It was no less an expert than Michael Dell who forecast the demise of Apple Computer Inc. In 2001, the chairman and founder of the computer company that bears his name said Apple had sealed its fate by failing to build computers that used Intel Corp. microprocessors and software from Microsoft Corp. In sticking with its own proprietary technologies, Apple could not survive. "We know how the movie ends," Mr. Dell, now 39, said. "It's just a question of what happens in the middle."
But three years later, it is Apple — not Dell Inc. — that some say is now the best bet for investors interested in backing a computer maker.
Long an ugly duckling for investors, the Cupertino, Calif., company has been the soaring swan of the market for the past year. Its stock is up 176 per cent in the past 12 months (it closed yesterday at $70.10 U.S.), compared with 13 per cent for Dell. Apple already rivals Round Rock, Tex.-based Dell in manufacturing efficiency, and is poised to beat it on profit margins, earnings and revenue growth. On new product innovation, analysts say, Apple is unrivalled.
The much ballyhooed iPod digital music player has been an important part of Apple's resurrection story; iPod sales went through the roof during 2004's final quarter. But the bigger story may be Apple's resurgence as a computer maker. According to financial results released this week, sales of Macintosh computers jumped 26 per cent compared with the year-earlier quarter — double the growth rate for the rest of the computer business. For the first time in eons, Apple is gaining market share.
"The company could have begun a market share breakout story that could last for the foreseeable future," Steven Fortuna, an analyst at Prudential Equity Group LLC wrote in research note last week.
The turnaround is remarkable because many observers had written off Apple as a serious contender. A year ago, its market share stood at a paltry 3 per cent — despite some terrific products such as the iMac consumer desktop. Some Apple watchers speculated that the company was in secret talks to get the Macintosh operating system to run on Intel microprocessors, suggesting that the only way Apple could survive would be if its software worked on the computers that made up 95 per cent of the market.
The Street's favourite hardware company, overwhelmingly, was Dell, which made and sold Intel-based computers better than anyone. Many analysts still maintain a 'Buy' recommendation on Dell because they expect it to continue to dominate. And why not? For every 100 computers sold in North America, more than 30 are made by Dell, compared with just three by Apple.
Nonetheless, comparing Apples to Dells is a useful exercise, if only because it underlines the transformation that is helping Apple capitalize on what some reviewers are calling near-perfect products. Moreover, Apple finished its most recent quarter with gross profit margins of better than 28 per cent. Dell's margin is about 18 per cent.
The outlook is even brighter. Andrew Neff, who covers enterprise hardware stocks for Bear Stearns and Co. Inc., estimates that through 2007, Dell's revenue will grow by an average of 18 per cent compared with any year-earlier quarter. In an industry where overall revenue growth might be 15 per cent in a good year, that's more than respectable. But Mr. Neff says Apple is poised for an even bigger boom, with quarterly revenue set to grow by an average of 38 per cent through 2007.
"Apple should continue to exceed results from new product efforts where market opportunities are large and untapped, high-growth from leadership in music, and G5-driven product cycles," Mr. Neff wrote after Apple's latest financial results.
In the history of Apple Computer, this is the era known as Jobs II. Jobs I ended in 1985 when Apple co-founder and chief executive officer Steve Jobs quit, to avoid being fired by his own hand-picked board of directors. Twelve years and several horrible miscues later, Apple's board asked Mr. Jobs to return. But the computing world was much different in 1997. As a business, Apple was close to death; as a technology influencer, it was close to irrelevant.
With his reputation as an inventor already established, Mr. Jobs, 49, wanted to prove he could run a technology business as well as his long-time rival Bill Gates, also 49, founder of Microsoft. Coincidentally, Mr. Gates, the master entrepreneur, envied Mr. Jobs' reputation for invention. In 2000, he resigned the CEO's job at Microsoft to become its chief software architect, a role that essentially made him Microsoft's inventor.
To put Apple back on a healthy footing, Mr. Jobs cleaned up a sprawling product portfolio. Under his renewed stewardship, he said, Apple would make just four computing products: desktops and portables for the professional and consumer markets respectively.
