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Commentary: Apple's trouble comes from within and without

Although recent earnings warnings by Apple Computer, Intel and other PC-related companies may be sickening Wall Street, the PC market as a whole remains relatively healthy.

By Kevin Knox, Gartner Analyst

Although recent earnings warnings by Apple Computer, Intel and other PC-related companies may have sickened Wall Street, the PC market as a whole remains relatively healthy. The "bad news" announcements simply reflect the changing nature of the global PC market, which will increasingly show the characteristics of a more mature and more cyclical market.

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A few factors contributed to Apple's particular troubles, however. First, educational sales were lower than anticipated. That weakness likely resulted from continued pressure from Intel-based vendors--IBM, Hewlett-Packard, Compaq Computer, Dell Computer and Gateway--establishing formal programs to address the education market.

Second, spending on PCs in the European segment was down across the board. That situation particularly damaged Apple, which relies heavily on the European market for sales.

More fundamentally, however, Apple has failed to extend itself into any new market segments and has been selling most of its systems to its installed base. Apple has succeeded in doing so because of innovative designs and technology enhancements, such as the iMac and the G4 processors.

However, Gartner believes that during the third quarter of 2000, Apple has done few innovative things with its products. New colors are attractive, but not compelling enough to get people to buy a new system. The new Cube product has also been slow to catch on primarily because of its relatively high price.

Much of Apple's success depends heavily on its ability to innovate. The forthcoming release of Mac OS X should help to restart its sales cycle; however, to succeed, Apple must continually innovate and give people a reason to upgrade.

Still, there is no reason to panic. Apple remains a strong provider in the consumer, education and graphics markets, and buyers should not change their purchasing plans based solely on the profit warning announcement. Apple has had a tremendous turnaround as it moved from the brink of bankruptcy to continued profitability.

However, the company will be hard pressed to grow as fast as it has recently, given general PC market conditions as well as its strategy built on continual innovation.

(For related commentary on integrating Macs into a Windows network, see TechRepublic.com--free registration required.)

Entire contents, Copyright © 2000 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.