Monday Note

With Apple’s smartphones and tablets making so much money and taking up so much media bandwidth, one has to wonder: Is there a future for the Macintosh?

We’ll first take a look at broad trend numbers and try not to molest them too much. As we saw last week, they’ll confess to anything when under torture. After that, we’ll explore the significance of recent changes in the Mac ecosystem: the new MacBook Air and the Mac App Store. Finally, we’ll extrapolate a bit and attempt to answer the question in this note’s title.

Mary Meeker, the Wall Street analyst who recently left her Morgan Stanley pulpit for a Kleiner Perkins perch, just updated her highly-regarded Mobile Internet Trends presentation. From her 56 slides I extract this one:

2011 is the year when PCs will cede the market momentum lead to smartphones and tablets. The disparity between the old guard and the new Really Personal Computers become huge in 2012 and 2013.

This comes sooner than expected: Only four months ago, while she was still at Morgan Stanley, Meeker had this forecast:

The takeover wasn’t supposed to happen until 2012, but, as this review of Gartner and IDC numbers shows, the growth of mobile devices far outpaced the PC in 2010.

For Apple, the smartphone/tablet takeover happened even earlier. I just looked at the Q1 2010 numbers (for the September to December 2009 period):

And this was before the iPad.

For the same quarter this fiscal 2011 year, the iPhone and iPad brought in $15B vs. a “mere” $5.4B for the Macintosh line:

Let’s not forget the iPod Touch. It represents about 50% of the iPod’s $3.4B, with the total for all iOS devices representing 65% of Apple’s revenue. (I have no Apple TV numbers.)

This past year, the Mac business went down percentage-wise, from 28.4% of Apple’s total to 20.3% this past quarter, and operating margins are certain to be smaller than the almost obscene 60%+ Apple gets for its iPhone ($620 ASP against an estimated $180 BOM).

With these numbers, why bother with the Mac? Last October, Apple held a Back to the Mac event whose purpose was to answer that one question: Why bother?

In the first place, the Mac is a $22B business, #110 on the Fortune 500 list. Second, it’s growing nicely. See the numbers above: +23% in dollars (and 22% in units), with a stable ASP of $1313. That last number is the envy of the PC industry. Because of netbook sales, the industry-wide ASP hovers slightly above $530. (This is the net revenue to the manufacturer, not the retail price.) That’s why the largest PC maker, HP, makes only 5% in operating profit on their $10B quarterly sales. For HP, the Why Bother question applies. I’m curious to see what the new CEO, Leo Apotheker, will do about the low-margin commodity parts of HP’s lines of business.

Macintosh products, on the other hand, have avoided the ‘‘race to the bottom” that plagues  PC clones. The business is big, it’s growing faster than the rest of the industry, and it makes more money.

Then, last quarter, something changed:

Desktop unit sales were flat (-1%) while laptops took off (+37%). Compare this to the 2009 vs. 2010 units numbers in Apple’s 10-K (the yearly filing):

Back then, desktops were growing faster than laptops. So what happened last quarter? The answer appears to be the new MacBook Air.

To confirm this, let’s transport ourselves to a typical Apple Store. We’ll start in September 2010. The older MacBook Air is relegated to a low-traffic area of the store. It’s not “moving.”

Now look at the same store today. The Science of Shopping says the ‘‘high-value” area must be the first table on the left, because, statistically, that’s how we navigate stores. There we see six MacBook Airs: four 11” models and two 13” configurations.

Why the change?

The attractive price is part of the answer: The base 11” model sells for $999, low by Apple standards. But performance is the more important factor. The older generation Air was considered neat but sluggish. For the new machines, the slow hard drive was replaced with an SSD (Solid State Drive), and the word of mouth quickly spread: The new MacBook Air is fast! It boots up (and wakes up) quickly, plus it has a longer battery life, improved display… The former also-ran was transformed into a best-seller, especially the smaller 11” model (I’ll call it a neatbook in reference but not deference to Apple’s edict against using the n-word: netbook.)

Thinking of the Mac’s future, we don’t risk much when we assume SSDs will replace hard drives on laptops. Apple is on a drive to drive the drives out — at least in the mobile segment of the Mac line. (We’ll see how this manifests itself when the “Pro” configurations get refreshed later this year.) SSDs are still expensive but for how long? And how will Apple’s billions ($3.9B at last count) in advance purchase agreements with its suppliers impact prices?