The professional machines came first. The G3 line of desktop computers and the PowerBook line of portables not only shored up Apple's reputation; a healthy profit margin was built into each machine. On the consumer front, the company released (in 1998) the iMac, an all-in-one machine (in different colours) that became a monster sales hit. The multihued iBook laptop, another big hit, followed shortly after. Still, Apple could not seem to move the meter on market share, largely because sales to business were soft. Shortly after the Jobs II era began, the company's market share slipped below 5 per cent. It kept falling over the next 24 months, according to an annual survey done by Forrester Research Inc. of Framingham, Mass.
In the meantime, Apple retooled its iMacs, once with a base that supported a floating display on a gooseneck and, more recently, with a flat-panel machine in which the entire computer is housed behind a display only a few centimetres thick. Report on Business Magazine reviewer George Emerson called it "the closest thing to a perfect computer on the market."
And now there is the Mac mini, a tiny but full-powered computer that Apple will sell without a monitor or keyboard and which will be priced to snare Windows users.
"The knock on the Mac has always been that it's too pricey," says John Halblander of Light Computer Centre, an Apple reseller in Hamilton. "Now, for $630, you're getting a computer in line with anything else in the market that has its performance and speed."
At the same time, Mr. Jobs has overhauled Apple into a model of efficiency — he standardized the use of parts and components — that analysts say only Dell can match. "We applaud Apple's ability to control costs despite significant revenue upside," says analyst Mr. Fortuna, "as well as the company's ability to drive gross margins above the targeted range, despite [a] much higher iPod mix and significant air-freight costs associated with shipment of the new G5 iMacs."
Apple's ability to pare costs pays off in spades. That's because it can — and does — charge a premium for its products, based on brand loyalty. That, in turn, helps the company maintain healthier profit margins than its peers.
Meanwhile, users of Windows-based computers have been bedevilled by aggressive and mischievous spyware, viruses and spam. While Mac users must also deal with spam, they've been spared the worst spyware and virus attacks.
For all of those reasons — an increasingly dispiriting experience on Windows, a cheap machine (the new Mac mini), and Apple's efficient manufacturing operation — analysts and retailers believe the stars are aligned for Apple to reverse its market share decline.
The smartest thing Apple did to win over PC users was to release a version of iTunes that ran on the Windows operating system. When it made its debut, Mr. Jobs said it was the best application ever written for Windows, a dig at his old friend Mr. Gates, implying Microsoft had yielded poorly designed applications.
Mr. Jobs' boasting about iTunes proved justified. Critics loved it, calling it superior to Microsoft's own Windows Media Player, and better than any other music player application on the market. (Both Windows Media Player and iTunes are available as free downloads.)
And by making iTunes available on the PC, Apple opened the market for the iPod to millions of Windows users, all of them new customers for Apple. A percentage of those customers apparently enjoyed their Apple music experience enough to start buying Apple computers — a phenomenon since dubbed the iPod "halo effect."
Now, with the mini, Apple is trying to mute criticism that its hardware is so much more expensive than a Windows computer.
At $630, the mini, to go on sale in Canada on Jan. 29, will still be more expensive than the cheapest Windows-based computer, but the price is probably low enough to entice new customers.
"I think now [with the mini], you'll see even more people jumping onto Mac," Mr. Halblander says.
The risks — for both retailers and investors — are the same ones that have plagued Apple since it went public in 1980. For all its innovation and renewed focus on business efficiency and profitability, Apple still constitutes a very tiny part of the overall computer market.
But investors can take heart from the company's balance sheet. Apple's cash increased by $1.5-billion in its most recent quarter and now stands at $6.5-billion or a whopping $15.40 per share — all with no debt. Moreover, the ability to control costs adds to the cash coffers. In the last quarter, revenue rose 74 per cent, year over year, while expenses increased by just 28 per cent.
Apple's management has said those margins are unsustainably high. In future quarters, it projects increased expenses — new retail stores, more advertising and more research and development.
The ultimate compliment perhaps has been Michael Dell's attempt to do what Steve Jobs did long ago: turn his product into a name brand. Marketers say the goal of the "You're getting a Dell, dude" ad campaign was to differentiate the Dell brand from others. Perhaps Michael Dell has acknowledged Steve Jobs' contention that consumers don't always want the cheapest computer. Sometimes, they just want to buy what's cool.
David Akin is a CTV correspondent and a contributing writer to The Globe and Mail.
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
