bluecell
08-05-2003, 08:26 AM
According to this BusinessWeek article (http://www.businessweek.com/technology/content/aug2003/tc2003085_3215_tc112.htm), it's Apple.AUGUST 5, 2003
Where "Think Different" Is Taking Apple
Special Report Archive
*** SPECIAL REPORT: APPLE'S STRATEGIC SHIFT ***
Where "Think Different" Is Taking Apple
Rather than accept being a niche PC maker, Steve Jobs is transforming his baby into a high-end consumer-electronics and services company.
From the word go nearly two years ago, sales of Apple Computer's IPod MP3 player have been music to the PC maker's ears. Never has that been more true than on July 16, when Steve Jobs & Co. stunned analysts by announcing they had sold 304,000 players in the company's third quarter, nearly four times most analysts' expectations. The reason: Customer demand soared in May after Apple (AAPL ) launched its third-generation iPod, which stores 7,500 songs in a player that's lighter than two CDs -- and is compatible with Microsoft's (MSFT ) Windows operating system. Apple's flagship retail store in New York City's Soho section stayed open until 11 p.m. the day of the launch just to meet the demand.
"It's a paradigm shift at the company," says Charles Wolf, an analyst at investment firm Needham & Co. and a longtime Apple watcher (who owns shares of Apple stock). "They are redefining what kind of company they are." Indeed, the release of iPod for Windows last August established the demarcation line in an extraordinary strategic change for Apple, a company that over the past two decades has steadfastly refused to loosen its control over the creation, manufacturing, or distribution of its products.
BEYOND THE MAC.
Years after Apple launched its advertising campaign admonishing customers to "Think Different," CEO Steve Jobs appear to be taking his own advice. Instead of resigning himself to the idea that Apple will never be more than a niche PC supplier, Jobs is slowly transforming it into a high-end consumer-electronics and services company à la Sony (SNE ) -- one that he hopes ultimately will be less dependent on sales of the Macintosh PC, which now account for about 80% of revenues.
Apple's transformation has been gradual. It started in October of 1999, when the company introduced iMovie, a video-editing program for the Mac that brought professional-quality digital editing to the masses. Audio-editing software iTunes came next, in January of 2001. Then just 10 months later, Apple launched the first iPod.
Though the player got rave reviews, it soon became clear that most people weren't going to abandon their Windows PC just for the chance to use what arguably was the best MP3 player on the market. So in August of 2002, Apple introduced an iPod for Windows. By Christmas, it plans to launch more new Windows-compatible products, such as the wildly successful music-download service, the iTunes Music Store, originally just for Macs.
"That represents a shift in strategy, whether they realized it at first or not," says Wolf. "The iPod was the first product that wasn't tethered to the Mac." Apple executives decline to comment on company's strategy.
"CADILLAC OPERATION."
Nonetheless, a look at Apple's balance sheet reveals why it's so anxious to broaden its audience beyond the Mac's niche audience. In its third quarter, which ended June 30, Apple earned $428 million in gross profit, a 27.7% margin on sales of $1.55 billion, but it spent $419 million on operating expenses, leaving it with an operating margin of just 0.6%.
"Apple's gross margins are the envy of the industry," says IDC analyst Roger Kay. "But below the line, they give it all back. They pour money into R&D and [selling, general, and administrative expenses]. They have expensive retail locations and high-end advertising. It's a Cadillac operation."
Wall Street hasn't punished the stock, however. Apple shares are trading at a 52-week high of about $21. But to rise further, Apple has to do one of two things: Increase revenues and profits -- or cut staff and development and marketing costs. Jobs has clearly stated that his aim is to do the former. When the Net bubble burst in 2000, he promised his staff that there would be no layoffs. Instead, he said, Apple would "innovate through the downturn."
SKYROCKET POTENTIAL?
The iPod was the first step. According to an analysis by Needham's Wolf, at the current wholesale price of $360, a Windows version of iPod should have been able to capture close to a 10% share of the 2002 MP3 market -- about 900,000 units, worth about $325 million in revenue.
