Investors Overlook the Mac as a Windows PC

Much, if not all attention regarding Apple has been focused on the iPhone. Apple’s recent $200 price reduction on the iPhone resulted in analysts, journalists, and investors debating the true demand for new device. Additionally, the effects of the price cut on Apple’s earnings has been a hot topic of discussion. Certainly the iPhone is relevant to Apple’s performance, but ostensibly it’s the Macintosh computers that will have the most impact. Specifically, Mac’s ability to run Windows natively has the potential to be a colossal catalyst for boosting Mac market share.

Apple released “Bootcamp”, which allows Mac users to install and run Windows just like one would on a PC. Apple’s new OS, OS X 10.5 “Leopard”, slated for release this November will include Bootcamp software. Additionally, third party software called “Parallels” allows users to run Windows and Mac OS simultaneously.

The Windows capability has not yet been aggressively publicized by Apple, and analysts and investors have been relatively quiet on this issue. Yet, for more than two decades, the lack of Windows compatibility has been the primary reason behind consumers’ decision to NOT purchase a Mac computer. Now that Windows can be installed on Macs, sales could really explode. I believe that this aspect of Apple should garner more attention, and I will explain why.

Macs are a perennial top award winner in consumer surveys and industry publications. Marketing research has suggested that for many PC buyers Macs were their first choice, yet they declined to purchase due to the need to run Windows software. Computer buyers employ what marketers refer to as a “non-compensatory” purchase decision model. For every product attribute evaluated and compared, supremacy in most categories cannot offset a deficiency for a particular attribute. Explicably, Macs may score higher in a consumer’s mind for every attribute, but the fact that it’s a non-Windows machine eliminates the purchase possibility from the buyer’s selection set of product alternatives.

Simply, consumers want a machine that runs the same operating system that 95%-99% of all other computers run. In most cases, consumers require a machine than runs windows due to work or school related factors. Alternatively, there is a significant risk in buying a computer that may become extinct or no longer supported by software developers. That was a real concern years ago, when Apple was against the ropes as market share had been estimated to fall as low 1%.

A popular statement: “I really want and prefer to buy a Mac, but I need a Windows machine since that is what we use at work.” The lack of Windows compatibility has been an insurmountable hurdle for Apple for decades even though significant demand for its machines exist.

Apple has certainly recovered since the days of old with market share currently estimated well above 5%. While still miniscule, Apple has delivered substantial progress. The bright side of the matter is the enormous room for potential growth from seizing share from the Windows PC makers- Dell et al.

In one aspect, Mac’s ability to install and run Windows OS makes them no different than Dell, HP, Gateway, etc., which there is little difference among those traditional PC devices. In essence, installing Windows on a Mac means that there are no longer grounds for consumers to eliminate Macs as a products choice on that reason. Thus, a consumer could just as well buy a Dell or Gateway or Mac. Think about it. The primary factor keeping buyers from purchasing a Mac for decades has been overcome. Plus, if that barrier hadn’t existed we know that Mac sales would have been significantly higher. The bottom line: pent-up Mac demand can come to fruition now.

Given that Macs now compete with Dells and HPs as product choice in buying a PC, Macs retain an edge. Macs provide all of the functionality as other PCs, yet the Mac OS serves as a bonus, if you will. Why would someone choose a Dell or Gateway when that can buy a Mac, and not lose Windows functionality, yet gain all the benefits of Mac OS? I think that is a very central question. Especially since Mac prices have become more competitive.

Despite the lack of publicity I think this is huge. We know that there are a significant number of consumers who would prefer to buy a Mac but can’t get past the Windows issue. Now that this is no longer an issue, how many Macs can Apple sell? I can envision some individuals buying a Mac to solely run Windows just because they prefer the aesthetics of Mac’s design.

We have seen a dramatic increase in Mac sales and market share, yet I perceive the general consumer is unaware of the Windows capability. I am confident that when a more aggressive publicity campaign occurs, Mac sales will react robustly. I think that it’s the PC savvy segment, aware of Bootcamp that has been snatching up Macs recently, not entirely the normal, less aware consumer. Just from anecdotal evidence, people I have surveyed exhibit little awareness. Eventually that will change with time, and the impact on Apple’s revenues will be much greater than the iPhone or iPod.

Running dual OS on a single machine allows the Windows to Mac OS migration process much easier. Previously, it has been either one or the other. Moving to Mac OS means turning off the light on Windows. That’s a very difficult process and extremely risky. Any migration works best under a dual, parallel operating environment since it doesn’t require choosing one over the other. Particular tasks can still be handled in the Windows environment if the Mac OS proves to be unsatisfactory. Apple experienced much difficulty in persuading users to abandon Windows for a Mac, now that is no longer an issue.

It’s seems that the only benefit in using Windows is the fact that nearly everyone else uses it too. It’s unstable, crashes frequently and susceptible to a host of viruses. That’s the antithesis of the Mac. Granted there is much more software available to Windows, that will surely change as Mac OS gains acceptance. As more and more software is developed for Mac OS, adoption will follow suit. And as Mac share has been increasing, we have witnessed already increased interest from software developers.

