Flat-panel iMac hard to come by

There's a backlog of orders for new flat-panel iMacs, and the prices for the computers are rising because of the demand, according to dealers, distributors and analysts.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
7 min read
Apple Computer's current problems were born in a glass factory.

The Cupertino, Calif.-based computer maker is struggling to produce, let alone meet demand for, its new all-in-one, flat-panel iMac, according to analysts and other sources. The production problems have been caused in part by a shortage of 15-inch LCD (liquid-crystal-display) flat panels, they say.

While it's too early to determine how the delay will affect the company's bottom line, Apple is certainly failing to capitalize on the huge amount of publicity it received during the product's unveiling in mid-January, including a cover story in Time magazine.

Ingram Micro and Tech Data, two of the largest PC distributors in the world, had backlogs for the high-end iMac extending 18.6 weeks and 10.7 weeks, respectively, according to reports released March 4. In other words, independent dealers ordering new high-end iMacs may not get deliveries for 2.5 to 4.5 months, although the wait time is almost certainly exaggerated considering that dealers often double- and triple-order.

Ingram had nearly 3,300 unfulfilled dealer orders for the high-end model, which was released at the end of January, but only 43 units in stock and 250 in transit from Apple, according to its March 4 report. Tech Data had only 23 in stock and is getting fewer than 200 a week, sources said.

Combined, the two distributors had received only 1,326 high-end iMacs by March 4 since the product began shipping. When the new iMac debuted, analysts predicted that Apple would ship 200,000 or more by March 31, the end of the company's second fiscal quarter.

Ingram has 6,500 orders for the midrange and low-end iMacs, which are just coming into the market now. Tech Data has 1,000, but neither has any in stock or a firm ship date from Apple.

The imbalance has dashed the dreams of some retailers that had hoped to wring some additional profits from the hoopla.

"This is a big faux pas on Apple's part, not having this all ironed out before they brought the new iMac to market, particularly if they want to wow Windows users and bring them over to what they call 'the light side' from the Windows dark side," said Toni Duboise, an analyst at ARS, which conducted spot checks in stores.

An Apple spokesman declined to comment.

Dealers tell the same story. In ARS' spot checks during the last two weeks of February, of 25 stores selling Apple computers in 17 metropolitan areas, only nine new iMacs could be found for sale. On Apple's online store, customers are warned that delivery could take three to five weeks for the high-end model and five to seven weeks for the others.

"What's interesting is that two of the three midrange iMacs were selling for $1,599, or $100 over list price, which says the stores thought the demand justified the higher price," said Duboise.

Apple Store representatives, who get their machines straight from Apple, said they have received hundreds of machines but could still sell many more.

Flat-panel shortages
While several factors are likely contributing to the situation, many analysts pinpoint the constricted supply of flat panels--the complex silicon-and-glass sheet that is at the heart of flat monitors and notebook displays. Although the market was awash in cheap panels last year, the situation reversed in late 2001.

Computer and monitor makers now have to place orders 60 or more days in advance to get panels, say sources within the panel industry, and panel makers can't increase shipments for one PC maker without aggravating another valued client. Panel prices are also rising.

The iMac comes with a built-in flat panel, so a shortage means computers can't be shipped at all. Apple's situation is exacerbated because the panels incorporated in the new iMac must meet slightly higher technical specifications, so substitutions are difficult to find, sources said.

"There's not much (factory) capacity coming on in the next year, so we will see demand increase quicker than supply," said Barry Young, vice president of Display Search.

In addition, Apple may have underestimated demand for its latest product, which--even by Apple standards--has been surrounded by tremendous hype. Time magazine featured the unit on its cover on the day Steve Jobs showed off the product.

Although the shortage probably won't dim the excitement of the Mac faithful, it could hurt the company's chances of winning over converts, especially as PCs get cheaper as time goes on.

"This speaks to Apple's continuing problem of hyping and introducing a product before they're really ready to deliver," said Technology Business Research analyst Tim Deal. "Their inability to fill orders is the kind of thing that's going to turn a potential Wintel switcher off."

Still, for the next few months, the company will be in the somewhat enviable situation of being able to sell everything people can get their hands on, some analysts say.

The LCD shortage derives from the explosive growth in demand for desktop flat-panel monitors. Orders for LCD monitors (which incorporate a flat panel) more than doubled in 2001 and will probably roughly double again this year, according to statistics from Stanford Resources. Price increases and shortages will become a feature of the landscape as a result.

IDC analyst Roger Kay said he did not expect the supply shortage to abate before third quarter, but others don't see relief until next year.

