to a definite increase in Mac sales, but its much broader than the iPod,” said Joe Wilcox, an analyst for New York-based Jupiter Research of Jupitermedia Corp. He said that a convergence of product releases—the iTunes Music Store, the iPod and Apple stores—”helped revive the coolness of the [Apple] brand.” For example, he said, the Apple stores have a purpose, which, he said, is marketing: “showing the brand, the experience of using a Mac.”
This venue, Wilcox said, also plays to another Apple advantage. “Apple is able to package a lot of value, such as their own software [iTunes, iMovie, etc.] into their computers,” he said. Wilcox pointed out that competitors such as HP and Dell have to pay not only for Windows licenses but for any digital media software they bundle in their computers. This, Wilcox said, also helps support the margin of every Mac sold.
“The halo is iPod plus other things,” he said. “If it was just the iPod”—which, he stressed, is still selling better than expected—”the increase in Apples profits would be much less.”
“If thered been any downward sales pressure,” Wilcox said, “itd have been in the first calendar quarter of 2005.” This, he said, was the test for the iPod: whether it would be, in Wilcoxs words, “a blown-out supernova, or whether it had reached iconic status.”
Next Page: The potential downsides.
The Potential Downsides
Wilcox stressed that there are potential downsides for Apple. Though he downplayed any thought of an “Osborne effect” due to Apples announcement of its transition to Intel processors, “the transition isnt an immediate sales problem, but a long-term logistical one,” he said.
This transition will occur, Wilcox noted, over the same time frame during which Microsoft will be rolling out Vista, its new Windows operating system, some time in 2006.
“The challenge for Apple is to make sure developers are on board,” Wilcox said, referring to the need for existing Mac software to be at least recompiled to run natively on the upcoming Intel-based Macs.
Though existing software will run on the new computers through the Rosetta dynamic translation software, Wilcox noted, most developers will still have to update their applications, which could put pressure on companies also trying to deal with supporting a new version of Windows. “For companies with limited resources,” Wilcox said, “they have to make a choice—Mac OS X for Intel or Windows Vista?”
Still, Wilcox said, “I would be surprised if the [Intel] transition has any impact on Mac sales in the short term.”
“In fact,” he said, “the opposite might be the case.”
“Switcher consumers probably dont know or dont care” about whats inside their computers, Wilcox said. Businesses, he said, want to purchase computers that they can keep in service as long as possible; this, he said, might mean that the “least complicated option would be to buy Macs now rather than being an early adopter [of Intel-based Macs].” And the Mac faithful, he added, may want to buy PowerPC-based Macs now, out of platform loyalty.
He qualified his deductions as educated guesses, though. “Its too early to call the numbers,” he said.
Ted Schadler, a vice president and principal analyst at Cambridge, Mass.-based Forrester Research Inc., agreed that it was too early to analyze hard data about sales behavior in response to Apples Intel switch.
However, he said, Forrester does have hard numbers showing a rise in Apples market share and installed base, which he attributes at least in part to an iPod halo effect.
Forrester surveys between 60,000 and 70,000 U.S. and Canadian households each year, asking them what brand of personal computer they have purchased most recently. (Schadler stressed that this question measures installed base, which, he said, gives a more reliable sense of market penetration than market share.)
The survey is done in the January/February time period, after the holiday shopping season. “A little rise in the survey translates into a large rise in sales,” Schadler said.
The numbers showed Apple moving from a 3.0 to 3.3 percent market share, Schadler said, representing a 10 percent gain. This, Schadler said, was much higher than any other manufacturer and much greater than the industry average.
“The iPod halo is very measurable,” Schadler said. “Awareness in one product raises awareness of the entire brand,” he said, noting that multiple surveys showed many iPod purchasers ended up also buying a first Mac computer.
Next Page: Fear of Windows dangers attracts customers to Macs.