It’s not unreasonable to predict that Apple can progress to 10% share soon. Especially given the “Halo Effect.” Sales of iPhones and iPods will drive consumer interest in Mac computers, and when consumers become more aware of the Windows capability I believe market share can easily reach 30%. It’s not unrealistic to think that Macs could capture even more share. Why not? Apple’s iPod has 70-80% share, and why would a consumer purchase a Dell over a Mac? Price is the only reason that I can think, but for a higher price, the consumer receives more. I know I will never buy a traditional PC again.

Positive Aspects to Apple's iPhone Price Cut

Here are several of Apple's advantages for pricing the iPhone high initially, and the benefits to later cutting price:

1) Attract more non-AT&T customers to switch carriers. Apple receives bonus revenue for new subscribers. Eventually, Apple will have to offer the iPhone to other carriers, but while it’s exclusive to AT&T Apple can capture high margin revenue. Service revenues fall straight to the bottom line, thus it makes sense for Apple to ramp up adoption as much as possible before their exclusive carrier agreement expires.

2) A high initial price meant that the early adopters would be mostly “die-hard Apple loyalists.” This consumer segment has significant Apple bias, thus those users will talk very positive about the product, hence generating significant buzz. In addition, loyalists won’t focus on any drawbacks, for they focus on all the strong points of the device. Thus, Apple is less likely to receive negative word of mouth from the product release.


3) The initial high selling price means fat margins that can be allocated toward the recapture of up-front development costs. The sooner these development costs are recovered, future margins will expand at a faster pace.

4) The new iPod Touch is essentially an iPhone, without the phone capabilities. Thus, both the new iPod and iPhone will share the same components which will drive scale efficiencies. The shared costs between the two products will aid in offsetting the margin decline stemming from the lowered selling price. Increase in volume spreads fixed costs over more units, which improves the incremental profit margin per unit.

5) The lower price point of the iPhone should dramatically boost adoption. According to a ChangeWave Alliance survey of 3,000 non-owners, one-third stated “high price” as the reason for not buying an iPhone. Roughly 25% of those respondents indicated they would “likely” purchase an iPhone in the future, which one-third said they were waiting for the price to come down.

6) Apple is switching from a price-skimming strategy to a market penetration strategy. Apple will be able to expand market share quicker; this will strengthen competitive barriers.

A skimming strategy is defined by an initial high selling price followed by gradual decreases. The concept is to capture all the demand at the highest price point, and when that demand is exhausted, the price is reduced slightly to capture demand at the lower price point. This continues until no additional demand can be generated at a lower price point.

A penetration strategy, on the other hand, is setting price lower than product costs or competitors’ price. The objective is to drive volume rapidly which will enhance economies of scale and reduce unit cost. If there are high switching costs involved, then a penetration strategy is most appropriate. An excessively high selling price just invites competitors to offer similar devices at the lower prices consumers are willing to pay.

After a consumer buys an iPhone, it’s likely they will not be looking to buy a phone for two years. Additionally, given Apples strong brand and customer loyalty, once a consumer gets his hands on an iPhone it will be very difficult for a competitor to pull them away. Apple can repel competition with the adoption of more users since it’s doubtful that other firms will want to spend the effort in pursuing satisfied iPhone users. It hasn't worked for those firms seeking to convert iPod users.

I don’t think the move by Apple is a suggestion that iPhone sales were soft. Analysts closely following iPhone sales had been reporting that sales were tracking as expected. There was a disconnect between expected sales and consumer interest.

Customer satisfaction is extremely high, yet given the underlying positive perception, adoption hasn’t seemed to develop as sentiment would suggest. The high price is certainly a barrier. Surveys and polls indicated there is significant demand potential, but the steep cost has been a formidable barrier. Lowering the price will have an immediate impact on sales, immediate.

In my social circle, the majority of my friends say they are waiting for the price to drop. Or, they were waiting for the second generation (and a cheaper price tag). I got the impression that it’s a widely-held belief that Apple would release something better and cheaper soon which made folks hesitant to take the plunge. It was bound to happen. But, no one expected it would come this soon and the price reduction would be so great.

I wonder if this price reduction isn’t preparation for a future model with enhanced functionality.
An improved camera function would seem most logical. The current camera is pretty sweet for a phone device, yet it’s still far from a digital camera. Apple already has incredible software applications- iPhoto and iMovie, which can sync with the iPhone, thus improving this feature would really make the iPhone a slam dunk.

Apple’s iPhone revenue will certainly be lower than previous forecasts since projections were assuming $550-600 average selling price. Unit volume will be much higher, it’s doubtful that volume will be great enough to completely offset the decrease in price. Service revenues should be significantly higher, and margins should recover modestly from increasing economies of scale.

The exact magnitude the price reduction has on demand will be an important indicator. If demand reacts sluggishly then Apple has a serious problem. Thus, it will important to pay close attention to how Apple’s new move plays out in the consumer market.