Anthony Frausto-Robledo, EIC ([email protected])

30 Dec 2004 - (originally written 8 July 2004)

 

Editor's note: We have decided to publish the second part of our 'Mac LC' story series originally written in July of 2004. We also have another companion opinion piece comparing the Saab brand and GM to Apple's possible future moves.

The decision to publish this article (originally abandonded) has been brought about because some rumors suggest Apple may indeed have an LC like machine in the works for next month's MacWorld Expo. Thus our original reasoning may be indeed spot-on, as usual I might add. -- Ed.

Opinion: Apple needs a New 'Mac LC' for Market Growth - Part 2

It seems we have published an opinion article that has garnered more reader feedback than any story in recent years. Many Mac users wrote back to us regarding this story's views. Some were positive while many were negative. All and all, what we realized is that the view of Apple's market share position is one of those subjects that people seem to be passionate about regardless of what position they take. As promised in part 1, I am today discussing what kind of machine Apple needs to grow market share.

Recap

What I said in the first article was that Apple realized in the original Mac LC line of computers the "ability to edit the product wisely". And this had an impact on Apple's market share growth. (Apple's market share growth peaked in the early 90's when LC's were everywhere).

Market Share Market Snare!

Some people wrote in that market share is not important for Apple. Profit is important they argue. I dissagree completely! You cannot continue to decrease your market share to the point where it bearly exist. This notion is just not tenable. At some point things will come crashing down on you. Or at the very least become overly difficult.

As mentioned previously when Apple was at its market share high-point the company produced a broader but yet still well-defined product portfolio, where products were edited very well. When thinking about structuring products -- especially computers -- I like to think of the exercise as one of editing, simply because we all know what type of "best computer" Apple can make. It's a matter of paring down specific attributes to target specific market segments. There are only two goals and two vectors in defining or editing a product line (see table):

The first goal is to increase market share. The second goal is to increase profits. There are two vectors on products regarding pricing (you decrease price over time or you increase price over time, relative to the market). You can define or edit a product's feature set around all four of these choices above. And you can win on all four if you have the right factors on your side.

Looking at the matrix above Dell occupies the top left box. By under pricing their competition on identical gear Dell wins on volume and thus market share. When Dell does its best it occupies the bottom left box as well. A profit and market share dual win via the mechanism (or pricing vector) of decreasing prices.

Apple occupies the lower right box. By shipping products with unique or more feature-rich assets Apple can command higher prices and thus increased profits. When Apple does its best it occupies the top right box as well -- that coveted Sony position combining higher prices yet strong market share. Apple seems driven towards the opposite vector as Dell.

Vector Strategies and the War Chests

The high-volume/low margin Wal-Mart strategy employs a war chest that gets stronger with market share advantages over its competitors. Relentless corporate cost savings, penny-pinching, and bully tactics with contractors are some of the staple moves by those who aim to win with this strategy.

The low-volume/high-margin BMW strategy employs a war chest filled with rich technological advantages, coupled with a corporate culture built around perfectionism and supremacy. Spare no expense to do something right is Jobs' modus operandi. No wonder Apple teamed up with BMW for its first car to iPod integration play. Apple's best war chest looks something like this: war chest = big profits + big R&D budgets + Jobsian vision + perfectionist culture.

In the case of Apple, its war chest is best when the company can apply more money to its research and development. More money means obtaining the best and brightest and being able to fund truly forward looking research. However, part of Apple's war chest is the weapon of Steve Jobs. Steve is absolutely brilliant at making products great because he is such a perfectionist and he wants all of Apple's products to be the most excellence products in the industry. When Steve knows what market he is going after and understands that market, nobody can beat him.

Apple's perfectionist culture is a critical extension of Steve. At its best it means teams can deliver the goods. At its worst it means middle management gets stuck obsessing over the smallest details. The engine that drives Apple's war chest is both profits for R&D and Jobs. I don't believe for a minute that if Apple had Microsoft's R&D budget that Apple would be able to produce a better iPod because in the end the critical ingredient is Steve's ability to edit a product.

Getting To Sony

Jobs often talks about Sony as Apple's corporate idol and it's understandable why. Sony can and has won in the past by excelling within the top right box (increase marketshare/increase price). That is, they have shipped products that cost more than competitors but at high volumes or market shares. Sony's Walkman® shipped over 300 million units during its lifetime. For years, even after there were cheaper rival machines, people still payed more for Sony's 'WalkMan' because it was both the real deal and because it was Sony.

It appears that the iPod may replay this corporate history. Through the genius of the WalkMan Sony cemented its identity with consumers. The Sony brand owes much to the WalkMan® and its innovative and market-changing technology. Clearly, people today still choose Sony as a first choice with consumer electronics because of this legacy of innovation.

The question is how does Apple do this with its computers? And can the iPod serve Apple's future like the WalkMan served Sony so many years ago?

