Commentary: Apple's woes arise from its niche market

Apple's quarterly financial shortfall, announced late Tuesday, is a result of its niche market status combined with the general desktop market slowdown.

	See news story: Apple slices revenue forecast--again

Apple's basic problem is that its market is restricted mainly to a group of devoted home users, many of whom bought iMacs 18 months ago and who now have no reason to replace them.

In Apple's case, the market downturn is greatly amplified by its small percentage of the market (less than 5 percent), its focus almost entirely on the consumer space, and few large corporate buyers (who upgrade more often and cushion the softening consumer markets). However, as long as Apple's basic financials are solid, this slowdown is no reason for existing Apple business users to panic--Apple will be around for some time to come.

When Steve Jobs came back to Apple, everyone expected him to work wonders--and he did. But the Mac faithful constitute a home market, and they are not going to replace their Macs every two years. Even if Jobs comes out with the best thing since sliced bread, corporate buyers will pay little attention, because Apple just doesn't fit into most of their strategies.

Apple's vulnerabilities are compounded by Jobs' own tendency to focus too much energy on just one of the many balls that must be juggled to drive business success. Jobs is a visionary in understanding how people can use technology, and he has developed some great things based on that vision. But he often seems to get so involved in those designs that he forgets about the things that need to be done to keep a business going in the long term. In this case, he seems to have become so focused on the Cube that he may have neglected other things that could have helped Apple maintain its business.

Jobs did increase Apple's market share slightly with the iMac. He apparently based his financial projections for this fiscal year on the expectation that Apple could continue to expand that market, but it has not. One reason why that has not happened is Apple's refusal to license the Macintosh operating system to clone makers, who could produce low-end Mac clones that would sell to first-time home users, expanding the overall market. Currently, the Macintosh is the high-cost system on computer retailer shelves crowded with $700 Windows PCs.

Indeed, even traditional Mac strongholds like education are now rapidly moving to a Windows PC environment. Furthermore, Apple has so far virtually ignored a small but growing market--pervasive computing devices--an area where Apple played an early role with the Newton, but has failed to follow up with a modern equivalent that could capture market share and brand recognition.

The decision against licensing (and threats of court action against any potential clone makers) may lock Apple out of the next great PC growth markets: 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 locked into a niche home market and must design the company around that. That means Apple should schedule new systems to the buying rhythms of that market, where most users will replace their hardware about every four to five years and will look for add-ons in the interim to extend the abilities of their present systems.

Regardless of whether Apple captures a share of the Asian market and grows overall, Apple's earnings warning will not substantially alienate its loyal consumer base. Furthermore, business users who have Macs on their desktops should look at the merits of staying with Apple for certain applications and should not start migrating off those systems solely on the basis of this warning. Nor should companies considering new purchases of Macs be deterred. However, they should study Apple's full quarterly report when that is published to confirm that the company's basic financials remain stable.

Meta Group analysts Dale Kutnick, Jack Gold, Val Sribar, William Zachmann and Peter Burris contributed to this article.

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