Taking care of its core

Jun 6th 2005
From The Economist Global Agenda

Apple has announced that it will switch its computers from microprocessors supplied by IBM and Freescale to those made by Intel, the world’s biggest chipmaker. Emboldened by the success of its iPod music player, this is Apple’s latest move in an attempt to return to the mass market

ASK people to describe their computers. Most, with a shrug, will mention a couple of grey-coloured (or is that cream?) boxes, and software that crashes occasionally. But the sliver of the population who own one of Apple’s products are more likely to enthuse about the cool design of their hardware and the robustness and user-friendliness of their software. It is a surprise, then, that more people don’t chose the American firm’s computers. This is what Steve Jobs, its chief executive, hopes to put right.

On Monday June 6th, Mr Jobs used the platform of Apple’s annual developers conference to announce that the firm will switch from the chips supplied for over a decade by IBM and Freescale (which was spun off from Motorola last year) to products from Intel, the world’s biggest chipmaker. The first products with Intel chips should be available next year. Most observers suggest that the move is part of a strategy dedicated to returning Apple to the mass market for computers, which it dominated before the advance of Microsoft and Intel in the 1980s.

There are several suggestions about what prompted the change. Apple blamed its current chip suppliers for slow delivery last year, which held up production of some lines. And chip development has not lived up to promises Apple made for improvements in processing speed. Intel’s chips are faster and run cooler than Apple’s current chips. And cooler chips are important for the production of better laptops, a market growing considerably faster than that for desktop PCs. But there is much speculation that Intel can simply supply chips more cheaply than IBM and Freescale, and that Apple can use the saving to cut the retail price of its computers.

Apple’s problems in increasing its market share are, to a large extent, a result of the high prices it charges for its computers compared with similar products from the likes of Dell or Hewlett-Packard. Apple sold only around 2.3% of new desktop and laptop computers worldwide in the first quarter of 2005, according to IDC, a research firm. Dell commanded 18.9% of the market, HP 15.4%. But Apple is concentrating hard on ways to improve its market share and is banking on the huge success of the iPod, its digital music player, to create a “halo effect” and speed the revival of Apple as a force in world computing.

The firm’s recovery has been apparent for 18 months, after several years in the doldrums. In 2004, Apple’s net profits were four times higher than the year before, at $276m, and in mid-April the firm announced another blistering set of quarterly results: revenues up by 70% compared with the same period the year before, and net profits 530% higher, at $290m; Apple shipped over 1m computers (a 43% rise) and a staggering 5.3m iPods (over six times more than the year before).

The iPod has done wonders for Apple, providing not only profits but a positive brand image to a swathe of new young consumers. Though the iPod was derided by some as exorbitantly expensive at the time of its launch in 2001, it has amassed some two-thirds of the world market for hand-held music devices. And not content with anything less than total domination, in January Apple introduced the iPod shuffle, a flash-memory player, which is naturally smaller and better looking than anything the competition can yet muster. No wonder iTunes, Apple’s online music store, leads the field.

But Apple still makes most of its cash from computers, and to extend its product range it introduced the Mac mini at the beginning of the year. This small, relatively cheap computer comes without “peripherals”—customers can add their own keyboard, mouse or screen. This helps to keep costs low and so, it is hoped, will nudge more users of Microsoft’s Windows to switch to Apple. Mr Jobs hopes to spread the Apple message further still through a network of Apple retail stores. There are now over 100 around the world in prized locations.

The lead that the iPod has in the hand-held music player market looks unassailable for the time being. That said, Bill Gates is touting Microsoft’s own software format, Windows Media, to several online music services and hardware firms, hoping to set a rival standard with greater interoperability. At present, iTunes offerings only work with the iPod. Mr Gates suggests that the convergence of mobile phones and music players (using his software, of course) could threaten the iPod’s dominance. Apple should take the threat seriously. Nokia recently announced that it was preparing to launch a handset with a hard drive. Sony Ericsson will unveil its first Walkman phone later this year. To counter these threats, a deal between Motorola and Apple is expected to spawn phones with iTunes included in a couple of months.

If Apple is to make the most of the halo effect from the iPod to push its upmarket computers on greater numbers of customers, it would be well to do so as soon as it can. Such is the importance of the iPod to Apple that on June 3rd the firm’s shares fell by 4.5% after analysts suggested that sales of the device may be flat in the current quarter. If the halo slips, Apple may have to content itself with selling its wares just to the select, fashion-conscious bunch who presently make up the company’s loyal fan base.

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