A Bi-Vector Strategy Wrapped Around Brilliant Product Editing

Apple has got to realize that it can't win any significant market share when its entire product line is shaped and edited around that lower right hand box! (increasing profits via increasing price) The company needs a dual-vector strategy built around some judicious product definition and editing strategies. Apple can gain 800,000 more units per year if it wants to get serious about it.

1990's Mac LC

To do this Apple needs to revisit the historical circumstances that formed the success of the Mac LC product line in the early 90's and formulate a parallel strategy for today's market.

Learning from the LC

The Mac LC was a very different computer than today's iMacs and eMacs. And it was substantially different than Apple's top of the line Quadra's as well. Some hallmarks of the LC strategy and how they address criticisms of Apple's "all-in-one" designs include:

The Mac LC series were also inexpensive 32-bit color computers, although the first two versions ran on 16-bit buses. Still, I can remember sales people telling folks that Mac LCs were 32-bit generation computers while Windows/DOS machines where only 16-bit. Apple clearly crippled some aspects of the machines so they would not canibalize their more expensive pro gear. I think there is a lesson here for Apple to learn from.

The Trojan Horse and Lessons in Camaflage

I believe that the Macintosh brand name is far weaker in the minds of consumers than the Apple brand name. Don't get me wrong, I love the name Macintosh! But let's be honest about something here. Isn't this the name of a brand that lost a high-profile war with Windows? Part of the reason why the iPod has been so successful with a bunch of users who compute with Windows is because the product isn't a Macintosh. It has an entirely different name, yet it resonates the core values of Apple without the lost war attachment.

New iPod mini family- courtesy of Apple

It essense Apple is using camaflage with the iPod. The obvious goal is: for all iPod users to eventually move to all Apple products. Notice that this goal so stated doesn't have anything to do with the name Macintosh -- or at least it doesn't have to.

Apple is slowly introducing products that Windows users can use. This is often and correctly called the Trojan Horse strategy. It's a brilliant strategy so long as Apple appears to not care about whether or not people have an interest in Macintosh or not. In other words, it will work so long as Apple offers these products as true gifts to Windows people. People don't need to have an interest in Macintosh for Apple's computer market share to go up. They need to have an interest in Apple.

Packaging Brands and Editing Products

Apple could do well by looking very closely at how the automobile world is transforming into mega auto groups who package brands around tightly edited product profiles. This is particularly interesting with GM and its Saab subsidiary. GM is learning how to capitolize on shared components and platforms in order to shave costs on building cars and it is tapping all of its assets to do this. This means that it will tap Subaru's manufacturing expertise in all-time/all-wheel drive cars in order to bring a luxury foreign brand (Saab) into the hot new premium sport compact market.

New Saab 9-2X

GM's Saab subsidiary had to maintain at all cost the Saab brand philosophy in the final product but they clearly tapped some expertise coming out of Subaru and they did it in tall order. My prediction is that this car will be very successful in increasing Saab's market share and overall unit growth. It will be popular with former Subaru owners who always dreamed of a Swedish car (like Volvo) but couldn't afford one. And it will resonate with a new class of customer in the car market: eurocentric design oriented customers (quiet often young) who can afford cars priced in the mid 20 thousand dollar range.

The true Saab customer -- similar to the true Macintosh customer -- will still purchase pure Saab cars, but this new "Saabaru", as some people have called it, will no doubt increase Saab's total market share simply because the product doesn't appeal to the existing Saab owner class but will appeal to a new and different segment of car owners.

Targeting the New Apple Customer

If GM and Saab can do this why can't Apple? In fact, Apple is a prime candidate for this trend. What trend you say? The trend in luxury brands coming down market with products that don't cannibolize their higher-priced/higher margin products and don't tarnish the brand either. Volvo has done this better than anybody else in the car market recently. Who would have thought it possible ten years ago that you could buy a pure Swedish Volvo car for a smidgen more than a Honda Accord? But you can today.

Is Apple a BMW or Volvo of the computer world? Yes it is! Absolutely. One of the 'Mac Myths' is that they are expensive. And expensive generally equates to higher quality, more prestige and other similar perceptions. Do average Dell folk want to drive BMW's? Heck yeah they do! Or at least a good percentage of them do.

Alex Salkever of BusinessWEEK online wrote a six-step plan for Apple to increase its market share. In it he said:

"We're in the era of cheap chic, Steve. And I have no doubt that Apple can play that game with the best of them. Give us a really cheap, really cool PC, and watch them fly off the shelves." --- Alex Salkever, BusinessWEEK

If Land Rover, Volvo, and Saab can do it in the automobile world...if Michael Graves and Martha Steward can do it at Kmart....and if fashion divas and divos like Mossimo can do it...then why can't Apple do it with computers? Why can't Apple come down market in an intelligent way that doesn't cannibolize the rest of its more expensive product line?

This is the path to market share growth. If Volvo and Saab can figure this out, so can Steve Jobs.