Fear of Windows Dangers
Attracts Customers to Mac”>
Still, Schadler said, there are other factors driving Mac sales, which saw 35 percent growth year-over-year.
“Theres a fear factor,” Schadler said, “with Windows suffering brutally from virus and spyware attacks.” He added, “Im surprised theyre not selling more Macs.”
On the Front Lines
The first-hand experiences of many retailers support many of these conclusions. Those who spoke with Ziff Davis Internet News said they had seen strong Mac sales, often led by iPod purchases, and few—though some—purchasing delays due to the upcoming Intel transition.
“I think the iPod halo is absolutely real,” said Don Mayer of Small Dog Electronics in Waitsfield, Vt. “Every day,” Mayer said, “a customer walks in for an iPod and says, Hey, what about that iMac?”
Mayer said that this was “only part of an upward trend” hes seen in Mac sales. “The other part is more important,” he said: “Customers are looking for the benefits of Mac OS Xs security” from adware, spyware and viruses.
These two have combined to make what Mayer said was a “dramatic” increase in first-time Mac buyers.
Mayer said he hasnt noticed anything like an Osborne effect yet. “The closer we get to new machines,” he said, the more reluctant consumers will get—but thats not out of the ordinary.” Mayer added that there could be a software issue, where people would delay their purchases of the Intel-based Macs once they have hit the shelves because they might not want to spend the money to update all their software, depending on how effective the Rosetta emulation system is. But currently, Mayer stressed, Mac sales have gone nowhere but up.
“We do see some misunderstanding” about the Intel transition, Mayer said. “But frankly,” he said, “people dont care what processor is in a machine. They care about the software and what it allows them to do.”
“What Id like Apple to do,” Mayer said, “is lie. Say the new Macs are not coming until next summer, but then pop them out in January.”
The worst-case scenario, Mayer said, would be knowing that new, Intel-based Macs were coming three months before their release. “Then,” he said, “there will be a slowdown, and theres nothing Apple can do to prevent that.”
Mayer also stressed that it would be important to have stock in hand of the new computers not only in Apple stores but at independent retailers as soon as the product is ready. He noted that in the past, such retailers have been left out in the cold when new products have hit the market.
Next Page: Some buyers will delay purchases.
Some Buyers Will Delay
Ben Hampton, a partner at Lafayette, La.-based Mac Friends, said that he has seen some people choosing to delay their purchase of a Mac, though not many. “We already have two customers waiting for Intel-based Macs,” he said, adding that these customers are willing to wait until the end of 2006 or the beginning of 2007.
However, Hampton said, “most of our customers arent even aware of the Intel transition,” and he has seen growth in Mac sales due to iPod purchases.
“I think Apples timetable is about right,” he said, though he noted that any delay beyond mid-2006 for the first line of Intel-based Macs “would be a problem.”
“I think Microsoft is really helping out Apple,” Hampton said. “Their new operating system has had so many delays, its losing features and people dont seem to be having a positive response to the name.” This combines, he said, “to make Apple look like a more positive choice.”
“We have definitely seen evidence of the halo effect,” said Kevin Anderson, CEO and President of Computer Stores Northwest, headquartered in Lake Oswego, Ore. “Obviously a ton of Windows users are using iPods,” he said. “We have had far more Windows users in our stores than ever before, and many end up buying Macs.”
“As for the Osborne effect, were seeing very little of that,” Anderson said, “expect by the media and pundits and the usual small crowd who might be afraid of buying a computer because something faster and cheaper will be out next year.”
In fact, Anderson said, “the majority of our customers, frankly, are a bit oblivious to the whole thing, and thats really the way it should be. Its only one component of the computer, and really no different than when Steve Jobs announced that there would be a 3GHz G5 in a year,” he said.
As for what Apple could do to help smooth the transition when the Intel Macs arrive, Anderson said, “Just keep us informed as to what expected impact they may have, when they will ship, and then get us units as soon as theyre shipping.”
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