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Why iPod Can't Save Apple
MadMirko writes "MacNN quotes an article from Money Magazine titled Why iPod can't save Apple, which says 'the buzz on the digital music player and "swank" storefronts are masking an ebbing bottom line, noting reduced CPU sales (resulting a shrinking marketshare), decreased profits (in part due to the lower-margin iPod and little-to-no profit at the iTunes Music Store), failure of the iPod to drive CPU sales, failure of the retail stores to increase marketshare, hidden retail store costs, no operational income, and little value in the stock.'"
Here, you won't have to sell your sole to read it:i ntro_ ipod_0404/
http://money.cnn.com/2004/03/17/markets/free
-Aaron Mitti
Yet at the same time, Google has reported an increase in the percentage of Mac users using Google. HP has licensed the iPod for distribution and iTunes for inclusion on HP computers. And furthermore, Apple appears to be making huge headway into the science and technology markets as well as gaining steam again in the higher education environments. Finally, a significant portion of the scientists I work with are switching platforms from Windows to OS X.
So, from where I am viewing the market from the perspective of an end user, Apple's market position is looking pretty good to me. This article appears to be another one in the long chain of prognosticators predicting the demise of Apple Computer, but what they always miss is the disproportionate influence the company has had on the personal computer industry. Hey, where would Microsoft get all their R&D from if not for Apple?
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Apple has 4 billion in cash and zero debt. As the Money magazine article stated, Apple makes more money from the interest on their pile of cash than they do in profit. But, they make 60 some million on both. That's 120 million a year in profit and no debt. The guy who wrote this article has an axe to grind and that's all. I would love to be in Apple's position.
I haven't read the entire article since I'm not a subscriber to Money Magazine, so it's hard to gauge the article from just those quotes. However, the quotes seem to point out some valid concerns, but it might be a bit of "chicken little" as well.
The market share numbers aren't terribly convincing (since there's about a dozen different ways to measure market share, and one can always pick one that fits what you're trying to say). Without more info, it's hard to judge. Though Apple would obviously rather hear others saying their numbers are going. I've heard that the iPod is the #1 digital music player today and Apple has something like 75% market share for online music, so there's an upward trend. It would be interesting to see Apple's own tracking of unit shipments compared to these numbers. (I'm ignoring comments from someone suing Apple are never convincing until the case is over. There's too much incentive for the plaintiff to basically try to blackmail the defending company into settling).
However, the author is suggesting that Apple's cash flow from operations is negative, while its cash flow from investments is positive. I presume Apple's cash flow from financing is 0 since they've retired their debt. That's not a good pattern for a mature company, and after 20 years, Apple sure is.
Apple has been remaking itself as of late, and one would expect that its cash flow profile would match that of a growing company. And since Apple has a lot of cash, it wouldn't have positive cash flow from financing (meaning its getting its money from VC funding or by borrowing), but positive cash flow from its own investments to finance its remake of its operations.
As an investor, I would argue that I would rather have Apple financing its changing operations from investments rather than from financing. That's because financing from investments is better for shareholders since it doesn't dilute shareholder equity the way issuing more shares or even borrowing from a bank does.
So is it okay for Apple to have negative cash flow from operations at this time? I think so. They've changed their business quite a bit since 1996, and those changes will affect operational income in the short run. For example, Apple has opened some 80 stores, and that's a tremendous operational expense since they've incurred a lot of fixed costs. I believe that their retail story makes sense, since they're the direct opposite of most computer stores. In a way, the Apple Stores are like Target to Best Buy, CompUSA, and the others' Walmart.
Since the stock market currently values Apple at nearly the price to earnings of Dell, it means that the market believes that what Apple is doing will pay off in the long term. And it probably will. I believe Mac OS X and Apple's incredible industrial design are the foundations of its future success. The iPod is positioning itself as the next Walkman, and Apple's in a great position regarding digital music. Their recent deal with HP further solidifies this. As for iPods driving Mac sales, anecdotal evidence is often misleading, but I've met a number of people who have recently bought new Macintoshes after being Windows users for years, and the iPod has helped drive that. There's always room for Apple to pull another Cube and screw things up, but Apple's track record has been respectable in the past couple of years, so people are giving them the benefit of the doubt in that place.
Insert simplistic political, ideological, or personal proselytization here.
> An Ipod mini is not a $250 piece of gear, okay? And a 40 GB Ipod is *really* not a $500 piece.
This is one of the points that the article is considering. Low margin means that the sale price is not much higher than the price to market, and price to market includes a lot more than the cost of manufacturing. How much do those snazzy commercials take from the budget? How many dollars disappear to get the ITunes concept going? These sunk, hidden costs are part of the equation, and they can cut profitability on a product line faster than you can say "betamax", especially since Apple was banking on Ipods driving people to buy more Macintosh computers, and it really hasn't happened.
Virg
When you can show me a public display like the Longest Line then I might agree. (Be warned, it's a video clip.)
The key word is "lower" margin. (ie 40% margins are great, 20% are good)
Apple makes obscene profit margins on the rest of its hardware, while making traditional consumer-electronics margins on the iPod.
Remember also that Apple has all sorts of overhead. They need to keep OSX current, they develop their own software and must spend R&D money to improve their hardware... all to sell a few computers.
Contrast this to Dell. They do no R&D... they assemble.
Sun lived on Apple's business model for years, and look where it brought them. When was the last time you bought a Sun Workstation?
