Will Apple live up to Macworld hype?

When CEO Steve Jobs opens Macworld Expo in San Francisco next week, the showman will be expected to meet soaring expectations that have been fueled by his company's marketing machine.

7 min read
Rather than hunkering down and riding out a protracted slump in PC sales, Apple Computer appears to be starting the new year where it left off in 2001: pushing the envelope with sleek new products.

Despite an industrywide funk, Apple last year introduced the Mac OS X operating system, the iPod digital music player and two redesigned laptops--the Titanium PowerBook G4 and iBook.

The company also managed to open 27 retail outlets and to remain profitable for the first nine months of 2001. (Fourth quarter results are still being tallied).

As 2002 begins, Apple appears to be raising the bar even higher. When CEO Steve Jobs opens Macworld Expo in San Francisco next week, the master showman will be expected to meet soaring expectations that have been fueled by his company's own marketing machine.

"Count the days. Count the minutes. Count on being blown away," the company's Web site proclaimed earlier this week.

"The company has never hyped a Macworld keynote the way they've hyped this Macworld keynote," said Needham analyst Charles Wolf.

Whether Jobs can meet his own hype is an open question. But perhaps more important is whether his products and plans can help Apple grow its market share beyond the current 5 percent.

According to sources familiar with Apple's strategy, Jobs on Monday will introduce a flat-panel successor to the iMac, which at 3 years old is now ancient in computing years. New software also appears likely, including a long-rumored photo-editing program as well as possible enhancements to Mac OS X and other programs.

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What to expect at Macworld
Hari Sreenivasan, senior correspondent, CNET, and Michael Kanellos, senior editor, CNET News.com
Other companies such as Palm are expected to join the high-tech show-and-tell session, according to sources.

Apple, which moved the keynote address from its traditional Tuesday morning slot to a slot before the show floor opens, plans to Webcast the speech at 9 a.m. PST Monday and also will show it live via satellite at many of its retail stores.

Speculation abounds
Though much of the speculation has centered on a flat-panel successor to the iMac, Apple may also revamp its iBook portable or its Power Mac desktops, which are used extensively by graphics professionals. One thing the company is not expected to do is immediately start shipping a Power Mac that breaks the 1GHz barrier, sources said.

The Cupertino, Calif.-based computer maker had been rumored to be planning a new Power Mac professional system with Power G4 "Apollo" processors in excess of 1GHz. But sources close to Apple and the company's chip supplier, Motorola, said the Apollo processors would not be available until sometime later in the first half of the year.

The familiar iMac with its 15-inch cathode-ray tube (CRT) monitor also is not expected to disappear, but instead is expected to be updated somewhat and to remain the company's entry-level machine. There also has been some speculation that Jobs will unveil some new type of digital device, as the company did in October with the iPod.

The rumor mills, always buzzing before a Macworld show, have been particularly active this year. One rumor that gained widespread attention this week was that Apple was readying a handheld computer called iWalk. Web site SpyMac.com posted realistic-looking pictures and video of the device, but other Mac fan sites quickly claimed to find inconsistencies in the video and concluded it was a hoax.

In October, SpyMac posted pictures of a different device, claiming those were of the iWalk that Apple would introduce the following week. Instead, Apple introduced the iPod.

There have long been rumors of Apple returning to the handheld market it pioneered with the Newton but then abandoned. Although designs for an Apple-branded Palm are said to have made the rounds inside Apple, company executives have downplayed the idea several times in the past year and have noted that PDA sales have slowed dramatically.

It is clear that Apple's near-term financial fortune will rest on what comes out of Monday's speech.

As it often does before the twice-annual Macworld shows, Apple's stock has risen in recent days. Shares of Apple rose 7.7 percent during the first two trading days of the year, with trading volume running at nearly double Apple's norm.

While some investors are looking for announcements that will boost the company's fortunes long term, most analysts on Wall Street don't expect lasting effects from Macworld. Eleven of 17 brokerages responding to First Call's analyst survey described Apple's stock with the equivalent of a "hold" rating.