At a lower price point, sales could skyrocket. Wolf figures that at a wholesale price of $315, Apple would still earn more than 20% gross margins and sell 1.25 million players. That's $400 million in revenues. Couple that potential with market researcher IDC's prediction that the MP3 market will nearly triple over the next three years, and it's possible that by 2006 Apple could generate $600 million in annual sales on the iPod for Windows -- boosting its total revenues by about 10%. "The iPod is the first step. It should not be the last," says Wolf.
Morphing into a consumer-electronics company also capitalizes on a hip brand -- the cult of cool -- that Apple has spent billions building. Take the iTunes Music Store, which launched with much hoopla in April. Apple was the first player in that business to persuade the five major music labels to sign onto a pure à la carte download service, where music aficionados could buy individual tracks for 99 cents and burn them to a CD or transfer them to an MP3 player.
STREET CRED.
Until iTunes, customers' only legal option had been the more complex subscription services hawked by the label-backed services, Pressplay and MusicNet (see BW Online, 4/30/03, , and 4/22/03, "Web Music Gets Its Act Together"). On its first day, Apple sold a million downloads. By the end of July, it had sold about 7.5 million tracks.
Media reports at the time credited Jobs's street credibility in Hollywood as key to getting the service off the ground. (Jobs personally called individual artists, including Eagles lead singer Don Henley, to persuade them to make their music available on the service.) But insiders say it was more Apple's popularity with elite style influencers that helped persuade gun-shy music execs to grant the licenses required to create a less restrictive service.
Says one label exec: "Until Apple, it wasn't cool to buy digital music. This was about getting to that pivotal group of people -- the people who buy the cool sneakers and wear the right clothes -- and showing them that legally downloading music could be cooler than stealing it."
CHANGING THE DEBATE.
The Apple platform also appealed to the labels because it's so popular within the entertainment industry. When artists, studio engineers, and marketing executives saw the Apple store, many changed their tune about online music, says another executive. "Suddenly, people said 'I want to work with them.' It changed the debate from 'why do I have to give digital rights to X service to we have an exclusive track for Apple that we want to do."
More sales are on the way. A July report from research firm NPD Group shows that 20% of consumers age 13 and above were aware of Apple iTunes after just its first two months on the market. Among Macintosh users -- the store's initial target -- awareness was an impressive 46%. And NPD found that 6% of Mac users had paid for a song or album via iTunes.
Compare that to Pressplay and Rhapsody, two music subscription services that launched more than 18 months ago. According to NPD, only 14% of consumers said they were aware of those services. Less than 1% reported downloading music from either or had any plans to do so in the future.
POWER BOOST.
Not that Apple is abandoning its PC business. Its portable notebook sales are also growing smartly. In the third quarter, iBook unit sales jumped 43% from the quarter before, while revenues from the machine rose 30%. At Apple's Worldwide Developer Conference on June 26, Jobs introduced the Power Mac G5, its high-end workstation targeted at the professional graphics, advertising, and media markets. Since 2001, PowerMac sales have been in decline, in part because of the slump in the advertising market and partly because Apple hasn't provided a significant upgrade in power until now. (The G5 will use the new ultrafast IBM (IBM ) 970 processor.)
Analysts are hopeful that the advertising market's rebound will drive G5 sales, which, because of their premium price, deliver gross margins upward of 30%. Needham's Wolf estimates that a return to the PowerMac's historical average sales levels would translate into a 2004 earnings rise of 7.8%. Earnings would jump 60%, to 88 cents per share.
For that, Apple can thank its ability to turn out innovative software for the Mac on a regular basis. Most recently, Apple's audio/video chat software iChat and iSight, its state-of-the-art video camera, have won rave reviews from users (see BW Online, 7/9/03, "With iChat, Who Needs a Phone?"). Its .Mac initiative, which provides Web hosting, e-mail, and a variety of multimedia services, for $99.95 per year, is also turning out to be a sleeper hit. According to tech publisher O'Reilly & Associates, about 400,000 Mac users have signed up. A recent discussion at O'Reilly's Web site revealed that many users consider the service a good value and plan to renew their subscription.
