Analysis: The resurgence of the Macintosh: Is it real - and can it last?

Posted by Scott M. Fulton, III

 

Cupertino (California) - Stock exchange indexes fell, then rose again, on the news that emerged from Apple Computer. Millions of adoring fans awaited the announcement of new Apple products, during an invitation-only event where thousands had to be turned away. New Macintosh computers were unveiled, on the heels of astounding news that Mac sales were increasing in the US by 45% per year, even as it begins the transition to a new processor platform. And the face of CEO Steve Jobs, emerging like a genie from atop the wide monitor of the new iMac, graced the cover of Time magazine.

What decade is this again?

As we reported on Wednesday, the good news from Apple just keeps coming with the announcement of its first line of quad-core G5 PowerMacs, along with dual-core capability minimum across the product line. This on the heels of news from Apple last 11 October, confirmed by analyst firm IDC, of 45 percent year-to-year unit growth in shipments of Macintosh products to the American market. Although the spotlight continues to be hounded by iPod, the little device that has taken command of the portable consumer electronics market, all of a sudden, Macintosh enjoys what IDC projects to be a 4.3 percent US PC market share, and has its sights squarely set on the magic number of 5 percent.

But how much of the Mac's newly rediscovered success comes from sharing the afterglow of iPod's spotlight? David Daoud, IDC's research manager for personal computing, has addressed the subject of what has been called the "iPod halo effect." Daoud cited iPod shipment figures of 6.4 million units in the third quarter of 2005, up from 6.1 million the previous quarter, and 2 million in Q3 2004. Yet he doesn't believe there's any direct evidence of a direct correlation between iPod's success and Macintosh's, saying that in order for that to happen, Apple would have had to pull off what he calls a "grand piggybacking."

"If you're going to spend $300 on an iPod," said Daoud, "it takes another major leap of faith to spend another grand on a PC." While it's possible that new Mac owners are iPod-catalyzed converts, he said, it's also equally possible that they are existing Mac owners who purchased their systems during Macintosh's last surge of success three years ago, and that they're undergoing a "refresh cycle."

As IDC has reported, the US PC market is growing at an annual rate of 11 percent. While Macintosh's growth rate of 45 percent may seem disproportionate by comparison, Daoud finds it difficult to explain any disproportion on account of market share that Apple is directly stealing from competitors. He says there's no evidence to indicate that Apple's competitors are losing market share, although it's obvious there are fewer of them today than in previous years. Two years ago, Apple's marketing campaign to woo PC users to Mac by way of a point-by-point features comparison, he noted, is generally perceived to have failed. Also, IDC's research with regard to what Daoud calls "mindshare" - which measures relative brand recognition and loyalty among consumers - shows Apple neither gaining nor losing much among converts, but gaining some loyalty among those who already consider themselves Mac followers. Meanwhile, HP and Dell are both also stable in the mindshare category.

A wise but fictional detective is believed to have said something on the order of, once all other possibilities are eliminated, the one that remains, however silly it may sound, must be the truth. What remains for Daoud is the halo effect. "I think if anyone, particularly a company like Apple, needs to expand its user base," remarked Daoud, "they certainly need to be very innovative, in terms of understanding what everybody else wants. In other words, you're not developing a product just so that you'll be liked by your loyal crowd; you need to go beyond."

With regard to "beyond," Daoud refers to this math: Over 12.5 million iPods were sold in a six-month period. "I have to believe that not all of these were 'Apple guys,'" he said, referring to new iPod customers. If Apple can sustain these growth numbers on a quarter-by-quarter basis, he believes, the same proportions may be reflected in the number of iPod owners who visit Apple's Web site to connect to iTunes, and in so doing, end up purchasing Macs.

But which Macs are they purchasing, and does the answer give any clue about the purchasers? According to IDC, 602,000 desktop Macs (including PowerMacs, iMacs, and eMacs) were shipped in Q3 2005, while 634,000 mobile Macs (PowerBooks, iBooks) were shipped during the same period. For the first time, over half - 51.3 percent, to be exact - of all Macs sold were portables. Apple may very well be rebuilding itself into a mobile content company, and portable Macs may be playing a vital role in that transition.

Joe Wilcox, senior analyst with JupiterResearch, does not believe the "halo effect" is a major factor in Macintosh's resurgence. Wilcox credits Apple's 116 retail outlets in the US, plus Apple's extensive advertising campaign in all media. Of course, those ads were for iPods; but in another sense, he believes, they were for Apple. "If people don't know about the company, and don't see the company's products very much," he asked, "how can they buy them?"


Is Microsoft no longer on Apple's radar?