The Apple ePower Pro

Apple can come up with its own name but for now I want to call the new Mac LC the Apple ePower Pro. Quadra is a great name too but Apple should reserve that for a future product with four something (like for processors!). So what's so great about the ePower Pro?

For starters it doesn't have Mac in its name. Secondly, the letter "e" stands for two things intricately related to market share growth in the computer market: enterprise and economical.

When Saab decided to broaden its product portfolio with the new 2005 Saab 9-2X it needed to describe its key attributes. They did it like this:

"The list was short: the vehicle needed to have a high-performance personality, all-wheel drive, distinctive European design and be priced below the 9-3." --- Saab Magazine

There are only four key attributes in that description above. If I was to try to do the same with a product aimed and broadening Apple's portfolio with the intent on increasing market share I would likely say this about the Apple ePower Pro:

The computer needs to have a flexible business-like personality, an OS X / Linux boot strategy, distinctive Apple design and ease-of-use, and be priced below all other Macs.

Apple's General Motors: IBM

Since I am constructing an argument that says Apple should look at what is going on in the automobile world in order to learn how to increase market share with a luxury brand, I may as well take the analogy to its full extension.

What is going to make the new Saab 9-2X so successful is that Saab (which is owned by GM) was instructed to work with Subaru (which GM has a 21 percent stake in). GM used its full resources in Subaru to tap their expertise in all-wheel drive as well as to tap Japanese Subaru dealers for sale points for this and other future Saabs in Japan. As I said before, I think this new Swedish-Japanese hybrid is going to expand the Saab market share a small percentage in the US and Canadian markets, which is exactly their goal. They are going to do this without existing Saab buyers coming down market or leaving the brand.

In many ways IBM is Apple's GM. And in the past IBM has seen Apple as a type of possible luxury or unique-brand division. The two companies have come very close to merging in the past (in essense IBM buys Apple Computer) with the goal of the two collaborating and maintaining separate business identities. I have several IBM friends. It is no secret to those who know the inside story that IBM has had a fondness for Apple for well over a decade. The two companies, if anything, have one very mutual enemy. Both companies were burned by mistrust in Bill Gates.

IBM can serve as Apple's GM in many ways. In the vision of the Apple ePower Pro noted above, IBM's role might include co-manufacture and co-engineering. Additionally, IBM might sell an enterprise version of the Apple ePower Pro to IBM enterprise customers.

We have to remember that its entirely possible that a six-figure individual who owns a $40,000 Saab 9-5 might just buy a $23,000 Saab 9-2X just for fun, as a second car. In like manner, professional graphics artists who regularly buy Power Mac G5 computers might want an Apple ePower Pro for some particular reason, but it would be additive to Apple's market.

Flexibility and Linux

Perhaps the best reason why IBM might want to do this with Apple is to push their PowerPC platform into the enterprise market on the desktop. But IBM is not going to do this if Apple makes all the profit. So they have to figure out how to both win.

These days IBM is pushing Linux and its flexible nature. But IBM could win really big if they were able to push a Linux/OS X combo. That's real flexibility. And something that HP and Sun can't do. Paul Murphy of LinuxInsider thinks IBM is headed towards pushing Linux on the corporate desktop with or without anybody's help with the Cell processor at its center. He suggest that Apple could lose big time if this happens. If I was Apple I would go to IBM and say I want to help you with this goal but let's figure out a way where OS X can play into this.

What we are talking about is Apple market share. There are many ways we can shape this analogy which started with GM and Saab. Here is one way. In the proposed ePower Pro Apple and IBM could agree to co-produce it and ship a dual boot system that enables IBM's enterprise customers to run either of the two PowerPC-based operating systems (OS X or Linux).

In the case of a large government IBM client, managers, secretaries and adminstration folks might run Blue Linux (if it exist?) on the ePower Pro, while scientists, engineers, and marketing folks might run OS X mostly. Ideally both OS's would be able to run symultaneously. Here IBM has expertise in making processors that can run multiple operating systems at once. This is a core capability of IBM.

Closing Comments

This article started by saying that the Mac LC line of computers forms a valuable historical reference for Apple and its battle with market share growth. The challenge for Apple is to edit products wisely enough so that lower priced products don't cannonbalize higher priced products and that the lower priced products sell to a new class of users in order to increase market share.

The suggestion is that Apple look at what is going on with the automobile industry for cues on how to leverage brand yet tap broader expertise and global sales channels. Cheap chic is in. IBM can become Apple's GM; but the reference is actually more attractive than it sounds. IBM and GM are both big but in the case of IBM, they are noted for their cutting edge technology too and this makes them more akin to Saab and Apple than to GM at large.

At core issue here is access to the Apple brand. We know that at present only a small percentage of a vast user base is choosing to pay for the Apple brand with computers. I believe that this percentage has gotten too small and it needs to be raised. ---- ANTHONY FRAUSTO-ROBLEDO, Editor-in-Chief

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