Commentary: Apple's terrain erodes

Despite a salvo of new product announcements set for Macworld, Apple Computer is trapped in its niche markets: consumers, graphics, education and Web design.

However, the company's presence is dwindling in all of these--most notably in graphics and education, where it was once the dominant player. This is particularly noticeable in the education market. The vast majority of desktop computers in today's classrooms are inexpensive PCs.

Apple's sturdiest presence

	See news story: Apple expected to unveil speedier Power Macs

is in the home consumer market, where it retains a devoted following, but many of these consumers upgraded to iMacs 18 months ago and now have no reason to upgrade again, despite new products. In Apple's case, the market downturn is being greatly amplified by its small percentage of the market (less than 5 percent), its focus almost entirely on the consumer market, and its few large corporate buyers, which upgrade more often and cushion any weakening in consumer markets.

In a slowing economy, consumers are less likely to accelerate upgrades, and new customers are less willing to pay a premium price for Apple's perceived differentiators, making it unlikely that new products will help Apple break out of its niche or stem the steady erosion of its presence in these markets. Mac zealots in the home market are not going to replace their Macs every two years. And corporate buyers will pay little attention, because Apple just doesn't fit into most of their strategies.

Faster processors? Ho, hum
The new set of products seems to be depending on faster processors and better styling to draw consumers away from much less expensive PCs. But faster processors no longer drive the market. The processors already available are faster than needed for desktop applications. While the new Apple processors are fast, the Apple bus, which is just as important as the processor to desktop system performance, is still slower than the PC bus. In a slow economy, both home and business buyers will be much less ready to spend extra money just to get a nicer style or a better user interface.

Apple CEO Steve Jobs was successful in increasing the company's market share slightly with the iMac--and Jobs is a proven visionary at understanding how people can use technology. He apparently believes that Apple can continue to expand its markets with new products. But PC users are unlikely to throw out their relatively inexpensive PCs and all the related software to switch to a totally different and more expensive technology, particularly in a sluggish economic environment.

One reason Apple has failed to expand its markets is its refusal to license the Macintosh operating system to computer makers that could produce low-end Mac clones that would sell to first-time home users, thereby expanding the overall market; the Macintosh is a high-cost system on computer retailer shelves crowded with $700 Windows PCs.

Apple has so far virtually ignored the fast-growing market for pervasive computing devices. This is an area where it played an early role with the Newton, but has failed to follow up with a modern version addressing Newton's flaws that could capture market share and brand recognition for Apple.

Opportunity in Asia
The decision against licensing--and threats of court action against any potential clone makers--may lock Apple out of the next great PC growth market: mainland China and Southeast Asia. Most of what will sell in China will be manufactured in China. If Apple wants to capture a piece of that and expand its overall market, it needs partnerships with Chinese and other Asia-based clone makers to produce Macs.

Overall, Apple is focused on a niche home market and must design its business around that niche. This means Apple should schedule new systems to the buying rhythms of that market--most users replace their hardware about every four to five years--and in the interim, look for add-ons to extend the abilities of their present systems. To shore up its education market, Apple must address the economic advantage enjoyed by Windows applications.

Regardless of whether Apple captures a share of the Asian market and grows overall, Apple's financial problems will not substantially alienate its loyal consumer base. Business computer users with Macs on their desktops and new businesses considering the Macintoshes instead of PCs should look hard at the value they will get for the substantial extra cost and at Apple's long-term viability, which is increasingly coming into question as the economy slows.

Meta Group analysts William Zachmann, Jack Gold, David Cearley, Dale Kutnick and Peter Burris contributed to this report.

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