OS X won't jump-start Apple finances--yet

The new operating system is seen as critical to Apple's future, but analysts don't expect the software to improve the company's bottom line significantly in the short term.

4 min read
The new Macintosh operating system is seen as critical to Apple Computer's future, but industry analysts don't expect the software to improve the company's bottom line significantly in the short term.

In part, that's because Apple won't start including Mac OS X on new computers until the summer. Boxed versions of the operating system will arrive on store shelves and Web sites Saturday.

"Until then I think this is an extension of the 'public beta' that they were doing," SG Cowen analyst Richard Chu said. Since September, Apple has been selling a $30 test version of the operating system under that rubric.

Analysts also expect Mac owners to wait until more applications are available for the operating system. Although hundreds of developers have committed to writing programs optimized for Mac OS X, many applications won't show up for several months.

Nonetheless, the operating system is a key part of Apple's overall effort to recover from a quarter of red ink prompted by slow holiday sales. In January, the company predicted a return to profitability this quarter.

Stock price from December 20, 1996, to present.  

Source: Prophet Finance
Shares of Apple plummeted in September, when the company first warned of slowing sales. The stock, which traded above $53 before the warning, saw its price nearly cut in half the next day. Recently, it traded below $20 a share, one of the many victims of technology's economic slump.

Apple will get some revenue this quarter and next quarter from $129 Mac OS X upgrades, and analysts note that profit margins on software sales are quite good. However, the incremental license revenue from the new OS will never be that large, Chu said.

It's more important, he said, that the release proves to be useful and without any major bugs. In that case, Apple could see improved hardware sales in the second half of the year as it ships new systems with OS X.

"The best case for Apple would be that they launch the program, it works, (and) it gets good reviews," Chu said. "I think that would be good news."

Interest in the software, at least from Mac enthusiasts, appears to be running high.

A survey of 700 Mac user group members done by Wall Street firm Sanford C. Bernstein found that 43 percent of Power Mac and PowerBook owners plan to upgrade to the new operating system, along with 30 percent of iMac and iBook users.

Some 24 percent of those who own Apple's professional products and 21 percent of those with consumer models say they are delaying a new purchase until Mac OS X starts coming with new machines, according to the Bernstein survey. Some 28 percent of professional Apple customers and 20 percent of consumer Mac owners say they are waiting until more OS X applications are available before purchasing a new system.

Consumers looking to upgrade in many cases also will have to upgrade their hardware. The new OS, if used with existing Mac applications, requires 128MB of memory, more than a lot of Macs are equipped with.

David Bailey, an analyst at brokerage Gerard Klauer Mattison, does not expect the new OS to immediately benefit Apple's financial picture but said it is important for the company to launch the next-generation operating system.

"Practically and psychologically, it's important to have it out there," Bailey said.

While the new operating system will serve as the basis for all of Apple's future software and hardware efforts, he said, it is not likely to drive large numbers of Mac users to buy new systems. "We think that will happen when the third-party applications are available later this year or early next year," Bailey said.

For that reason, Bailey said, he is less concerned about reports that the new software may not have every feature or support every piece of hardware on the market.

Of more concern to several analysts is continued sluggishness in overall consumer PC demand.

"Everything we are hearing from the rest of the world suggests that whatever you thought six or eight weeks ago, things are tougher," Chu said. "I think the odds are that this will turn out to be a tougher quarter."

Analysts have also worried that Apple has not been able to generate sufficient inventories of some new models.

In a report published Friday, Sanford C. Bernstein analysts warned that although Apple's target of breaking even or posting a slight profit may be achievable, "there is some risk to revenues for the quarter, as Apple appears to be supply constrained and several resellers cite shortages."