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Apple missing sub-$1,000 market

Having shown it can again make money, it now faces the more crucial test of responding to a booming segment claiming 40 percent of PC sales.

Apple Computer (AAPL) again appears to be up to the challenge of turning a profit, but in the long run it faces a more crucial test from the waves of low-cost Microsoft-Intel computers hitting the market.

Sales of sub-$1,000 PCs now constitute Special coverage: All the Mac's a stage between 40 and 42 percent of all retail sales, according to market research firm Computer Intelligence, but Apple appears to be missing out on this increasingly important market segment, though it is mindful of the new market dynamics.

"We are aware that 40 percent of sales are under $1,000. That market does have some of our attention as a management team," said Mitch Manditch, vice president of worldwide sales for Apple.

Umax, the last of the major Mac clone vendors, is already doing something about it. Umax has a number of sub-$1,000 systems with 200- and even 240-MHz PowerPC 603e processors available. The 603e is the PowerPC processor generally employed in consumer-oriented systems.

Apple's lowest price consumer systems, on the other hand, are priced between $1,400 to $1,500. A Power Macintosh 6500/225 with 32MB of memory, a 3GB hard drive, a CD-ROM drive, and a modem costs $1,349 at MacWarehouse when purchased with a monitor, an item that costs $399 more.

Meanwhile, consumers are flocking to cheaper PCs from Windows-Intel manufacturers such as Hewlett-Packard (HP). It offers a system with a 233-MHz Pentium MMX chip, 32MB of memory, a 4.0 GB hard drive, CD-ROM drive, and 56-kbps modem for $1,099 without monitor.

Even better, consumers can get a HP system with 200-MHz Pentium MMX, 32MB of memory, a 2.1GB hard drive, a CD-ROM drive, and a 56-kbps modem for as little as $799.

Apple has no comparable product to counter offerings from HP, Compaq, or Packard Bell.

But Phil Schiller, vice president of worldwide product marketing for Apple in an interview with CNET'S NEWS.COM, said the company can be a strong competitor in this market.

"The first thing Apple has to do is to focus the company and deliver products to core markets that love Apple. That will help us return to profitability," Schiller said. After that, when the company is financially sound, then Apple will outline a strategy for moving into growing markets, he said.

Jobs spoke to this yesterday too. "We need to be matching prices of the PC industry much more closely," said interim CEO Steve Jobs at the Macworld keynote speech yesterday.

Jobs maintains that the company's new Power Macintosh G3 systems are more powerful than systems using Pentium II processors from Intel, yet are priced equivalently to systems from Dell or Gateway 2000. Jobs, however, did not address the market's major trend towards the lowest-cost systems.

In a press conference following Jobs's keynote, Apple responded to questions about its strategy for the rapidly growing sub-$1,000 segment.

Manditch pointed to the Power Macs which are selling in the $1,400 to $1,500 price range. However, those systems were introduced early in 1997 and have yet to be updated.

Analysts expect that Apple doesn't have the luxury of watching the market from the sidelines. While the company revealed good news in the form of an expected $45 million profit for the quarter just ended (see related story), Apple sank to eighth place from fifth in the U.S. market during the third quarter, according to International Data Corporation. Worldwide, Apple went from fourth place overall, with a 5.5 percent market share, to ninth place, with a 3.3 percent share, in a year-on-year comparison.

"Can they expand their market share out of where they are? There isn't a game plan for growing," said Amy Wohl, editor and principal analyst for TrendsLetter. "The graphics market isn't a huge market. You can maintain your customers in that market, but there are not a lot of new customers," Wohl said.

Other analysts agree that Apple now needs to think of where it will find new customers.

"It's clear that if Apple is going to be competitive going forward, they have to be aware that where the new customers are coming right now in the PC market is in the sub-$1,000 market," says Tim Bajarin, president of market research firm Creative Strategies.

Bajarin thinks Apple can produce inexpensive systems, but faces a quandary because it is trying to become profitable again by relying on sales of higher-margin systems.

"While Apple can continue pushing an emphasis on niche markets, if they are not also simultaneously bringing in new users, then growth is basically stunted," Bajarin thinks. "They haven't had to play in the low-cost area, but the dynamics of the industry totally changed last quarter. Apple has to be crazy not to identify this as a key trend and respond to it."