As our sister publication Tom's Hardware Guide reported throughout last month, Microsoft is busy developing Windows into a sophisticated platform that serves as an "information conduit" of sorts, utilizing XML formats to drive data from applications such as the Office suite, through SharePoint, and out by way of whatever browser the user happens to have. This is but one stage in a massive operating system transition which Microsoft has said may take up to five years to complete. Last month, Microsoft began demonstrating Vista to developers and potential partners as perfecting the fundamentals and infrastructure of the operating system.

Meanwhile, Apple is concentrating on a massive migration of its own. Last June, Apple stunned even its own loyal "mindshare" base by announcing it would begin a transition away from PowerPC processors, and toward total adoption of Intel, beginning next year. The impending shift raises another possibility: Could Mac loyalists, purchasing the last of the "classic" Macs, be driving up sales numbers?

"I was a little surprised that the Mac sales were up," said Tom Halfhill, senior analyst with In-Stat and senior editor of the acclaimed Microprocessor Report. "I was expecting them to decline when they announced they were switching to Intel x86 processors, just because people might be afraid to buy into a processor architecture that they're phasing out...But it could be that they're picking up sales from people for that reason."

Halfhill believes the transition period - during which the existing base of Mac OS X software would be recompiled to run on Intel processors without an emulation mode - would consume up to three years, optimistically speaking. Mac loyalists, he believes, may be purchasing the most powerful G5 units they can (certainly the "quad-core" feature will help), to tide them over into the era where all the Apple/Intel confusion goes away.

If a reasonable transition would take three years at least, was it prudent for Apple to even start one now, especially with Windows preparing to make a major transitional shift before the end of next year? "Apple's decision to go with x86 was driven by their processor needs," responded Halfhill. "They couldn't encumber that decision by what Microsoft was doing with Windows, or what's happening with Linux. Operating systems are always in transition; there's always a new version of Windows coming out in a couple of years. [Apple] can't just let that be a hold on what they do with their processor strategy. They can't be tied down by what Microsoft is doing, otherwise they'd never make a transition."

If Windows truly is moving toward a more open, standards-based approach to its file formats and inter-application communication, as Microsoft contends, then Halfhill believes this can only benefit Apple (as well as Linux). His theory works like this: During the final years of the printed Byte Magazine, where Halfhill was a Senior Editor, he wrote about the gradual emergence of three interoperability technologies: Java, TCP/IP, and XML. As long as those technologies continue to be embraced to one degree or another (Microsoft would certainly prefer only the latter two), the brand of the application that makes use of them becomes less and less important. In other words, the Mac doesn't need a "killer app" in 2005 as much as it did in 1985. "Once you have cross-platform data formats like XML," argued Halfhill, "the application doesn't matter. You could have a totally different word processor than Word, or a totally different spreadsheet than Excel, and as long as it could read that XML, it would be all the same. That's why Microsoft has been resisting it all these years."

But Microsoft's embrace of open standards comes at a time when there are few, if any, competitors in the applications space for Microsoft to open up to, Sun and OpenOffice notwithstanding. So Microsoft doesn't lose anything by embracing XML. But the move ends up helping Apple, by taking the spotlight away from the need for a "killer app," and reducing the competitive pressure for Macintosh's applications suites, including Apple's own iWork - a name you don't read much about. If everybody's applications utilize the same file format, applications suites become commodities, and feature comparisons become less important. A few years ago, Apple tried to push Macintosh using a feature-for-feature comparison against Windows and Microsoft Office, in a campaign which Halfhill noted was one of Apple's few spectacular failures. Apple may have always won the overall usability argument, but when it tries to break that argument down into constituent parts, and compare its own parts with Microsoft's, consumers either don't buy the argument or get lost in the details. So Apple's strategy may be to focus consumers' attention elsewhere, and Jobs perhaps understands fanfare better than any CEO in the business.


The Intel factor

Without the competitive pressure to make spreadsheets better, Apple - and, in turn, Steve Jobs - can concentrate on their core product, which right now is content. IDC's David Daoud believes Apple wants to position itself as the center of what he calls the "digital crossroads," where content is critical, but equally critical is the need to present that content in a package that consumers will want for its own sake. The long-term money is not in the applications suite, Daoud believes. That segment is becoming commoditized along with the PC itself, so perhaps Microsoft can have it to itself, with everyone else's blessing. "I don't think [Jobs] really wants to compete with Microsoft in the space of Office and the operating system," said Daoud, "and there's no surprise why he moved towards Intel. There's no need to bother and spend too much energy on things like microprocessors. Focus on what consumers want, and you can set the agenda, and you can get the rest of the industry to follow. That's what he's done with iPod, and I think he's trying to do the same thing elsewhere.

