iPhone sales disappoint – now don’t forget the Mac!

After the most highly anticipated consumer product roll-out in recent memory, I suspect I had a lot of company dialing into Apple’s earnings call today. A lot of speculation about iPhone sales figures would finally meet up with some real data – at least that’s what we hoped.

And we did get some data. The numbers look pretty bleak, and the online world immediately erupted into a passionate defense of Apple.

So with a few hours of contemplation in hand, let’s see what we now know.

First off, it’s clear that iPhone sales have underperformed so far. Estimates for the initial sales ranged from 200K to 700K, and though Apple and AT&T are fudging the numbers quite a bit, the launch clearly landed at the low end of the range. The iPhone launch was, to not put too fine a point on it, a commercial disappointment.

It seems that Apple had hoped for somewhere around 1M in sales on the launch, and they are likely to land on about a quarter of that.

To put that in perspective, on any random ordinary business day Nokia alone sells over 1M phones. And the notion that AT&T is gaining market share? With 64M subscribers and a typical new-quarter subscription growth of about 1.5M, even if half of the iPhone customers are new to AT&T the result is a minor bump on their market data.

Apple still says they expect to sell their millionth iPhone before the end of September, and 10 million before the end of 2008. It’s now doubtful if they’ll make that first milestone, and there is no way they’re selling 10M of this sucker through 2008.

Again, since opinions like these attract flames like moths to an old neon sign, let me once more state for the record that I love my iPhone, as friends can attest. And indeed, so do all the iPhone users I know (which is quite a few). It is a marvelous device. But we are not typical.

Despite the initial lukewarm response, I think Apple is onto something here. I think there is a large, untapped market for premium, portable internet devices. I actually pretty much believed that long before the iPhone launched. So Apple is onto something significant here, but it will take longer than they appear to have thought.

However, there are other concerns at play here. Read on.

Macintosh sales dominate growth and profits

The reality is that despite the hoopla around iTunes, Apple TV, iPods, and the iPhone, the bulk of Apple’s growth is from traditional sales of Macintosh computers. Of the now-much-touted $1B in growth year-over-year, which is a significant achievement, at least two thirds comes from growth in sales of desktops and laptops.

From a creativity and PR standpoint, the iPhone dominates the moment. But Apple’s killer device today is their superior laptops, which in my mind, after IBM giving up the premium laptop segment, faces no serious competition. If you do the math on it, that’s clearly also where the bulk of Apple’s profits are currently coming from.

Let’s consider even if Apple sells a million iPhones; that’s only some $200M in annualized revenue. That’s less than a third of the growth in Mac sales. So if Apple’s focus on the iPhone distracts their growth in their core business, then the net net could easily be a loss. That’s not even accounting for the fact that the overall R&D effort for the iPhone is significant, at least on the order of several hundred million. But the real dilemma is the opportunity cost. Witness the delay of the next OS X release which was blamed on testing resources being diverted to the iPhone team.

Which raises the question of how wisely Apple is managing the engineering efforts around next-generation laptop and OS technology. The advent of Microsoft’s Office 2008 for the Mac (promised for the end of this year), steadily improving emulation solutions from Parallels and VMWare, and the upcoming (and unfortunately delayed) Mac OS X 10.5 release (a.k.a. “leopard”), together with a new generation of Macs based around the upcoming 45-nm parts from Intel, sets Apple up for an almost unique opportunity. Or, at least one that hasn’t been available for many years.

Add to that the fact that Microsoft rolled out the much-ballyhooed Vista to worldwide yawns and frustrations, and it’s clear (to me) that Apple needs to make very careful trade-offs with their resources over the next several quarters.

It’s true that iPods have been great for Apple. Some $2B in sales of iPods and related products and services relate to that. But sales are flat at this point – in fact, quarter-over-quarter, iPod sales are down. That’s partly a result of cannibalization – those of us who planned to buy iPhones have delayed or cancelled our purchases of high-end iPods.

In contrast, the worldwide market for PCs (desktops, laptops, and server x86 systems) is on the order of 50-60 million per quarter. At 1.8M units, Apple still holds only around 3% of the market (more in the US, around 5%). Of course, this percentage is not entirely fair, for various reasons (some of which are aptly described by danieleran), but most importantly pricepoint. In the most recent quarterly numbers from Apple, the average revenue per sold Mac is $1400, which is much higher than the average PC. And, notably, this average is holding steady: same quarter last year the number was pretty much the same.

That is remarkable. But what is even more remarkable is the growth. Year-over-year, Apple is reporting 33% growth in Mac sales.

Where’s future growth?

What does this tell us? That Apple already owns the high-end MP3 player business, which is mostly a US phenomenon. There’s little more revenue growth in that segment. Presumably the prices are falling at about the same rate that the market is growing, add to which the high-end part will be taken over by iPhones.

But for desktops and laptops, there is plenty of growth. No matter how you argue Apple’s market share, it’s still fairly small.

And as was the case in previous transitions for Apple, I’m worried that this bread and butter part of Apple’s business is getting poor treatment.