AHEAD OF THE CURVE.
Apple's strategy is changing, no doubt. But will it work? Tim O'Reilly, founder and president of O'Reilly & Associates, says the push into services is a step in the right direction. "Apple has always been countercyclical. They didn't accept that PCs would become a commodity, and the result was that they became a niche player," he says. This time, though, he says Apple is ahead of the curve. As software and services become more important -- both to consumers and to generate revenue -- Apple's moves to capitalize on its brand and bring simple, elegant software and services to the Windows world makes sense.
O'Reilly likens it to the same strategic decision Sony made when it abandoned its Betamax video-recording technology in favor of the more popular but inferior VHS: "At some point Sony decided to compete on brand, software, design, and quality. That's what Apple has to do."
Challenges remain, of course. The reason Apple has succeeded in creating elegant, easy-to-use software and hardware is that it has complete control over the design and manufacturing of its products. But coming out with Windows software, such as iTunes, and hardware, such as the iPod, puts Apple in the same situation as any other third-party developer for the dominant Microsoft platform. Since Apple has no control over the underlying code of the Windows operating system, it'll be difficult for it to make Windows products that are seamless and intuitive.
WHERE PEOPLE WANT TO GO.
The irony is that to succeed, Apple may need to give up some of the control it has fought for 20 years to protect. If anyone can do it, though, Apple may be able to. For one thing, Jobs & Co. are sitting on $4.5 billion in cash, and the company continues to be profitable -- though not as much as some Wall Street analysts would like (see BW Online, 7/23/03, "Time for Apple To Rethink Options"). As the digital lifestyle becomes more pervasive, analysts say, the battle for hegemony will increasingly turn on who can make it easiest for consumers to integrate new devices and services with their TV, PCs, even their toaster.
"Microsoft's mantra is 'Where do you want to go today?' But it has always been Apple that has succeeded at figuring out where people really want to go," says O'Reilly. Steve Jobs's promise to "innovate through the downturn" may turn out to be the right strategy -- both for Apple and for its customers.
Where "Think Different" Is Taking Apple
Special Report Archive
*** SPECIAL REPORT: APPLE'S STRATEGIC SHIFT ***
Where "Think Different" Is Taking Apple
Rather than accept being a niche PC maker, Steve Jobs is transforming his baby into a high-end consumer-electronics and services company.
From the word go nearly two years ago, sales of Apple Computer's IPod MP3 player have been music to the PC maker's ears. Never has that been more true than on July 16, when Steve Jobs & Co. stunned analysts by announcing they had sold 304,000 players in the company's third quarter, nearly four times most analysts' expectations. The reason: Customer demand soared in May after Apple (AAPL ) launched its third-generation iPod, which stores 7,500 songs in a player that's lighter than two CDs -- and is compatible with Microsoft's (MSFT ) Windows operating system. Apple's flagship retail store in New York City's Soho section stayed open until 11 p.m. the day of the launch just to meet the demand.
"It's a paradigm shift at the company," says Charles Wolf, an analyst at investment firm Needham & Co. and a longtime Apple watcher (who owns shares of Apple stock). "They are redefining what kind of company they are." Indeed, the release of iPod for Windows last August established the demarcation line in an extraordinary strategic change for Apple, a company that over the past two decades has steadfastly refused to loosen its control over the creation, manufacturing, or distribution of its products.
BEYOND THE MAC.
Years after Apple launched its advertising campaign admonishing customers to "Think Different," CEO Steve Jobs appear to be taking his own advice. Instead of resigning himself to the idea that Apple will never be more than a niche PC supplier, Jobs is slowly transforming it into a high-end consumer-electronics and services company à la Sony (SNE ) -- one that he hopes ultimately will be less dependent on sales of the Macintosh PC, which now account for about 80% of revenues.
Apple's transformation has been gradual. It started in October of 1999, when the company introduced iMovie, a video-editing program for the Mac that brought professional-quality digital editing to the masses. Audio-editing software iTunes came next, in January of 2001. Then just 10 months later, Apple launched the first iPod.
