Does Apple Need to be a Computer Company?

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Visiting the Macworld Expo that just wrapped up, it was very clear: iPod rules the roost. That's not surprising any more. What is more significant is that iPod also ruled at CES, where Apple didn't even have a booth.

As my colleage Dave Hoffer wrote on Gizmodo:

"The ubiquity of the iPod was the most notable thing this year at CES. Standing in the Microsoft booth at the Playsforsure kiosk, an attendee looking at the 40+ MP3 players before him said, “Where’s the iPod?” “Apple doesn’t come to CES,” the flummoxed Microsoft responded. “They have their own show.” [Referring to Macworld coming a week later] Looking around CES, it was clear that Apple didn’t need its own booth, since the iPod was everywhere."

Describing the iPod phenomenon, technology analyst Tim Bajarin was quoted in the San Francisco Chronicle during Macworld as saying, "The Mac is the center of your digital lifestyle. The iPod is a portable extension. They clearly go hand in hand." I'm not so sure about this. I think keeping the Mac at the center misses the shift that is happening (and perhaps has already happened) in customers' minds, if not in Apple's or the rest of the PC industry's. My sense is that the center has shifted to the externalities.

The challenge for computer manufacturers is that the conceptual and emotional center for customers has shifted away from the existing revenue centers 

Steve Jobs a few years back certainly positioned the Mac as the hub of the digital lifestyle with the iPod as one of its spokes. Bill Gates said basically the same thing at the time: The PC as the center of the digital life. Products such as Media Center PC's were meant to push that. At this year's CES right before MacWorld, Gates talked about "digital lifestyle" explicitly, though this time the language had shifted emphasis to the recently announced Xbox, a much lighter weight and more subtle method of shifting away from a PC focus. Obviously neither Apple nor Microsoft nor any of the other big computing companies are sitting still on this issue.

But my sense is that customers are further ahead than they are. This is mostly true I suspect for Generation Y, who have grown up ensconced in technology and computers and treat them as wallpaper rather than objects of idolotry. For them, the iPod is the center of their digital lifestyles, and the Mac (or PC) is the extension. In the terminology of Goeffrey Moore, computers have stopped being core and have become context.

The challenge for manufacturers, then, is that the conceptual center has shifted ahead of the revenue center. The conceptual center is where customers invest emotionally and cognitively, it's where they see the focus of their interaction and attention, and what they see as most important. The iPod has taken this position for many people, even if their PC is still used for music acquisition and management, as well as many other tasks. Music is emotional, products that you carry with you and fondle are emotional, and the iPod scores on both these fronts, so becomes the conceptual center for people for much of their "computing" experience. This means that the place where the highest value is for consumers is not where the old revenues used to be, and companies must figure out how to continue to sustain revenues. Apple has been very successful on this front so far.

In CYQ3 2005 Apple sold 6.45m iPods and only 1.24m Macs (220% up on iPods from the same quarter a year before, but still a good 48% up on Macs). In its 2005 financial year Apple reported $6.3 billion in combined Mac sales and $4.5 billion in iPod sales. This doesn't take into account the huge 14 million iPods bump that Apple got in the holiday season. As the San Jose Mercury News put it:

"During the holiday season, Apple for the first time became -- at least temporarily -- a digital media company first, and Mac maker second. Apple reported $2.9 billion in iPod sales, while Macintosh computers had revenue of $1.72 billion." 

On the other hand, Apple only makes a fairly small amount of income from iTunes Music Store sales (a projected 5% of total revenue in 2006 according to one estimate, with only about 20 songs per iPod being purchased, if you takes Jobs' figures of 850 million songs and 42 million iPods sold as of end of CY 2005). Apple doesn't break out earnings on the music store, perhaps to hide its margins, instead lumping it in with "Other music related products and services". Included in this number in addition to song sales are sales from the infinite number of iPod accessories (some by Apple but mostly by others) sold through its online and physical stores.

But analysts still seem stuck in the perception that Apple must translate increased iPod sales into higher Mac sales, and gets its market share of the PC business up about 3% in order to be sustainable. Concern over projected Mac sales was one reason why Apple's stock fell so much (along with many other companies) a week ago. Certainly it's doubtful that Apple can maintain its torrid growth of iPod sales - better competitors will come along wanting a piece of the pie, there may be a backlash against the iPod from consumers, music companies have growing concern over Apple's influence on their distribution and profits, and the front end of the mass market will get saturated and growth will slow as the harder-to-persuade middle and late masses jump less onto the bandwagon.

Would those same analysts have advised Xerox to stick to the copier business instead of recognizing a broader shift to document handling (including desktop publishing of course, but also adjacent industries such as overnight shipping)? It remains to be seen whether Apple itself still feels beholden to being a "computer" company rather than a "digital lifestyle" company. As one door closes, another opens.