Several Asinine and/or Risky Ideas Regarding Apple’s Strategy That Boot Camp Does Not Portend
When I wrote about Boot Camp Thursday, I started by observing that while I and many others were initially shocked by Apple’s announcement, it only took a few hours before the idea seemed completely obvious and not really surprising at all.
Boot Camp has opened the door for a lot of additional speculation regarding what this means going forward for Apple. I think it’s only fair for me to go on the record regarding which of these ideas really would be shocking, if they were to come to pass.
Regarding anything related to Apple’s strategy going forward, it’s essential to keep in mind just how Apple functions as a business. It’s not very complicated. Apple now has two fundamental businesses: selling Macintosh computers and selling iPods. And I think if you wanted to, you could argue that this is really one core business, selling computers, and that some of their computers are Macs and some are iPods.
I’m not offering this as anything other than a statement of the obvious, but it’s apparently not so obvious to many of the pundits speculating on Apple’s future plans.
Selling hardware is their business. That’s where their revenue comes from, that’s where their profits come from, and revenue and profit is what defines a business. Everything else they do is in support of this core business. Apple is famous for its software — both the Mac OS and their own Mac applications — but they make way less money selling Mac software than they do selling Mac hardware. And the iTunes Music Store is just the equivalent of “software” for iPods.
And so that’s the prism through which one needs to view Apple speculation. For any idea, ask yourself this: Would it help Apple sell more Macs or more iPods? If the answer is “no”, Apple isn’t going to do it, or, if they do, it’d be a genuinely shocking development.
I forget to do this myself occasionally. On Thursday, I wrote:
All Apple needs to do to be spectacularly successful with its computer business in the next few years is to take just a few single digits of market share away from Windows.
But that doesn’t actually quite make sense, because “Windows” — or the company behind it, Microsoft — doesn’t actually sell PC hardware. If Apple is going to grow a few extra percentage points of computer hardware unit sales, those points must come at the expense of PC makers.
If this growth is driven by Boot Camp (and/or Parallels Workstation, or VMware for Mac, or an Intel-native version Virtual PC, or any other means of running Windows on Mac hardware), Microsoft may not even “lose” anything at all, because customers driven to the Mac for this reason must also buy Windows if they want to run it.
Boot Camp doesn’t pit Mac OS X against Windows, and so it doesn’t pit Apple directly against Microsoft. What Boot Camp does is pit Mac hardware that can run both Mac OS X and Windows up against all other PC-hardware that can only run Windows.1
Apple Is Going After the Profits, Not the Mass Market
If Apple takes a few additional market share points, it will be at the expense of companies like Dell, Toshiba, Lenovo, and Sony. What’s essential to note is that they’re not just going after any and all of the PC market — they’re going after the high end, which is to say, the profitable end.
Nicholas Carr agrees with me, and he nails it in his analysis of why Boot Camp matters:
As I’ve said many times before (too many, in fact), the consumer PC market has, like other consumer markets before it, split into two basic segments: buyers of commodities, and buyers of premium goods. The money’s in serving the latter. That’s why, for instance, Dell just bought Alienware.
In reference to my line that “Instead of choosing between a Windows PC or a Mac … you now get to choose between a computer that can only run Windows or a computer that can run both Windows and Mac OS X,” Carr continues:
I think that’s the reason the Apple’s stock price has shot up nearly 20% since the Boot Camp announcement yesterday. It’s not that Apple may be able to expand its general market share by a couple of percentage points; it’s that those percentage points are likely to represent many of the most attractive customers in the market.
And that’s Apple’s strategy in a nut.
What would be interesting would be to see computer manufacturers’ “market share” computed in terms of profits, rather than unit sales. Apple almost certainly makes more profit from a $600 Mac Mini sold through one of its own stores or Apple.com than eMachines does from a $500 POS PC sold at Wal-Mart. But in terms of “market share”, they each count as one computer sold.