Halfhill agrees with Daoud that Microsoft is not the major threat to Apple right now. But he disagrees with Daoud insofar as the reason for Apple's shift to Intel. Apple needed processors with lower power, especially in the mobile space, argued Halfhill; and IBM and Freescale - the microprocessor foundry spun off from Motorola - weren't giving Apple the roadmap they were looking for.

"The problem for Apple is getting this transition made to a new processor platform, with as little disruption as possible," Halfhill told us. "But they've done that before." He's referring to the monumental transition Apple made in the prior decade, away from the 680x0-based CPUs that gave birth first to Lisa, then to the classic Mac, to the PowerPC architecture Apple co-engineered with Motorola and IBM. This time around, however, as Halfhill points out, Apple has a lot more older "classic" software to cast off, as much of the classic System 7 software, and older, will simply no longer run.

Price will be another problem, as the shift to Intel will inevitably be costly, no matter how inexpensive Apple's choice of Pentium processors becomes. Halfhill predicted Apple will inevitably be "paying more for Intel processors than they're paying now for PowerPC processors. I don't see the machines getting any cheaper."

Jupiter's Joe Wilcox disagrees. His firm has been following the "price delta" between Apple and so-called "Wintel machines" (the Mac enthusiasts' name for Windows computers, which has survived AMD's entry into the market), and believes that the new iMacs, introduced last week, may finally put Macintosh on a par in the all-important price category. "Apple's Macs have been competitively priced for some time," argued Wilcox. "So we see now a Mac that is competitively priced against a Windows Media Center PC."

The entry-level price for Apple's new iMac G5 series is $1299. JupiterResearch compared this new entry against a similarly-equipped HP Media Center PC, whose MSRP is $1199. The HP model, acknowledged Wilcox, had twice the on-board memory as the iMac, and 90 GByte more storage. However, the HP had an analog graphics card versus the iMac's ATI Radeon X600 PCI-Express card. And the HP system also omitted the monitor, built-in camera, wireless network card, and Bluetooth connectivity that come standard with the iMac G5. What the HP gains in capacity, Wilcox argued, it lacks in functionality compared to the iMac.


The whole digital home experience thing

Throughout 2006, Intel will be heavily promoting its new Viiv digital entertainment platform, placing Windows Media Center PCs at the center of the "digital home entertainment experience." With the introduction of the new iMac G5s, Apple is aiming squarely for the same market as Viiv. This is where form factor should play a role, and where one might come to the conclusion that the iMac's form factor works against it. The largest screen available for the new iMac is the 20" diagonal with widescreen aspect ratio. That's plenty big for a PC monitor, but it isn't exactly a widescreen TV. To its credit, all new iMacs feature digital video output to as wide a digital screen as you may want. With a Windows Media Center PC, this is the part of the strategy where you would simply cast aside the smaller monitor. But with the Macintosh, there's a problem: There's a computer inside its monitor.

Some may see this as a problem; and this is where the arguments in favor of the new G5s get, as Lewis Carroll put it, "curiouser and curiouser." Wilcox believes the 20" monitor is plenty big for many households' widescreen experience. In addition, he argues, the iMac may be best suited for the type of digital home entertainment experience which isn't centered so much around the TV. "Given that we're still early adoption with big screen TVs," he remarked, "I think it's presumptuous to assume that it's designed to be hooked up to a big screen TV. Just because you can do it doesn't mean that you'd want to do it." Many households, he reminded us, contain digital entertainment components that don't need to hook up to the TV set, including the stereo receiver.

The other "curiouser" argument comes from David Daoud, who believes that the G5s could very well succeed in a digital home experience that isn't so much centered around...the computer. A media center PC, Daoud argues, will be most households' secondary system. Consumers may use it to surf the 'net, but not to balance the checkbook. Intel knows this, which is why its Viiv platform is structured around networking, streaming, and the multiple-PC household. If consumers don't need another new PC to run Windows or Office, then the requirement for a media center to be Windows compatible may very well disappear, which would be to Macintosh's advantage. This could give room for Apple to innovate, setting new standards for what a digital media center should be - since there are no such standards yet, Daoud argued - and enabling Apple to "play a role in determining the longer-term profile of what a media center is."

Just to be arguing what role the Macintosh will play in the market, with the presumption that it will play a role, is on a personal note, a welcome feeling. Whether you're a Windows, Linux, or Mac user, you have to acknowledge that the way we use computers today was, to a very large extent, created by Apple. I covered the Macintosh throughout the 1980s and '90s for Computer Shopper, back when people used that magazine to help raise the level of their children at the dinner table. As far back as 15 years ago, I produced pieces about the Macintosh's last-minute rescue from imminent demise. And here we are again, talking about Steve Jobs' next set of innovations, and pondering how the rest of the world will respond.

Welcome back, old friend.