Few if any expect Apple shares to match their performance after the iMac's initial launch in May 1998, when the stock began a climb of more than 400 percent over two years. For one, PC sales were growing in double digits at the time.

Apple's stock, which had been beaten down by the chaos that followed the ouster of then-CEO Gil Amelio, was also more of a value then too.

The iMac first appeared when Apple was trading at less than 20 times estimated earnings; now the company trades at 49 times projected profits for 2002 and 35 times for 2003, based on First Call's estimates.

Even relative optimists such as Gerard Klauer Mattison analyst David Bailey--who this week upgraded Apple to an "outperform"--believes Macworld itself will provide only a temporary lift. "We expect the stock to continue to run up before Macworld Expo on Jan. 7 and fall off subsequently," Bailey said.

What Apple needs
A new consumer desktop to succeed the iMac is tops on Apple's list of needs, analysts say. Speculation that Apple will deliver a flat-panel successor to the iMac has been circulating for more than six months. In fact, analysts had hoped Apple would release the iMac's successor in time for the holidays, but hopes evaporated after the company's October launch of the iPod brought no word of a new Mac.

The first signs that Apple would finally deliver the new computer came in early December, when Morgan Stanley analysts Gillian Munson and Sterling Levy reported that Apple had placed orders for components that could produce about 100,000 flat-panel iMacs per month.

Although Apple often discounts old products before releasing new ones, it has not recently chopped the prices of its desktop or laptop models. In fact, a rebate on several iMacs ended Dec. 31 and was not extended. A rebate of up to $500 on the Power Mac with the purchase of a flat-panel monitor has been extended through the end of January.

Still, Apple's online store now lists a seven-day lead time before iMacs ship, which would prevent units going out before new ones are announced Monday. By delaying shipping, Apple could be trying to avoid a massive return of newly purchased iMacs by people desiring a flat-panel machine.

Wolf said the introduction of a new consumer desktop machine could help Apple significantly, noting that 40 percent of Mac owners have a pre-iMac machine.

Still, the company's new products will face a challenging price environment. Although Apple was somewhat competitive in terms of price with Dell Computer, Hewlett-Packard and others on various products for much of 2001, the price gap has widened in recent months.

For instance, CompUSA was recently selling an iMac with a 600MHz processor and a 40GB hard drive for $1,299, making it one of the most expensive PCs in its class on the market today. By contrast, a Sony Vaio with a 1.5GHz Pentium 4, a 17-inch flat-face CRT, an Epson stylus printer and a 60GB hard drive was selling for $1,199.

As for notebooks, Apple offers an iBook with a 600MHz processor and a DVD drive for $1,499. A similarly configured Sony Vaio with a 900MHz Pentium III and a DVD/CD-RW drive sells for $1,349. Like Apple, Sony puts a strong emphasis on industrial design and includes multimedia-friendly features such as FireWire ports.

Meanwhile, the performance of Apple's stock may depend on announcements beyond the anticipated iMac change, analysts said. UBS Warburg analyst Don Young sees Apple offering more non-PC products.

"We continue to warm up to the positioning of Apple in the 'Digital Life Style' and free from the constraints of a low-market-share PC player," Young said in his latest Apple report. "With the potential for many new categories of 'appliances,' Apple's penchant and flair for industrial design, and strong brand position--the company has the potential to enhance its growth and profitability outlook."

Wolf noted that if Apple were to quickly make its iPod compatible with the Windows operating system, it might be able to generate sales of $300 million this year. That's roughly 5 percent of what Wolf expects Apple's total revenue to be for 2002.

Although the unit is pricey, Wolf said he believes Apple could soon drop the price to $349 and should be able to charge less than $300 by the holiday season while retaining a healthy profit margin.

Wolf said he would be watching Jobs' speech not only for what the CEO has to say about new products, but also for word on how well Apple did over the holidays with the iPod and whether the company's new stores have been successful at luring owners of Windows-based computers to buy Macs.

"The raison d'etre of the stores is to attract new users," Wolf said.

News.com's Michael Kanellos and Sergio Non and staff writer John Spooner contributed to this report.