ARS analyst Sam Bhavnani noted that shortages are worst for 15-inch panels--the same size used in the new iMac. "Apple should have checked their supply beforehand," he said. Bhavnani warned that Apple would be harder hit than most other companies because "they use a very high-quality panel."

Gateway is also experiencing a supply crunch. The Poway, Calif.-based PC maker is quoting four-week lead times for delivery of its Profile 3 computer, which also incorporates a flat-panel monitor.

Questions for the quarter
Many financial analysts had predicted Apple would ship more than 200,000 new iMacs during its second fiscal quarter, which ends March 31. But it is now uncertain how much of a backlog the company will have to carry over into the next quarter. Still, most remained upbeat. Apple has never specified how many it plans to ship.

Gerard Klauer Mattison analyst David Bailey said it is too early to say whether Apple can meet all outstanding orders by the end of the quarter. But he emphasized that at this point, he is comfortable with Apple's handling of the iMac launch. It's also a long-term project, he said, adding that the new iMac "is not only important for (Apple's) results for this quarter but the entire calendar year."

In a research note issued last week, though, Merrill Lynch analyst Steve Fortuna warned that production problems in Taiwan had potentially reduced the number of units to a trickle: 5,000 in January and an estimated 5,000 to 10,000 in February. Some sources close to Apple have said that these estimates are egregiously low, however.

"Our forecast for the (current) quarter calls for 200,000 units, which would mean a lot of units need to be produced in March," Fortuna said.

Added Charles Wolf, an analyst at Needham & Co., "Given the company's not talking, I can't say whether they're hitting an implicit production target."

In January, Wolf forecast that in the quarter Apple would ship about 125,000 of the old globular iMacs and 200,000 of the new ones--100,000 of the high-end, 75,000 of the midrange and 25,000 of the entry-level models. This week, he said that orders of the top-of-the-line iMac, which sports a DVD recording drive, would appear to be at least 50,000 above his projections, creating a backlog.

Unless Apple seriously missed analysts' earnings projection, though, Wolf didn't see a material problem with shareholders even if Apple can't meet demand before the quarter's end.

"The market doesn't give a damn if they end up the quarter and get on the phone April 16 and say they have a backlog of 100,000 units," he said. "The stock is not going to be penalized."

For its part, Apple has said it expects to be back-ordered during the quarter and has been shipping units in by plane from Taiwan to meet orders, faster than the cheaper and more typical method of delivering computers by cargo ship.

PC offensive undermined?
But the product delays have created a secondary problem that could undermine Apple's Windows offensive. In terms of pricing, Apple is already falling behind its competitors because of the relentless gravity of discounts in the PC world. When Apple first announced its three new iMacs in January, the prices were roughly equal to PC-flat panel combos available on the market.

Two months later, Apple's products cost $50 to $300 more. Gateway's PCs provide the starkest example. The company sells a PC that competes almost directly with Apple's budget iMac. The 500SE desktop comes with a 1.6GHz Pentium 4, 128MB of SDRAM, a 20GB hard drive, a CD-RW, a floppy drive and a similar graphics chip. Gateway sells it for $999, or $300 less than the $1,299 entry-level iMac.

Similarly, the Gateway 500S--which comes with a 1.8GHz processor, a CD-RW/DVD-ROM, 256MB of double data rate (DDR) DRAM, a 15-inch flat panel and a 40GB hard drive--goes for $1,199, again $300 less than the midrange iMac.

Although pricing is important, it may not dent the enthusiasm for the iMac, at least not initially. The company attracts customers because of its hardware designs, operating system and strong customer loyalty.

"There's a certain premium to be paid for the all-in-one design and the pivoting arm," said Stephen Baker, an analyst at NPD Intelect. "That arm is a pretty masterful piece of engineering...For the next few months, they will be able to sell as many as they can get their hands on."

Nonetheless, the scope of a lingering shortage could begin to aggravate dealers and customers. CNET News.com contacted several dealers, who asked not to be identified. None had received more than four iMacs since Apple started shipping the high-end model on Jan. 28, and waiting lists were long. One Washington-area CompUSA had received only 19 high-end iMacs, 13 for Sunday's 20th anniversary sale. The situation at Apple stores is better, but not perfect yet.

"There is that expectation when you go to Apple's brick-and-mortar presence that you're going to walk away with something as a customer," Deal said. "Your inability to do that is going to sour your experience, and that's the last thing Apple wants to do in its quest to generate new customers to the platform."