By Charles Haddad It's a debate nearly as old as Apple itself. Should the company forget about making computers and just sell software? Apple CEO Steve Jobs thought he had finally ended this argument three years ago, when he snuffed out the fledgling market for Mac clones. Through aggressive pricing, clone makers such as Power Computers were gobbling up Apple market share at a rate that alarmed Jobs & Co.
Today, the debate is being resurrected for two reasons. First, personal computer sales are tanking industrywide and losses are mounting. Second, Palm Computing has successfully licensed its market-leading operating system for handheld computers. Sure, Palm has lost significant market share to the clones. But licensing its OS has spawned a horde of units that have made Palm the Windows of handheld computing. Not even Microsoft, after repeated attempts, has been able to crack Palm's dominance of this important new market.
But the Mac is not a single-purpose device like the Palm handheld. Nor is it a boxy PC that sells for slightly above cost. The Mac is a stylish and powerful computer that commands premium prices. And Apple derives the lion's share of its revenue and profit from hardware sales. In a good year, Apple can garner profit margins in the 30% range on a new Mac. The company would be crazy to walk away from margins like that, even if hardware sales slump every couple of years or so.
MADE FOR EACH OTHER. That's not to say software isn't critically important to Apple. Indeed, with a Mac, software and hardware are joined at the hip. The microprocessor is designed just to run the Mac OS and vice versa. That's why most Mac software works in a similar way, making it easy to learn new programs. The Mac's stylish curves and iridescent colors would be meaningless without the Mac operating system. Who'd want a zoomy red computer that was hard to use? All right, I take that back, given the tens of thousands of people who bought PC knockoffs of the iMac during the past two years. Go figure, as novelist Joseph Heller would have said.
But I digress. My point is this: While software may never be a big moneymaker for Apple, it does drive hardware sales. It gives newbies a reason to buy a Mac over a PC and offers longtime users an incentive to upgrade to the next generation of Macs.
As such, software is a harbinger. Crappy software leads to weakening Mac sales, while great new software gives the platform a tremendous lift. No matter how low Apple sinks, it always rises back up with another big hit in software. The game is never over as long as the company can attract new generations of great software engineers. And that's exactly what it has done in merging Jobs's NeXT staff with Apple. It is NeXT engineers who are leading the development of OS X, Apple's new operating system, which is due out in late March.
LONG, HARD FIGHT. It's this promise of new software that makes me see a light at the end of the dark tunnel Apple is now entering. Newly released movie and music software, such as iTunes, iMovies, and iDVD, are the kind of stuff that will eventually lure people back to the Mac. Maybe not today, maybe not tomorrow, and maybe not next quarter. But eventually, the word will get out. Users will upgrade to new machines, and PC makers will copy Apple's latest innovations. What has become a natural cycle in the PC world will turn another revolution.
Notice I didn't mention Apple's upcoming new operating system, OS X. Don't get me wrong, I like OS X. I think it represents a significant advance in ease of use and power. But I still don't think the average user -- that artist, photographer, home businessperson, or writer working alone -- sees the point of it yet. Sure it's pretty, but why spend $129 on a new operating system for which there is little new software and which won't make your your current programs run any better than they do now?
That's what most average users are thinking. They find their Mac is stable enough, thank you very much. Eventually, I do think OS X will be a winner, but only after a long, hard campaign by Apple. Scores of big-time developers will have to release not only updated versions of their old software but exciting new programs that make use of OS X's new features. Then OS X will become the new standard, and Apple's profits will soar once again. Haddad, Atlanta-based correspondent for Business Week, is a long-time Apple Computer buff. Follow his weekly Byte of the Apple column, only on BW Online