Inside Apple's warning lurk more serious problems

Yesterday, the Cupertino, Calif.-based PC maker warned that earnings per share would be about one-third below expectations because of slow sales with its new Power Mac G4 Cube and weaker-than-expected demand in the European and education markets.

But inside Apple's profit warning lurk more serious problems, warn analysts. Although Apple has gained market share in the past two years, the company still sells a substantial number of systems to its existing customer base looking for a technology refresh. Because existing customers buy new products at a slower rate than companies churn them out, some analysts say, a slowdown was inevitable.

For Apple, sales may not pick up until Mac OS X systems hit the market next year.

"When these guys slow up their purchasing, there's going to be maybe an 18-month dry span until Apple introduces new products, and they come out and buy more," said ARS analyst Matt Sargent, adding that he was shocked to see Apple's stock price rising over the past year. "It was rocketing up as if it was a long-term trend. But it wasn't."

Additionally, there is a lump of inventory out there that must disappear before new products start selling. Distributor Ingram Micro has three times as many G4 Cubes in stock as any other Mac, according to dealer sources. In August, Apple systems made up 40 percent of inventory on shelves at online dealers, up from 20 percent in June.

Credit goes to Jobs
The top-selling Apple system in August was the Power Mac G4 400, a discounted, discontinued model. It sells for around $1,299.

Much of Apple's recent success can be credited to once-ousted, now resurrected CEO Steve Jobs, who since returning to Apple in 1996, has reinvigorated the product lines, sales, customer enthusiasm, company morale and the stock price. Apple also enjoyed the luxury of customers who don't consider price an all-consuming passion.

"The Mac community has never been very concerned with budgetary limitations," Sargent said. "I think that works for small, special buys and is good for high-end professionals, such as writers and graphic designers."

Nonetheless, market share gains could not keep up with the early growth pattern. Even with potentially declining sales among Mac enthusiasts, Apple could have still maintained momentum in its two other core markets--education and consumer--but missed cues that will make it difficult to recover from, say analysts.

Apple last year ceded the top spot in education to Dell Computer, according to market researcher Dataquest. Dell captured 21.4 percent of the education market in 1999, compared with Apple's 16.5 percent.

"Apple has failed to adequately survey the competitive landscape for the education market and is resting on the laurels of its established education market share," Technology Business Research analyst Tim Deal said.

Skipping new features
On the consumer front, the launch of iMac two years ago boosted Apple's consumer market share and brought a truly revolutionary computer to market, but that computer has not evolved as quickly as other consumer machines. Apple has changed the color and adopted faster processors but skipped out on other features.

CD-RW drives, which are popular for writing CDs with MP3 music files downloaded from the Internet, come in about 40 percent of PCs sold at retail, according to PC Data. Their appeal is particularly strong among students. Apple does not offer CD-RW on any of its system.

"I would have preferred to see a new iMac form factor that incorporated 17-inch monitors and CD-RW to some extent as well," PC Data analyst Stephen Baker said. "Clearly those are two of the hottest technologies out there."

Apple's problems were exacerbated by poor execution in its launch of new Mac models unveiled at July's Macworld trade show in New York.

"In terms of the whole switchover from one cycle to the next, Apple hasn't been that good," Baker said. "It's hard when you do it every six to eight months--you freeze the market in a changeover--and it makes it hard to liquidate the old stuff and bring in the new stuff."

Design lightning also didn't strike twice. Although the iMac took off when it first came out, the Cube is experiencing a slow start, according to Apple. Part of the problem could be sticker shock.

While on the one hand the Cube sells for a marginally high price of $1,799 in its entry-level configuration, "the whole package is too much," Dataquest analyst Chris LeTocq said. The 8-inch square by 10-inch high Cube works best with Apple's 15-inch flat-panel monitor, which adds another $1,000 to the price.

"You can go and get a truck that will take you to work, or you can go get a sports car," LeTocq said. "No one buys one of these things because they have to do work on it. It's a luxury item."