Though the player got rave reviews, it soon became clear that most people weren't going to abandon their Windows PC just for the chance to use what arguably was the best MP3 player on the market. So in August of 2002, Apple introduced an iPod for Windows. By Christmas, it plans to launch more new Windows-compatible products, such as the wildly successful music-download service, the iTunes Music Store, originally just for Macs.
"That represents a shift in strategy, whether they realized it at first or not," says Wolf. "The iPod was the first product that wasn't tethered to the Mac." Apple executives decline to comment on company's strategy.
"CADILLAC OPERATION."
Nonetheless, a look at Apple's balance sheet reveals why it's so anxious to broaden its audience beyond the Mac's niche audience. In its third quarter, which ended June 30, Apple earned $428 million in gross profit, a 27.7% margin on sales of $1.55 billion, but it spent $419 million on operating expenses, leaving it with an operating margin of just 0.6%.
"Apple's gross margins are the envy of the industry," says IDC analyst Roger Kay. "But below the line, they give it all back. They pour money into R&D and [selling, general, and administrative expenses]. They have expensive retail locations and high-end advertising. It's a Cadillac operation."
Wall Street hasn't punished the stock, however. Apple shares are trading at a 52-week high of about $21. But to rise further, Apple has to do one of two things: Increase revenues and profits -- or cut staff and development and marketing costs. Jobs has clearly stated that his aim is to do the former. When the Net bubble burst in 2000, he promised his staff that there would be no layoffs. Instead, he said, Apple would "innovate through the downturn."
SKYROCKET POTENTIAL?
The iPod was the first step. According to an analysis by Needham's Wolf, at the current wholesale price of $360, a Windows version of iPod should have been able to capture close to a 10% share of the 2002 MP3 market -- about 900,000 units, worth about $325 million in revenue.
At a lower price point, sales could skyrocket. Wolf figures that at a wholesale price of $315, Apple would still earn more than 20% gross margins and sell 1.25 million players. That's $400 million in revenues. Couple that potential with market researcher IDC's prediction that the MP3 market will nearly triple over the next three years, and it's possible that by 2006 Apple could generate $600 million in annual sales on the iPod for Windows -- boosting its total revenues by about 10%. "The iPod is the first step. It should not be the last," says Wolf.
Morphing into a consumer-electronics company also capitalizes on a hip brand -- the cult of cool -- that Apple has spent billions building. Take the iTunes Music Store, which launched with much hoopla in April. Apple was the first player in that business to persuade the five major music labels to sign onto a pure à la carte download service, where music aficionados could buy individual tracks for 99 cents and burn them to a CD or transfer them to an MP3 player.
STREET CRED.
Until iTunes, customers' only legal option had been the more complex subscription services hawked by the label-backed services, Pressplay and MusicNet (see BW Online, 4/30/03, , and 4/22/03, "Web Music Gets Its Act Together"). On its first day, Apple sold a million downloads. By the end of July, it had sold about 7.5 million tracks.
Media reports at the time credited Jobs's street credibility in Hollywood as key to getting the service off the ground. (Jobs personally called individual artists, including Eagles lead singer Don Henley, to persuade them to make their music available on the service.) But insiders say it was more Apple's popularity with elite style influencers that helped persuade gun-shy music execs to grant the licenses required to create a less restrictive service.
Says one label exec: "Until Apple, it wasn't cool to buy digital music. This was about getting to that pivotal group of people -- the people who buy the cool sneakers and wear the right clothes -- and showing them that legally downloading music could be cooler than stealing it."
CHANGING THE DEBATE.
The Apple platform also appealed to the labels because it's so popular within the entertainment industry. When artists, studio engineers, and marketing executives saw the Apple store, many changed their tune about online music, says another executive. "Suddenly, people said 'I want to work with them.' It changed the debate from 'why do I have to give digital rights to X service to we have an exclusive track for Apple that we want to do."
