Apple is enjoying great success with the iTunes Music Store and the iPod, but is this enough to turn around the company’s fortunes? Three Business Week reports look into this question.
The first report looks at Apple's victory with regard to online music downloads.
Speaking to Business Week, Apple CEO Steve Jobs predicts that any new players entering the market now will have to work hard in order to be successful.
He says: "Whoever enters this market now is going to enter a market that's not in its infancy. And they'll enter a market against a competitor that has a 70 per cent market share – and surprisingly, that competitor's name will not be Microsoft. It will be Apple. Now, I understand that there's no guarantee we'll stay on top, but that's the situation."
And Jobs has no fear of Microsoft in this new market, despite the fact that the Seattle-based software giant has many partners in hardware and on the services side using Microsoft technologies. He told Business Week: "The people using their technologies have yet to be successful."
Jobs puts down the success of the iTunes Music Store to four factors: "Apple is the most creative technology company out there. Almost all recording artists use Macs and they have iPods. And there's a trust in the music community that Apple will do something right – that it won't cut corners – and that it cares about the creative process and about the music.
"Also, our solution encompasses operating-system software, server software, application software, and hardware. Apple is the only company in the world that has all of that under one roof. We can invent a complete a solution that works – and take responsibility for it."
The second Business Week report notes: "The iTunes Music Store managed to clock 30 million downloads in 2003 without the assistance of any marketing by a PC partner. Adding HP to the mix could push the total to over 100 million in 2004 and well above that in the future."
The report considers that even though Apple says it doesn't make money from selling digital downloads: "At those types of volumes, Apple will make money."
The reports also examine the success of the iPod, suggesting that this also bodes well for the company. The digital music player was a big seller this Christmas – so popular in fact that many shops ran out.
Apple could have had even fewer iPods available. The company made 750,000 units for Christmas, despite predicting that it would only sell in the region of 500,000. Jobs told Business Week: "It was a big gamble on our part. We thought we could be way too high."
But Apple sold every one. "The thing that I love is that the best product is winning for a change," said Jobs.
Regarding the success of the iPod Jobs said: "It's very exciting to be able to apply Apple's innovation, engineering excellence, and marketing skill in a market where we don't have that 5 per cent market-share ceiling to see what we can do. And it feels good."
And this level of market share includes Windows users: "We sell more iPods to owners of Windows PCs than we do for the Mac, and it has been that way for a long while," Jobs told Business Week.
Business Week's third report goes on to suggest: "If Apple can maintain its success with the iPod, and follow up with other non-Mac products (the iPod works with the Mac as well as with Wintel PCs). Indeed, the iPod just might cast the Mac in an entirely new light."
The report notes that the iPod actually brought in more revenue ($256 million) than Apple's consumer flagship iMac line ($251 million), and suggests: "Why not focus on using the Mac to boost the bottom rather than the top line?"
Profits over market share
Apple had a positive reception to its first-quarter results, but shares fell 5.6 per cent the day after the earnings report. According to the Business Week report this was for two reasons: "The stock had run up in anticipation of solid numbers. And the Street had been hoping for bigger sales numbers on Power Mac G5 desktops."
According to the report, analysts are warning that the iPod sales growth could dim soon, so it is increasingly important that Apple keeps churning out Mac-related profits. "After all", notes Business Week, "that product still brings in nearly 70 per cent of sales, and that's not likely to change in the short term".
Merrill Lynch analyst Steve Milunovich adds: "If they're going to make Wall Street happy, it's going to be about PCs."
But in the Business Week interview Jobs suggests that analysts should start measuring the Mac by the profits it produces, rather than by its market share: "We've got 25 million customers that want the best computers in the world. If our market share grows, we're thrilled. But we've held our own, while our rivals were losing hundreds of millions of dollars a year. We're in pretty good shape."
Business Week suggests that Apple may experience stronger Mac sales as a result of the "return to strength in the ad and media biz" predicted for 2004.
The report also notes that Apple is developing a strong niche in the scientific computing market. Although this may only result in tens of thousands of machines per quarter, "this can make the difference between a good quarter and a ho-hum quarter for the Power Mac line," according to Needham & Co analyst Charles Wolf.
Apple is looking at other ways of increasing its profits. The Business Week report notes that by selling Mac OS X updates, the newly updated iLife suite, iChat software, and .Mac accounts to Mac users: "Jobs is clearly in the process of building a recurring revenue stream of hundreds of dollars per customer. Granted, not all Apple buyers will bite, but if even 10 per cent of the faithful buy in each year, that could mean hundreds of millions in new revenues."
And, according to the report, there is evidence that Apple is winning back the education market.
However, according to Gartner's preliminary market-share data, Apple held just 1.8 per cent of the worldwide PC market in the fourth quarter of 2003. And, Business Week suggests: "Some think Apple's share will fall further, if it can't keep pace with surging overall PC demand."