Whatever Apple’s “profit share” of the PC industry, it must be much larger than its 2-5 percent market share. And Apple’s strategy seems clearly geared toward ramping up profits, not just unit sales.
Why Apple Isn’t Going to Release Mac OS X for Other PCs or License the Mac to Other PC Makers
One contrary view to Apple’s Boot Camp announcement, espoused both by Paul Boutin in Slate Friday and Robert X. Cringely in an op-ed Saturday in The New York Times, along with numerous other pundits and webloggers high on Boot Camp fumes, is that Boot Camp isn’t bold or important at all, and that what Apple really ought to do is release a version of Mac OS X for generic PC hardware. As Boutin puts it:
Instead of a disk that allows you to boot Windows on a Mac, what about a disk that lets you boot OS X on any Intel-powered PC? I don’t want Windows on a Mac. I want OS X on a PC.
The reason this isn’t going to happen — at least not soon — is that it doesn’t fit with Apple’s aforementioned business, selling computer hardware. Boot Camp fits because it makes it more likely that more people will buy Mac hardware, and doesn’t make it any more likely that existing Mac users will switch to buying computers from some other company.
This strategy would turn Boot Camp on its head, as the company selling all those $140 [sic] retail copies of its operating system would be Apple. And with hundreds of millions of Windows machines in the world, getting even 1 percent of PC users to switch to OS X would be a huge new business for Apple. It would also create another headache for Microsoft. And that, in the end, is what Apple does best.
The problems with this logic are manifold. For one thing, gaining one percent of the market by selling one percent more of the total computers would be way more profitable than selling that many $130 copies of Mac OS X.
According to Apple’s quarterly financial statements, the company in recent years has consistently hit gross profit margins a tad over 25 percent. Apple does not (publicly) break these margins down on a product-by-product basis, but I think 20-25 percent is a reasonable estimate of their profit for most of their big-ticket products.
So, let’s say today Apple makes $500 in profit on a $2,500 MacBook Pro. Tomorrow, in Boutin’s and Cringely hypothetical world where Apple sells $130 copies of Mac OS X for any PC, they might make about $100 in profit when someone buys a Sony Vaio and a copy of Mac OS X.
Cringely’s statement that “getting even 1 percent of PC users to switch to OS X would be a huge new business for Apple” ignores the fact that it might also completely sabotage Apple’s existing and very profitable business of selling Macintosh computers. Cringely seems to be making the assumption that everyone who’s currently using Apple hardware would keep buying Apple hardware, and that these retail copies of Mac OS X that run on generic PCs would be sold only to new customers.
If that were the case, sure, it would only add to Apple’s success. But that wouldn’t be the case. There can be no doubt that many current Mac users would buy other-branded hardware, costing Apple hundreds of dollars in profits. To make up for each such loss, Apple would need to gain three, four, or maybe even five new customers.
That’s not to say all Mac users would abandon Apple hardware. But hundreds of thousands would, and Apple would need to gain millions of new switchers just to compensate for that lost revenue and break even; otherwise they’d lose money on the endeavor, even while gaining many more users of Mac OS X.
Boutin clearly recognizes that this would in fact happen:
Face it, most of your time at the computer is spent interacting with the operating system and applications, not admiring the case. OS X is an excellent operating system, with a lovely, soothing interface that doesn’t wriggle like a bug. Why not run it on the cheapest computer you can get? If you cracked open a new Mac and took stock, you’d realize you could buy the same computer much cheaper by ignoring its packaging. Once you got rolling on e-mail and Web surfing, you might even forget what your PC looks like. What matters is what’s onscreen.
Leave aside for this discussion the fact that you can’t actually get a comparably-equipped computer from any other company for that much less than Apple’s current Intel-based Mac line-up — you can get much cheaper computers, sure, but not much cheaper computers with comparable components. The point here is that Boutin is right that what matters most is what’s on-screen.