iPhones, iPods, iTunes -- sometimes it's hard to remember that Apple makes a product that doesn't start with the letter "i." But Apple does, and it's a personal computer.
This is a good week to remember that fact. While Wall Street analysts have been hunting the "lost" 2 million iPhones with the fervor of a CIA operative on the trail of WMDs, Apple continues to wield a weapon of its own: Leopard. And that weapon is actually increasing Mac sales relative to PC sales at an accelerating rate.
Since it debuted to rave reviews late last year, the new Mac operating system has been driving a surprisingly large gain in market share for Apple, and (less surprisingly) has blown away Microsoft's Windows Vista in surveys of consumer satisfaction.
The good news (from Apple's point of view) about Mac sales and the bad news about unlocked iPhones aren't directly related, of course. But they illustrate a number of key strengths -- and weaknesses -- inherent in Apple's business model.
Apple can do whatever it wants with the Mac platform, and when it does it very well, as it has with recent Mac PCs and the Leopard OS, the company wins big. But it doesn't have that same freedom on the iPhone -- its dependence on partnerships with AT&T and other carriers means it has to accommodate some of their concerns, perhaps to the iPhone's ultimate detriment. That fear is what's behind the "lost iPhones" dilemma.
Why the "lost iPhones" question matters
The case of the missing iPhones boils down to this: Apple reported selling about 4 million iPhones through mid-January. But its U.S. carrier partner, AT&T, says it has activated only about half that number.
The discrepancy raises a number of possibilities. The early take of a number of analysts was dire: Apple, they thought, was carrying a huge load of inventory.
Bernstein Research analyst Toni Sacconaghi was apparently the first to spot the problem. Using a sales figure of 3.7 million phones (he wasn't counting January sales), Sacconaghi figured there were about 1.4 million phones unaccounted for, after factoring in European sales by Orange and T-Mobile.
He then estimated that approximately 15 to 20 percent of those phones were sold to people who hacked them for use with an unauthorized carrier. That seemed like a reasonable number since Apple itself had estimated that 18 percent of the phones it sold in the previous were unlocked by users. If these assumptions were true, it means that 670,000 to 850,000 iPhones were languishing in inventory.
That kind of inventory glut is not only bad in and of itself (inventory costs real money to carry), but it would also indicate that sales to end-users were lagging badly. Not everyone agreed with Sacconaghi's thesis, but since his opinions have a lot of weight on Wall Street, investors were worried.
Earlier this week, Sacconaghi and RBC Capital's Mike Abramsky did some more research, and both concluded that the number of unlocked phones was much higher (25 to 30 percent) than they'd originally estimated, meaning that there were far fewer in inventory. Apple, by the way, has not given an estimate for the number of phones hacked in the fourth quarter.
Sacconaghi believes -- and I agree -- that the unlocked phones are a problem because they rob Apple of significant carrier revenue, and may make it harder to sign up other carriers in the future. Abramsky, on the other hand, figures that the high number of hacked phones indicates strong demand in places outside AT&T's data coverage area, and bodes well for future sales. In either case, the higher number of unlocked iPhones means that Apple is carrying less inventory than feared.
Apple's control strategy is risky for devices
We'll see how this plays out, but there's a deeper issue here for Apple. The Cupertino, Calif., company long ago made a decision that it would control the Mac platform from top to bottom. IBM, on the other hand, decided that the PC platform would be open.
As a result, cloners of the original PC were legion, and the resulting economies of scale helped make the platform ubiquitous. It also gave rise to scores of frustrating incompatibilities as disparate vendors implemented the hardware and software very differently.
Apple users, of course, coped with far fewer glitches since the platform was controlled by one company. The price for a better user experience: higher costs and a limited market.
Now Apple is deeply involved in mobile digital devices, including wireless phones. And that's a realm it can't control. So it gains scale by partnering with AT&T, and presumably other carriers in the future. The price: hackers using the hardware in ways Apple never envisioned.
Why Apple's strategy may work despite the risks
I've never believed in the "halo" theory that users like iPods and other gadgets so much, they'll migrate to the Mac. But Leopard is proving that a good OS (helped by a competing "bad" OS) can make a world of difference. Fair or not, Microsoft's new OS is getting terrible press; indeed InfoWorld's campaign to save XP has struck a major chord in the IT community.
What matters in all this OS brouhaha is what paying customers think; to that end, it appears that Apple's strategy of a controlled, high-quality platform is succeeding. In a recent survey by ChangeWave, which conducts periodic consumer polls, more than 8o percent of Apple buyers say they are "very satisfied" with Leopard. This compares to 53 percent for Windows XP Home and 51 percent for XP Pro -- and just 27 percent for Windows Vista Home Premium and 15 percent for Vista Home Basic systems.
The same survey looked at PC purchases during the holiday season. Apple's share of laptop sales jumped 3 points between November and January to 17 percent, while the company's desktop sales jumped 6 points to 16 percent. You've got to believe Leopard is making a huge difference.
There you have it. Apple's PC brand is built on a platform it controls. The iPhone is part of a new world order in which more than one player has a major impact on the outcome. Neither fact is going to change, and Apple will continue to reap the rewards -- and the penalties.
Posted by Bill Snyder on January 31, 2008 03:00 AM