We now move to the Mac App Store.

The Mac App Store was launched on January 6th and, but for a few bugs, appears to be a success. My first impression: Nice…it helps the small-scale developer who otherwise can’t get shelf space.

True, the App Store is a boon to developers — the creators of Pixelmator, a well-crafted, easy-to-use Photoshop subset, made one million dollars in revenue in three weeks. But that’s not the Store’s only — or even most important — benefit.

Let’s start with the convenience for the user. As with iTunes tracks and iOS apps, the Mac App Store circumvents the usual e-commerce obstacles. The site, the download, the payment system, the installation and updates…the workflow is smooth. No serial numbers, no DVDs, no waiting. And you can install the same applications on more than one machine by simply confirming your Apple ID, no further payment required.

And let’s talk price… Mac software prices are coming down. A sharp-tongued friend of mine “hopes” Adobe opens a 24/7 War Room. Why? “Because the market price for Mac software just got divided by three.” Nuance and exaggeration aside, he’s right. When Pixelmator was launched in the second half of 2007, it was priced at $59. Now, much improved, it sells for $29 on the App Store (albeit “for a limited time”) with a free upgrade to an upcoming 2.0 version.

Apple sells its own productivity apps (word processor, presentation, and spreadsheet) for $19.99 each. It’ll be interesting to see if, how, and when Microsoft or even Adobe use the App Store and how they’ll price their products.

Now, an IQ test. This…

…or this…

Both are available today. Which do your prefer? The $199 DVD (protected by a serial number) that you buy at the physical store and install on a single machine, or the $79 product you download and install as you see fit on any of your machines?

The difference in price is, of course, the main attraction, but freedom from serial numbers is also important. When I switched machines using the Migration Assistant, everything moved over without a hitch, files, applications, settings, even the desktop background…or so I thought. A few weeks later, I fired up Aperture and, unlike the rest of my applications — even Microsoft Office — it demanded a serial number. A foraging expedition produced the Aperture 3 DVD, but that didn’t placate the cerberus because that was an upgrade DVD. I needed to come up with the SN for Aperture 2. I erased the program and bought Serial Number Freedom — and legal multi-machine installs — for $79.

All of this leads one to wonder if Apple will rid its stores of “boxed” software, thus fulfilling another of their goals: fewer SKUs, a simpler store.

So, what’s the future for the Mac?

There’s the promise of “regularity,” apps that only use published APIs. This is both a controversial topic and a way for Apple to redeem past sins. Restricting hacks could mean less room for developer creativity, but it will also mean a more reliable system and, for Apple, more freedom to make changes “under” the applications once enough of them are “regularized.”

This takes us to a more speculative train of thought: Moving to the ARM architecture.

When you experience the 11” MacBook Air on a relatively slow 1.4 GHz Intel processor, you can’t help but wonder how it would feel on multi-core ARM hardware. Porting an OS to a new processor is no longer rocket science, but moving third-party applications is much harder — unless they’ve been distributed and regularized in such a way that makes the transition smooth and transparent.

Then we have the next OS X version, dubbed Lion. Last October, Steve Jobs emphasized the point that Lion’s simplified UI borrows the “magic” of the iPad. We’ll have to wait for the product, slated for a Summer ’11 launch, but that didn’t stop my friend Peter Yared, a serial entrepreneur and sharp blogger, to offer a suggestion: “Take that iPad-ified MacBook Air one step further. Look at the Toshiba Tablet PC; there’s a pivot inside the display’s hinge:

Twist the display and it becomes a tablet:

Imagine what Apple could do with this!”

As I was writing this note, I found Andy Ihnatko, a respected technology journalist, appears to be thinking closely related thoughts in this MacWorld piece.

I worry about the complications: OS + UI + mechanical challenges but…Apple might have the people and guts to pull it off. We’ll see.

End notes:

No MicroNokia kremlinology today. I’ll write about it in a few weeks, after the dust settles. In the meantime, you can look back at past Monday Notes such as last September’s Nokia’s New CEO: Challenges or last February’s Mobile World Clusterf#^k. And, of course, Elop’s Burning Platform memo, highly unusual in its brutal frankness.

As always, look for penetrating analysis on Horace Dediu’s Asymco. And for another type of “penetrating” commentary and BS detection, see Brian Hall’s The Smartphone Wars — they both rose to this week’s challenge.

—JLG@mondaynote.com

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