Theodicius

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They just don’t get it

Posted on by arlen

I’ve been hearing from more people after the new MS ad campaign (you know, the one where MS pays an actress to cleverly make the point that the reason you buy a Windows laptop is because you can’t afford a Mac?) claiming Apple should license OS X to cheap Dell/HP machines for the low end customers. It’s not going to happen without a radical change in the Apple approach to marketing, and as long as they deem OS X important to them, I don’t see Apple making that change. When you look at it from their perspective, there’s just no business case for it.

What is it Apple is selling? The one constant in all the variations is User Experience. Whether you’re talking iPhone, iPod, or iMac, Apple’s big competitive advantage is the consistently excellent user experience. So, what happens when they go for the low end buyer?

They lose money. Don’t believe me? Follow.

Let’s start with some realism — not everyone who currently doesn’t own a mac wants one. Some folks are happy with the machine they have, or the software they have. So they won’t sell a cheap OS X laptop (I have to specify laptop, because you *can* buy an OS X desktop for substantially less than $1K) to every current laptop owner.

There are two ways Apple can go for the low-end laptop market. Either they license it to Dell/HP or they build it themselves. If the cheap laptop uses the same components as the current MacBook laptops, and they license it out for a royalty fee, they lose sales from their own laptop line, and would therefore have to sell 5+ of the cheaper laptops for every sale they would lose, just to break even. This means they’d would almost have to double the market penetration of OS X just to make as much money as they are making right now. That’s not going to happen overnight, if it happens at all. So the company would have to take a long-term profit hit, just to find out if this was going to make sense in the long run.

But, since this cheap laptop has the same components as their current line, they could simply take the profit hit themselves and reduce the prices. This has the advantage of not forcing them to share the profits with another company, so the market penetration wouldn’t have to rise as steeply and as quickly to maintain the same level of profitability; maybe a 50% sales increase would cover the lost profits. Of course, that would probably also mean they’d would have to open another manufacturing facility, since they’re already operating at near-full capacity. So again a profit hit.

The second alternative is to license out to laptops that contain cheaper, AKA less capable components. Then Dell/HP can pay Apple higher royalties and still make the cheap price point. So what happens then? Fewer sales losses, because the cheaper laptops are made with cheaper components, so the current Mac line still has a premium. So the cheap laptops need less market penetration, say only 25% gain, to break even.

That latter scenario seems realistic, but I’ve left something out of the equation: reputation. What happens to it in each scenario?

Well, in the build-it-themselves scenario, the first thing that happens is they get mauled in the press by people pointing out that Apple was obviously being greedy, gouging people for no reason. To some extent that happens today, but if you think it happens a lot today, just wait for the price drop to happen. The uproar with be followed by the usual class-action lawsuit by people who paid the older prices, followed by angry customers lashing out. So much for the gain in market share; the backlash will cost them future sales even if the lower prices gain them.

In the license-it-out scenario, they stand to lose even more. Remember what Apple was selling? The user experience. If they license it out, the put the thing that differentiates them most from the rest of the market into the tender loving care of the same companies that have done so well preserving the Windows user experience (yes, that’s an actual example of sarcasm). The people who buy the cheap laptop hoping for the Apple user experience won’t get it. The cheaper laptops with cheaper components won’t perform as well. These folks will look at their crippled OS X experience, and tell the world that it’s nothing special. Their complaints will fill the market, once again driving down sales, but this time not only of the cheap clones, but of the rest of the product line. And once a brand loses its luster, its very difficult to regain it; just ask Parker Pens.

Apple sells every laptop it makes right now; it continues to make a solid profit for its shareholders. Getting down into the low-end (and low-profit) computer market won’t do much to enhance that, and will cost them far more. Why would they, when they so obviously don’t have to?

I’m reminded of the story of the popcorn stand vendor and the investment banker. The popcorn vendor has a good morning, and since it’s a wonderful day, decides he’s going to close early and enjoy the day by taking a walk along the beach with his wife. The investment banker comes along just as he’s closing, and asks why he’s closing early.

“To spend the rest of the day walking on the beach with my wife.”

“But there’s still time to sell more popcorn yet today!”

“I’ve sold enough. I’ve made the money I set out to make. Why should I stay and sell more?”

“To make more money!”

“What would I do with that?”

“Buy more popcorns stands. Then you could have more people selling your popcorn, and make even more money!”

“But what would I do then?”

“Then, when you’ve spent years building it up, you could sell the business to someone else.”

“Then what would I do?”

“Then you could spend the afternoons taking long walks with your wife along the beach.”

“But I can do that now.”

People who have spent the time watching Apple know: Apple likes the “boutique” image. They like the exclusive cachet that surrounds the brand. Price isn’t the issue for Apple; it’s the image; and they milk that for all its worth. They’re really good at it. And working that marketing approach sells every machine they can manufacture, almost before they make it. That’s why their stock today is worth 10 times what it was worth in 2004. It’s also why they’ve weathered the current financial storm better than their competitors (AAPL is off 20%, DELL off 40%, MSFT off 30%, SNE — Sony — off 35%).

Apple, as the popcorn vendor, has kept total control of its business expansion and stayed within itself. As a result it’s solid. If they became just like the Microsofts and Dells of the industry, not only would they lose time and money learning how to compete properly in that world, they would cease to be Apple, and be just another computer company.

All the analysts saying otherwise just don’t get that.

But let’s say they do all this anyway, and find a way to make it work. What happens then? The same people will still be complaining about the price or the performance. So even after doing all that, they still wouldn’t win. (Example: Sony laptops hit price points higher than Apple’s for similar configurations, yet Apple gets the heat for high prices.)

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