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What's Spoiling Apple's Summer

By Charles Haddad If these times were an episode of the old TV show, Chiller Theater, I'd title it The PC Recession that Refused to Die. Consumers and companies remain reluctant to buy new machines and software even as the economy begins a slow recovery. It's truly a scary time to be selling any kind of computer (see BW Online, 6/7/02, "The Forces Conspiring Against PC Sales").

So far, Apple (AAPL) has held up amazingly well. It has managed to juice sales with a continuing parade of new products, including the first UNIX-based operating system for the masses, an affordable flat-panel home computer, and dazzling new laptops.

Still, like a wolf that persistently hunts its prey, the PC recession is starting to catch up with Jobs & Co. Schools, which represent 25% of its sales, continue to slash spending. Demand is also slowing for its new flat-panel iMac, and Apple now has a four- to six-week inventory of them.

WARNING FLAGS. Business info-tech spending also isn't picking up, limiting the potential market for Apple's new wafer-thin Xserve server computer (see BW Online, 5/29/02, "Apple Plunges Back into Servers"). With prices rising for components such as flat-panel screens and chips, some analysts are starting to raise warning flags about Apple's performance in the quarter that closes at the end of this month.

Are things as bad as they look at first glance? Yes and no. Demand is indeed leveling out for the flat-panel iMac, but the slowdown is at least partly seasonal. Sales classically taper off as school lets out and then begin recovering in the fall when class resumes. That's followed by the holiday buying season. Apple is intentionally building inventory of iMacs to avoid shortages during its busiest seasons in fall and winter.

Still, sales have fallen off more sharply than expected. Initially, Apple had said it would sell 300,000 iMacs this quarter, while Salomon Smith Barney predicted 265,000. With the quarter under way, analysts now expect that this quarter's sales will remain flat -- at about 220,000 -- compared to the previous three months. In short, something more than a seasonal fall-off in demand may be happening here.

EDUCATION SQUEEZE. Most troubling is the school market. State budgets, which finance schools, have been clobbered nationwide by a collapse in corporate and sales tax revenues. The former have fallen for 11 straight months in Georgia, for example. In Apple's home state of California, educators are bracing for sharp cutbacks in state funding. Plans to build wireless networks supporting laptop computers are being put on hold for now in schools across California.

Such a hiccup in school upgrades hits Apple the hardest. With its AirPort wireless network, iBook laptops, and PowerSchool administrative software, Apple is better positioned than anyone to uncouple schools from the confines of desktop computing (see BW Online, 5/8/02, "Apple's Classroom Counterattack"). Schools that have adopted Apple's wireless network are wildly happy with it, but the system is expensive to set up initially.

If Apple is increasingly vulnerable to hard times, it has also never been better prepared. It's a lean operation, with a small but strategically savvy lineup of Macs. That's especially true at the low end of the market, populated largely by students, teachers, and first-time users.

CHEAPER OPTIONS. In the past, it was hard to buy an inexpensive Mac -- even used. The darn things had a remarkably high resale value because they never wore out.

Now, those looking for a bargain have several choices. You can buy yesterday's hot technology new, in the form of the old gumdrop iMac, for $800. Or you can pay $1,000 to $1,160 for a limited package of the latest technology -- the new eMac. Marketed only for schools at first, a slightly souped-up version of the eMac was released for consumers a month ago. It's priced slightly higher than the education model but includes a CD-rewritable drive and a 56kbps modem.

Best of all, though, the consumer eMac is highly competitive with budget PCs. It has twice the hard-drive capacity and a sharper screen than the comparable Gateway 500SE, which now sells for $999. Such price-competitiveness is Apple's recognition that "the $1,000 price range is a big part of the market," says Phil Schiller, its senior vice-president for worldwide product marketing.

An affordable entry-level Mac won't stem the decline in state education budgets. But it will help Apple remain competitive in these lean times -- and might keep this beast of a PC recession at bay. Haddad, Atlanta-based correspondent for BusinessWeek, is a long-time Apple Computer buff. Follow his weekly Byte of the Apple column, only on BusinessWeek Online

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