Fast Forward: Recession not making a dent in Apple's pricey product line

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By Rob Pegoraro
Wednesday, October 21, 2009

Meet your next computer: It's no cheaper than the model it replaced, and its new features consist of processor and memory upgrades you probably won't notice and some design refinements you've lived just fine without until now.

In that light, the rather pricey new desktop and laptop computers Apple introduced Tuesday morning should flop in the market.

Apple's updated $999 MacBook, $1,199-and-up iMac and $599 Mac Mini models may look sharp, and some add such thoughtful features as a wireless mouse that includes the "multi-touch" technology first seen on the iPhone. But Windows-based computers can cost half as much -- even before you factor in Apple's inflated charges for memory and storage upgrades. Since there's a recession going on and we're all smart capitalists, buyers will undoubtedly switch to more affordable alternatives. Clearly, Apple is doomed.

Except it's not.

In its quarterly earnings announcement Monday, the Cupertino, Calif., company blew away Wall Street's expectations, shipping more Macs in a quarter than ever before -- 3.05 million -- for a $1.67 billion profit. The New York Times noted that "Macintosh sales have now grown faster than the rest of the PC market in 19 of the last 20 quarters." TechCrunch marveled at the firm's $34 billion cash reserves -- more than the entire market value of Dell or Yahoo.

These results suggest that Apple has been able to accomplish something that a functioning market should make nearly impossible -- rake in consistently higher profit margins for a product that could be replaced by cheaper alternatives from other suppliers.

If anything, that trade-off has only become easier in the last year. The same switch to Web-based applications that has freed Mac users from having to worry about finding a Mac equivalent to some Windows program can also free Windows users from putting up with the hassle of software installs and uninstalls, one of uglier aspects of life in Microsoft's operating systems.

My own computer-shopping advice points out this difference in cost before getting into the comparative advantages of Macs and PCs. When co-workers with tight budgets have asked me directly what laptop to buy, I've told them to go ahead and get a PC (after which I've counseled them on how to uninstall the bundled trialware junk on the average Windows machine).

And yet a year and a half ago, an NPD Group analyst calculated that Apple's sales amounted to one quarter of every dollar spent on computers in the United States.

How can Apple keep printing money as if it were silicon wafers?

It's unwise, not to mention insulting, to explain away Apple's success by calling its customers "fanboys" or describing them as members of a cult. (Though it may be tempting to trot out that theory when observing the Twitter chatter about a new Apple product or the reflexive coverage this company can draw in the traditional media -- things that never happen with PC manufacturers.)

The best explanation for it may be seen sitting in traffic right now: Apple has made a business out of selling a premium product, just like BMW, Cadillac or Lexus.

Analysts and critics can insist that Apple has to ship a netbook to stay competitive, and Mac shoppers can wish that the company would turn its considerable talent for design to that category of computer. But Apple doesn't have to do that any more than Cadillac owes the world an $18,000 subcompact.

As grotesque and incomprehensible as Apple's existence may seem to people content with an affordable PC, the company seems to have taken up residence at a spot in the market that other vendors seem unable to barge into.

Manufacturers of Windows-based PCs can craft higher-end models -- Hewlett-Packard's Voodoo line of desktops and laptops have offered as much style as many Macs. But they can't do much to differentiate the software on those deluxe models -- whether it's Windows Vista or the new Windows 7, shipping Thursday -- from what they ship on the $400 boxes lining mass-market retailers' shelves. Apple won't license Mac OS X to them, and most won't ship the free, open-source Linux operating system on anything bigger than a netbook.

This could be a self-reinforcing trend: As PC builders keep having their profit margins squeezed, they have fewer resources to devote to high-end consumer products, while Apple's focus on the most profitable end of the market leaves it with ever more money to dump into product design. Or buying small islands.

A version of this ran first on the Faster Forward blog; read more at http://voices.washingtonpost.com/fasterforward.


© 2009 The Washington Post Company

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