Conformity is the jailer of freedom and enemy of growth. -JFK
Intel and AMD are floundering at the moment. AMD is roaring ahead with 64-bits, but not in terms of performance. Arguably, we don't need a whole lot more performance on the desktop right now, but that's another topic. Over a year ago, Intel was at the 3GHz mark. Now they've moved up to 3.4GHz, at the expense of significantly higher power consumption. They're dropping to a 90nm process (Prescott), and have somehow managed to drastically increase power consumption at the same time. What!? This doesn't bode well for notebooks and small form factor boxes.
But IBM is on track to hit 3GHz this summer and cut power consumption by ~50% at the same time. The roadmap goes out to much higher clock rates, and includes multiple cores on one chip. If this happens, and in a few years we're looking at dual core 4GHz PPCs that use less power than single-core Intel/AMD CPUs, then that's a big deal.
Dell spends between 1% and 2% of revenues (or about $700 million annually) on R&D. This is a very modest amount compared to Sun and Apple. But to say they spend no money R&D is simply incorrect.
Remember... ZG9uJ3QgZm9yZ2V0IHRvIGRyaW5rIHlvdXIgb3ZhbHRpbmU=
That's probably because Apple laptops are price-competitve with Wintel. Wintel desktops are cheaper than Apple because of economies of scale which don't really apply in laptops -- all laptops are basically proprietary designs. So if you buy a Powerbook or iBook, you get a quality laptop at about the same price as a Wintel laptop, plus desirable features like OSX and much longer battery life. Not surprising, then, that Apple laptops are popular even while the desktops are kind of a niche market.
The scalloped tatters of the King in Yellow must cover
Yhtill forever. (R. W. Chambers, the King in Yellow
Contrast this to Dell. They do no R&D... they assemble.
This is a great point, but it's not longer true. It was true several years ago, however. Dell now does a good deal of in house R&D. They used to buy laptops from Sager and rebadge them as Dell. Now their laptops are designed in house and a good deal of engineering goes into them. Take this for example.
With the Dell Axim, their Ipod clone, their line of custom cases, laptops, and even proposed standards (dell is pushing for a standard port for upgradeable graphics cards in laptops, and is developing a solution in house for it). They are way past their assembler days of yore.
Ooooohhh... give the troll a cookie.
/. trolls.
Try reading Sun's annual report sometime. You might come to the realization that your company is in the minority by far.
Sun's cash cow back in the day was the $10,000 pizza-box workstations that they sold to universities and companies. The market has completely vaporized expect in the minds of
Hell -- even SUN abandoned that market. Most Sun people are using Sun Ray terminals last I heard.
Conformity is the jailer of freedom and enemy of growth. -JFK
Hm. Apple PowerMac G5:
* HyperTransport
* PCI-X / AGP
* DDR SDRAM
* S-ATA
* Gigabit Ethernet
* IEEE 1394b a.k.a. Firewire 800
* USB 2.0
So, tell me, which of these, which will be the only interfaces that you can sanely use, is proprietary?
In the PC world, anything other than an Opteron machine can compare in specs.
Incorrect. If the $150m was a settlement, Apple would've kept the money for good. Since it was just a $150m investment, Microsoft has since sold off shares in Apple at a tidy profit.
The settlement had to do with other terms.
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T Money
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Expensive upgrade path?
That one died a long time ago - the RAM, HD, optical drive, graphics card, peripherals, plugs, cables, ethernet ports, and so on are all pretty standard.
The only difference between a tower Mac (G4 or G5) and a PC when it boils down to it is the motherboard and the CPU, but how is this different to buying a PC board that supports a P4 or an AMD chip - you usually have to replace the board if you want to up the speed of the CPU unless you stick with a compatible form factor.
The eMac and iMac aren't easily upgradable, but they're not designed to be.
The iBook and Powerbook are both fairly easy to upgrade in terms of new hard drive and optical drive - both parts are standard laptop components used in PC laptops.
It may cost more to get into the Mac platform (I agree, all new software is expensive) but once you're on it doesn't cost a huge amount more to keep up to date with the hardware compared to updating a PC. The long working life of Macs also helps here - from the entirely unscientific anecdotes of mine, I've dealt with a fair number of Macs and PCs and the Macs tend to have at least twice the useful life before needing a hardware upgrade.
When the PC needs upgrading, I can just sling FreeBSD on it and use it as a server, but it means a new machine is needed. The Macs I have just keep going - running OS X here on a battered old G3 which is ambling along nicely.
Every day one of my user's asks me for advise about buying a new computer, and each time I explain to them why they need a Mac.
The #1 reason is that there are no virus problems on a Mac, and no major problems with spyware, malware, and general browser hijacking. Having someone like me come to their house to clean out their PC will cost them much more over all than if they had just bought a Mac in the first place.
The #2 reason is the digital hub aspect. Adult's want mostly the same things from their home computers: Music, Digital Photos, Email, Internet Access, and Instant Messaging. All things that a Mac does better or the same as a PC minus most of the security woes and difficulty of setup. Most of the stuff they want to do will work right out of the box, nothing to install or mess with.
The #3 reason is investment. After 3 years, you can sell your Mac and still get a lot of money for it. Try selling a 3 year old PC and you will get a fraction of what a Mac resells for.
So, in conclusion, I see that as Windows gets so bad that I spend 3/4's of my day cleaning out spyware, viruses, and restoring hijacked machines to a workable state, people will start to get tired of it and turn to the best alternative. And I will be there ready to give them directions to the nearest Apple store.
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