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Apple on eve of Macworld
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January 8, 2001: 6:05 p.m. ET
Apple needs to reduce performance gap with IBM PCs, analysts say
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - As Apple Computer's loyal followers prepare to gather in San Francisco for the annual Macworld trade show which starts Tuesday, the computer company is in the most difficult position it has encountered in three years.
Apple CEO Steve Jobs returned to the company in 1997 and brought it back from the brink of bankruptcy with the innovative and colorful iMac and iBook product lines. Under his leadership, Apple's stock rose from $9.50 in January 1998 to around $65 last March.
The company's fortunes made a sudden reversal, however, when it disclosed in late September that its earnings for the quarter ending Sept. 30 would be substantially below expectations because of slower-than-expected sales that month. In response to that announcement, Apple's stock was sliced in half, plunging to $25.75 from $53.50 and losing about $9.3 billion of market value in one day.
Apple's (AAPL: Research, Estimates) picture grew even darker on Dec. 5, when it warned of a huge shortfall in revenue for the quarter ending Dec. 30, which will cause the company to report its first quarterly loss in three years. The company said at the time that it had experienced significantly slower-than-expected sales during October and November, causing its revenue for the December quarter to come in around $1 billion, rather than the $1.6 billion analysts had expected.
When Apple announces its financial results on Jan. 17, the computer maker expects to report a net loss, excluding investment gains, of between $225 and $250 million. Analysts had expected it to report a profit of about $10 million, or 3 cents per share.
The price/performance gap
On the eve of Macworld – running Jan. 9 to Jan. 12 at the Moscone Convention Center in San Francisco -- the personal computer market as a whole is experiencing sluggish sales, with manufacturers slicing prices to clear out their inventories. Apple's position among PC makers is especially challenging, analysts say, because its machines suffer from a price/performance gap when compared to IBM-compatible PCs with microprocessors from Intel. In addition, none of them offers writable CD-ROM drives, which have become very popular for storing music downloaded from the Web.
Sales of the Power Mac G4 Cube -- which Apple calls "a supercomputer miraculously engineered into an eight-inch cube, suspended in a stunning crystal-clear enclosure" – have been far below what the company had planned. Apple recently slashed the G4 Cube's starting price to $1,499 from $1,799.
"I think we will see Apple unveil some new Power Mac models at Macworld, such as a G4 operating at 733 MHz," said Lehman Brothers analyst Daniel Niles. "I think that is great, but it still doesn't help much against Intel, which has 1.5 GHz chips coming out in machines from Dell, IBM, etc. It creates a problem in the consumer market when you have two PCs priced the same and one has twice the megahertz rating."
While system performance is not determined entirely by clock speed, measured in MHz or GHz, the difference in advertised clock speeds has caused some consumers to choose IBM-compatible machines over Apple's iMac or Power Mac.
"They missed some consumer trends by not having writable CD-ROM drives or DVD drives," Niles added. "I think they will show some of those at Macworld, but I'm not sure they are going to offer them at that point."
CS First Boston analyst Kevin McCarthy expects Apple to unveil a G4-based PowerBook in a new, slimmer form and more powerful PowerMacs. The PowerBook, which is Apple's notebook computer, now comes with a G3 processor.
"Apple has been slow in bringing out new looks," said Bruce Tognazzini, a software design consultant who worked at Apple from 1978 to 1992. "They have been floating on the strength of industrial design for most of the past three years. The Cube is a lovely design, but it came out at too high a price point."
Tognazzini is now part of the software design consulting firm Nielsen Norman Group in Silicon Valley.
Weak pricing environment
Regardless of what new products Apple introduces, the company has to cope with a very weak pricing environment for PCs. In the wake of their weakest holiday season in recent memory, PC vendors are getting ready to drastically cut prices and offer rebates on overstocked systems.
"If you're a consumer and you decided to wait out the Christmas season, you're going to get some great buys from a price standpoint very shortly," said Tim Bajarin, president of technology consulting firm Creative Strategies Research International. Most vendors are offering price cuts and rebates that will reduce the cost of desktop PCs anywhere between 15 percent and 25 percent, Bajarin said.
"We've seen some aggressive pricing as computer makers have tried to clear out inventory," said Lehman's Niles. "The personal computer market in general is going to get pretty bloody as people try to clear out older inventory."
For its part, Apple rang in the new year with price cuts on its line of professional desktop and notebook models, including the G4 Cube and Power Mac, as well as the G3 PowerBook. The average price cut is 23 percent, or more than $650.
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We've seen some aggressive pricing as computer makers have tried to clear out inventory. The personal computer market in general is going to get pretty bloody as people try to clear out older inventory.
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Daniel Niles
Analyst
Lehman Brothers |
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"We believe the magnitude of the price cuts indicates that Apple's rebate program had not been successful in working channel inventories down to normalized levels," said CS First Boston's McCarthy. "The current discounts may set a precedent for new product pricing, possibly wounding Apple's historical ability to debut new products at premium margins."
Strong balance sheet
On a positive note, Apple still has a strong balance sheet. As of Sept. 30, it had about $4 billion in cash and short-term investments, equal to about $12 per share.
In addition, Apple recently released a public test version of its OS X operating system. OS X is said to feature state-of-the-art technology throughout, including advanced Internet and graphics technologies, a new user interface named "Aqua," and an open-source UNIX-based foundation named Darwin.
"Mac OS X is the future of the Macintosh, and the most technically advanced personal computer operating system ever," Jobs said when the test version was released last year.
If the final version of OS X is as good as Apple claims, it may encourage more computer users to switch to the Mac platform. But for now, most securities analysts recommend that investors wait on the sidelines instead of rushing to buy Apple's stock at its current depressed price.
"We maintain our 'hold' rating, given Apple's consumer desktop exposure against adverse macro trends and the fiscal second quarter's likely inventory overhang," said CS First Boston's McCarthy. 
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