More sales are on the way. A July report from research firm NPD Group shows that 20% of consumers age 13 and above were aware of Apple iTunes after just its first two months on the market. Among Macintosh users -- the store's initial target -- awareness was an impressive 46%. And NPD found that 6% of Mac users had paid for a song or album via iTunes.
Compare that to Pressplay and Rhapsody, two music subscription services that launched more than 18 months ago. According to NPD, only 14% of consumers said they were aware of those services. Less than 1% reported downloading music from either or had any plans to do so in the future.
POWER BOOST.
Not that Apple is abandoning its PC business. Its portable notebook sales are also growing smartly. In the third quarter, iBook unit sales jumped 43% from the quarter before, while revenues from the machine rose 30%. At Apple's Worldwide Developer Conference on June 26, Jobs introduced the Power Mac G5, its high-end workstation targeted at the professional graphics, advertising, and media markets. Since 2001, PowerMac sales have been in decline, in part because of the slump in the advertising market and partly because Apple hasn't provided a significant upgrade in power until now. (The G5 will use the new ultrafast IBM (IBM ) 970 processor.)
Analysts are hopeful that the advertising market's rebound will drive G5 sales, which, because of their premium price, deliver gross margins upward of 30%. Needham's Wolf estimates that a return to the PowerMac's historical average sales levels would translate into a 2004 earnings rise of 7.8%. Earnings would jump 60%, to 88 cents per share.
For that, Apple can thank its ability to turn out innovative software for the Mac on a regular basis. Most recently, Apple's audio/video chat software iChat and iSight, its state-of-the-art video camera, have won rave reviews from users (see BW Online, 7/9/03, "With iChat, Who Needs a Phone?"). Its .Mac initiative, which provides Web hosting, e-mail, and a variety of multimedia services, for $99.95 per year, is also turning out to be a sleeper hit. According to tech publisher O'Reilly & Associates, about 400,000 Mac users have signed up. A recent discussion at O'Reilly's Web site revealed that many users consider the service a good value and plan to renew their subscription.
AHEAD OF THE CURVE.
Apple's strategy is changing, no doubt. But will it work? Tim O'Reilly, founder and president of O'Reilly & Associates, says the push into services is a step in the right direction. "Apple has always been countercyclical. They didn't accept that PCs would become a commodity, and the result was that they became a niche player," he says. This time, though, he says Apple is ahead of the curve. As software and services become more important -- both to consumers and to generate revenue -- Apple's moves to capitalize on its brand and bring simple, elegant software and services to the Windows world makes sense.
O'Reilly likens it to the same strategic decision Sony made when it abandoned its Betamax video-recording technology in favor of the more popular but inferior VHS: "At some point Sony decided to compete on brand, software, design, and quality. That's what Apple has to do."
Challenges remain, of course. The reason Apple has succeeded in creating elegant, easy-to-use software and hardware is that it has complete control over the design and manufacturing of its products. But coming out with Windows software, such as iTunes, and hardware, such as the iPod, puts Apple in the same situation as any other third-party developer for the dominant Microsoft platform. Since Apple has no control over the underlying code of the Windows operating system, it'll be difficult for it to make Windows products that are seamless and intuitive.
WHERE PEOPLE WANT TO GO.
The irony is that to succeed, Apple may need to give up some of the control it has fought for 20 years to protect. If anyone can do it, though, Apple may be able to. For one thing, Jobs & Co. are sitting on $4.5 billion in cash, and the company continues to be profitable -- though not as much as some Wall Street analysts would like (see BW Online, 7/23/03, "Time for Apple To Rethink Options"). As the digital lifestyle becomes more pervasive, analysts say, the battle for hegemony will increasingly turn on who can make it easiest for consumers to integrate new devices and services with their TV, PCs, even their toaster.
"Microsoft's mantra is 'Where do you want to go today?' But it has always been Apple that has succeeded at figuring out where people really want to go," says O'Reilly. Steve Jobs's promise to "innovate through the downturn" may turn out to be the right strategy -- both for Apple and for its customers.