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Apple's High-Water Mark?
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Apple's Prospects

To summarize Apple's current position: The company appears to have reached a point where it cannot reduce its operational costs. It has taken on the continuing fixed expense of a large retail infrastructure. Its new hardware architecture is not as powerful as first perceived, and migration to the new platform is likely to create some tension with existing customers and software partners. To maintain leadership in the digital media market, it has had to reduce prices of its iPod media players and will most likely have to continue to do so. Last, Apple will face a strong challenge from Cell-based systems from Sony and others.

Some have already taken notice of Apple's prospects: in December, financial analyst Andrew Neff of Bear Stearns lowered his rating of Apple stock from Buy to Hold.

Apple has made some moves to improve its position, at least as far as its iPod media players are concerned. By the end of this year, about 50 percent of all automobiles sold in the United States should offer iPod integration with their stereo system. Apple is also opening very small versions of its stores in mini-malls and other places, in an effort to reach out to more customers. While Wall Street may have concerns about Apple's profit potential, Apple does have enough margin cushion to lower computer prices, which should attract buyers to the retail stores. The question is, how will Apple's new business model measure up? Is it sustainable?

Apple's recent branding and retail strategy appears to be an attempt to create a "Nike effect." For years, teenagers from impoverished areas have been one of the largest consumer groups of expensive Nike athletic footwear, spending up to $200 per pair. Apple has achieved this effect with the iPod, but can it do it with its computers? One interesting recent phenomenon is an apparent increase of Mac Mini sales due to user desire to integrate the iPod with a media server.

What can Apple do to counter the coming IBM/Sony/Toshiba/Lenovo challenge? For starters, it can hope the Cell processor turns out to be overrated. This is a real possibility. The computer industry is littered with the remains of technology that promised greatness yet never delivered on the hyperbole. Barring that, Apple should start looking at other microprocessor technology. One great advantage of Unix is the ease of porting to different hardware architectures. Apple may need to migrate Mac OS X yet again in response to the Cell's challenge.

Several companies are working on technology similar to that of the Cell. Sun Microsystems has been developing an 8-core microprocessor, code-named Niagara, that may compare well with the Cell. Some startups are also working on high-performance microprocessors. Apple may have to choose one of these as a partner. Apple could do this and still continue producing systems with Intel's Core Duo, creating a dual-tier product line to satisfy both casual and power users. Sony and Lenovo will most likely adopt such an approach, at least initially until they see how the market for Cell develops. Another possibility is IBM deciding to offer the Cell to Apple. Finally, recent industry speculation is that companies such as Intel and AMD will simply copy IBM's Cell architecture; the feasibility of such an approach may well be decided in a court of law.

There are some who think Apple should allow Mac OS X to run on other hardware. This would be an interesting strategy. The main advantage would be a much larger market. Some disadvantages are vastly lower margins, having to support a plethora of third party hardware, and having to compete with low-cost vendors offering the same operating system. Apple's only differentiator would be the physical design of its computers (which could possibly work, if the "snob effect" came into play). Apple, when pressed to port Mac OS back in the mid-'80s, refused to do so. Now Apple is again in that position. What is the best course? It makes sense to port Mac OS X only if Apple's current strategy doesn't work. Again, a great advantage of Mac OS X is its underlying Unix architecture, which enables easy porting to other platforms, making it easy to execute a third-party porting strategy.

IBM faces its own set of challenges and risks. Foremost, overheating may still be a problem: the Cell's primary core is a 4GHz Power 5. IBM claims to have solved the problem with advanced on-die thermal management and improved physical characteristics. Market timing and coordination between IBM and its partners will be important. IBM is still dealing with a legal challenge to Linux, and though it appears to have won that battle, an even fiercer fight involving software patents may follow (in which IBM will most likely prevail, should it come to pass). Geo-political forces could interfere with the Lenovo partnership. Despite these potential risks, IBM appears to be in an enviable position.

Sony also faces some challenges. Rumors claim the PlayStation 3 will cost between $800 and $900 to produce; Sony plans to sell it for around $500. This is a common market strategy in the game console business. Manufacturers sell the consoles at a loss, and then recover the losses and proceed to profitability from sales of games and related products. Sony recently announced a delay of PlayStation 3 until November, allegedly because of copyright problems with the BluRay DVD Sony intends to use. Despite this, there is a chance Cell processors will find their way into desktop PCs later this year. IBM's initial system push for the Cell appears to be blade servers.

2006 promises to be a very interesting year for the computer industry. Sony and Apple are on a collision course in the coming battle for digital entertainment and media systems. Apple has the early edge, while Sony appears ready to start executing long-term plans. Significant new hardware and open source software introductions may change the very nature of the industry. How Apple and other companies cope with the coming changes will make for interesting observation. Ultimately, the consumer should benefit.

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Adrien Lamothe developed his first computer program in 1976 and never looked back.

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