Remember, Apple has played this particular game before. The original Apple II business was mistreated, first in favor of the poorly-built Apple III, and then in favor of the first Macintosh which, though revolutionary, took a long time to get serious commercial traction. Let’s hope Apple, in the midst of all it’s excitement around products like Apple TV and the iPhone, doesn’t lose sight of what it today actually does best: laptops (in case you missed my point earlier).

For example, what clearly seems not to be happening is an adequate focus on basic tools. The calendar, address book, and email software in Macs continues to be weak, and poorly integrated with their online services, not to mention the iPhone. Rolling Safari out on Windows is probably a good long-term strategy, but again seems like a distraction. This doesn’t drive any revenue, and loses any potential of the Mac platform having a benefit on web browsing experience. I would much prefer if they simply focused on improving Safari.

At this point I think Apple should circle their wagons and refocus on their core business. The iPhone is for the medium term destined to be a premium device, and I don’t think it will get anywhere near the announced 10M number by the end of 2008. But it might eventually. In fact, I would even hazard to say that it is likely to. Despite all its faults, the iPhone is a leap ahead in portable information appliances. As I’ve argued previously, I don’t even view it as a cell phone. It’s a portable information appliance that, oh yeah, can also make phone calls.

I don’t think the next billion in quarterly sales will come from the iPhone. I think it will come from vanilla desktops and laptops. Assuming those product lines haven’t been hurt too much. And assuming Apple gets back on the bandwagon of improving their main asset – MacOS X on Intel processors.

(PS. I’m not going to comment on Apple’s bizarre reference to the Interpret survey that USA Today recently covered, indicating ridiculous satisfaction numbers with the iPhone. I can’t find information on who funded this survey, nor details on the methodology. I’ve contacted Interpret for details. But I’m not holding my breath. Expect this datapoint to misquoted ad naseum for years.)

4 Comments

  1. Chris Hall

    >That is remarkable. But what is even more remarkable is the growth. Year-over-year, Apple is reporting 33% growth in Mac sales.

    This is a fascinating statistic, but how do I interpret it? I don’t even know if we can quantify Apple’s competition – is it other hardware vendors? Other OS vendors? Free OS distributions?

    One meaningful statistic would be “Apple OS installs vs. Windows vs. Linux”, I think. It entirely discounts the different nature of the underlying hardware business, though.

    I think it’s very hard to measure PCs vs. Apple machines as PCs don’t have a single point of distribution.

    I would bet a good dinner that this 33% growth is more or less flat in term of overall OS market share. I’ve heard that Apple has a 3-5% market share for at least 5 years – if PC sales growth was not roughly 33% then this would not be the case.

    It may be that Apple’s core competency IS in the Macintosh, but it’s not clear to me that focusing on a product that is ‘treading-water’ is going to help Apple all that much.

    [PSM] Apple has indeed held steady around 3% market share for a while (that’s worldwide; in the US it’s about 5%, hence the two numbers floating around). Personally I would compare them to premium, fully-equipped PCs, but those stats are tricky to come by. PC sales are inflated vs Macs since they include POS terminals, Linux blade servers, and all sorts of market segments that Apple has never pursued. So, yes, it’s tricky to interpret that 33% number. One very interesting number would be to know what percentage of Core 2 Duo Intel chips are sold in Apple boxes vs everything else.

    But to your point, focusing on old cash cows is indeed a little dangerous. But ignoring them is even more dangerous. I think the key strength for Apple today is to leverage Mac OS X and related technologies (like Safari) across multiple verticals – desktop, laptop, home entertainment, mp3 players, and now phones. In so doing I fear they will overextend themselves and not put enough engineering into their bread-and-butter Mac sales.

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  2. Ah, yes, nice to see the new iMacs released. Good job, Apple. Not too dramatic, but cool enough to earn CNET Editor’s choice. Sweet keyboard. I want one, but don’t have a good excuse to buy…

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  3. Apple is doing very well, and I don’t think they are displeased with iPhone sales. The iPnone has brought Apple a lot of free publicity. Apple seems to have a long term plan, that is working now, Last December I was stuck in an aurpotrt for several hours waiting for a late connecting flight. People started Pulling out their laptops. Every one was a Mac. When I first switched to a Mac two years ago, I was amazed by the stability and neatness of OS-X. I now have an Intel iMac with Parallel Desktop, a truely amazing piece of software. Windows becomes an OS-X application. Compared to a Windows machine, the iMac is very stable. It seldome crashes, although Firefox is not vey stable. Camno. Firefox adapted to OS-X is. I expect Apple to do very well in the future. They seem to know what they are doing more than Microsoft, more than Dell, More than Hp, and more than just about anyone else.

    [PSM] Hi Charles, thanks for commenting. Well, my anecdotal experience is also that Mac is grabbing market share, and in the laptop space they are. But it’s being lost in the noise. As Randall Stross points out over the weekend, Apple does not seem to be pursuing an effective channels strategy. I agree that Apple is much more on the ball now than the companies you mention, but I still argue that they need to capitalize more on their current strengths. We’ve seen this game before in tech, recently with AMD’s failure to capitalize sufficiently on their x86-64 strategy in the face of Titanium.

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